Partnering With Suppliers To Manage Change and Reduce Cost

Author(s):

Ray Gagnon
Ray Gagnon, President, Gagnon Associates, Boxborough, MA 01719-1915, 508/635-9836.

82nd Annual International Conference Proceedings - 1997 

Abstract. Facing 15 to 20% yearly market price erosion, simultaneous heightened consumer demand for more product features, and fierce competition, purchasing professionals in Europe's largest manufacturer of consumer electronics are succeeding in reducing costs by involving their suppliers in collaborative change-planning forums called "Town Meetings." Grounded in proven change management principles and moderated by neutral, third-party facilitators, these intense, multiple-day work sessions succeed because they provide an "even playing field" on which customers and suppliers can develop and plan the implementation of cost-down change initiatives together.

The Challenge. Europe's largest manufacturer of consumer electronics products operates in nothing short of a highly punishing business environment. As a matter of course, market price erodes by 15 to 20% yearly. Competition, especially from the Japanese, is fierce. Moreover, consumers are unrelenting in their demands for more and more innovative product features with the introduction of every new model.

The Approach. This challenge was the impetus for changing the way the Company works with key component suppliers to reduce cost. As a supplement and enhancement to existing supplier development activities, the Company began working with selected suppliers of key, high-volume components in intensive, multiple-day work sessions called "Town Meetings."

Though sponsored by the purchasing function, these are not negotiating sessions. Instead, they bring to bear on one key product component at a time the relevant customer and supplier expertise necessary to explore collaboratively any and all avenues for significantly reducing the integral cost of that component. In addition to standard bill-of-materials issues, all aspects of component design through development and production are fair game.

Perhaps the most unique feature of these "Town Meetings" is that they are not presided over by the Company or its representatives. Instead, external consultant/facilitators help the Company's purchasing professionals carefully plan each session. Then, and most importantly, these same external consultants serve as neutral, third-party moderators of the team deliberations.

Customer/supplier team members serve as content experts, decision-makers and, ultimately, the implementors of whatever cost-down recommendations they make. In contrast, the third-party consultant/facilitator remains content neutral at all times. The facilitator also serves as a process "coach," providing the team, in true just-in-time fashion, with creative stimulation, teambuilding, problem-solving, process-mapping, and other group process "tools" required to analyze the challenge at hand and reach consensus on cost-down recommendations.

Perhaps equally important is the facilitator's role in managing the meeting "climate." The Company's tradition of tough, power-play negotiations has resulted in the kind of adversarial relationship history which makes suppliers understandably wary as they approach their first "Town Meeting" experience. In contrast to what is expected, however, suppliers quickly see and respond to the neutral facilitator's insistence on and enforcement of an open, impartial and even-handed atmosphere.

By the "groundrules" of the "Town Meeting," it is just as acceptable for a supplier to identify actions on the part of the customer that are adding unnecessarily to cost as would be the reverse. In fact, some of the biggest gains have resulted when the Company has learned for the first time, in a "Town Meeting," that they have been unnecessarily overspecifying a material or failing to take advantage of some new technology that is currently being exploited by their competition. Since a key "Town Meeting" operating assumption is that cost-reduction gains will be shared by customer and supplier, both are motivated toward an unprecedented level of candor, creativity and collaboration.

Bureaucracy-Reduction and Change Acceleration. Another unique feature of the "Town Meeting" is its ability to reduce normal bureaucratic delay and hasten the implementation of cost-reducing change initiatives. On the final day of a "Town Meeting," the joint customer/supplier team presents its recommendations to a decision-making team composed of senior executives from both the Company and the supplier organization. The third-party facilitator continues to moderate this plenary session in which the joint management group must deliver "go/no go" decisions, on the spot, for all recommendations. In effect, therefore, implementation of cost-reduction initiatives can begin the very next day. Approval rate for team recommendations is typically well over 90%.

The Results. The Company began significant "Town Meeting" activity in Europe and the Far East over the last two years. The results speak for themselves: A session focused on TV connectors identified possibilities for saving 10% of what was being spent yearly on that component, approximately $3.2 million US dollars (USD). Two years later, not only has the $3.2 million been achieved, but subsequent purchasing/supplier negotiations, based on agreements made at the "Town Meeting," are resulting in a recurring savings of $1 million USD per year.

Another "Town Meeting," targeting TV speaker boxes, sought to reduce by 10% the amount currently being spent yearly on that component -- $2.4M. The joint customer/supplier team identified initiatives which, they estimated, could save a total of $3.8M. Actual results since the meeting which have been directly attributed to it are $2.5M, with roughly half a million per year expected for another year or so.

Additional results achieved last year by the Company's audio manufacturing group based in Singapore already total over one million dollars in just three sessions: [Note: The following represent only portions of the actual results presented at the conference session]:

Session Focus: Packaging Costs (carton box, padding, Styrofoam, etc.)

Savings Target (%) Identified at Session Achieved to Date
10% 10 - 15% 12.5%
287K US Dollars (USD)   354K USD

Session Focus: Tape Decks


Savings Target (%) Identified at Session Achieved to Date
10% 9.6% 13.5%
550K USD   700K USD

Session Focus: Speaker Boxes

Savings Target (%) Identified at Session Achieved to Date
10% 7 - 10% 9%
    202K USD

Partnered vs. Imposed Change. Prior to initiating "Town Meetings," the Company's Singapore-based audio business group had been using a customer audit process in an effort to get suppliers to implement cost-reduction improvements in their operations. Company representatives would spend half a day or so at a supplier site, carefully document potential improvement areas, and estimate gains to be achieved once the supplier complied in making these customer-recommended changes.

Of the estimated cost reduction opportunities identified by the customer, only 10% typically were actually realized. By contrast, over the last two years of "Town Meeting" activity, customer/supplier teams have actually achieved 80% of the cost-down opportunities identified at these collaborative forums. (See Figure 1 below.)

CUSTOMER AUDIT VS. "TOWN MEETING": BOTTOM LINE COMPARISON
Fig. 1 is not available in this text-only version.

To anyone familiar with fundamental theories of managing change, these contrasting results are no mystery. First, the required roles for effectively initiating change are clearly defined. (See Figure 2.)

REQUIRED ROLES FOR SUCCESSFUL CHANGE
Adapted from Daryl R. Conner, 1992.
Fig. 2 - This graphic is not available in the text-only version of this paper.

Second, the "Town Meeting" process provides a framework within which jointly to work through the difficult transition from current relationship/cost state to desired relationship/cost state. (See Figure 3.)

Figure 3 is not available in this text-only version.
Adapted from Beckhard-Harris, 1987.

Third, all the elements required for successfully managing change are present. (See Figure 4.) The need for change is driven by no less compelling a goal than joint survival in a grueling marketplace. In this context, the motivating vision is long-term business viability by offering products at competitive prices that will drive ever-increasing volumes. And, the structure of the "Town Meeting" provides both a framework within which to mobilize joint commitment and a format to monitor results against the jointly developed cost-reduction change plan.

Fig. 4 - A FRAMEWORK FOR MANAGING CHANGE

  1. Creating A Shared Need For Change
  2. Developing A Motivating Vision
  3. Mobilizing Commitment
  4. Monitoring Results

Adapted from Noel M. Tichy and Stratford Sherman, 1993.

Last, by using the three classic change strategies of Empathy/Support, Communication, and Participation/Involvement "Town Meetings" successfully overcome the normal resistance change always encounters when it is externally imposed vs. planned collaboratively. (See Figure 5.)

Fig. 5 - OVERCOMING RESISTANCE TO CHANGE: THE 3 CLASSIC STRATEGIES
Figure 5 is unavailable in this text-only version.

The "Town Meeting" forum creates a win/win vs. an adversarial dynamic. The even-handed process and the neutral, third-party moderator who manages it help to allay apprehensions on both sides. And once the guard is down, what can be shared and learned about improving the way both sides of the customer/supplier relationship conduct their business adds up to real dollars and cents.


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