IDEAS AT WORK cult tbat some executives wonder transplanted whether the Japanese partnership Japanese-style supplier model can or even should be trans- planted to the United States, where relations to the competitive competitive, contractual, arm's- length relationships between manu- soil of the United States. facturers and their suppliers have long been the norm. They rightly point out that the partnerships among the members of a Japanese keiretsu grew out of cultural and his- torical experiences that are very dif- ferent from tbose that shaped U.S. How Chrysler Created industries and companies. One U.S. manufacturer, however, has shown that it is possible to make an American Keiretsu the transition. This company is Chrysler Corporation. Its experience demonstrates not only that a modi- by Jeffrey H. Dyer fied form of the keiretsu model can work in tbe United States but also that the benefits can be enormous. Borrowing from Japanese prac- was relatively easy because it did not Since 1989, Chrysler has shrunk tices, U.S. manufacturers have cut require altering the nature of their its production supplier base from their production and component relationship with suppliers. The tra- 2,500 companies to 1,140 and has costs dramatically in the last decade ditional adversarial relationship re- fundamentally changed tbe way it by overhauling their supplier bases. mained: Manufacturers continued works with those that remain. In- They bave radically pruned the to design products largely without stead of forcing suppliers to win

ranks of their suppliers and given input from suppliers, to pick suppli- its business anew every two years, more work to the survivors in return ers on the basis of price through a Chrysler now gives most of tbem for lower prices. And by getting their competitive bidding process, and to business for the life of a model and remaining suppliers to deliver parts dictate the detailed terms of the con- beyond; excruciatingly detailed con- just in time and to take responsibil- tract. They continued to expect sup- tracts have given way to oral agree- ity for quality, they have managed pliers to do as they were told and not ments. Instead of relying solely on to slash inventories, reduce defects, much more. its own engineers to create tbe con- and greatly improve the efficiency of In sharp contrast, the second cept for a new car and tben to design their own production lines. stage-involving suppliers in prod- all the car's components, Chrysler Now many manufacturers are uct development and process im- now involves suppliers deeply. And striving to wring even greater bene- provement-requires radically chang- instead of Chrysler dictating prices fits from their suppliers. They would ing tbe nature of tbe relationship. to suppliers, regardless of whether It requires a bona fide partnership, the prices are realistic or fair, the like to involve suppliers much more two sides now strive together to find deeply in product development and in which there is an unimpeded two- ways to lower the costs of making to enlist them in the drive for con- way flow of ideas. Although many cars and to share the savings. tinual improvements of production managers now talk about their de- processes. The prizes they are seek- sire to turn their suppliers into ing: ever more innovative products, partners, the fact of the matter is Jeffrey H. Dyer is the Stanley Gold- ever faster product development, that actually doing it-after decades stein Term Assistant Professor of and ever lower costs. of exploiting suppliers by pitting one Management at the University of But as many managers now real- against the other-is exceedingly Pennsylvania's Wharton School in ize, accomplishing tbe first stage difficult. Indeed, the task is so diffi- Philadelphia.

42 PHOTOS: CHRYSLER CORPORATION ARCHIVES IDEAS AT WORK The results have been astounding. vehicle engineering; Glenn Gardner, Company. One factor that Chrysler The time Chrysler needs to develop LH program manager; and Tbomas studied was supplier relations. a new vehicle is approaching 160 Stallkamp, head of purchasing, Honda was organized into product weeks, down from an average of 234 planted the seeds and then nurtured development teams composed of in- weeks during the 1980s. The cost Chrysler's keiretsu. By benchmark- dividuals from all key functions, all of developing a new vehicle has ing competitors, listening to suppli- of whom had eradle-to-grave respon- plunged an estimated 20% to 40% ers, and experimenting with ideas sibility for the development of a ve- during the last decade to less than $1 and programs, they gradually de- hicle. The teams included suppliers' billion for the Cirrus/Stratus, intro- veloped a vision of tbe changes engineers, who had responsibility duced this year. And, at the same that Chrysler needed time, Chrysler has managed to pro- to make. They came duce one consumer hit after an- to realize tbat those other - including the Neon, the changes required trans- Ram truck, the Cirrus/Stra- forming both tbe pro- tus, and the new minivan [sold as cess of choosing and the Town &. Country, Dodge Cara- working with suppli- van, and Plymouth Voyager). As a ers and the personal result, Chrysler's profit per vehicle relationships between has jumped from an average of $250 Chrysler's staff and its in the 1980s to a record (for all U.S. suppliers. They came to understand automakers) of $2,110 in 1994. (See that people-both at Chrysler and in for both the design and manufacture the insert "How Supplier Partner- suppliers' organizations-must have of a particular component or system. ships Helped Revive Chrysler.") a common vision of how to collabo- Executives from Chrysler thought rate to ereate value jointly. They initially that Honda's practices were Of course, Chrysler's astounding came to recognize that trust in rela- interesting but completely foreign to comeback is hardly news anymore. tionships will take root only if both Chrysler, which was organized hy But surprisingly, one crucial aspect parties share in the rewards and not function and which developed prod- of tbe story has been overlooked: ex- just the risks. And ultimately they ucts in a traditional sequential actly bow the company managed to process that did not routinely in-

transform its contentious relation- incorporated those realizations into volve suppliers. Chrysler's engineers ships with its suppliers. Believing tbe fabric of tbe company's manage- designed components, and suppliers that Chrysler's turnaround might ment systems. built them. Whereas Honda selected hold lessons for other U.S. manu- To be candid, the steps that suppliers tbat had a history of good facturers, I undertook a three-year Chrysler took were not always hy relations witb the company and a study of the company's revival. design. But tbrough trial and error, track record for delivering quality From 1993 to 1996, I interviewed the automaker has managed to de- products and meeting cost targets, 13 executives at Chrysler and also velop supplier management prac- Chrysler selected suppliers that 33 of the company's suppliers, and tices that are a model of cooperation could build components at tbe low- analyzed thousands of pages of and efficiency. est possible cost. ¡Buyers bad to ob- Chrysler's documents. tain quotations from at least three From this work emerged a blue- The Impetus for Change suppliers.) A supplier's track record print of the steps that other compa- In the mid-1980s, as part of an ef- for performanee and quality was rel- nies might take to huild their own fort to improve its competitiveness, atively unimportant. As a conse- American keiretsus, providing that Chrysler conducted an extensive quence, tbe typical relationship he- those steps are accompanied by benchmarking study of product de- tween Chrysler and its suppliers was the exemplary management-or, velopment and manufacturing at characterized hy mutual distrust more accurately, the exemplary Honda Motor Company, which was and suspicion. leadership-that Chrysler's execu- then expanding its manufacturing Honda's approach suddenly tives displayed. Four men in particu- and sales presence in the United looked less foreign after Chrysler ac- lar-Robert Lutz, Chrysler's presi- States faster than either Mo- quired the American Motors Corpo- dent; François Castaing, the head of tor Corporation or Nissan Motor continued on page 46

HARVARD BUSINESS REVIEW fuly-August 1996 43 IDEAS AT WORK

How Supplier Partnerships Helped Revive Chrysler

Parttierships with suppliers ding, negotiating contracts, and and development (ER&.D), which have helped Chrysler improve hringing suppliers on board and consists of the costs associated performance significantly hy up to speed. After selecting sup- with designing and engineering a speeding up product develop- pliers, Chrysler would have to new vehicle; tools, such as dies ment, lowering development spend additional time responding and molds; facilities, such as new costs, and reducing procurement to problems they encountered conveyors, presses, and welding costs, thereby contributing to in- when trying to manufacture a lines in the plant; and preproduc- creases in Chrysler's market part they usually had not de- tion and launch (PP&L) expenses, share and profitahility. signed. Often suppliers did not such as training and manufac- Shortening the Product Devel- even know they had won the turing preparation. For a typical opment Cycle. Company docu- husiness until 75 to 100 weeks Chrysler program, roughly 15% ments indicate that Chrysler has hefore volume production. Under to 20% of total costs are in reduced the amount of time it the new system, suppliers he- ER&D, 40% to 45% are in tools, takes to develop a new vehicle come involved at the conceptual 25% to 30% are in facilities, and from 234 weeks (the average 5% to 10% are in PP&L. Since product-development cycle for 1989, Chrysler has heen ahle new-vehicle programs in the to reduce overall program costs 1980s) to 183 weeks for the LH significantly. Before Chrysler program. The next version of the adopted Japanese-style supplier LH - scheduled for introduction partnerships, its investments in in late 1997 - is on schedule to preproduction plants, equipment, reach the target of 160 weeks and training, and its piece costs from concept approval to volume during production often ran 25% production. Thus, since 1989, to 50% over budget. Chrysler has reduced the time it By involving suppliers early takes to develop a new vehicle hy in product development and giv- more than 40%. Also, Chrysler's ing them greater responsibility productivity increased during the for design and manufacturing, 1980s: whereas the automaker Chrysler has sped up the product developed only four new vehicles development process - and has hetween 1980 and 1989, it has stage (ahout 180 weeks hefore volume production on the LH, needed fewer engineering hours already developed and introduced per vehicle. For instance, ER&.D six new vehicles since 1990, Neon, and Cirrus/Stratus pro- grams), giving them an extra 18 to costs for the LH program were without increasing the size of its roughly $300 million (or 20% of total engineering staff. 24 months to prepare for volume production and additional time the LH's $1.6 billion program). By Partnerships with suppliers to work out potential prohlems reducing ER&D time hy 24% have been essential to speeding early in the process. over previous programs, Chrysler saved approximately $75 million product development. Under its Reducing the Overall Costs of old system, Chrysler devoted 12 in developing the LH. The com- the Vehicle Program. The cost of pany's 1998 LH model will save to 18 months of the development developing and launching a new process to sending out hids for an additional 15% in ER&X) over model can be divided into four the 1993 modeL quotations, analyzing bids, rehid- categories: engineering, research.

ration in 1987 for its profitable engineer and design a number of its was beginning a fourth, the Allure operations. AMC had implemented vehicles' components. Also, the en- coupe. In comparison, Chrysler's some Honda-like supplier-manage- gineering and manufacturing staff in 5,500 engineers and technicians bad ment and development practices. AMC's Jeep and truck group had developed only four all-new vehicles The reason was necessity. Because heen operating for several years as during tbe 1980s: the K-car, the AMC bad neither the resources to an integrated team. With just 1,000 minivan, tbe Dakota truck, and the design all its own parts nor the pow- engineering employees, AMC had Shadow/Sundance. er of larger automakers to dictate the developed three vehicles hetween AMC's operations suggested to prices it was willing to pay for tbem, 1980 and 1987-the Cherokee, tbe Chrysler's executives tbat Japanese- it had learned to rely on suppliers to Premier, and tbe Comancbe-and style partnerships might he possible

46 DRAWINGS BY DAVID HORN IDEAS AT WORK

Faster development cycles also Chrysler now has suppliers take ler has reduced its number of have belped to reduce program responsibility for both the proto- buyers by 30% and bas sharply costs because bard tools can be type and tbe volume production, increased tbe dollar value of purchased closer to volume pro- it has been ahle to reduce time, goods procured by each buyer. duction. Chrysler now purchases communication problems, and Those results were made possible bard tools approximately 50 to 60 incompatibility in the parts. hy reducing the number of overall weeks hefore volume production, In fact, tbe overall cost to de- suppliers (reducing searcb costs) as opposed to 75 to 100 weeks he- velop a new vehicle seems to be and eliminating tbe competitive fore, as it did when product devel- gradually declining at Chrysler. bidding system (reducing negotia- opment was slower. Thus the Tbe LH program cost $1.6 billion, tion and contracting costs). In a company saves up to 12 months tbe Dodge Ram truck cost $1.3 presentation to suppliers in No- of investment in bard tools. Giv- billion, the Neon cost $1.2 bil- vember 1994, purcbasing chief en that 40% to 45% of program lion, and the Cirrus/Stratus cost Tbomas Stallkamp requested costs are in tools, Chrysler saved less than $1 hillion. These costs tbat suppliers eliminate sales rep- approximately $60 million on the resentatives altogetber and shift LH program by delaying the pur- those resources to engineering. chase of hard tools (assuming a conservative 10% cost of capital). Increasing Market Share and Profitability. Because unit sales of Chrysler also has saved money vehicles increase substantially in hy reducing the number of both tbe United States and Ja- changes in hard tools after they pan after a major model change, bave heen cut. Historically, the automakers tbat develop new lengthy development process did models more quickly than com- not produce the first prototype petitors can increase their mar- until ahout 65 weeks hefore vol- ket share. Chrysler's ability to ume production. However, the produce more new models has lead time on many hard tools was contributed to its increased share more than 65 weeks, so work on of the U.S. car and truck mar- hard tools had to begin hefore the ket - 14.7% in 1994, up from first prototype was completed. compare favorably with the de- 12.2% in 1987. Tbis is Chrysler's Wben problems were discovered velopment costs of similar mod- highest share in the U.S. market in the prototype, Chrysler bad to els developed by GM and Ford. in 25 years. Chrysler also bas ask for corrections to bard tools For instance, the Neon is similar dramatically improved its profit- that already had heen ordered. to GM's Saturn ($3.5 billion to de- ability. Its return on assets, which With tbe LH program, Chrysler velop) and Ford's Escort ($2.5 hil- throughout the 1980s tended to involved suppliers earlier on,- as lion). Tbe Cirrus/Stratus is simi- be lower than its competitors', a result, the first prototype was lar to Ford's Mondeo/Contour, has been the highest among U.S. completed 24 weeks earlier than which cost $6 billion to develop, automakers since 1992. Its profit in previous programs - and hard according to the Economist (April per vehicle has increased from ap- tools were cut after Chrysler and 23, 1994). proximately $250 in tbe 1980s its suppliers identified prohlems (taking tbe average from 1985 with the prototype. Also, because Reducing Procurement (Trans- tbrougb 1989) to $2,110 in 1994. action) Costs. Since 1988, Chrys-

in an American context. Equally rus) was running a projected $1 bil- its hoxy cars appealed only to older important, that discovery occurred lion over budget, and tbe company huyers. Chrysler's executives knew at a time wben Chrysler's leaders was in dire financial straits. It had a they had to do something fast. had heen made keenly aware that $4.5 billion unfunded pension fund. Some changes in top management tbeir development process was in- Its losses were deepening: after clos- belped. Lutz, who bad become presi- adequate. Tbe company's newly ing tbree plants in 18 montbs during dent of operations in 1988, champi- launched LH program (Chrysler 1988 and 1989, Chrysler hit bottom, oned tbe effort to adapt and apply Concord, , and Dodge reporting a record loss of $664 mil- tbe positive lessons learned from Intrepid - Chrysler's answers to lion in tbe fourth quarter of 1989. Honda and AMC. When Chrysler's 's popular Tau- With the exception of the minivan. continued on page 50

HARVARD BUSINESS REVIEW Juty-August 1996 47 IDEAS AT WORK 1Supplier-Management Practices at Chrysler Have Changed Process Characteristics Relational Characteristics

1989 1994 1989 1994 Suppliers chosen by Suppliers presourced Little recognition or Recognition of past competitive bid -Cost targeted to a credit for past performance and track -Low price wins set price performance (transaction record (relationship -Selection after design -Selection before design, orientation) orientation) based on capabilities

Split accountability for Single supplier No responsibility for Recognition of suppliers' design, prototype, and accountable for design, suppliers' profit margins need to make a fair profit production parts prototype, and production parts Minimal supplier Substantial investments Little support for Feedback from suppliers investment in in coordination feedback from suppliers encouraged coordination mechanisms mechanisms and and dedicated assets dedicated assets Discrete activity Focus on total value- No guarantee of business Expectation of business focus; no process ior chain improvement; relationship beyond the relationship heyond the soliciting ideas or formal process for contract contract suggestions soliciting suppliers' suggestions Simple performanee Complex performance No performance Considerable evaluation evaluation expectations beyond the performance expectations contract heyond the contract Short-term contracts Long-term contracts Adversarial, zero-sum Cooperative and trusting, game positive-sum game chief engineer retired in 1988, Lutz darkly joked stood for "last hope." By 1991, Chrysler's senior man- replaced him with François Cas- The reborn LH program was to serve agers knew they were onto some- taing, AMC's chief engineer. In one as a pilot for redesigning Chrysler's thing. Tbe LH was being developed of bis first moves, Castaing recom- product-development process and in record time and below the aggres- mended that Chrysler slam the supplier relations. sive cost targets set at the beginning brakes on the LH program, and the To spur creativity and increase the of the program. The new approach to company picked Glenn Gardner to speed of the product development product development and working rethink and relaunch the program. cycle, the three executives made witb suppliers was extended to the Gardner had been chairman of Dia- three important changes that broke rest of the company that year. with tradition. First, to shield the team from in- Chrysler's New Model ternal bureaucracy, tbey The model of supplier manage- decided to move it away ment that Chrysler now uses re- from Higbland Park, flects several important changes in , where most of the company's processes for select- Chrysler's operations ing, working with, and evaluating were located. Seeond, to suppliers. speed decisions internal- Cross-Functional Teams. To get ly and to eliminate se- its functions to present one face to quential decision making, they in- mond-Star Motors Corporation, suppliers and to end the conflicting cluded on the team individuals from Chrysler's joint venture witb Mit- demands and shifting priorities that design, engineering, manufacturing, subishi Motors Corporation, and had been tbe hallmark of its sequen- procurement, marketing, and fi- was familiar with Mitsubishi's prod- tial development process, the com- nance. Finally, they decided to ex- uct-development process, wbich pany reorganized into cross-func- periment with new methods of tional vehicle-development teams. was similar to Honda's. working with suppliers, drawing on Lutz, Castaing, and Gardner It now has five cross-functional plat- tbe lessons learned from Honda, form teams - one for large cars, one picked the team to develop the LH, a AMC, and Mitsubishi. for small ears, one for minivans. model code that many at Chrysler

50 HARVARD BUSINESS REVIEW fuly-August 1996 IDEAS AT WORK one for leeps, and one for trucks. system in volume once the vehicle is surprising, given that some studies Cross-functional teams improve con- in commercial production. Tbe new have found that 70% of quality prob- tinuity, coordination, and trust practice means that suppliers of lems in automotive components are botb within Chrysler and hetween such complex components as the due to poor design. Consequently, Chrysler and its suppliers. Suppliers heating and air-conditioning system Chrysler and its suppliers would also develop more stable relation- join the product de- ships with Chrysler's staff and can velopment effort very count on tbe company to follow early and, as prime through more effectively on prom- contractors, take to- ises and agreements. tal responsibility for Presourcing and Target Costing. the cost, quality, and Presourcing means choosing suppli- on-time delivery of ers early in the vehicle's concept-de- their systems. Suppli- velopment stage and giving them ers say this approach significant, if not total, responsihili- gives them more flex- ty for designing a given component ihility in developing effective solu- waste time trying to assign blame or system. The rationale for prç- tions to problems. for problems when they eould have sourcing is that it permits many In the past, Chrysler bad often giv- been trying to solve them. engineering tasks to be carried out en responsibility for design, manu- To overcome that fragmented ap- simultaneously ratber than sequen- facture of prototypes, and volume proach, Chrysler had to move away tially, thereby speeding up the devel- production of a component to sepa- from competitive bidding. For the opment process. rate companies, with the result be- LH project, Chrysler's corporate pur- In addition to having responsibili- ing a lack of accountability. When chasing department gave tbe proj- ty for design, most presourced sup- suppliers bad problems producing a ect's cross-functional platform team pliers are responsible for building component at the required cost or a prequalified Ust of suppliers con- prototypes during development and quality, they would often blame sidered to have tbe most advanced for manufacturing the component or tbeir troubles on the design-not engineering and manufacturing ca-

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Total Value-Chain Improvement: The SCORE Program. Tbe next step o in building a partnersbip witb sup- ro pliers is to figure out how to moti- D vate them to participate in continu- ous improvement processes for the value chain as a whole. Eliciting the full effort and total resources of sup- pliers is critical hecause partner- ships work only when botb parties try to expand tbe pie. Such coopera- tion is possible only wben tbe sup- plier trusts the buyer and when tbe two parties really communicate. Chrysler began to build trust and improve communications with a small set of suppliers during tbe re- horn LH program. However, it was 1988 1989 1990 1991 1992 1993 1994 anotber program, one that Chrysler began to develop in 1989, that be- Î came, almost by accident, the com- LH supplier partnership pany's most important method for experiment model extended building trust, lowering costs, and begins throughout Chrysler improving communication. The for- mal name of that program now is SCORE tbe Supplier Cost Reduction Effort program introduced (dubbed SCORE). Asking for Help. Tbe basic pur- Tetox return on assets is calculoted by dividing pretax income by total assets. pose of SCORE is to help suppliers Sources. Annual reparts. and Chrysler reduce systemwide

52 HARVARD BUSINESS REVIEW July-August 1996 Let Holland speed your entry or expansion in Europe. costs without hurting suppliers' whom were upset witb GM's beavy- profits. The catalyst for tbe SCORE banded treatment. (Cbrysler would Holland has the program was a speech tbat Lutz gave later strive to contrast its approach productive, skilled and multi- at the Athletic Club in Au- witb GM's in order to drive home lingual workers to add value gust 1989 to executives from 25 of the point that Chrysler's patb was Chrysler's largest suppliers. Lutz different. Eor example, at a time to your products. It has the told the suppliers tbat because of when GM's purchasing czar, Jose telecom, transportation and Chrysler's desperate situation, he Ignacio Lopez, was prohibiting bis industrial infrastructures to wanted their assistance and ideas on buyers from accepting a luncb invi- help you get the most out of how tbe company could lower botb tation from a supplier, Stallkamp your investment. its own costs and those of its suppli- was instructing his buyers to take ers. The message was, "All I want is suppliers to lunch.) your brainpower, not your margins. " That's why more than 1,800 During these talks, many suppli- globally-minded American Tbe fledgling efforts in tbe LH ers complained about how GM was program to build tighter relation- demanding that they reduce prices- companies — in sectors like ships with suppliers were bearing a move that would require tbem to infotech, chemicals, food fruit, and Chrysler's leaders were ea- lower their costs-when, from their processing, medtech, ger to maintain the tnomentum. At perspective, GM couldn't even get biotech, auto supplies and tbe time. Corpora- its own house in order. The suppliers tion was increasing its squeeze on noted that Chrysler, too, was far consumer goods — have suppliers, demanding across-tbe- from perfect. Indeed, Chrysler had set up manufacturing, board price cuts. In his speech, Lutz long been guilty of turning down or value-added logistics, HQ, wanted to stress that Chrysler was simply ignoring potentially money- call center, R&D and other taking a different patb. saving suggestions from its suppli- value-adding facilities in Tbe suppliers crowded around ers-for instance, recommendations Lutz after the speech, eager to offer tbat they use a different material HOLLAND. their ideas. Given Cbrysler's history in a component-because the sugges- of adversarial relationships with tions would have required running suppliers, one might ask why they tests and making other changes in didn't react cynically to Lutz's re- the component or in Chrysler's pro- quest for help. For one thing, tbey cesses. In many cases, engineers re- knew tbat Chrysler was on tbe fused even to consider such propos- ropes. For anotber, Cbrysler had four als, because considering them would relatively new leaders who bad have increased the engineers' work- demonstrated a commitment to rad- loads. Others were overly fearful of ical cbange: Lutz, Castaing, Gard- taking risks. ner, and Stallkamp, tbe purchasing Unveiling SCORE. It was based chief who, in early 1990, had re- on these discussions witb suppliers placed a champion of competitive that Chrysler establisbed SCORE as bidding. There also was hard evi- a formal program tbat committed dence of Cbrysler's sincerity: AMC the automaker to encouraging, re- and the relaunched LH program. viewing, and acting on suppliers' Lutz kept the hall rolling after tbe ideas quickly and fairly, and to shar- speecb. He was so impressed witb ing the benefits of those ideas with ->Jetheriands- tbe suppliers' ideas and willingness the suppliers. Tbe SCORE program iraenln\^sti to sbare information tbat be bad se- was unveiled in 1990 at a meeting —A^ncy- nior executives schedule follow-up witb Cbrysler's top 150 suppliers. To meetings with tbem. Some ideas empbasize its desire to cbange, Offices of the Netherlands were so good tbat Lutz, Castaing, Chrysler specifically asked suppliers Foreign Investment Agency and Stallkamp decided to establish to suggest operational changes tbat a formal process for reviewing, ap- it could make in its own organiza- New York San Matea proving, and implementing them. tion to reduce hoth its costs and (212)246-1434 (4151349-8848 To get advice on how Chrysler those of the suppliers. Chrysler soon Chicago Dallas could accomplish that task more received a large number of written (3121616-8400 (2141823-7283 systematically, Lutz asked a small suggestions. Onawa group of Chrysler's senior execu- Cbrysler's executives knew that (6131237-5030 tives, including Castaing and Stall- the initiative would fail if the com- On the Internet at kamp, to visit a number of key sup- pany simply rejected all the ideas or http://www. nfia CDm or info @ nfia.com pliers. These unusual visits im- did not respond quickly. So in an- I h IS material JS (SjOlishefl by Ogilvy Adams & Rinehait. pressed the suppliers, many of ivhich IS legislersO as an ageiir ol ihe Gmemmem •( Itie other display of strong leadersbip. Nsthedaids It is filed ivilh the Deparwient nl Justice whBie Bie lequitei registrsiion staTement IB available tar public insOBCtiaii Hegistraiion does not indícale app'O*»! ol tlie contents by the United Stales Guvsmmenl HARVARD BUSINESS REVIEW July-August 1996 (DEAS AT WORK cbrysler's top managers took per- "For many, wben we fixed our opera- provement througbout its value sonal responsibility for making sure tions, they made buge savings," chain is to tbe automaker. tbat the eompany followed tbrough Price says. Since February 1994, Chrysler bas on its promise to review and act on Perbaps even more important, given suppliers specific annual tar- the proposals quickly. Castaing, Chrysler offered to sbare tbe savings gets for savings from SCORE ideas. Stallkamp, and other senior execu- generated by tbe suppliers' sugges- Although Chrysler does not penalize tives met once a montb to review tions witb tbe suppliers. Partly be- a supplier if it misses a SCORE tar- tbe proposals and evaluate Chrys- cause it did not bave tbe resources to get, tbe supplier's performance over ler's responses. Initially, Chrysler's audit suppliers and partly to pro- time may eventually determine how engineers wanted to reject many mote trust, Chrysler initially did not much business it receives from tbe ideas, and senior managers bad to quibble when it suspected that a automaker. Suppliers are expected decide when to overrule them. De- supplier was grabbing more tban to offer suggestions that result in balf. "Tbat first time, we cost reductions equaling 5% of the didn't ask for a renegotia- supplier's sales to Chrysler. The tion," recalls Price. "We automaker also has expanded tbe just let them know that program to enlist suppliers' assis- we knew. The result: we tance in reducing vebicle weighty began to get more and warranty claims, and complexity. more ideas-sometimes ¡Suppliers receive a $20,000 credit for even on products they every part removed from a system.] * didn't supply." In one Chrysler also tracks tbe number of case, a supplier suggested proposals awaiting a decision and termined to avoid a not-invented- tbat Chrysler stop making a part out the amount of time it takes to re- bere syndrome, Castaing forced of magnesium and use plastic - an spond to a proposal, Altbougb tbe through some of tbe ideas, pacify- improvement tbat would cost tbe job no longer falls to senior execu- ing tbe engineers by telling them supplier tbe business. Tbat sugges- tives, Chrysler's managers continue to give the ideas a try simply as an tion saved Chrysler more than to review engineers' evaluations of experiment. Enougb of the early $100,000 per year. suggestions from suppliers. Man- ideas were accepted to convince Beyond the incentive of improving agers also help suppliers witb tbe suppliers tbat Cbrysler really was tbeir own profitability and increas- SCORE paperwork and routinely in- open to suggestions. Soon the sug- ing their business with Chrysler, tercede on tbe suppliers' behalf. In gestions were pouring in, and the suppliers appreciated being listened other words, tbe managers serve as successes helped break down the en- to for a change. Under the traditional the suppliers' advocates within tbe gineers' resistance. system, suppliers were rarely asked company. And to make submitting for their ideas or suggestions for im- ideas even easier, SCORE is now an To get suppliers to buy into the on-line process: a supplier can sub- SCORE program, Chrysler took provement; tbey were simply given a discrete task and asked to perform mit a proposal or check on its status three steps. First, it focused on what at any time. Chrysler itself was doing wrong. tbat task for a price. Performance Second, it asked suppliers to make expectations were explicitly written When Chrysler accepts a SCORE suggestions for changes tbat in- in tbe contract. idea, tbe supplier has two choices: it volved materials or parts provided Incorporating SCORE. In 1992, can claim its balf of the savings or it hy lower-tier suppliers-those that Chrysler made SCORE a formal can sbare more of the savings with provided nonstrategic components part of its supplier rating system. Chrysler in order to boost its perfor- or that supplied parts to key suppli- Cbrysler began to require suppliers mance rating and potentially obtain ers. Only as a third step did it turn to offer ideas for improvement, to more business from the automaker. to wbat the key suppliers-tbe ones maintain a vebicle system focus, To understand more clearly how that made strategic components or and to make every effort to improve SCORE works, consider the experi- systems-were doing wrong, "Tbe the Cbrysler "extended enterprise." ence of Magna International. One of order with wbich we addressed tbese Now Chrysler keeps detailed Cbrysler's largest suppliers. Magna issues was important," Cbrysler's records of the number of proposals provides tbe automaker witb seat Barry Price says. "The suppliers nev- eacb supplier makes and tbe dollar systems, interior door and trim pan- er would have gone for self-criticism savings they generate, and it uses els, engine and transmission sys- before we developed a traek record of those figures - along with the sup- tems, and a wide variety of otber correcting our own problems." plier's performance in the areas of products. In 1993, Magna made its Wby were suppliers willing to price, quality, delivery, and technol- initial SCORE proposal, suggesting take tbe risk of expending resources ogy-to grade the supplier's perfor- tbat Chrysler use a different wood- to offer sucb ideas? Tbe answer is mance. In 1995, a supplier's SCORE grain material on a decorative exteri- tbat Chrysler made it profitable for rating was 15% of its overall rating, or molding on its minivan. Tbe ma- tbem to participate in SCORE and up from 8% in 1994-an indication terial Magna recommended cost less demonstrated that it would play fair. of bow important continual im- and offered the same quaiity as tbe

54 HARVARD BUSINESS REVIEW July-August 1996 Amgen, Inc. Packaging, distribution material Magna bad been using. To facilitate interaction witb sup- and customer service Magna documented the proposal on pliers, Cbrysler bas taken a number ARCO Cbrysler's supplier-huyer informa- of otber steps, including the creation Manufacturing tion form and submitted it to the re- of a common E-mail system and tbe sponsible Cbrysler buyer. The buyer establisbment of an advisory board Gap, Inc. tben notified engineering and re- of executives from its top 14 suppli- Warehousing, distribution quested its review and consent. Tbe ers. In addition, it has instituted an entire process took approximately annual meeting of its top 150 strate- Hewlett-Packard two weeks. Chrysler approved tbe gic suppliers and also holds quarter- Manufacturing, distnbution proposal, wbich resulted in annual ly meetings witb eacb supplier to and call center savings of $250,000. Since then. discuss strategic and performance is- Magna bas submitted 213 additional sues and to review priorities for the IBM SCORE proposals, 129 of whicb coming year. Chrysler has approved-for a total R&D, manufacturing For tbeir part, suppliers have cost savings of $75.5 million. and distribution demonstrated tbeir trust in Chrysler Rather tban taking a share of these by increasing their investments in Mars Inc. savings. Magna has opted to give dedicated assets-plant, equipment, Manufacturing, distribution 100% of tbem to Chrysler in tbe systems, processes, and people dedi- and packaging bopes of boosting its performance cated exclusively to serving Chrys- rating and winning more business. ler's needs. In addition to the resi- Morton International Tbe result: since 1990, Magna's sales dent engineers, nearly all suppliers Manufacturing to Chrysler have more tban doubled, have purcbased Catia [Chrysler's from $635 million to $1.45 billion. preferred CAD/CAM software), Oracle Corporation What is more, tbe greater econo- which at $40,000 per engineer |seat) European HQ, R&D mies of scale mean that the business is no small investment. (To belp witb Chrysler is now more profit- them obtain a lower price for Catia, able, says Jobn Brice, the Magna ex- Cbrysler arranged a large-scale ecutive director in charge of the group purcbase for more than 200 Chrysler account. suppliers.) SCORE has been astoundingly A number of suppliers also have successful. In its first two years of invested in dedicated facilities to To learn how these and many operation, 1990 and 1991, it generat- improve their ability to make just- other companies have entered ed 875 ideas worth $170.8 million in in-time deliveries to Chrysler and to or expanded in the European annual savings to Cbrysler. In 1994, provide it with better service. For ex- market through the Netherlands, suppliers submitted 3,786 ideas, ample, Textron built a plant dedicat- please mail or fax this coupon wbicb produced $504 million in an- ed to producing interior trim parts to: Cap Vermeulen nual savings. As of December 1995, for the LH and located a new design Chrysler had implemented 5,300 facility less than two miles from the Netherlands Foreign ideas tbat have generated more than Chrysler Technology Center. Partly Investment Agency $1.7 billion in annual savings for the as a result of investments such as One Rockefeller Plaza company alone. those, tbe average distance between New York, NY 10020 FAX 212-246-9769 Enhanced Communication and Chrysler's assembly plants and its Coordination. Cbrysler promoted suppliers' facilities has been decreas- cooperation both among suppliers ing. At Cbrysler's plant in Belvidere, NJetheriands and between suppliers and Chrysler Illinois, where tbe Neon is assem- p)reienlnvestment in several ways. To coordinate com- bled, the number of supplier ship- -A^ncy munication with and across suppli- ment points has dropped by 43% and ers more effectively, the automaker the average distance from supplier to has imitated the Japanese practice of assembler plant has shrunk by 26 miles. My previous research has employing resident engineers-su-p- Name pliers' engineers wbo work side by demonstrated that geographic prox- side with Cbrysler's employees. The imity lowers inventory costs and en- number of resident engineers in hances communication. [See my ar- Cbrysler's facilities has soared from ticle "Dedicated Assets: Japan's fewer tban 30 in 1989 to more than Manufacturing Edge," HBR Novem- her-Decemher 1994.) 300 today. Executives at suppliers Telephone and at Chrysler claim tbat this prac- Long-Term Commitments. To tice has resulted in greater trust and Address more reliable and timely communi- earn suppliers' trust and to encour- cation of important information. age tbem to invest in dedicated as- sets, Chrysler is giving a growing City State HARVARD BUSINESS REVIEW July-August 1996 IDEAS AT WORK number of suppliers inereasingly Ford and GM on all five dimensions a cost-cutting program. By learning longer commitments. The average (significantly higher than GM on all how to communicate, we've learned length of the contracts held by a five and significantly higher than how to help eacb otber. " Tbe level of satnple of 48 of Chrysler's supphers Ford on three of the five). communication needed to make a on the LH program in 1994 was 4.4 supplier partnership productive sim- years. By comparison, Chrysler's The American Keiretsu ply may not happen naturally in tbe supply contracts lasted 2.1 years on The American keiretsu that U.S. business environment. average in 1989, according to a 1991 Chrysler has created differs from a On the other hand, Chrysler's study by Susan Helper titled "How ¡apáñese keiretsu in two major re- policies for building partnerships Much Has Really Changed between spects. First, Japanese manufactur- seem to be too successful in one U.S. Automakers and Their Suppli- ers like Toyota and Nissan typically sense: tbey appear to be making it ers?" (Sloan Management Review, own 20% to 50% of the equity of harder for the company to continue Summer 1991). their largest suppliers; Chrysler does to shrink its supplier hase, which it Today Chrysler has given oral not and could not take similar would like to do to reduce coordina- guarantees to more than 90% of its stakes. Toyota, for example, bas on- tion costs, improve quality, achieve ly ahout 310 suppliers, even greater economies of scale, and, and those with which it last hut not least, strengthen its ties has equity ties, about 50, with tbe suppliers it retains. The typically depend on it for shrinkage rate has slowed. Chrysler two-thirds of their sales. still has almost four times as many So their destinies are suppliers in the United States as closely intertwined. By Toyota does in Japan. comparison, Chrysler In addition, Chrysler still lags far still has a much larger hehind its Japanese competitors in group of suppliers, and converting lower levels of its supply few of its most important suppliers chain to the new supplier-manage- suppliers that they will have the depend on it for a majority of their ment approach. Its biggest suppliers business for the life of the model sales. Second, approximately 20% are only beginning to replicate pro- they are supplying and heyond. Of of the executives at Toyota's and grams such as presourcing, target course, the suppliers must fulfill one Nissan's major supplier companies costing, and SCORE in their own condition: they must perform well formerly worked for tbose automak- supply chains. on the current model and must meet ers. This intimacy leads to a high the target cost on the next. "The level of understanding and a com- Even if Chrysler has a long way to business is theirs to keep forever or mon culture that Chrysler could go, the progress it has made in the until they elect to lose it," Stall- never duplicate. last seven years is nonetheless re- kamp declares. markahle. Its success to date in Suppliers make it clear tbat However, Cbrysler's arrangement building an American keiretsu-or, Chrysler's longer-term commit- has its advantages. It is much easier as its leaders prefer to call it, ments are having the desired effect. for Cbrysler to drop underperform- Chrysler's "extended enterprise"- "I would certainly say that we are ing suppliers than it is for Toyota or proves that decades of adversarial re- more comfortable making invest- Nissan. Because those companies lations can be overcome. As Steve ments and taking risks on behalf of cannot drop suppliers so easily, they Zimmer, Chrysler's director of oper- Chrysler than on behalf of our other are under greater pressure to commit ations and strategy for procurement customers, with whom we have a resources to help suppliers improve. and supply, notes, "We've learned less secure long-term future," says This assistance almost certainly that you don't have to be Japanese to Ralph Miller, CEO of auto supplier benefits rivals-including Chrysler- bave a keiretsu-like relationship APX International. that buy from tbose suppliers. with suppliers. " Cbrysler has proved that highly productive partnerships Surveys conducted for Ford and Chrysler's formal programs that with suppliers not only can flourish Chrysler in 1990, 1992, and 1993 by measure results and offer incentives in the United States hut are the wave Planning Perspectives, an indepen- for improvement ideas are prohably of the future. dent market-research company, more suitable for tbe U.S. business confirm that Chrysler has made environment than the Japanese com- The author would like to thank the Regi- tremendous strides in developing co- panies' relatively informal approach nald H. Jones Center for Management operative, trusting relationships would be. One could argue tbat Policy, Strategy, and Organization at the without formal programs such as Wharton School and Michigan Future for with its suppliers. In 1990, suppliers their support of this research. He would rated Cbrysler lower than both GM SCORE, suppliers would not devote also ¡ike to thank Thomas Stallkamp and Ford on five key dimensions, in- the same resources to generating and the many others at Chrysler who as- cluding trust, responsiveness to ideas. As Stallkamp observes, sisted him. ideas, and efficiency. By 1993, sup- "SCORE is a success because it is Reprint 96403 pliers rated Chrysler bigber than a communications program, not just To order reprints, see the last page of this issue.

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