While musing over American Auto’s debacle with suppliers and wondering why it wanted to take an elevator to the top without stopping at any of the floors in between, I began to conceptualize the problem as a pyramid or hierarchy. Thinking back to college social psychology, I thought of Maslow’s needs hierarchy, discussed briefly in the Develop Exceptional People and Teams Who Follow Your Company’s Philosophy, which assumes humans can work on higher-level needs like self-actualization (developing themselves) only if lower-level needs are satisfied. So I developed a supplier version of the need hierarchy.
The message from suppliers was that they were not interested in supplier development help from American Auto until some more fundamental issues were fixed. As a starting point, they wanted fair and equitable commercial relations. A lot of American Auto’s practices were simply unfair. For example, American Auto had adopted the Toyota practice of target pricing, setting targets for suppliers instead of relying on competitive bidding, but they had not executed it effectively. One supplier explained:
We have gone through a different target cost process for every group we deal with (in American Auto). If you are above target, they cannot issue a purchase order. We have gone around and around and reached launch without a purchase order.
Another supplier complained how inconsistent American Auto is in the target setting process:
If we meet the target too early in the design process, they will change the target. So there is absolutely no incentive to make the target early. There is no target-setting process. It is done differently every time. It even is different across programs within the same platform. It depends on who is in the room.
American Auto also has developed a long and complex process of certifying that a supplier’s process is capable from a quality perspective. Although it was burdensome, suppliers accepted it—but American Auto kept changing it. In fact, it would change multiple times during a new vehicle program and each time the supplier certification process would extend out. Until they were certified, suppliers did not get paid for tooling. Typical of most manufacturing businesses, American Auto is responsible for paying for the costs of tooling, dies, and special equipment used to make the parts. This can run into millions of dollars. In some cases, suppliers got all the way to the production phase and were producing new parts for months that were passing all the quality tests, but since they were not quality certified, they were not paid for the tooling.
This comes back to the concept of “coercive” versus “enabling” bureaucracy discussed in Standardized Tasks Are the Foundation for Continuous Improvement and Employee Empowerment. Both American Auto and Toyota are very bureaucratic in their dealings with suppliers. By this, I mean there are extensive standards, auditing procedures, rules, and the like. While suppliers view American Auto as highly coercive, Toyota, which uses similar quality methods and procedures, is viewed as enabling. For example, an American automotive interior supplier described working with Toyota in this way:
When it comes to fixing problems, Toyota does not come in and run detailed process capability studies 15 times like American Auto. They just say, “Take a bit of material off here and there and that will be OK—let’s go.” In 11 years I have never built a prototype tool for Toyota. Knee bolsters, floor panels, instrument panels, etc. are so similar to the last one it is not necessary to build a prototype. When there is a problem, they look at the problem and come up with a solution—focus on making it better, not placing blame.
By contrast, a supplier gave the following highly emotional description of American Auto:
In the climate we have today versus days past, we are successful if we do not get the crap beat out of us. We may execute on a program or a change and may be performing under the most demanding circumstances (e.g., attempting something we had said could not be done) and we execute 99.9% flawless. But if it is not 100% you get killed. We used to get appreciation for busting our butt for making the last-minute change. Now we are happy if we do not get any licks during the course of the week. It used to be a reward system and now it is purely a punitive system.
The supply chain need hierarchy in suggests that, until the relationship has stabilized to the point where the business relationship is fair, processes are stable, and expectations are clear, it is impossible to get to the higher levels of enabling systems and truly learning together as an enterprise. And you can come down the hierarchy as fast as you can go up. American Auto was making progress up the hierarchy in the early to mid-1990s and then went sharply down in the late 1990s and into the 21st century. Toyota in the meantime has been moving steadily up. For American Auto to become a benchmark for supplier relations, they will need to do much more than build a supplier development center. To begin to approach Toyota, they will need to remake their internal culture, become a learning organization, and break down the chimneys that provide contradictory policies to suppliers.
Toyota Way Principle 11 is Respect your extended network of partners and suppliers by challenging them and helping them improve. What really cements Toyota as the model for supplier relations is its approach to learning and growing together with its suppliers. It has achieved, in my view, something unique: an extended learning enterprise. This is, to me, the highest form of the lean enterprise.