European Journal of Purchasing & Supply Management 7 (2001) 227242

Lean supply: the design and cost reduction dimensions

Ronan McIvor*
School of International Business, Faculty of Business & Management, University of Ulster, Londonderry, Northern Ireland BT48 7JL, UK Received 12 July 1999; received in revised form 21 November 2000; accepted 20 February 2001

Abstract The objective of this paper is to determine whether the principles of the lean supply model are currently present between an OEM and its key suppliers in the electronics industry. The research focuses on two key dimensions of lean supply supplier involvement in customer design activities and joint buyersupplier cost reduction. Although the ndings have indicated the presence of some of the principles associated with lean supply in areas such as higher levels of customer and supplier integration in the new product development process and high levels of information exchange in the supply chain, total leanness along these dimensions is not currently present. In fact, the research has revealed that considerable barriers currently exist to meeting the requirement of equality between partners and the mutual sharing of benets. Evidence found here has shown that the majority of benets accrued from the relationship were obtained by the customer. # 2001 Elsevier Science Ltd. All rights reserved.
Keywords: Lean supply; Design and cost reduction

1. Introduction The objective of this paper is to determine whether the principles of the lean supply model are currently present between an OEM and its key suppliers in the electronics industry. The research focuses on two key dimensions of lean supply supplier involvement in customer design activities and joint buyersupplier cost reduction. The analysis is also extended to the nature of the relationship between the OEMs key suppliers and their other major customers. With OEMs in the electronics industry constantly re-designing their existing products in order to reduce costs and increase functionality there is tremendous emphasis on internalising suppliers into their cost reduction and design activities. The research seeks to inform the debate on the application of lean supply in practice. Much of the analysis on lean production and its impact on the supply chain have focused mainly on the automotive industry. For example, the automotive industry has been the subject of many of the most detailed studies into the relative performance of Japanese and Western manufacturers (Pickernell, 1997; Gules et al., 1997; Sako et al., 1994;
*Corresponding author. Tel.: +44-28-7137-5321; fax: +44-28-71375323. E-mail address: r.mcivor@ulst.ac.uk (R. McIvor).

Boston Consulting Group, 1993; Lewis et al., 1993; Anderson Consulting Group, 1993; Womack et al., 1990). Hines (1995) has expressed the need for research to establish whether lean supply is feasible in a wide range of industrial sectors, and to identify the pitfalls in the implementation of and management of change towards lean supply. Providing insights into buyer supplier relations in the electronics industry would be of potential value to other industries that are attempting to adopt lean production practices. Such insights would also be of value to other industries that are using more and more electronic components. For example, the automotive industry is increasingly using electronic components in its products. The value of electronics in a new car is already greater than its steel content and growing at around 20% a year as car makers increasingly use electronics to add features or conform to new safety or pollution legislation (Nairn, 1998). The research carried out focuses on an electronics manufacturer and its key suppliers. For purposes of condentiality the company will be referred to as the Company throughout the paper. Over the last number of years the Company has adopted a strategy which has led to the extensive outsourcing of more activities to suppliers. The trend towards outsourcing is supported through the development of more collaborative relations with its key suppliers. The buyersupplier relations of

0969-7012/01/$ - see front matter # 2001 Elsevier Science Ltd. All rights reserved. PII: S 0 9 6 9 - 7 0 1 2 ( 0 1 ) 0 0 0 0 4 - 1

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the Company and its key suppliers are compared against that of the lean supply model. As part of the analysis carried out the following research questions are answered: (i) Are buyersupplier relations between the Company and its key suppliers consistent with the lean supply model of customersupplier relationships in terms of:
* *

Nature of supplier involvement in design; Joint cost reduction? (ii) How does the nature of the relationship between the Company and its key suppliers compare with that of the suppliers other major customers? (iii) What are the current impediments to the application of the lean supply model between the Company and its key suppliers?

2. Lean production and lean supply Interest in the Japanese sub-contracting model was fuelled by the publication of The Machine that Changed the World (Womack et al., 1990) which found a 2 : 1 dierence in productivity between car assembly plants in Europe and those in Japan, with the Japanese plants showing a 50% superiority on defects per car. In their book Womack et al. (1990) have explained how companies can dramatically improve their performance by adopting the lean production approach pioneered by Toyota. For full eectiveness, the lean production system must be extended down through the supply chain. The term lean embodies a system that uses less of all inputs to create outputs similar to the mass production system but oering an increased choice to the end customer. The logic behind lean thinking is that companies jointly identify the value stream for each product from concept to consumption and optimise this value stream regardless of traditional functional or corporate boundaries. This is carried out by teams organised between functions and between companies, supported by the relevant functional specialists. This will result in networks of organisations working together in what Womack and Jones (1994) term the lean enterprise: . . . a group of individuals, functions, and legally separate but operationally synchronised companies. The groups mission is collectively to analyse and focus on a value stream so that it does everything involved in supplying a good or service in a way that provides maximum value to the customer. In order to facilitate this change process, it is necessary to redene corporate strategy and to identify key customer facing processes such as order fullment

and new product development together with key noncustomer facing processes such as supplier integration. Although lean production was developed through the study of the Japanese automotive industry, Womack and Jones (1994) argue that its approaches and way of thinking can transcend cultural and industrial divides. Also, other work on the lean enterprise extends the principles beyond manufacturing in the company to include value streams for product families, covering suppliers and customers (Womack and Jones, 1996; Dimanescu et al., 1997). The roles of and relationships between suppliers and customers along the value stream are crucial to achieving leanness, hence the importance of lean supply. Womack et al. (1990, pp. 138168) emphasised the strategic role that suppliers have to play and outlined the characteristics of lean supply. For example, the need for minimal inventory for cost and quality reasons and early detection of defects requires a kanban supply arrangement. Suppliers need to deliver frequently, in small quantities, as required to the point of use with total quality guaranteed eliminating the need for incoming inspection. Suppliers are also involved in the design of components with assemblers, organising their supply base into a tiered hierarchical structure. First tier suppliers organised the design of components with their supply base, supplying component sub-systems to the car assemblers, who often-held equity stakes in these companies. The notion here is that buyers and suppliers are locked together in long term, obligational relations as distinct from the historical Western model of shortterm competitive relations where contracts are awarded largely on the basis of price. Lamming (1993) developed lean supply characteristics in a prescriptive model, progress towards which could be analysed to determine likely future success. Lammings lean supply model draws heavily on Japanese experiences and is designed to capture the position of the leading manufacturing and assembly companies in the automotive industry. Also, it was proposed as a postJapanese model. Reporting on the progress towards lean supply Lamming (1995) summarises it as: . . . the elimination of the duplication of eort and capability in the supply chain, combined with a philosophy of continuously increasing the expectations on performance and self-imposed pressure to excel. This is achieved by recognition of mutual dependence and common interest between customer and supplier } beyond the principle of operational collaboration (as characterised by supply partnerships): such strategies require the reconception of the business unit. The characteristics of the lean supply model are shown in Table 1. A lean supply arrangement should provide a ow of goods, services and technology from

R. McIvor / European Journal of Purchasing & Supply Management 7 (2001) 227242 Table 1 The lean supply model of customersupplier relationships (Lamming, 1993) Factor Nature of competition Lean supply characteristic Global operation; local presence Based upon contribution to product technology Organic growth and merger and acquisition Dependent up on alliances/collaboration Early involvement of established supplier in new vehicle Joint eorts in target costing/value analysis Single and dual sourcing Supplier provides global benets Re-sourcing as a last resort after attempts to improve True transparency: costs etc. Two way: discussion of costs and volumes Technical and commercial information EDI Kanban system for deliveries Regionally strategic investments discussed Synchronised capacity Flexibility to operate with uctuations True just-in-time with Kanban Local, long-distance and international JIT Price reductions based upon cost reductions from order onwards: from joint eorts Supplier vetting schemes become redundant Mutual agreement on quality targets Continual interaction and kaizen Perfect quality as goal Integrated: assembler and supplier Long-term development of component systems Supplier expertise/assembler systems integration Very high for both customer and supplier Self-imposed Not culturally specic

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Basis of sourcing decisions

Role/mode of data/ information exchange

Management of capacity

Delivery practice

Dealing with price changes

Attitude to quality

Role of research and design

Level of pressure

supplier to customer (with the associated ows of information and other communications in both directions) without waste (Lamming, 1996). Recent doubts have been expressed about the earlier interpretation of buyersupplier relationships in the Japanese car industry that have led to the interest in lean production and lean supply in Europe and North America. This has led to the challenging of the general applicability and measurable benets of lean production

and lean supply. Womack and Jones (1996) argue that lean production practices represent a universal set of principles that can achieve the same benets outside Japan to those found in Japan itself. Lewis (2000) argues that the predominance of Japanese exemplars raise legitimate concerns about cultural specicity. Although, benchmarking studies have beneted from close attention to actual practice, many have largely ignored the wider economic and market conditions (Katayama and Bennett, 1996). For example, Toyota enjoyed a set of circumstances such as consistently rising demand that enabled the company to sustain a high ow through its own factories and those of their suppliers. Toyota has a unique history and geographic setting that have facilitated the practice of JIT and Kanban systems. Oliver and Hunter (1998) have questioned the competitive impact of leanness. Investigations into the relationship between protability and lean production by Oliver and Hunter found no statistical signicance between high and low users except that high users exhibited much higher volatility in prots. Also, lean production methods have not been applied universally across Japan but evolved from studies of the Toyota Production System (TPS). It must be pointed out that other Japanese companies have not adopted the principles of lean production to their fullest extent. For example, Nissan believed it was more practical and economical to keep a larger amount of inventory on hand than Toyota due to the fact that Nissans plants were more geographically dispersed (Cusumano, 1994). There is also a clear onus on academia to challenge and debate models such as lean supply. New and Ramsay (1997) argue that academics have a duty of care before promoting their hypotheses as proven fact. For example, in relation to lean supply, there is a lack of empirical evidence of the implementation of Lammings lean supply model which enable a judgement to be made on whether it is worthwhile applying and whether the measurable benets are actually achievable. Erridge and Murray (1998) argue that there is a lack of conrmation of the feasibility of Lammings lean supply model as a whole, with its interdependent strategies for organising and managing interactions and processes within and between the customer and supplier organisations in extended supply chains. For example, Lamming (1995) argues that progress towards lean supply is achieved by recognition of mutual dependence and common interest between the customer and supplier } beyond the principle of operational collaboration: such strategies require re-conception of the business unit. These normative assumptions of mutual dependence and common interest need substantiation in order to determine whether the model can bring the customer or supplier any measurable benets in terms of performance.

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Burnes and New (1996) argue that partnership may not always be the only way forward for supply chain improvement. In competitive and increasingly global industries, suppliers who prosper will be the ones that can achieve world class performance regardless of the orientation of their customers. Also, there are inconsistencies in the literature on the denition of lean supply both as a distinct model and in relation to partnership. Even Lamming (1995) contributes to the lack of clarity in the denition of lean supply by identifying characteristics dierent in some respects to those set out in Table 1 such as the extensive outsourcing of responsibility for design and redesign of products and services and a dismantling of blame cultures. Whilst, it could be argued that both sets of characteristics are derived from a common philosophy, a lack of consistency and clarity may lead to misunderstandings among both practitioners and academics. Also, there is confusion in the literature in distinguishing between lean supply and partnership with the two terms being used interchangeably. Cox (1996) argues that lean supply is not an end state but something proactive rms must do at all times. In order to achieve lean supply companies will pursue external relationships } ranging from partnership to adversarial } which will enable them to maximise competitive advantage. Against this, Lammings denition of lean supply would seem to suggest that it is not achievable unless a close relationship, built upon mutual trust and openness, is present, which is not compatible with an adversarial relationship. For example, Lamming argues that under lean supply members of the supply chain must recognise the concepts of being in the same boat and mutual destiny (Lamming, 1996). Nevertheless, Cox identies a variety of partnership strategies that are consistent with lean supply including preferred suppliers, single sourcing, network sourcing and strategic alliances. The objective of this research is to determine whether the principles of lean supply are currently present between an OEM and its key suppliers in the electronics industry. It examines the feasibility of lean supply and if measurable benets are achievable in applying its principles. In particular, the research focuses on supplier involvement in customer design activities and joint buyersupplier cost reduction } two key dimensions of lean supply. These two dimensions are not being considered in isolation. The issues of cost management and design cut across a number of the lean supply factors proposed by Lamming. Referring to Table 1, the issue of design is included in the factors of Basis of Sourcing Decisions, Information Exchange, and the Role of R&D. In relation to cost reduction, it is included in the factors of Basis of Sourcing Decisions, Information Exchange, and Dealing with Price Changes. OEMs in the electronics industry have been placing considerable

emphasis on integrating suppliers into these activities for the following reasons: (i) New product development: due to shortening product life cycles and time-scales there are signicant eorts directed towards new product development. There is signicant emphasis on OEMs and their suppliers working together in the new product development process to reduce costs and have formal cost reduction plans for the future life of new products. (ii) On-going cost reduction and re-design: with OEMs in the electronics and telecommunications industries constantly re-designing their existing products in order to reduce costs and increase functionality there is tremendous emphasis on internalising suppliers into the process. The research provides an opportunity to inform the debate on the application of these dimensions of lean supply in practice.

3. The research site The research focuses on a Strategic Business Unit (SBU) of a global electronics equipment manufacturer and its key suppliers. The Company had experienced considerable change over the last 10 years having been taken over by a multi-national electronics company. The take-over had resulted in an increasing emphasis on the adoption of world class practices such as a total quality culture, integrated product development and continuous improvement. The Company is quite small in comparison to other sister plants within the corporate fold with annual sales revenue in 1996 accounting for only 2% of the total revenue of the global company. In 1991 the Company set up a design facility close to the manufacturing plant for new product development and the redesign of current products. The design facility supports the manufacturing facility and adapts standard company products to customer requirements. The colocation between the manufacturing facility and the design centre enables design to work closely with the product manufacturing operation. The products and systems developed in the design centre are technically complex requiring, at various stages during the development cycle, the involvement of the disciplines of mechanical and thermal design, electrical and electronic design, software, systems design, printed circuit board (PCB) design, manufacturing interface, manufacturing support, component and supply management. An important ingredient in enhancing the competitive position of the Company is cultivating the relationship between the manufacturing plant and the design centre. In the manufacturing site the role of design aects the whole spectrum of product development and manufacturing activities, impacting on the success of projects

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that range from the re-design of existing products to the development of new products. Therefore, with design being a high value adding activity it is seen as increasing the technological capability of the site as a whole. The Company denes its core business as comprising the skills and technologies that contribute to minimising the time between an order being received and fullment of that order. The achievement of excellence in its core business depends upon the management and integration of the activities involved in the order fullment process including manufacturing velocity, delivery to customer required date, inventory management and supplier management. The ability to manage and co-ordinate the linkages has been central to the Company achieving its core business with outsourcing being an important facilitator of this strategy. As a result of pursuing such policies the purchasing function has been undergoing considerable change in the way it is organised and the way in which it deals with suppliers. The trend towards outsourcing is supported through the development of more collaborative relations with its key suppliers.

4. Research methods A single case design was chosen because of the exploratory nature of the study and the level of detail in the data required. Using a single case design allows an increase in the quality and quantity of data obtained (Yin, 1994). An in-depth case study can make up for the lack of generality by revealing a greater depth of understanding of the set of events under analysis. The research focused on a number of key areas in order to deal with the subtleties and intricacies of complex social situations. In particular, it analysed the relationships and social processes in a way that would have not been possible using a survey approach alone. Also, to eectively achieve the primary objectives of the research required a variety of data collection methods such as direct observation, access to documentation, interview and survey. A particular strength of the case study method is that it allows the combination of these types of data collection methods which enables the researcher to capture the complex reality under scrutiny (Saunders et al., 1997). By observing meetings involving the Company and its key suppliers, it was possible to gain an understanding of the factors that inuenced company decision making with regard to the management and organisation of its supply base. It enabled a deeper understanding of the issues involved and oered the potential to obtain sensitive data that may have not been forthcoming in an answer to a questionnaire. Gathering data from the organisation and its key suppliers was facilitated through direct observation of meetings involving company personnel and supplier representatives. This provided detailed and intricate descriptions

of the important issues and behaviour patterns of the people involved in these meetings which in turn enabled an understanding of the meanings and behaviour of the people involved both internally in the Company and the representatives of its key suppliers. For example, it was possible to directly observe the interactions of the purchasing personnel and supplier representatives in areas such as cost reduction and new product development in order to gain an insight into the nature of buyersupplier relations. It also enabled observations to be made of other functions in the Company such as design and nance interacting with suppliers. Structured and unstructured interviews with personnel from both the Company and its key suppliers were also carried out. A key benet of using interviews was to follow up on and develop issues that were raised in meetings. A structured questionnaire was also used at this stage to complement the analysis carried out in the Company. The questionnaire was used to collect data from the suppliers with regard to the level of design collaboration and joint cost reduction in the supply chain. The questionnaire was not exclusively concerned with the relationship between the Company and its suppliers. A number of sections dealt with the demands that other major customers are placing upon suppliers. This enabled a comparison to be made between the nature of the relationship between the Company and its suppliers with that of the suppliers other major customers. Yin (1994) has found that certain case studies can benet when the same questions are posed for two pools of sites } a smaller pool (the Company) that is the subject of the case study and a larger pool (the supply base) that is the subject of a survey. The answers can be compared for consistency. The analysis in the Company provided an insight into the relations with its suppliers while the survey complemented this analysis by revealing an indication of the prevalence of such relations in the supply chain. Questionnaires were sent to 45 suppliers out of a total of 600 suppliers from a variety of business segments. A total of 40 questionnaires were returned completed, a response rate of 89%. The predominant organisation structure of the suppliers was multi-national. 35 suppliers were multinationals with the rest being locally owned limited companies. The number of people employed by each supplying company ranged from 1600 to 24. The types of items supplied ranged from high technology electronic components to complex electro-mechanical sub-assemblies. There were also a number of suppliers that supplied complex Printed Circuit Board (PCB) assemblies. Approximately 80% of their purchases by value were obtained from these suppliers and they were dened as key suppliers. In relation to Kraljics (1983) purchasing product portfolio model these suppliers supplied mainly strategic items, i.e. a considerable value in the cost price of the end product. As well as supplying strategic items, some of

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the electronic component suppliers supplied lower value items such as resistors and relays. The Company had been attempting to develop more collaborative relations with all these suppliers with particular emphasis on greater integration in design and cost reduction activities. In particular, the Company believed that greater involvement of supplier in new product development activities would enable growth to be achieved more quickly.

These two dimensions are explored in the following discussion of three examples. 1. Standard Items } These items may include standard electronic components. Designers select the suppliers at the development stage for these items by referring to the Corporate wide database which contains a list of all the approved suppliers for the item. There is limited interaction between the Company with these types of suppliers concerning information on prices, lead times and future market trends. 2. Printed Circuit Board (PCB) Assemblies } A number of suppliers were asked to quote after the design and technical specications were completed. There was a certain amount of competition with a number of suppliers being requested to quote and provide other information such as lead times and cost breakdowns before the Company made the selection decision at the development stage. There was no evidence of any supplier involvement in design team meetings in the Company. 3. Specic Electronic Components } With these types of components there is a high level of involvement between the Company and the supplier, which begins at the concept stage. These key components have a considerable impact upon the power and functionality of their end products. The design process is heavily inuenced by the current and future capabilities of the suppliers in the relevant technologies. The interaction process can be in the form of working sessions where representatives from Purchasing and Design in the Company and the supplier share technology roadmaps. The supplier selection decision is made at the concept stage if a supplier is recognised as the most competent in terms of technology and can meet the price, quality and delivery criteria. However, the supplier selection may not take place at the concept stage if there are a limited number of suppliers competing for the business. Another inuencing factor is that procurement at Corporate level encourages the Company to buy these components from suppliers with which it is in a strategic alliance. Although there is a high level of collaboration between the Company and its suppliers in the design process in the areas of information sharing, there is

5. Findings. Supplier involvement in customer design activities This section analyses the nature of the interaction between the Company and its key suppliers in the design process. The analysis is then complemented with questionnaire results that examine the extent of involvement between the suppliers and their other major customers in the design process (excluding the Company). Table 2 shows the stages involved and the tasks carried out within each stage of the design process in the Company. A high level of interaction was observed between suppliers and the relevant functions in the Company. The functions included design, engineering, manufacturing, purchasing, component management, product integrity and marketing. In analysing how customers involve their suppliers in the design process, two dimensions should be considered (Bonaccorsi and Lipparini, 1994): (i) The timing of supplier involvement: refers to the stage at which the customer begins to search for suitable suppliers and make them aware of the project. Suppliers may be involved at the concept stage or in the development stage after detailed design is completed and technical specications are issued. A key factor indicating the depth of the partnering relationship between the customer and its suppliers is at what stage the supplier selection decision is made. (ii) Degree of competition among suppliers: refers to the degree of competition among suppliers at their time of involvement. For example, if one supplier is selected at the concept stage with no involvement from other suppliers then the degree of competition is low. The converse situation follows when a number of suppliers are competing for selection at the development stage.
Table 2 Activities for each stage in the design process Concept Denition of: Target markets Product architecture Identify key building blocks of the product Identify key components required Development

Engineering Product and process detailed design Prototype conceptually Build and test Engineering release

Manufacturing First-o production

Product design and planning Prototype on small scale Test

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conicting evidence on the nature of involvement of suppliers in the design process. In some instances, the supplier is heavily involved and selected at the concept stage of the design process } a specic component supplier. In other instances, the role of the supplier was limited to that of providing information on prices and lead times with the supplier selection decision being made at the development stage. In this instance a number of suppliers were being played o against each other so that the customer could extract the most favourable terms. The researcher found no evidence to suggest that the Company is pre-selecting suppliers before the design process begins. However, at Corporate level there are changes occurring in the way it deals with suppliers in the design process: . . .theres nothing to prevent us from picking suppliers before the product enters development. What it does imply is a very dierent way of working with suppliers than weve done historically, and oering dierent services to company designers than we do now. Pre-selecting suppliers before we start design would help us tremendously in both our time to market and product cost initiatives. Extract from Interview with the Director of Corporate Procurement. This implies that the Company has not been pursuing a policy of selecting suppliers at the concept stage although suppliers may have had some involvement at the concept stage. A related issue is the fact that the global corporation is trying to increase the eectiveness of R&D spending. The corporation is growing at 30% annually with a 14% of sales revenue on R&D. If this is to continue the corporation will not be able to recruit enough design people to maintain this forecasted growth. The corporation is therefore pursuing a strategy to enable suppliers to take a more active role in the design process: . . .use suppliers as solution providers. If we concentrate our purchasing power on a few suppliers, then we can inuence their technology roadmaps and R&D activities. Essentially, they will do some of the R&D for us, at no cost to us. Extract from Interview with the Director of Corporate Procurement. Expansion was particularly evident in the Company at Local level with the design facility in particular experiencing rapid growth over the last number of years. It is therefore imperative that suppliers are more involved in design and in some cases have full responsibility for the design of components. However, the researcher observed a diculty with attempting to increase the role of the supplier in the design process. Company designers perceive it as a threat to their employment if the Company outsources design

activities. The researcher observed a case where one of the Companys customers required a customised product. The chosen supplier was heavily involved with Company designers in the design process. However, a situation arose in which the Companys customer required many changes throughout the design process leading to a situation where the design people were communicating any changes requested by the customer to the supplier. Designers were ercely opposed to the supplier interfacing directly with the Companys customer, perceiving it as a threat to their employment. With regard to the design section of the questionnaire suppliers were questioned on the extent of their involvement in the design process with their major customers. The rst issue dealt with was the level of supplier involvement in the design process with their major customers (excluding the Company) in the design process and how this has changed and is likely to change in the future. Suppliers were also asked about the level of involvement of their own major suppliers in the design process. Two types of design involvement were considered:
*

Collaborate with their major customers in the design process; Full responsibility for component or sub-system design.

For each of these, suppliers had to indicate it to be one of the following:

* *

A current requirement; If not a current requirement, it was expected to be in the future; Currently not a requirement and not expected to be in the future.

As Fig. 1 shows 77.5% of suppliers currently collaborate with their major customers in the design process with only 17.5% of suppliers having no involvement in design. Only 42.5% of suppliers are currently being required by their customers to take full responsibility for component/sub-system design. However, an increasing number of suppliers (55%) expect their major customers to give them more full design responsibility in the future. In relation to the level of involvement between the suppliers questioned and their own major suppliers the results are presented in Fig. 2. 57.5% of suppliers already have their own suppliers collaborating with them in the design process and this is not likely to change in the future. Over half (57.5%) of respondents do not have suppliers currently responsible for full component/subsystem design and do not expect them to be involved in the future. Only 22.5% of suppliers require their own suppliers to be fully responsible for design. However, there is a signicant shift with almost half (42.5%) of suppliers expecting their own suppliers to take on full responsibility for design in the future.

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Fig. 1. Level of design involvement between suppliers and their major customers.

Fig. 2. Level of design involvement between suppliers and their own major suppliers.

Fig. 3. Time of supplier involvement in design with major customers.

This is in line with the 55% of the Companys suppliers that expect their major customers to give them full responsibility for design, indicating the importance of having a design capability at lower levels in the supply chain.

The next issue addressed was the time at which the supplier became involved in the design process } concept, development, engineering or manufacturing. Fig. 3 shows the results for this section with most suppliers (60%) involved at the Concept stage with

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Fig. 4. Customer and supplier functions involved in design process.

37.5% of suppliers involved at the Development stage with only 2.5% of suppliers involved at the Manufacturing stage. Fig. 4 shows the functions that are involved from the Customer and Supplier organisations in the design process. From the Customer, with the exception of Marketing, most functional areas are well represented. As expected the Engineering function is best represented (97.5%). A signicant gure is that of 90% of customers involving the Purchasing function in the design process. From the Supplier organisation, not surprisingly, the Engineering (95%), Manufacturing (82.5%) and Design (75%) functions were well represented. However, from both a Customer and Supplier perspective is the importance of the respective Quality functions in the design process. 77.5% of Customers have their Quality functions involved while the gure for Suppliers is 82.5%, indicating the importance of quality in the design process. The multi-functional involvement from the Customer and the Supplier clearly indicates the prevalence of a team approach being adopted to the design process. The involvement of Purchasing from the Customer organisation illustrates the importance of suppliers in the design process and the need to manage eectively their integration into the process. The role of the purchasing professional is becoming increasingly that of a member of a cross-functional team. This point is further reinforced by the fact that 60% of suppliers are involved at the Concept stage of the design process. Suppliers are contributing through initial technical

suggestions, process capabilities and quality assurance considerations. Fig. 5 shows the types of information exchanged between suppliers and their major customers in the design process. Suppliers expect their level of involvement in the design process with their major customers to increase. However, it is unclear whether this means suppliers will increasingly take on full responsibility for component and sub-system design. Evidence from the suppliers in their responses to the questionnaires indicates that they are well aware of the importance and the benets that can accrue from a more prominent role in the design process of their major customers. It is interesting to compare these results with those of the contract lengths established between these suppliers and their major customers. In the questionnaire suppliers were asked to indicate the average contract lengths with their major customers (excluding the Company). The results are presented in Fig. 6. Although OEMs in the electronics industry are increasingly involving suppliers in new product development activities, these ndings in relation to average contract length would suggest that they are not selecting suppliers for the life of the product.

6. Joint buyersupplier cost reduction This section analyses the level of joint cost reduction between the Company and its key suppliers. The

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Fig. 5. Information exchange between suppliers and their major customers.

Fig. 6. Supplier average contract length with major customers.

analysis is then complemented with the questionnaire results that explore the extent of joint cost reduction between the suppliers and their major customers. Munday (1992) has emphasised that in a partnership relationship, buyers and suppliers require a great deal of cost data underlying component prices. The objective is to create a situation conducive to the customer and supplier working together to minimise costs. There are a number of techniques associated with cost analysis in the supply chain:
*

improvement and cost reduction (SMMT & DTI, 1994). Cost transparency:- refers to the two way sharing of cost information between suppliers and customers and identifying opportunities for cost improvements (Lamming, 1993). Total cost of ownership: describes all the costs associated with the acquisition, use and maintenance of a good or service throughout the entire supply chain (Ellram, 1996).

Open book costing: refers to the negotiation technique in which the customer requires the supplier to share component cost information, as part of the process of

During the time spent in the Company the researcher observed little evidence of the practice of cost transparency or total cost of ownership. In relation to open

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book costing there was clear evidence of the Company requesting suppliers to provide component cost information such as material costs, packaging and delivery cost, overheads and prots. For example, during the on-going cost reduction programmes cost information may be requested from a supplier if the Company perceived an opportunity for a cost reduction. The following case provides an insight into the Companys approach to cost reduction and the role of suppliers. The Company approached one of its key subassemblers to determine whether there was an opportunity for a cost reduction on a high-volume subassembly. Discussions revealed no opportunity for such a reduction under the current design. However, design and purchasing believed that it would be achieved by changing the manufacturing process and using an alternative sub-assembler. Outlining these proposals to the current sub-assembler, the sub-assembler agreed to reconsider if there was any scope for a cost reduction with the current design. The sub-assembler came back with reduced costings of the current design that was only slightly more expensive than the proposed new design. Although the sub-assembler provided a breakdown of the costs associated with the sub-assembly there was no evidence of the Company working with the subassembler to identify any scope for cost reductions in the manufacturing process. It seemed to be more of a situation where the sub-assembler lowered its price for fear of losing the business. The supplier involved in the preceding example is one of the Companys most important suppliers with over 20% of its sales turnover with the Company. Ellram (1996) describes this scenario as a leverage purchase due to the signicant spend on the part of the customer and the importance to the customer in terms of competitive impact. Due to the importance of such purchases the customer must be willing to carry out detailed cost analysis applying such techniques such as Value Analysis and Total Cost Modelling. When asked by the researcher why there was a low level of joint customercustomer cost reduction activity the purchasing manager identied a major problem to be that of limited resource in the purchasing function. It was also pointed out that suppliers may have been reluctant to become involved in such a process because they may not have known their own cost structures to share them with their customers. The purchasing manager also commented that during annual price negotiations with suppliers he was very sceptical of cost breakdowns provided by suppliers to justify any component price changes. He further added that it was very dicult to constructively negotiate prices with limited information on supplier internal operations without being seen to be creating a win/lose situation. This analysis was further reinforced by

comments from one of the Companys key electronic component suppliers: Closer working together so we can reduce the cost of ownership by actively partnering with your shop oor. Better understanding of Purchase Price Variance savings vs. total cost savings. Cost improvement programmes throughout the life of the contract rather than annual contract negotiations. An important issue advanced in this comment is the suppliers dissatisfaction at the annual contract discussions being the only forum for cost reduction and the favouring of a registered cost improvement programme throughout the life of the contract. It further emphasises the limited participation of suppliers in the Companys cost reduction programmes. However, there appears to be an inuence from Corporate level to change the approach to cost measurement throughout global operations. It is closely linked to the policy of preselecting suppliers at the concept stage of the design process and giving them a contract for the life of the product: We could commit to purchasing from a particular supplier or set of suppliers, and that means supplier negotiations would change. Right now we try to get an annual cost reduction from a supplier. Instead, we would determine what the product has to cost over time. This would be a shared cost objective, not ongoing price negotiations. Extract from Interview with the Director of Corporate Procurement. These comments would suggest that the corporation is intending to adopt a system comparable with target costing. Target costing is not a costing system as such; rather it is an activity which is aimed at reducing the life cycle costs of new products, while ensuring quality, reliability and other customer requirements, by examining all ideas for cost reduction at the product planning, research and development process (Kato, 1993). It involves determining what price the market, or nal customer, will pay for the product and working backwards to calculate the allowable costs for systems, subsystems and components. At the beginning of the design process the customer sets target costs for items in collaboration with the suppliers (Dyer, 1996). The focus on cost rather than price has created a winwin situation because the company works with suppliers to meet common cost and functional objectives. Nissan in the UK also places heavy emphasis on supplier costs with its total cost control concept which is explicitly linked to the recognition that, with over 80% of their costs eectively bought-in, supplier cost controls must form a central and integral part of any realistic target costing system (Carr and Ng, 1995).

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Interviews with representatives from the customer and supplier organisations revealed some interesting insights into cost reduction. For example, over the last number of years the Company had embarked upon a number of supply base rationalisation programmes. For example, one buyer was openly resistant to supply base rationalisation fearing it provided less opportunity for cost reductions with the Company being unable to switch suppliers easily. Such a view provides an insight into the attitudes of purchasing personnel in relation to supplier management. Supplier representatives were also sceptical of the merits of sharing cost information fearing that the customer may use it to extract lower prices. These attitudes are based upon previous behaviour and illustrate the diculties associated with adopting more collaborative buyersupplier relations. In relation to the cost issues addressed in the questionnaire suppliers were questioned on the extent of application of the cost analysis techniques } open book costing, cost transparency and total cost of ownership } with their major customers (excluding the Company). Suppliers were also questioned on whether they were applying these techniques with their own major suppliers. For each of the techniques, suppliers had to indicate it to be one of the following:
* *

A current requirement; If not currently required, it was expected to be in the future; Not a current requirement and not expected to be in the future.

open book costing } 57.5%) of suppliers questioned do not expect the practice of any of these techniques. Currently, there is limited practice of total cost of ownership, cost transparency and open book costing revealed by the gures 32.5%, 27.5% and 30%, respectively. Although the practice of these techniques is expected to increase in the future the majority of suppliers do not expect their major customers to require their practice. One major barrier to the suppliers and their major customers in cost sharing is the diversity of manufacturing cost accounting systems used by participating companies. Suppliers were asked to indicate which manufacturing costing method it used. Fig. 8 shows the results that clearly illustrate a wide variety of accounting systems used by suppliers. Also some suppliers are using more than one costing method. With rms using dierent methods, this makes it dicult to compare costs objectively. The variety of costing systems in use is a major barrier to the development of cost transparency as well as the diculties associated with poorly managed systems. The results of the practice of the cost analysis techniques between the suppliers and their own major suppliers questioned are presented in Fig. 9. Currently there is a low level of practice of the techniques. In particular, only 10% of suppliers are currently using open book costing with 35% expecting to use it with their own suppliers in the future.

7. Discussion of ndings The ndings have shown a high degree of interaction between the Company and its key suppliers in the design process. However, in relation to the level of supplier involvement in design there were inconsistencies in its approach. For example, in some instances suppliers were heavily involved and selected at the concept stage.

Fig. 7 shows the results of extent of the practice of these techniques between the suppliers and their major customers. The most signicant nding is in relation to the number of suppliers that are not currently required to practice these techniques and do not expected to be required to in the future. The majority (total cost of ownership } 52.5%, cost transparency } 62.5% and

Fig. 7. Extent of practice of cost techniques among suppliers and their major customers.

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Fig. 8. Manufacturing costing method used by suppliers.

Fig. 9. Extent of practice of cost techniques among suppliers and their own major suppliers.

There were other instances of the Company playing suppliers o against one another in the design process in order to extract more favourable terms. Part of the problem was due to the fact that the Company had no formal policy statement or clear guidelines on the management of suppliers in the design process. However, there was evidence of Corporate level adopting a policy in the future which will involve pre-selecting key suppliers before design begins and giving the supplier the business for the length of the product life. Questionnaire results have indicated a high degree of interaction between the suppliers and their other major customers at the concept stage. Also, the suppliers have indicated that in the future the level of involvement is likely to move from that of being a collaborative role to that of being fully responsible for the design of certain

components and sub-systems. These ndings indicate that suppliers and OEMs in the electronics industry are not currently integrated in the research and design process in a way that Lamming (1993) has proposed in the lean supply model. However, as OEMs focus on a limited set of core competencies there is likely to be more integration in the future with OEMs taking advantage of the research and design capabilities of their suppliers. In relation to joint cost reduction, there was limited evidence of the practice of cost transparency or total cost of ownership between the Company and its suppliers. There was limited evidence of what Lamming terms true transparency with clear evidence of cost sharing being all in the one direction from the supplier to the customer. There was clear evidence of the Company using cost

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information to erode the margin of the supplier by threatening to alter the supply arrangement. This is considerably dierent from how Lamming proposes price changes should be dealt with in lean supply that involves reducing prices based upon joint eorts at cost reduction. Suppliers expressed dissatisfaction at annual contract negotiations being the only forum for cost reduction with the Company. In relation to their other major customers, suppliers have indicated limited practice of joint cost reduction with it not likely to increase signicantly in the future. This suggests that OEMs are not requesting cost breakdowns from suppliers on a regular or formal basis. It was found that suppliers were using a wide variety of accounting systems, which was a considerable impediment to joint cost reduction.

Table 3 Current impediments to lean supply Dimension of lean supply Current impediments Supplier involvement in design In some instances, the Company is still playing suppliers o against one another in the design process. Currently, there are no clear policy guidelines for the level of supplier involvement and the time of supplier selection in design. Design personnel resistant to increasing the level of involvement of suppliers in the design process. Conict between members of the integrated product development team. For example, design attempts to make the supplier selection decision limiting the inuence of purchasing. OEMs not increasing the average contract lengths with their key suppliers. Diversity of manufacturing accounting systems used by suppliers limits the feasibility of the application of techniques such as open book negotiation and cost transparency. Perceptions of cost reduction as being that of switching suppliers still prevalent. Suppliers are suspicious of the motives of customer when requesting cost information. Some suppliers may not have been condent enough of the accuracy of their costing structures to share them with their customers. Not enough dedicated resource in the Company to jointly work with suppliers to identify areas for cost reduction. Annual contract negotiations perceived as a barrier to cost improvement programmes. Culture of people in both the customer and supplier is a considerable barrier to the principles of lean supply such as supply base reduction and cost information sharing.

Table 3 presents a summary of the current impediments to the pursuit of supplier involvement in design and joint buyersupplier cost reduction as evidenced by the research ndings. These ndings indicate the diculties associated with adopting these dimensions of lean supply. It is clearly very dicult to ensure the seamless integration of each member of the supply network. These impediments are not unique to the relationship between the Company and its suppliers. Questionnaire results conrm that suppliers are sharing similar experiences with their other major customers. These experiences clearly illustrate the diculties of one company attempting to pursue these dimensions of lean supply with its suppliers if these same suppliers are accustomed to working with their other major customers in the way they always have. This further emphasises the importance of the people in both organisations. The culture of the people permeates a number of the dimensions of the lean supply model including design and cost reduction. The success of the customer and supplier embracing collaborative relations is heavily dependent upon the attitudes of the people from both organisations who manage the relationship at the operational level. Although the ndings have indicated the presence of some of the principles associated with lean supply in areas such as higher levels of customer and supplier integration in the new product development process and high levels of information exchange in the supply chain, total leanness along these dimensions is not currently present.

8. Conclusions The ndings have illustrated that the dimensions of design and joint cost reduction are not currently present in their purest form between an OEM and its key suppliers. However, there was clear evidence of these dimensions being present in buyersupplier relations in the following areas:
*

Joint buyersupplier cost reduction

High level of interaction between suppliers and customers in the new product development process; Customers increasing the level of supplier involvement in the new product development process; High levels of information exchange in the supply chain.

The survey results have illustrated that companies in the electronics industry are likely to increasingly adopt some of the principles associated with lean supply in the future in areas such as greater supplier integration in the new product development activities of OEMs. The evidence also suggests that benets similar to those in the automotive industry can be obtained by OEMs in the areas of cost reductions and extracting

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price reductions from suppliers. Lamming (1993) argues that lean supply cannot be achieved unless some kind of close relationship, built upon mutual trust and openness is present, which is not compatible with an arms length strategy. However, this is too rigorous a requirement in that it is possible for companies to achieve some of the benets associated with lean supply without pursuing a relationship based on being in the same boat and mutual destiny. The research has revealed the current impediments that exist to creating a network of organisations which are legally separate but operationally synchronised companies (Womack and Jones, 1994). Some of these impediments may be overcome by giving suppliers longer-term commitments and changing the culture of the purchasing professional. However, there are other considerable impediments that are very dicult to overcome:
*

References
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Diversity of manufacturing accounting systems limit the application of joint cost reduction techniques in the supply chain; Due to rapid technology changes in the electronic components industry, OEMs are unlikely to enter into long-term relationships.

In relation to Lammings requirement of a close relationship built upon mutual trust and openness, it has already been shown that the customer obtained most of the benets of lean supply such as cost reductions while at the same time pursuing methods more compatible with an arms length strategy. This is in clear contravention to Lammings requirement of equality between partners and the mutual sharing of benets. Evidence presented here has shown that the majority of benets accrued from the relationship were obtained by the customer. For example, in the area of attempting to obtain cost reductions from suppliers there was evidence of the customer obtaining the benets of cost reductions while eroding the prot margin of the supplier. These ndings support Coxs (1996) argument that in order to achieve lean supply companies will pursue external relationships } ranging from partnership to adversarial } which will enable them to maximise competitive advantage. In other words, each member of the network will do what is best for themselves in terms of achieving the greatest competitive and prot-making advantage. For example, it has been shown how an OEM can use its inuence to obtain reductions in inventory and cost reductions which have a positive impact on the achievement of its own business strategy objectives. This is far from Womack and Jones (1996) notion of the lean enterprise that involves identifying the value stream for each product from concept to consumption and optimising this value stream regardless of traditional functional or corporate boundaries.

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R. McIvor / European Journal of Purchasing & Supply Management 7 (2001) 227242 SMMT and DTI, 1994. A review of the relationships between vehicle makers and suppliers. Department of Trade and Industry, Vehicles Division, London. Womack, J.P., Jones, D.T., 1994. From lean production to the lean enterprise. Harvard Business Review 75, 93103. Womack, J.P., Jones, D.T., 1996. Lean Thinking. Simon and Schuster, New York, NY. Womack, J., Jones, D.T., Roos, D., 1990. The Machine that Changed the World. Rawson Associates, New York, NY. Yin, R.K., 1994. Case Study Research: Design and Methods. Sage Publications, Beverley Hills, CA. Ronan McIvor is a Senior Lecturer in the School of International Business at the University of Ulster. He holds a rst degree in Business Studies, an M.Sc. in Computing and Information Systems and his doctorate is in the area of supply chain management.

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