INNOVATIONS IN SUPPLY CHAIN MANAGEMENT*
It was snowing outside the new Chrysler Headquarters building on Friday afternoon, December 5, 1997, as Thomas T. Stallkamp looked through his window and wondered whether Chrysler was on the right path. Stallkamp was credited as a driving force behind the radical innovations in Chrysler's supply chain management that had fueled the carmaker's resurgence during the last seven years, and had just been named President of The Chrysler Corporation.
Many questions came to mind as he reviewed his weekly SCORE report. The SCORE program, short for Suppliers Cost Reduction Effort, was the vehicle of change Stallkamp had instituted as Executive Vice President – Procurement and Supply at Chrysler. It was also a key element in a new concept at Chrysler called Extended Enterprise, by which the firm was changing its relationships with suppliers. Were the changes and programs he had put in place working as planned? Was innovation in supply chain management really helping Chrysler to stay ahead of the competition? Could competitors effectively copy Chrysler's methods? How could Chrysler apply its Extended Enterprise concept as it expanded globally? What lessons had been learned from the SCORE program that could be applied to other aspects of the company?
The Automobile Industry in America
Postwar Dominance (1945 to 1970)
As the only major nation to survive World War II with its industrial, economic, and political systems intact, the United States entered a period of unparalleled prosperity and growth which lasted over 25 years. Compared to the previous 25 years, which were marked by global war, mass unemployment, and world-wide depression, the prolonged expansion of the American economy was remarkable not only for its magnitude and duration, but because it was unexpected by most economists at the time.1
The period was characterized by tremendous growth in disposable income throughout the population, and manufacturing industries that had expanded to meet wartime production needs were able to shift their production to consumer goods in response to this new demand. Perhaps no industry better illustrates this boom than the American automobile industry from 1945 to 1970.
Mass production techniques, an early technological contribution of the automobile industry, and vertical integration were considered key factors in establishing the dominance of the three major American automobile manufacturers as they entered the 1950s. These were the General Motors Company (GM), Ford Motor Company, and Chrysler Corporation, all located near Detroit, Michigan. With rapidly expanding domestic markets, and little competition from foreign competitors, the industry grew rapidly, producing bigger and better cars to match changing consumer tastes and needs (see Exhibit 1). Construction of the interstate highway system and the transition from urban to suburban living also increased demand as consumers came to regard the car as a necessity for both local transportation and longer trips. The age of the automobile had arrived.
Growth translated into prosperity for automobile workers. Auto manufacturers and their suppliers experienced a steady increase in wage expenses as their demand for skilled labor grew. This was partly due to the efforts of a strong organized labor movement that had developed in the industry. As a result, autoworkers became among the highest paid of all manufacturing industry employees.
During the postwar decades, American automakers also institutionalized adversarial relationships with their suppliers. By the late 1960s, there was also a growing realization that the high degree of vertical integration achieved by the industry had actually resulted in inefficiency and waste in their supply chains. The automobile manufacturers therefore began to increase both outsourcing of component parts and supplies, and competitive bidding practices for their procurement. As the productivity gains from functionally specialized mass production system began to plateau, the industry sought to increase profitability by forcing price reductions on suppliers. This resulted in a highly competitive market structure among automotive suppliers, with a few large buyers able to manipulate business uncertainty and exploit smaller parts and components makers. Emphasis on price competition not only bred mutual distrust between automakers and their suppliers, but also eroded the suppliers' incentives and capabilities to improve product design and production processes.
Perhaps more important, the basic economic conditions in America were beginning to change - the postwar boom was coming to an end. It would be some time, however, before people were to see this change. Fortune, for example, predicted in 1967 that real wages would increase 150 percent by the year 2000. In fact, real wages in the early 1990s were no higher than at the time of the article.1 This slowdown was occurring at the same time as foreign competitors were entering the American market.
The Rise of Foreign Competition (1970-1980)
By the early 1970s American automakers were facing strong global competition both at home and abroad. Japanese automakers in particular made a significant impact on the industry by introducing smaller, less expensive, and more fuel-efficient cars to the American market. This coincided with the oil crisis, which resulted in higher gasoline prices and a shift in consumer tastes toward greater fuel efficiency. Other advantages of the Japanese automakers resulted from their use of just-in-time (JIT) inventory controls, modern manufacturing techniques, and quality control and management practices.
By 1980, American carmakers had lost about one-fourth of the fastest growing segment of the domestic market - small cars - to Japanese producers. In response to pressure from the United States government, Japanese automobile producers implemented voluntary export restraints (VER) on their auto exports to United States. This VER agreement limited Japanese imports to not more than 1.68 million vehicles per year. This figure was later revised in 1984 to allow Japanese producers to import 1.85 million vehicles per year. The VER agreement was allowed to lapse in 1985, but the Japanese government indicated its intention at that time to continue to restrict automobile exports to United States to 1.85 million per year.2 The VER was intended to buy time for American automakers to restructure and improve their competitiveness.
Restructuring of American Automobile Production (1980-1990)
While under the limitation of VER in the early 1980s, Japanese (and other) automobile companies shifted their strategies to foreign direct investment, setting up new facilities to produce cars locally in United States. Leaders were Honda, Mazda, Nissan, and Toyota, which collectively invested $5.3 billion in North American-based automobile assembly plants between 1982 and 1991.2 This was viewed as a response to VER - the Japanese automobile firms wanted to circumvent the threat of protectionist trade legislation. However, it was also a response to higher production costs at home and the sharp rise in the value of the Japanese Yen against the U.S. dollar during 1987, which dramatically increased the cost of exporting both automobiles and component parts from Japan to other markets.
These new Japanese manufacturers brought with them to America their supplier management practices, which eventually came to have a significant impact on the American automakers. As a result of both imports and foreign direct investment, there was a shift in the distribution of market share between the Big Three and other automakers selling in the U.S. (see Exhibit 2).
To halt further erosion of their position, protect their remaining share of the domestic market, and prepare for competition in the global economy, the American automakers implemented programs to duplicate the world's best manufacturing practices. This included efforts to apply Japanese-style manufacturing practices such as JIT inventory control and leaner production systems to reduce costs. Yet, there were still important differences.
The Japanese management system was built on partnering arrangements that had mutual benefits for both the automakers and their suppliers. In contrast, the American automakers were more inclined to force vendors to bear part of their burden of readjustment while they struggled to manage the risks they faced in a period of structural change. Many of the American manufacturers choose to support only those suppliers who were willing and able to share these risks of change. Although substantial benefits were derived by the automakers, the position of their suppliers was made ever more tenuous in the absence of single sourcing, limited competition, and long-term contractual relations.
Also during the 1980s, the global automobile industry was swept by a wave of strategic alliances between carmakers of different countries. Alliances among the 23 largest competitors increased from 10 in 1978 to 52 in 1988. By 1990, nearly all of the world's carmakers were linked to at least one other company in this web of strategic alliances. A major factor responsible for this trend was the growing cost of developing a new car. By entering into such alliances, automobile companies could share fixed costs of new product development and, at the same time, gain access to new markets and to manufacturing and technological know-how.
HISTORY OF THE Chrysler Corporation
The Chrysler Corporation was founded in 1925 by Walter P. Chrysler, a former railroad mechanic who rose through the ranks of GM to lead the highly successful Buick Division. Chrysler did not get along well with William Durant, the founder and head of GM, and eventually left to form his own company. When he couldn't get his new car into the 1924 New York auto show, Chrysler rented the lobby of the Commodore Hotel to exhibit his first car, and stole the show. As his company expanded, Chrysler bought the Dodge Motor Company, and started the low-priced Plymouth line toward the end of 1920s.3
Always short of capital in this capital-intensive business, Chrysler was forced to build its cars largely of purchased parts. Despite this, the Chrysler Corporation became known for producing solid, well engineered, but conservative cars. A notable exception was the streamlined Airflow design, which Chrysler introduced in 1934. However, when the Airflow flopped, Walter Chrysler vowed never again to attempt such a radical innovation.3
The Post-War Boom Period (1950 to 1975)
Chrysler survived both the depression and war years, emerging as one of the three major auto producers in the United States. In the early years after World War II Chrysler actually sold more cars than Ford Motor Company, but this changed when Henry Ford II brought in a team of former GM managers to turn Ford around. Soon thereafter, Chrysler fell back to number three, with about a 20 percent share of the market – a figure it has never since achieved (see Exhibit 1).
During the 1950s, the conservative Chrysler designs failed to match rapid changes in consumer tastes, which were driven by the more innovative styling and features of its competitors' products. While others were producing cars that were longer, lower, and wider, Chrysler's conservative engineers were still making cars with extra height that would accommodate people who wore hats – even as American men stopped wearing hats. Chrysler's quality also began to deteriorate in the late 1950s, and a growing number of consumers considered Chrysler's products inferior.
Through the 1960s and early 1970s, Chrysler experienced a steady increase in sales, but its earnings growth did not follow the same trend. Earnings remained small as margins decreased from 1961 to the mid-1970s (see Exhibit 3). Of even greater significance, from 1966 Chrysler began accumulating long-term debt. By 1974 Chrysler's long-term debt had reached nearly $1 billion, and its debt to equity ratio exceeded 40 percent (see Exhibit 4). Financial crisis plagued the company throughout the 1970s, and by the end of the decade threatened its continued existence.
Crisis and Bailout
Although Chrysler set sales records in 1972 and 1973, a combination of high gasoline prices, high interest rates, severe inflation, political uncertainty, and weakening of consumer confidence drove Chrysler into a financial crisis in the mid-1970s. American consumer demand soared for smaller, more fuel-efficient cars, and the Japanese manufacturers were the first to respond, making great inroads into the U.S. market. The combined domestic market share of the total American market fell, while the market share for importers rose to 23.4 percent.4
In the midst of Chrysler's impending financial crisis, John J. Riccardo was named Chairman in early October 1975. Responding to the growing financial troubles, Chrysler hired Lee A. Iacocca as the new Chrysler President in November 1978. Less than a year later, Mr. Riccardo resigned and Mr. Iacocca was elected Chairman of Chrysler on September 20, 1979.
Iacocca aggressively applied his 32 years of experience at Ford to meet the challenge of rejuvenating Chrysler's sagging operations. He began by firing forty Chrysler vice presidents and bringing in a Ford team to replace them. He later noted that while many of those he replaced were good people, he didn't have time to sort them out – he needed people he knew, fast, to save a sinking ship.3
Chrysler reduced costs, restructured its management and recruited new executives to deal with its serious financial problems. Despite these measures, external factors continued to limit Chrysler's ability to finance its programs fully. Chrysler was forced to seek assistance from the federal government in the form of loan guarantees.
In late December 1979, the U.S. Congress passed the Chrysler Corporation Loan Guarantee Act, which President Carter signed into law on January 7, 1980. The act provided Chrysler with $1.5 billion in federal loan guarantees. The agreement also required wage concessions from UAW-represented workers and white-collar employees (see Exhibit 5), along with other concessions from Chrysler's suppliers, creditors, and lenders. The bailout kept Chrysler operating despite record losses of $1.7 billion in 1980.4
Recovery and Restructuring in the 1980s
"If you can find a better car … buy it!" This was the challenge that became Chrysler's battle cry in its recovery fight, as Lee Iacocca began appearing in Chrysler's advertising during July 1980 touting the company's new line of K-cars. Developed on a limited budget, the Dodge Aries and the Plymouth Reliant, code-named the "K-cars", were designed to compete with imports and enjoyed early sales success, which Chrysler rode to profitability in 1982. Chrysler had cut its inventories by $1 billion, reduced white-collar staff by 50 percent, and cut its break-even point by 50 percent in drastic efforts to manage its finances.
The company began to turn around, and for the first time since 1973 it was profitable over four consecutive quarters, and recorded its first annual profit in five years (see Exhibit 3). In August 1983, Chrysler paid off its federal loan guarantees seven years early, at a profit of $350 million to the U.S. government.4
Other factors also seem to bode well for Chrysler's future. Throughout the travail of the 1970s, Chrysler had managed to double its fleet average miles-per-gallon, and in 1978 it had introduced the first domestic-produced front-wheel drive, small cars – the Dodge Omni and Plymouth Horizon. Chrysler was also the first American company to convert its fleet to front-wheel drive.
In another important move, Iacocca committed in 1979 to the development of a completely new type of product – the minivan. The idea had originated at Ford, which after extensive research concluded that while the minivan was likely to succeed, it would be too expensive for Ford initially, since it required the development of a new front-wheel drive platform.5 However, the K platform used for the Dodge Aries and Plymouth Reliant would work perfectly for a minivan.
With the encouragement of other former Ford engineers then working at Chrysler, Iacocca decided to pursue the minivan project. From their first day in dealer showrooms in January 1984, the Dodge Caravan and Plymouth Voyager minivans were a hit beyond all expectations. Minivans created a new market segment and changed the way American families traveled. They also soon became Chrysler's best-selling vehicles (both in America and Europe), along with its trucks.
Chairman Iacocca made another controversial move in March 1987, when Chrysler acquired the American Motors Company (AMC), the number four "American" automaker. AMC was the product of a merger between two small automakers, the Hudson Motor Car Company and Nash-Kelvinator Corporation in 1954. AMC was best know for its Jeep brand light trucks (a subsequent acquisition) and its rather unconventional-looking passenger cars, such as the AMC Pacer. Due to its much smaller size, AMC was a weak competitor compared to the Big Three automakers, and as a result had made an alliance with the French carmaker Renault.
Iacocca's interest in AMC was limited to its Jeep brand and dealer network, but Chrysler was unable to negotiate a separate sale of this unit. Fearing it might lose out to another buyer, Chrysler finally agreed to purchase all of AMC, including Renault's 46 percent interest, for $1.5 billion. Along with the Jeep brand, Chrysler assumed control of a new assembly plant in Bramalea, Ontario, outmoded assembly plants in Toledo, Ohio and Kenosha, Wisconsin, a network of 1400 AMC-Jeep dealers, and nearly $800 million of AMC debt. In addition, Chrysler was committed for the next few years to producing the soon-to-be-introduced AMC Premier, which used engines and transmissions from Renault.5 Chrysler faced problems of assimilating the AMC employees, who came from a different corporate culture, into its own organization; there was also resentment among some senior managers who had been opposed to the AMC purchase.
Like other carmakers during this period, Chrysler too formed strategic alliances with different foreign carmakers, including an early agreement with Mitsubishi Motors Corporation of Japan. In 1971, the Chrysler Corporation agreed to buy 35 percent of Mitsubishi Motors for the purpose of importing Mitsubishi sub-compacts under the Dodge Colt name. By April 1985, the two firms announced they would build small cars together in the United States, beginning not later than 1988. Soon thereafter, they announced the formation of Diamond Star Motors in Bloomington, Illinois. Although Chrysler invested half the capital for the Diamond-Star assembly plant, management of the plant was the sole responsibility of Mitsubishi, a company well-versed in the modern manufacturing management principles of continuous improvement, consensus management, discovery of root causes of failure, and just-in-time inventory control.
Despite its remarkable turnaround earlier in the decade, by the end of the 1980s Chrysler once again faced financial problems. The company had a $4.5 billion unfunded pension fund and had recorded a loss of $664 million for the fourth quarter of 1989; it had also closed three assembly plants within 18 months during 1988 and 1989. With the exception of its minivans, its boxy cars appealed only to older buyers.6 Chrysler's executives knew they had to do something different, and fast.
Innovation in Supply Chain Management at Chrysler
Identifying Problems in New Product Development
Chief among the concerns facing Chrysler management was a realization that the company's new product development process was inadequate. Developing a new platform, upon which a series of car models could be based, typically required more than five years and fixed costs well over $1 billion. In early 1989, the recently-launched L/H family sedan program (which later became the Chrysler Concord, Eagle Vision, and Dodge Intrepid) was already running a projected $1 billion over budget at a time when the firm was in dire financial straits.6
Through benchmarking of competitors, listening to suppliers, and experimenting with new ideas and programs, Chrysler's management gradually developed a vision of the changes they needed to make. It was apparent that most delays and cost overruns were ultimately attributable to the traditional sequential design approach that Chrysler followed, with different functional groups responsible for different steps in the product development process. This resulted in poor coordination and conflicts between the functional groups, often requiring redesign and retooling. A great deal of time was wasted arguing and arbitrating, and every fight that couldn't be resolved had to be decided by a senior executive. There was also second-guessing from the top, and "suggestions" from senior executives could undo months of work. What was needed was a new approach that combined individuals from the different functional groups into an integrated product development team.
Another critical element of this process was the relationship between Chrysler and its suppliers. Suppliers were at the same time both essential to and largely uninvolved in the product development process. About two-thirds of the components Chrysler uses in manufacturing come from outside sources. In 1996, after greatly reducing its number of suppliers in preceding years, Chrysler was still purchasing 60,000 different items from 1,140 different suppliers and spending about $34 billion in the process.3 If Chrysler could involve the suppliers earlier in the process, it might realize time and cost savings by avoiding design problems that were often not discovered until suppliers' components had already been ordered.
There was another concern as well. Lacking capital resources for most of its history, Chrysler never achieved the same degree of vertical integration as GM and Ford. This actually turned out to be a blessing, however. With the average automaker's labor costs approaching $50 per hour, about two to four times the labor costs of automotive suppliers, there was a strong incentive for outsourcing parts and components. Earlier investments and union labor agreements make this more difficult for GM and Ford to accomplish than Chrysler. However, the fact that Chrysler shared most of its 150 major suppliers with Ford and GM raised the possibility that it might lose its purchasing clout with suppliers as the bigger companies moved toward more outsourcing. The only way to overcome this would be for Chrysler to improve its relations with suppliers.
As difficult as the task would be to change Chrysler's internal culture, the changes required to transform both the process of choosing and working with suppliers, and the personal relationships between Chrysler's staff and its suppliers, were enormous. People in both organizations would need a common vision of how to collaborate to create value jointly. Such trust required that both parties share in the rewards and not just risks. These were radical ideas to many in the American automobile industry, and there was real concern as to whether it could actually be done.6
Benchmarking Study of Honda
During the mid-1980's, Chrysler had undertaken an extensive benchmarking study of Honda Motor Company. At the time, Honda was expanding its manufacturing and sales presence in the United States faster than either Toyota or Nissan. Chrysler saw Honda as both a formidable competitor and an example of success in the automotive industry. One factor that was carefully studied during the benchmarking exercise was Honda's supplier relations.
Honda was organized into product development teams composed of individuals from all key functions, all of whom had cradle to grave responsibility for development of a vehicle. These teams included suppliers' engineers who had responsibility for both design and manufacture of a particular component or system. Such a concept was completely foreign to Chrysler, which developed products in traditional sequential process without the routine involvement of suppliers. Chrysler's engineers designed components and suppliers built them.
Another difference was found in procurement. Honda selected suppliers who had a history of good relations with Honda, and a track record for delivering quality products and meeting cost targets. By contrast, Chrysler selected suppliers that could build component parts at the lowest possible cost. For any purchase, Chrysler's buyers had to obtain quotations from at least three suppliers. Further, the supplier's record of performance and quality was relatively unimportant. This led to the mutual distrust and suspicion that characterizes supply chain relations in the American auto industry.
Results of the Honda study generated considerable debate within Chrysler, and many senior managers were convinced that the lessons learned from Honda could not be applied to the situation at Chrysler. However, the desperate circumstances of 1989 led to a reappraisal of this conclusion.
The AMC acquisition, although initially made for other reasons, turned out to be a key factor in this reappraisal, as AMC had already implemented some Honda-like supplier management and product development practices. Due to its small size, AMC had neither the resources to design all its own parts nor the power of the large automakers to dictate prices to its suppliers. Rather, it had learned to rely on suppliers to help engineer and design a number of its vehicles' components. In addition, the AMC Jeep and truck group had been operating for several years as an integrated team. From 1980 and 1987, AMC had developed three new vehicles (the Cherokee, Premier, and Comanche) and was beginning a fourth (the Allure coupe), with fewer than 1,000 engineering employees. In contrast, Chrysler's 5,500 engineers and technicians had developed only four all new vehicles during the 1980s (the K car, minivan, Dakota truck, and Shadow/Sundance).6 The Honda approach suddenly looked less foreign.
The L/H Program – Developing a New Approach
Chrysler decided to use the re-launched L/H program as the test model for a radically different approach to product development, including a new way of dealing with suppliers. The steps taken by Chrysler in changing their supplier relations were not always by design – trial and error played an important role in the process. However, one consistent factor throughout was the strong commitment of a group of key managers to making the changes work.
One of these people was Bob Lutz, who was hired in June 1986 and became Chrysler's President of Operations in 1988. A former Ford executive, Bob Lutz saw the design of new products that would appeal to consumers as his primary mission at Chrysler. Except for the recently introduced minivans, none of Chrysler's products were selling well, and new models were clearly needed urgently to keep the company going. Lutz was also a champion for efforts to apply lessons learned from Honda and AMC, but he needed an appropriate project and like-minded assistants to accomplish this.
When Chrysler's Chief Engineer retired in 1988, Lutz replaced him with Francois Castaing, then Chief Engineer at AMC. Castaing had previously built racecars for Renault, and was experienced in Renault's team approach to developing highly innovative products in a very competitive environment. He was also familiar with AMC's integrated team concept of new product development, along with its non-traditional approach to supplier relations. One of Castaing's most pressing challenges was deciding how to re-launch the L/H family sedan development program. Never before had Chrysler begun line assembly of a new car model in less than 54 months from the day of executive approval, and the L/H had to be ready in 42 months to meet Iacocca's mid-1992 deadline.
Glenn Gardner was the person chosen for the task of rethinking and re-launching the L/H program. Gardner had joined Chrysler as an engineer in 1958 and risen through its ranks. He had directed the successful minivan project, and next supervised development of the Dakota mid-size pickup truck. Then in 1985 he was selected as senior Chrysler representative at the Diamond-Star joint venture assembly plant with Mitsubishi Motors in Bloomington, Illinois, where he gained first-hand exposure to Japanese production methods.
Once assigned to the L/H project, Gardner began to assemble an integrated development team, but the task proved not to be easy. Senior people in the corporation had opposed the appointment of Gardner, and were upset about other management changes that occurred around the time. Enthusiasm for the L/H project was not great. Although Lutz and Castaign promised that none of the 850 employees needed for the L/H team would be forced to join, many did so with less than a full heart.5
Despite these obstacles, the re-launched L/H program from its start reflected a new commitment to innovation and quality. For example, the previous L/H prototype was quickly discarded, and the team committed themselves to a radical new concept of engine and transmission for the front-wheel drive car. Under their "cab-forward design", the engine was aligned longitudinally, allowing designers to make a smaller engine compartment and apportion more space to the cabin. Higher standards were also adopted for body stiffness and fit based on the standards of competing Japanese, rather than American, carmakers. Despite such major changes in concept, Gardner's assistants reported after just six months that the L/H was on schedule and could be delivered by the mid-1992 deadline.
Development of SCORE and Chrysler's Extended Enterprise
In undertaking the L/H project, several changes were made which broke with tradition. First, to shield it from corporate bureaucracy, the team was moved it away from Chrysler's Highland Park headquarters. Second, to speed critical decisions and eliminate sequential decision-making, a true multi-functional team was established with full authority over the program. Third, it was decided that the L/H program offered a perfect opportunity to experiment with new methods for working with suppliers, drawing on Honda, AMC, and Mitsubishi lessons.
Key senior management, including Lutz, Castaign, and Gardner were strong advocates of a new approach to supplier relations and supply chain management. Another was Thomas Stallkamp, who in early 1990 had replaced a champion of competitive bidding as Chrysler's new head of purchasing.
The catalyst for changing Chrysler's relations with its suppliers was a speech Lutz gave in August 1989 to executives from 25 of Chrysler's largest suppliers. He told the suppliers that because of Chrysler's desperate situation, he wanted their assistance and ideas on how the company could lower both its own costs and those of its suppliers. He said, "All I want is your brainpower, not your margins."6
That the suppliers reacted positively to Lutz's request was a bit surprising. However, they knew that Chrysler was in serious trouble. They also realized that in Lutz, Castaign, Gardner, and Stallkamp the company had four relatively new leaders with a demonstrated commitment to radical change. There was also evidence of Chrysler's sincerity based on their experience with AMC and the re-launched L/H program.
Lutz was so impressed with the ideas expressed by the suppliers, not to mention their willingness to share information, that he immediately arranged for senior executives to schedule follow-up meetings with them. Some of the ideas were so good, that Lutz, Castaing, and Stallkamp decided to establish a formal process for reviewing, approving, and implementing them.
Lutz asked a small group of Chrysler's senior executives, including Castaign and Stallkamp to visit a number of key suppliers to solicit their advice on how to formalize the process. This approach itself contrasted with the heavy-handedness of GM at the time, signaling an important change in Chrysler's outlook to suppliers. This was critical, as 1990 a survey of automotive suppliers had rated Chrysler lower than both Ford and GM on five key dimensions, including efficiency, trust, and responsiveness to ideas.
As a result of meetings with its suppliers, Chrysler developed the SCORE (Supplier Cost Reduction Effort) program, a formal process which committed the automaker to encouraging, reviewing, and acting on suppliers ideas quickly and fairly, and to sharing the benefits of those ideas with the suppliers. The program was announced in 1990 at a meeting with Chrysler's top 150 suppliers.
Chrysler's senior management took personal responsibility for making sure the company was following through on its promises under the SCORE program. Castaign, Stallkamp, and others met once a month to review proposals and evaluate Chrysler's responses. Meanwhile, Chrysler engineers initially exhibited the not-invented-here syndrome, and wanted to reject many ideas, and senior managers had to overrule them. Enough of the early ideas were accepted to convince suppliers that Chrysler really was open to suggestions; and as more ideas poured in, successes began to break down the engineers' resistance.
Initially, Chrysler invited suggestions from suppliers as to what the firm itself was doing wrong. It next asked suppliers to make suggestions for changes in materials or parts provided by lower-tier suppliers. Only as a third step did Chrysler turn to what its key suppliers were doing wrong. This was considered a critical decision in that by addressing its own problems first, Chrysler was able to convince suppliers of the need for self-criticism.
Another aspect of the program that was critical to supplier buy-in was the sharing of savings from SCORE suggestions. In this way, and by demonstrating that it would play fair, Chrysler made it profitable for suppliers to participate. Beyond the incentive of improving their own profitability, suppliers appreciated being listened to for a change, and this fostered the development of greater trust between Chrysler and its suppliers.
Institutionalizing the Changes
The transformations that had taken place in Chrysler's product development and supplier relations under the L/H program were recognized as just the beginning, and a major corporate overhaul would be needed to ensure the firm's future success. As a first step, Chrysler extended the SCORE program to the rest of the corporation in 1991.
Other challenges of remaking the corporation would become the responsibility of a new leader, as there was a changing of the guard at Chrysler. In March 1992, the Board of Directors named Robert J. Eaton as Vice Chairman and Chief Operating Officer of Chrysler. Robert Eaton was an outsider, hired away from GM, where he had been responsible for GM Europe. Less than a year later, Lee Iacocca stepped down as Chrysler Chairman and CEO, and Robert Eaton was elected by the board to fill both posts effective January 1, 1993.
This decision surprised many people, who had expected that Bob Lutz would be offered the top job when Iacocca left. However, rather than leaving, Lutz stayed, and got along well with Eaton. The two men shared a common vision of a revitalized Chrysler Corporation and were dedicated to turning their vision into reality. A key element in their plan for success was institutionalizing the lessons learned under the L/H program, and in particular, the new way of dealing with suppliers.
Supply chain management often means pushing inventory costs out of the company and putting off delivery and payment until the goods are truly needed. Many companies may also ask suppliers to shoulder more development costs of switching to provide complete subassemblies instead of mere parts. Such arrangements foster closer relationships with fewer suppliers who play along because they can help assure a revenue stream for years to come. However, within any firm, enormous changes in attitude are needed to make supply-chain management work. The core concept – viewing and controlling the procurement, manufacturing, and distribution processes as a unified flow – often requires that people at every level of an organization look beyond the narrow old rules that told them how to do their jobs. Resistance is common.
Through strong leadership and high-level involvement, Chrysler's new vision of Extended Enterprise began to take shape. The initial success of SCORE and other innovations in dealing with suppliers was so convincing that Chrysler announced in 1992 that the SCORE program would be a formal part of its supplier rating system.
Exactly how Chrysler was able to transform itself and win over suppliers was something of a mystery, especially to outsiders. As Thomas Stallkamp explained in a recent interview, "People come in here and expect us to show them our little formula. We're not saying this is necessarily going to work for them."8 Whatever Chrysler was doing, it was working. By 1993, in the same survey of suppliers that rated the company so poorly in 1990, Chrysler was given top marks in every category - well ahead of GM in all five, with Ford closer to Chrysler in only two.
The SCORE Program and Chrysler's Extended Enterprise (1992-1997)
SCORE – How the New System Works
The SCORE program was developed out of an effort to lower costs, build trust, and improve communication with suppliers. Key aspects of the program include:
As part of its supplier rating system, Chrysler sets an annual SCORE savings target for suppliers that is equal to five percent of their sales to the company. For cost-saving ideas to be counted under the SCORE program, they must meet two basic criteria. First, at least 50 percent of the actual cost saved must be passed through to Chrysler. Second, savings are counted in SCORE if, and only if, costs are actually removed (it is not acceptable to push costs further down the supply chain).
This underscores what Chrysler wanted to establish in its supply base: a mindset that always tries to remove cost from the supply chain, not transfer the cost to another link in the chain. Debra Walker, Chrysler Supervisor of SCORE Continuous Improvement, emphasized the win-win nature of the program: "The key to SCORE is that we are not eroding our suppliers' profit margins. If we were, we wouldn't be getting more than 125 ideas each week."7
For example, if a supplier takes the full hit for a raw material price increase and doesn't try to pass any of the increase onto Chrysler, that savings (called "economic absorption" by Walker) does not count as SCORE savings. "We put those in another bucket," says Walker. "SCORE is removal of cost, not transference of cost." On the other hand, if a supplier passes through a price reduction as a result of continuous cost improvement efforts with a second-tier supplier, that amount would count as a SCORE savings.7 Walker also pointed out that suppliers can give Chrysler more than its half share of the savings, and gain extra credits with the company, but this is not the main intent. "Sometimes a supplier will pass along 100 percent of savings to Chrysler, but we don't ask for that. We want them to know up front that it's a shared savings."7
There are several ways that suppliers can submit proposals that meet one of what Chrysler calls the "enablers" that qualify cost-savings ideas under SCORE. However, cost avoidance is a key part of the program. For example, ideas that reduce vehicle weight are valued at one dollar per pound of vehicle weight reduction.
Suppliers are encouraged to submit SCORE suggestions that cover a wide variety of processes and operations, including:
Each year Chrysler personnel involved in overseeing the SCORE program meet to examine new areas that might qualify for SCORE, and to possibly delete any old "enablers" that are not being used. In 1997, the SCORE group was considering inclusion of recyclability and environmental improvements in the SCORE system, as well as other system improvements.
Every SCORE proposal is submitted by a supplier or buyer to Chrysler's procurement group. "Even a Chrysler employee has to go to the buyer," says Walker. "We want to be sure the supplier talks to the buyer and possibly the engineer about the idea before it's submitted."7 The proposal is then reviewed, going through the important step of idea assessment. As Walker explains,
In determining the amount of savings "we always start with an estimate. As it goes through assessment, the estimate gets refined. When it finally gets to our SCORE finance group, they try to come up with the most accurate number possible. We try to focus on bottom-line savings, those savings that hit the profit-and-loss statement. Once a proposal is actually booked, we think we've got a real good number."7
In late 1994, Chrysler provided the capability for suppliers to submit SCORE proposals on-line, and to check on the status of their SCORE proposals on-line. Access is either through the Internet, or via a dial-up modem. The number of participants more than doubled when the program went on-line, and Chrysler attributes this rise largely to the real-time feedback the on-line system provides.7
Participation by Suppliers
SCORE is a voluntary program, although Chrysler encourages participation by including SCORE in its supplier rating system. The company defines participation as having at least one accepted SCORE proposal. From 1993 to 1996 participation increased dramatically. In 1994, 33 percent of appropriate suppliers chose not to participate in SCORE, but by 1996 that figure had dropped to only 9 percent. By 1996, about 185 of Chrysler's key suppliers were participating.7
More important, by 1996 over 26 percent of the suppliers participating in the program had reached or exceeded their goal of SCORE savings equal to five percent of their total sales to Chrysler. 7 During 1990 and 1991 SCORE generated 875 ideas worth $170.8 million in annual savings. By 1994 it had resulted in 3,786 ideas which created annual savings worth $504 million. In 1995 an additional 3,649 SCORE proposals were received, with total annual savings resulting from the program estimated at $1.7 billion (see Exhibit 6).
When the number of SCORE proposals skyrocketed to 8,225 in 1996, Chrysler attributed the jump mainly to implementation of the on-line tracking system, increased involvement of non-production purchasing, more SCORE awareness meetings, and the addition of quality enablers to the system. Significantly, about 3,100 proposals in 1996 were quality related.7 Chrysler's ability to handle all these proposals also improved. Chrysler tracked the number of proposals awaiting decision and amount of time it takes to respond to a proposal. The average processing time for a SCORE proposal had fallen from 199 days in 1993 to only 89 days in 1996.
While it took some time for the SCORE program to build momentum after it was first started, in just a few years it had achieved results that its creators never dreamed of. As Stallkamp said,
"SCORE started out as a cost-reduction program, but now it's much broader than cost. It's getting people to work together. It's taken on a life of its own, and we underestimated the momentum it would build…Each year we've increased the savings goal. Initially, none thought we could achieve it, but it's been amazing to see it really works as we broaden it."7
But the cost-savings don't just stop at the suppliers. All functions within the Chrysler organization now participate, whether they work in sales and marketing, engineering, manufacturing, finance, or procurement and supply, by offering cost-savings recommendations. And the effect of integrating the SCORE mechanism of counting cost-savings has helped internal cooperation instead of fostering competition in cost reduction initiatives.
Effects on Suppliers
Chrysler's SCORE program is a structured approach by which Chrysler's suppliers seek ways to reduce cost, or improve product or process performance for the same cost. While the cost savings are impressive, Chrysler purchasing leaders believe that the true long-term value of SCORE and similar programs help in creating a mindset in the supply base that results in continuous cost improvement. By splitting SCORE cost savings with suppliers, Chrysler provides a strong incentive for suppliers to continuously make their processes more efficient.
This sharing of savings is the key to SCORE's success, says Stallkamp. "This program does not hurt the supplier's profit margin, which is what a lot of other people are still doing. It's a mutually beneficial program, and it seems to be the only cost-reduction program around like that."7
Stallkamp also admits that another key to SCORE's success is that "our competitors were talking a completely different approach in the early 1990s. But more than that, suppliers have seen that by taking waste out of the system, they can improve their own cost structure as well as help us." He notes that a key Chrysler supplier recently reported increased overall financial results that they attributed to SCORE.7
Suppliers can benefit in another way by reducing costs through SCORE participation. They ingratiate themselves to a large customer, and they improve their profit margins. In addition to their right to claim half of the savings that result from an accepted SCORE proposal, other incentives also exist for suppliers. The procurement group uses a supplier rating system to identify its best-performing suppliers with a "Pentastar" rating. As Walker explained,
"SCORE constitutes 15% of a supplier's Pentastar rating. Last year, to be a Pentastar supplier, your rating had to be 95 or higher. So suppliers that don't participate in SCORE cannot be recognized as the best-performing suppliers to Chrysler. And we want to do business only with Pentastar suppliers."
The whole idea is for Chrysler and its supplier to develop closer relationships, and for Chrysler to identify loyal and cooperative suppliers with which it prefers to do business. Since implementing SCORE, Chrysler's supplier base has shrunk from 2,500 in 1989 to 1,140 in 1996, resulting in cost savings to the company and greater business for the remaining suppliers. Instead of forcing suppliers to re-bid for business every two years, Chrysler now gives most of them its business for the life of a new car model.
Effects on New Product Development and Innovation
The relationship that Chrysler has fostered with the suppliers has allowed the carmaker to rely heavily upon the suppliers to do much of the work in new product development. They have asked suppliers to become experts on the parts they produce, not just the manufacturing aspects, but the engineering and development too. By 1997 Chrysler's product development costs had dropped to 2.7 percent of revenues, half that of their competitors.3 The development time required for a new vehicle was also down, from an average of 234 weeks during the late 1980s to just 160 weeks.6
"The Dodge Dakota program is an example of how Chrysler and their suppliers are working together to reduce product development time and manufacturing costs," said Bob Crockett, Becker Group Vice President, Chrysler Business Unit. Becker was involved early in the design phase of the new vehicle development program, which took just 24 months from design release through launch.9
Becker submitted 10 SCORE proposals to Chrysler for the 1997 Dakota (pickup truck) program. One suggestion saved $10 and reduced weight by two pounds per vehicle by replacing metal with plastic for the interior door trim bolster. In addition, several costly and labor intensive steps were combined into one operation for leaner assembly process. Another SCORE proposal saved Chrysler $200,000 by modifying the door panel design. Becker molded door panel fasteners into the door panel, thus improving fit and finish and eliminating metal screws. "We were able to optimize the manufacturing process through the design and engineering phase," said Crockett.9
Prior to 1989, Chrysler typically devoted 12 to 18 months to the procurement process: requesting bids, evaluating bids, re-bidding, negotiating contracts etc. Suppliers often did not know if they had the contract until just 75 to 100 week before volume production. Under the new system, the focus is on total value-chain improvements (incremental innovation). Suppliers are pre-selected based on capabilities and given a target cost for the part based on a fixed price for the vehicle, and that single supplier is responsible for design, prototype, and production parts. Suppliers are expected to make substantial investments in coordination mechanisms and dedicated assets. The number of supplier engineers working in Chrysler plants has risen from 30 in 1989 to 300 today.9
The relationship building as well as private computer networks that link the suppliers to Chrysler are supporting ingredients for faster turnaround on the new car and truck designs, higher quality parts and lower assembly costs at factories.10 The computer networks facilitate electronic transfers of shipment schedules, which under the old system could take weeks to transmit design changes to the various tiers of suppliers. In addition to reducing development time, this has reduced the cost of new product development by 20 to 40 percent to less than $1 billion. As a result, Chrysler's profits per vehicle increased from an average of $250 in 1980s to $2110 in 1994, a record for all U.S. automakers.6
Effect on Customers – Quality and Value
Decreased product development times and costs means that Chrysler can offer its customers a wider selection of new cars more frequently. This also allows Chrysler to incorporate customer demands into new car designs more quickly, offering a better selection of products. While Chrysler developed only four new vehicle models between 1980 and 1989, it introduced six new vehicles from 1990 to 1996. Chrysler hopes to gain from more frequent new product launches by remaining ahead of competitors in meeting customer tastes and needs. This leads to increased market share, as unit sales of vehicles usually increase substantially after a major model is introduced. Chrysler's share of the U.S. car and truck market increased from 12.2 percent in 1987 to 14.7 percent in 1994.
By building good relationships with its suppliers, and involving them in the product development process, Chrysler often finds out about new materials, parts, and other technologies before the other automakers.11 This allows Chrysler to be the first in bringing new technologies to the customer. By incorporating new technologies and materials in its cars, Chrysler is able to produce higher quality vehicles at lower costs. The end user benefits from a lower retail price and a car with better design features. An example of a new car that incorporated innovative design features provided to Chrysler by a supplier (in this case Alcoa) was the 1997 Plymouth Prowler, the first car built in North America with an all-aluminum body.11
With help from suppliers, Chrysler has also reduced the number of parts and components included in a new car. In theory, this simplified the design and should increase customer value by reducing the number of things that can go wrong, making repairs easier, and lowering both maintenance and repair costs. For Chrysler, such improvements should also reduce warranty claims.
For most consumers, the greatest benefit of Chrysler's Extended Enterprise concept is lower costs for new car models. The direct cost savings that Chrysler expected to achieve through SCORE in 1997 amounted to $325 million.13 Part of the cost savings achieved through SCORE may flow down to the customer in the form of cheaper retail prices. In August 1997, Chrysler announced a decision to cut the price of the next year's cars and trucks by an average of 0.6 percent.14 While this appears a small amount, the auto industry is characterized by annual price increases. Further, the other big U.S. carmakers, namely Ford and GM, respectively said that they would hold prices flat in 1998 and hold price increases to less than the rate of inflation.
Steve Zimmer, Director of Operations and Strategy, summarized the success of Chrysler's Extended Enterprise idea as not just "generating cost reduction, utilizing our suppliers up front in our product development process, [but] dealing with basically a chain of suppliers that are intimately involved in a conversion process from raw materials to a product that delights the customer."11
Stallkamp explained the overall objective of SCORE and Extended Enterprise is "to understand that our whole objective is satisfying our customer." He went on to say that Chrysler's goal is to be "the quality leader by the end of the decade," and "to be called a premier automaker, meaning recognized as a leader in the overall manufacturing of vehicles." 12
The Future for Chrysler
While most observers agreed that Chrysler's new approach to supply chain management had resulted in lower costs and greater profitability for the automaker, management considers the process of change in supplier relations far from complete. One important objective is extension of SCORE to non-production suppliers. As Bernie Bedard, Manager for Supplier Continuous Improvement said,
"The true long-term value of SCORE is that it's a corporate initiative that everyone can take part in, whether they work in sales and marketing, manufacturing, finance, or procurement and supply…[the reaction of people outside procurement] is getting better by the day as they begin to understand the program and how it works. What SCORE has done is develop a continuous improvement culture for all of Chrysler."7
Stallkamp credits SCORE with giant leaps forward in internal operations as well as with suppliers. "It's made engineers think more about cost, and it's got engineering and purchasing much closer together. It's made people in non-production areas think about systems cost."7
SCORE combines all savings, doing away with approaches to cost reduction that were isolated by corporate function. Stallkamp adds, "Before, we had a purchasing cost-reduction goal, engineering had theirs, everyone had their own thing. Now, SCORE is the mechanism to stop this competition. It counts no matter where it comes from. That's been a tremendous advantage as far as getting all the people at Chrysler to work together. SCORE has been a non-adversarial way of making our people talk to each other."7
Chrysler also faced a challenge in how to extend the principles embodied in SCORE to lower tier-suppliers. This is the true essence of the Extended Enterprise concept, and its importance lies in the fact that most quality problems arise from second and third tier suppliers.12 As Stallkamp explained,
"In many cases the first tier supplier doesn't even know where the third tier supplier is, strange as that may sound. Usually only one tier talks to the next; two tiers back may be in the dark…We think there are tremendous savings opportunities in waste, and in miscommunication and in quality problems that come from not having anybody watching over the chain…We want to spend more time, not managing or controlling the chain, but being the facilitator for the chain…We want everyone who's involved to talk to each other as a first thing, and to understand that our whole objective is satisfying our customer, not Chrysler, not our dealer, it's our retail customer."12
Many concerns also faced Thomas Stallkamp as the new President of Chrysler in December 1997. Could Chrysler continue the process of change and effectively push its concept of Extended Enterprise further down the supply chain to further reduce costs and improve product quality? Was the company putting itself in a risky position by giving too much power to suppliers? Would the advantages Chrysler had gained by improving its relationship with suppliers be lost as competitors copied its methods? Could lessons learned from SCORE help Chrysler change its relationship with dealers, affecting similar improvements in its distribution chain and a resulting increasing new car sales? And how could Chrysler leverage its supplier relationships as it expands globally?
1 Krugman, Paul, The Age of Diminished Expectations, The MIT Press, Cambridge, Massachusetts, 1994, p.205.
2 Hill, Charles, International Business – Competing in the Global Marketplace, 2nd edition, Richard D. Irwin, Boston, Massachussetts, 1997.
3 Flint, Jerry, "Company of the Year – Chrysler," Forbes, 13 January 1997, pp.83-87.
4 Reich, Robert B. and Donahue, John D., New Deals, The Chrysler Revised and the American System, Times Books, 1985.
5 Levin, Doran P., Behind the Wheel at Chrysler, The Iacocca Legacy, Harcourt Brace & Company, New York, 1995.
6 Dyer, Jeffrey H., "How Chrysler Created an American Keiretsu," Harvard Business Review, July-August 1996, pp.2-11.
7 Fitzgerald, Kevin R., "Show Suppliers the Money," Purchasing, 14 August 1997, pp. 40-47.
8 Brown, Eryn, "The Push to Streamline Supply Chains," Fortune, 3 March 1997.
9 "Supplier Cost-Reduction Efforts at Chrysler," Manufacturing Engineering, 3 September 1997, pp. 107-108.
10 Brenna, Mike, "Auto Manufacturer Designing Data Pipelines to Suppliers," Sacramento Bee, McClatchy Newspapers, 3 October 1997.
11 Martin, Justin, "Are You as Good as You Think You Are?" Fortune, 30 September 1996.
12 McCormick, John, "Interview with Thomas Stallkamp, Chrysler's Head of Purchasing," Automotive Sourcing, July 1995.
13 Supplier's Team With Chrysler for $1.2 Billion in Cost Savings," Quality Progress, September 1997, pp.14-16.
14 Ipsen, Erik, "Detroit Cuts Prices After Big Saving; Restructuring Success Could Bolster Profits," International Herald Tribune, 16 August 1997.
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