Looks like it’s really all over for NUMMI, the Toyota/GM joint auto manufacturing venture in Fremont, CA. Last summer, I wrote a post about the strong possibility of Toyota’s closing the plant (NUMMI: Things Are Looking Gloomy). The plant was losing money. Located in a high-wage area, even potential UAW concessions didn’t seem like enough to allow the plant to continue. And now Toyota has decided to close the plant in April as a result of GM’s pulling out of the joint venture when it filed for bankruptcy. Toyota couldn’t do it alone.

Besides the loss of 4700 jobs at the NUMMI plant, the toll on suppliers will be even greater, according to a December 24th Wall Street Journal article (subscription required). According to Bruce Kern, executive director of the East Bay Economic Development Alliance, tens of thousands of people work for first and second-tier suppliers to the plant. His organization is working on finding new business for some of these suppliers. While Toyota plans to continue use the top 25 suppliers, this still leaves many suppliers without their key customer. Many suppliers have had nearly total dependence on the auto industry and have not diversified. It looks like another blow to the California economy from this closing, one that will reverberate through the NUMMI supply chain.

While another WSJ article describes many suppliers to Detroit automakers as surviving the downturn better than expected, though perhaps not well-poised financially for any big ramp-ups, these suppliers appear to be in potentially worse shape. Many of the NUMMI suppliers are small businesses that have not gotten the credit and considerations that saved some of their larger Detroit brethren from bankruptcy. Of course, the threat of the NUMMI closure and its economic impact has been hanging over the supply chain for quite some time. It appears that some of the suppliers have faced the problem head-on as soon as the automotive downturn started and have been proactively pursuing other business opportunities to stay afloat. But how many of the suppliers did not? And how many can get enough new business to survive?

Because NUMMI was focussed on using lean manufacturing principles and practices that were flowed down to its supply base, there should theoretically be quite a few well-run suppliers who could be suppliers of choice for other industries, should they have the capabilities to make the transition to supplying products that take advantage of their core competencies. A few things are working against them, however. Not to make too many gross generalizations, but many manufactures are better at operations than sales. Customer diversification for a small company identified with the automotive industry is a huge challenge. Lean companies will have an advantage in eliminating waste, doing more with less and being suppliers of choice. Lean can help spur growth and give competitive advantage, but only when there are growth opportunities to take advantage of. Lean suppliers may be able to survive longer than their peers, but only if they find enough business to keep them afloat and new customers to enable them to thrive.

-Sherry R. Gordon

Last month, U.S. Sen. Sherrod Brown (D-Ohio) and Phil Angelides, Chairman of Apollo Alliance, along with other business, labor and clean energy leaders introduced the “Investments for Manufacturing Progress and Clean Technology (IMPACT) Act of 2009,” a bill intended to facilitate the development of domestic clean energy manufacturing and production. The purpose of the bill is to give loans and technical assistance to manufacturers to help those, particularly in the automotive industry, retool to manufacture clean energy components. This bill would infuse $1.5B into the Manufacturing Extension Partnership (MEP), a national network of manufacturing assistance centers that is part of NIST (National Institute of Standards and Technology) and has focused on assisting small to medium-size manufacturers by providing consulting and training. MEP has been on the front lines of teaching and coaching these SMEs in lean manufacturing principles and practices. This funding would used, according to an article in RenewableEnergyWorld.com, to “help manufacturers access clean energy markets and adopt innovative, energy-efficient manufacturing technologies”.

Interestingly, the Bush Administration tried to kill MEP repeatedly during its tenure. This always puzzled me, as it seemed counter to their stance of helping small business as the engine of the economy. Now, MEP seems as if it could be getting a new life. However, some people question the potential re-purposing of MEP in clean energy manufacturing and not focusing on its  current mission of lean implementation and education.

First, MEP was never supposed to remain in the lean business indefinitely. Having a publicly-funded organization charging market rates and competing against private sector lean consultants is not my idea of competition or a good use of public funds. Second, while some may argue that pursuing green manufacturing is push to the customer instead of pull from the customer (a violation of lean principles), green is indeed part of lean and certainly not at odds with lean. In fact, focusing on manufacturing of green components for clean energy, 70 percent of which are produced outside the U.S., is very compatible with lean manufacturing. In the nineties, I was running New England Suppliers Institute, which delivered some of the first public lean workshops as well as lean training and coaching to manufacturers, before MEP had even thought of lean and was eyeing our business as a good idea to pursue. There was not a big customer demand for lean at the time. However, MEP got into the lean business then because they saw the potential business for themselves and huge benefits to manufacturers. Green manufacturing also has the potential to be very successful.

If this bill passes, time will tell whether the clean and green repurposing of both MEP and manufacturers in the automotive industry will pay off. In my opinion, that’s what public funding is for – for investing in public good and national security in new and promising areas. It’s not just for supporting an already plentiful resource, i.e., lean consultants. Retaining and strengthening the U.S. manufacturing base is a good purpose. However, in our increasingly service-based economy, appreciation for manufacturing as an engine of growth has decreased. Breathing in new, green life may be just what it needs. Manufacturers need to be always looking ahead to the next big thing and not become complacent with what is successful at the moment.

In a recent post, “GM’s Failure: What Happened to Lean,”  I wrote about the origins of lean at GM and the NUMMI partnership with Toyota. Now, it seems that NUMMI is on Toyota’s chopping block and that Toyota seriously considering shutting down the plant. The NUMMI venture, begun in 1984, helped Toyota make a beach head in the U.S. and also was an incubator of sorts for lean manufacturing à la TPS (Toyota Production System). Toyota was trying to import TPS into its U.S. plants, and through NUMMI GM was learning about lean and trying to adopt it as well. Since then, GM has essentially pulled out of the NUMMI venture and makes only the Pontiac Vibe there, not for very much longer as it closes down the Pontiac brand. Toyota makes Corollas and Tundras at this plant. So NUMMI is now a Toyota plant with UAW workers (an anomaly for Toyota).

So why would Toyota even consider shutting down this flagship plant? Higher wage costs than its other plants are the main reason — in fact, the highest labor cost facility of any automotive plant in the automotive industry. Associates’ wages here are much higher than at Toyota’s other plants in part because of its San Francisco Bay area location also because of its UAW workforce.  The plant is losing money. Also, the plant is much farther from most of its suppliers, which adversely impacts costs. Even though Toyota has pledged not to close plants, it is on track to lose even more money this fiscal year than last and may feel forced to close NUMMI. At this point, the only production left in the plant will be Toyota’s, giving the UAW less leverage. This apparently has prompted the UAW to be more amenable to wage concessions in order to keep the plant open, despite trying to organize workers at Toyota’s other non-UAW plants. As one of the biggest employers in the area, NUMMI’s closure would be devastating to the already suffering local economy.

It will be interesting to see if losing money trumps pledges to keep production facilities open. Toyota management is under enormous pressure right now due to its unprecedented financial losses. Will the symbolic value of NUMMI help it avoid closure? UAW wage concessions may make it more likely to remain open. Corporate America usually opts for not losing money. But I’m not going to guess what Toyota will decide to do in this complicated situation.

Some people are heaving sighs of relief that Chrysler is emerging from bankruptcy in the arms of Fiat and that GM is officially in bankruptcy soon to emerge as leaner and meaner entities. However, many are left holding the proverbial bag. Who are they? The unsecured creditors who are lining up to salvage whatever they can from this mess. Two key groups of creditors are particularly important. 

The first group consists of first-tier suppliers. The Chrysler list, for example, reads like a who’s who of the top tier automotive supplier firms: Visteon (owed $25.6M), Cummins Engine (owed $43.9M), Johnson Controls ($50.3M), Ohio Module Manufacturing ($70.3M). The GM list, where the total amounts owed to unsecured creditors is far higher, exceeding $50B, and includes some of the same suppliers as well as many others.

The second group of unsecured creditors includes all the people who have product liability lawsuits pending against these two automakers. People in the midst of product these lawsuits have now joined the ranks of unsecured creditors, lining up alongside the first-tier suppliers who are owed billions of dollars. But in comparison with the first-tier suppliers, these creditors consist of the “little people”. The New York Times profiled someone who lost both legs in a Jeep Wrangler accident and who is in the midst of a product liability lawsuit against Chrysler. With Chrysler’s bankruptcy and sale to Fiat, he is finding that his chances of getting much money from the lawsuit are poor. The bankruptcies are also freezing lemon law cases as well. Consumer advocacy groups are claiming that more people will be injured by defective vehicles because “a critical public-safety protection that has been used to reduce the number of Americans hurt or killed from defective Chrysler and General Motors vehicles,” namely “the public’s right to hold these companies accountable,” has been stripped away, according to Joanne Doroshow, executive director of the Center for Justice & Democracy.

The choices here are between ugly and uglier. Those who have auto safety-related injuries are not the only ones impacted. The suppliers holding unsecured Chrysler and GM debt also stand to severely impact the lives of their own employees and the employees at their suppliers should they be unable to collect their money. Whether public safety is at risk because of the carmakers’ ability to circumvent safety procedures is not clear as the newly-reorganized companies keep the good assets and ditch the bad ones. If the auto companies attempt to and are able to skirt legitimate claims, the tarnish will remain on their new images and fresh starts and impede future success. It makes you wonder whom the bailout is helping. Or whether it is just buying time for those affected by the U.S. automotive industry to retool themselves, rather than retooling the industry itself.

The latest victims of the economic downturn seem to be suppliers in the electronics supply chain. As reported in the May 18th WSJ article “Clarity is Missing Link in Supply Chain“, as business began to contract, Best Buy dramatically cut back their forecasts to electronics companies such as Toshiba just before the holiday season last year, for fear of ending up with unsold inventory. The ripple effect throughout the supply chain was dramatic. As Toshiba reacted quickly and suddenly cut back its DVD player production, other suppliers were impacted far out of proportion to the actual event. This is also known as the whipsaw or bullwhip effect, with suppliers at the end of the chain feeling the harshest impact. The order cutbacks at Best Buy hit the semiconductor supply chain, including such companies as Applied Materials, a maker of the capital equipment used in semiconductor chip production, who had to lay off 2,000 workers and furlough thousands of others. The impact was felt through the supply chain, down to a small machine shop in California that makes aluminum parts for machines semiconductor plants and that had to lay off 75% of its workforce, far out of proportion to the initial glitch, and now is sitting on a year’s worth of inventory.

JIT, the practice that spared the top of the supply chain from being stuck with excess inventories, ending up hurting it. As sales failed to tank as much as predicted and customer demand was actually greater, there was no inventory to sell to consumers. Thus, the ugly side of just-in-time manufacturing was exposed.

What went wrong? First, there was a lack of visibility at the lower links of the supply chain. Could that be prevented? Yes. Communications with lower tier suppliers would help avoid some of the surprises. Supply chain visibility and optimization software would have helped some of the firms get visibility into what could happen upstream and downstream. But then these firms would need to inform and collaborate with their suppliers and help them prepare for the drop in business so that they would not be blindsided and left holding the inventory bag, so to speak, for their customers.

But is this the fault of JIT practices? Not really. The challenge is to optimize service to customers and minimize inventory. It is costly to hold too much just-in-case inventory and in the end, does not pay off in the electronics industry where idle inventory rapidly becomes obsolete.

However, that doesn’t stop the JIT-bashers from piling it on. See, JIT doesn’t work. Get rid of Six Sigma. Lean is useless. That’s the amazing commentary that comes out when supply chain failures occur. People blame the tools, not those who use the tools. As the saying goes, “A bad workman blames his tools.”  There seems to be a lot of pent-up anger over high-performance management systems and tools such as JIT, Lean and Six Sigma as well as a readiness to rush to judgment that it’s the tools that cause the problems. The toolheads like their tools and convince others that the tools are the silver bullet. Many businesses don’t like dealing with the messiness of leadership, culture, change, customer-supplier collaboration and continuous improvement. However, JIT, Lean and Six Sigma are worthless without them.

I was reading the recent blog post at the Spendmatters:   Beyond Shedding the Deadweight in Procurement and Operations. Instead of just cutting headcount, particularly in procurement, Jason Busch suggests other ways to approach cost reduction. Among the suggestions are: driving better efficiency by fully using software solutions in the Procure-to-Pay cycle; using third parties to help you outsource and cut spend; and last, cutting inventory as much as possible and working with critical suppliers to help them reduce their cost structures.  I’d like to add lean to list, both as a continuous improvement toolset and as a way of thinking. Companies should be deploying lean thinking and lean enterprise practices to help remove waste in the entire company. Waste is defined as creating no value and as something that a customer would not want to pay for.

OK, so you’ve heard a lot about lean and maybe your company has a lean initiative going on. Many people still think lean something you do only on the factory floor and it doesn’t pertain to them if they work in an office. No, it’s not just for manufacturing wonks. Or else I hear, “Yeah, we’re lean. We’ve cut everything to the bone.”  That’s lean and mean or lean anorexic, not the real meaning of Lean Enterprise.  Lean and mean is a cost-cutting exercise and is not real Lean, which is a systematic elimination of non-value added activities (i.e., that do not add value to the customer or that the customer would not want to pay for). Cutting 10% across the company is a desperation mentality, value-add and customers be damned, like amputating your own limb. Desperate measure for desperate times.

So what about lean in relation to all things procurement and suppliers? Lean thinking, tools and culture afford the opportunity to reduce and eliminate the sources and causes of waste and cost that come from doing things the way they’ve always been done. It means not just helping suppliers improve their operations and cost structures, but also addressing one’s own internal process inefficiencies that often adversely impact suppliers’ ability to meet customer requirements.

Traditional procurement maintains a big supply base, a short-term focus and is internally driven. Lean procurement is system-oriented with a focus on total cost and internal and external customers. The traditional mentality is to get a better price (’cause that’s what we’re measured on), but potentially pay later in quality, delivery and service issues. Now is the time to look at the supply base and decide based on best value, including performance, which suppliers to focus precious resources on and whom to disengage. Procurement can adopt lean practices such as value stream mapping to identify non-value added activities. It can look at internal workflows and at those involving suppliers. Visual systems (5S) in the office can be used to improve the procurement and supply management work environment so that people don’t waste time looking for things or even waste space. Procurement can identify not only the problems, the root causes of the problems. It can uncover:  Where are the bottlenecks? How much do people have to wait for the next step in the process or for resources due to work imbalances and bottlenecks? And who manages the waiting, which is in itself only additional waste? Procurement should work in concert with other functions to expose and eliminate hidden cost drivers such as: customer complaints, long lead times, systems issues, quotation errors, incoming inspection, expediting, excessive paperwork, poor controls, poor communications, poor supplier quality, etc. Or, eliminate the extra steps and waste in what can be called the inter- and intra-company circle of waste – that is, the waste that occurs in the business processes pertaining to and between customers and suppliers or in the white spaces.

But most importantly, in addition to working on important supplier performance improvement and development projects, procurement can adopt a continuous improvement/lean mentality and culture within its own function both as a model to its suppliers and as an important step to do its part to help restore the entire company to financial health.

What steps can you take to avoid supply risk? Be methodical and be proactive. Segment the supply base for risk. And look beyond just the obvious categories. First, look at all types of suppliers who have risk potential, depending on your type of business, such as: direct material suppliers, suppliers providing important services, and transportation suppliers. Often companies look only at the big dollar volume items. But this can be short-sighted.  As evidenced by the now infamous fastener shortage at Boeing, a small-dollar-value part can stop a manufacturing line. And worse, it is an example of outsourcing run amok in the machinist strike at Boeing.  However, not all risks lie in direct materials. For example, if disruption of transportation is a critical risk, then look at 3^rd party logistics and carriers. Or if loss of intellectual property is a risk, identify the most likely segment of suppliers. Examples are by geographic location – countries where IP protection is weak or by type of supplier, such as suppliers who help develop products or information technology. If you are using single sourcing, look at the categories where you are using single source suppliers and assess the potential risk from those suppliers and whether you need to find backup sources. Another potential area of risk may be just-in-time deliveries using kanbans. This does not mean that you need to rush out and start stockpiling inventory. If your just-in-time suppliers have truly adopted lean practices, they may be flexible enough to adapt to changing demand. Unexpected disruptions such as geopolitical and natural disasters are more worrisome, but not impossible to plan for. Lean suppliers – and all strategic and critical suppliers – should have risk and business continuity plans in place.  But you may need to review the tradeoffs between supply disruption and using additional sources or carrying additional inventory.

Some additional sources of information include my book, Supplier Evaluation and Performance Excellence, and these excellent articles: “Coming to Grips with Supplier Risk” from the Supply Chain Management Review and the Marsh study, “Supply Chain Risk Management” (available by registration on the site).

Like many challenging areas of supply management, reducing and mitigating supply risk is not rocket science. It just takes a lot of planning, organizational discipline and hard work – which may be why supply risk is often in the talking and not the action stage in many companies.

back to Sherry’s website

In a rush of enthusiasm about a lean supply chain, some firms expect that their suppliers will embrace lean with equal passion. Passion for lean can be contagious, but getting suppliers to adopt lean requires much more work than lean inoculation or indoctrination. Before rushing off and sending out an announcement that suppliers should adopt lean, a lot more must be in place. Some enthusiastic suppliers may be eager to learn more about how to become lean, and you need to be prepared internally to work with them and have a path already thought through. The firm should first identify which suppliers would make the most business impact and from whom both they are you would derive the most benefit by their adopting lean; which are likely to be willing candidates for lean; and who is already on or at least contemplating a lean path. This can be done through a supplier segmentation exercise focused on lean.No, supplier segmentation isn’t just for sourcing. It can be used for lean supply chain and for supplier performance management. Segmentation is a way to determine appropriate resources for managing, developing relationships and working with suppliers, depending on their relative importance to the business. Segmentation is not a science. And it should not become a long, academic exercise, either. It is best when used as a team exercise to help come to a common understanding about and categorization of the current state and for identification of future opportunities for, in this case, lean in the supply chain.

For some strategic suppliers who are vital to and have a high impact on the business, lean supplier development may be the best path. That is, a customer firm may wish to get a supplier to adopt lean principles and practices throughout its business. We are talking real lean adoption, not lip-service lean adoption (which, unfortunately, is an all too common occurrence). However, for other types of suppliers, targeted lean projects geared toward a specific result may provide the best use of resources and a quick win that can help gain support and pave the way for more lean in the future.

Thus, supplier segmentation for lean is a good first step. Actually, there is a step that must be taken before the segmentation – defining first what a lean supply chain really means to your company.

 When my company was a small supplier to Boeing, I was of course happy to have landed them as a customer. Our relationship was excellent and added value to both parties. Boeing took a chance with my company, an emerging technology business. And the initial bureaucracy that we had to go through to become a supplier to such a large company was challenging beyond even their expectations. But on the other hand, there was a lot in it for them. The value that we added was clear. They got the following benefits from using a smaller technology supplier: thought leadership, alignment with and accommodation of their needs, excellent service, and a supplier who would always “go the extra mile” for them.  And for us, they used our product and got benefit from it which helped affirm our value as an emerging company. Together we created synergies that we would not have done alone, in spite of our disparate sizes. Clear value is a key ingredient for success in creating mutually beneficial relationships between customers and suppliers of disparate sizes.

This takes me to the point that I was making in my last post about when your supplier is bigger than you are. A smaller company, whether in a supplier or customer role, can develop a mutually beneficial and cooperative relationship with a bigger organization. Another key is developing and fostering good working relationships among the people at both companies.  The old adage, it’s all about the relationship, applies just as well to customer-supplier relationships.  While companies do business with each other, it’s really the people who do business with other people. Of course, you need to choose wisely when developing relationships, as doing so requires resources. Not every customer or supplier merits the resources required to develop deeper and trusting relationships.

Relationships can and should be built at different levels of the organization. When the time comes for getting a larger company to cooperate with a smaller one, several things may happen. Your contacts are more likely to go to bat for you when needed or break through the bureaucracy. Especially when senior management develops relationships with counterparts at the larger company, then making the business case for change, such as better business processes and practices, becomes much easier to accomplish. However, if the relationship is purely transactional and arms-length, then introducing new processes, business ideas, opportunities, etc. will taken longer (best case) or won’t happen at all (likely case). Transactional relationships are less personal and do not require high levels of interaction and trust, important ingredients for getting a bigger company to work cooperatively with your smaller one. Interestingly, the nature of the relationships between companies may not necessarily indicate the importance of the companies to each other, depending upon whether a company has segmented its suppliers and customers and is pursuing appropriate relationships based upon segmentation.