Battered by bad news throughout 2004 — steeply rising commodity prices, automotive production cutbacks, a projected $350 million loss — Delphi Corp. could be tempted to put the hammer on its suppliers to make arbitrary price concessions. After all, that tactic has been widely employed in the auto industry to counter red ink or raise profits.
As both a supplier itself — the world's largest with $28 billion in annual revenues, and a direct purchaser of $14 billion in materials from its own supply chain — Delphi has been seated on both sides of the purchasing table since it was spun off in 1999 from General Motors Corp.
GM remains Delphi's largest customer, with 50% of its sales derived from the No.1 auto maker. But that's down from 60% in 2002. Still, GM is expected to continue as Delphi's core customer for years to come, even though the auto maker has turned to its competitors for more components, while Delphi has been mining business from other auto makers worldwide.
Delphi is not focusing on short-term fixes to improve results by pressuring its suppliers for price relief, however. A new purchasing strategy that took root three years ago is starting to bear fruit.
The “lean enterprise” campaign it is mounting in many ways mimics what Toyota Motor Corp. and Honda Motor Co. Ltd. have employed successfully for decades. Delphi is teaming up with suppliers, not simply bashing them on price, to drive out waste and boost quality and productivity.
The prime mover behind Delphi's drive is R. David Nelson, 67, who joined the company in March 2002 as vice president-global supply management after a 5-year stint as purchasing chief at John Deere Co. It was at Honda of America Mfg. in Marysville, OH, where he was purchasing vice president from 1987 to 1997, that he gained first-hand knowledge of the Japanese auto maker's landmark lean philosophy that encompassed close and trusting relationships with its supply base.
“Their numbers say everything,” Nelson says of Toyota and Honda. After his stint at Deere he had planned to slip quietly into retirement until Delphi, which already was adopting elements of the vaunted Toyota Production System (TPS), offered him the challenge of reshaping its global purchasing operations.
“I had learned some amazing new ways of doing business at Honda,” he says, which centered on partnering with suppliers to achieve quality and cost success rather than dictating price above all else.
When he came aboard at Delphi he gathered some retired Toyota executives to get the ball rolling, “and we got some results that would knock your socks off,” he says. Delphi soon won coveted “Shingo” awards at 20 North American plants based on efficiency gains using manufacturing and assembly cells, capability in grasping the tenets of TPS and adoption of participatory management principles.
Until then, Delphi had been focused internally rather than on what its suppliers could contribute, Nelson says. “We said we wanted our suppliers to be as efficient as we wanted to be inside, so they called me because they wanted someone with experience in this area. It has been the most exciting part of my 47-year career. Learning the Honda way was excellent, but to come here with the express purpose of changing the direction is a great challenge.”
Nelson's first task was to develop strategies and a timetable for execution, but he has no illusions about overnight success. “Within five or six years we should be up there with the best,” he says.
Delphi's plan centers around three key strategies. First is a reduction in its supplier ranks to 1,000 from 4,000 currently (and 15,000 when Delphi was formed). More than 95% of its purchases come from 1,107 suppliers, Nelson underscores. The idea is to mesh its commodities strategies with this core group of suppliers.
Asked what will happen to suppliers dropped from dealing directly with Delphi, Nelson says the reduction will be accomplished “largely through attrition.” He does not say when Delphi's supplier ranks will be trimmed to 1,000. “All hidden costs go away — records, phone calls, a huge amount of overhead,” he says.
Second, Delphi is developing detailed standards aimed at determining how much a component or service should cost, targeting waste reduction as the primary goal. Some 80% of the value of its purchases was expected to be covered by the new standards as 2004 closed, he says.
The third key strategy supports supplier efforts to train engineers in lean development practices. So far, 70 Delphi engineers have fanned out to supplier facilities, and “we're getting the same results outside as inside,” says Nelson. In both cases, reductions in people costs are ranging from 20% to 50%, productivity is up between 30% and 60%, and first-time quality improvements range from 10% to 45%, he says.
Part of the effort is to commonize Delphi's processes, he says. “We've got a lot of engineering centers that specify parts, but they don't communicate. There may be one bolt in the same division with five part numbers and five prices. We've proliferated specs, and now we've got a great opportunity to commonize.” That means a chance to eliminate waste, benefiting both Delphi and its suppliers.
Delphi also is spreading the word with gusto. It is conducting workshops with supplier executives, preaching the lean gospel and training via a newly established Supplier Lean Development College.
Setting cost standards, which Nelson deems vital to eradicating waste, may not be something every supplier readily embraces. But it's a strategy the Japanese auto makers have employed with success for a long time, he says, and it gives suppliers a critical voice in final pricing decisions.
Delphi has what he calls “VAVE,” or value analysis/value engineering, capabilities and has ramped up the focus because the process “takes out cost,” he says. To help his cause, Nelson brought in Hiromichi Kaminmura, a retired, 27-year Toyota expert. “I knew we needed this capability, and he's the best I've ever seen,” says Nelson. Kaminmura initiated a scientific cost certification program covering 30 commodities.
“We sit with suppliers and work to eliminate waste and optimize costs together,” says Nelson. “Sometimes we miss something, but if there is a big difference, we go back and find where it is. For example, if it's a raw material, maybe we'd supply it to our supplier. If it's in manufacturing, the development engineers step in.”
Nelson admits setting cost standards “can be mind boggling” because it gets down to the finest details such as the size and cost of equipment, output per hour and much more. Together Delphi and the supplier work out manufacturing processes, perhaps changing the way a cell is organized, for example.
Typically the process does not call for a supplier's investment, and Delphi does not provide financial support unless the operation is “troubled,” he says.
The overall lean-enterprise movement is showing substantial results, Nelson says. Supplier quality improved 34% in 2003, and 82% of suppliers delivered zero defective parts per million. Delphi's delivery performance to automotive customers ran just a shade under 100%, premium freight costs were down 51% in 2003 vs. 2002, and worldwide formal customer complaints dropped 13%.
Nelson says he has full support from Delphi's management, but he concedes some resistance down the ranks, which he says is normal whenever huge changes are made.
He also is getting support from suppliers. A November 2003 video of a Lean Supplier Conference included snippets from several supporters.
“I'm sure if we use this process diligently it will be a win-win,” says Mick North, plant manager at Metaldyne Inc.'s forging operations. Getting tooling manufactured, for instance, once took 184 days; now that's down to five. Value-added per labor hour was $78 in 2002, he says, rising to $115 in 2003.
Michael Gleeson, vice president of M&Q Plastic Products, says since his company embraced the new strategy, overtime has dropped by 50%, finished goods output jumped 52% and cycle time was slashed by 57%. “It's made us think differently in every detail,” he says.