Standardization across the automotive sector: too much of a ‘good’ thing?

One of the ways in which OM is used in practice is to drive standardization in sub-systems and components. These are, more often than not, procured from suppliers as it has been estimated that in excess of 70% of the cost of a product is outside the OEM. Through the standardization of components, efficiency and economies of scale can be achieved that can (in theory), drive the profitability of an organization significantly. Great. But, what if it goes wrong?

Could recent large-scale automotive product recalls signify that we currently have too much of a ‘good’ thing? The automotive sector is an industry where component and platform sharing is prevalent, leading to the potential for a single component failure to necessitate a recall on a massive scale, as the component will be shared across a lot of models. Toyota in particular In September 2014, Toyota announced the recall of 690,000 Tacoma pickup trucks in the US because of a potential vulnerability in the vehicles’ suspension systems and in October another 1.75 million cars have been recalled linked to brake systems and potential fuel leaks. General Motors has reportedly recalled more than 30 million cars so far in 2014 alone. Whilst some argue that the current trend to recall large quantities of vehicles has helped auto-manufacturers stay in touch with the customer, showcase their superior customer service and (hopefully) entice customers to invest in the beautiful shiny new model that happens to be on display as the customer returns their car for ‘repair’, we might also ponder the not insignificant costs that must be attached to the recall process.

Standardization can significantly reduce the cost of producing vehicles, however, like all good things, we need to balance our desire to reduce costs with our need to ensure quality. Where supply chains are concerned, the predominance of a cost reduction strategy can escalate to the point that quality becomes overlooked. Consider these two core points:

  1. Cost based procurement creates fragility

Standardization of sub-systems and components allows purchasing to drive volume breaks and also creates competition between suppliers to offer the best price. These are then negotiated down. This creates two potential areas of fragility. The first of which is that the firm has created enormous exposure to risk by putting all it’s eggs in one basket. The second is that a supplier is really not going to take further short-cuts in order to eke out some profit from what was already probably a razor thin margin?

  1. Cost based procurement affects the wider system

There is the argument that the 2010 recalls that Toyota issued – and put forward by Akio Toyoda, the CEO of the firm – were due to them pursuing growth that was not sustainable according to the Toyota Production System (TPS). TPS (and Lean) is a socio-technical system; it’s people that implement processes and people need to learn. This takes time. When rapid growth is pursued, systems can be implemented but humans will take time to learn them and create other the implicit systems that allow Operations and Supply Chains to work. Thus, fragility in the system was created leading to recalls as systems were treated as technical whilst ignoring the social aspect of them.

OM prescriptions

So, what can be done to make organizations less exposed to recalls? We have three short prescriptions:

  • Don’t put all your eggs in one basket. Whilst dual sourcing can increase transaction costs (i.e. what it costs to complete the transactions) as a firm is essentially doubling up resources, it spreads risk. If the material and design of the sub-system or component is solid, then process failure is generally the root cause of a recall. Lightning is unlikely to strike twice.
  • Allow suppliers to make a profit. A slightly more expensive supplier with goodwill is likely to be less of a headache than a cheaper, disgruntled one. Disgruntled suppliers are costly, but because organizations tend not to have any understanding whatsoever of transaction costs (too difficult to measure), then piece part price is used to represent cost. Goodwill will allow some transparency into what is actually going on. After all, you’d rather have a thriving supply base than one on life support.
  • Consider the speed at which the system works and remember it’s technical AND social. Too often we consider TPS and Lean as just a tool-set but it took Toyota many decades to implement. That’s because they did it right and considered it as wide-scale cultural change. When firms become more reliant on supply chains (and 99.99% of firms are), then this wider system needs to learn the system. So that’s even wider-scale change then. The additional advantage is that treating the supply chain as a socio-technical network creates informal knowledge exchange (remember that?) allowing information to flow that can allow early problems to be recognized. In theory, recalls shouldn’t be as frequent because they would have been identified far earlier.

Too much of a good thing really can be a good thing. But only when done well.

Why can’t we all just get along? Creating the conditions for (non) collaboration

I went to lunch this week with a former CPO from a large industrial firm and a purchasing director from an automotive firm. Over lunch I was asked the question: “why do we find collaboration so difficult in supply chains?” My response was that there are a number of reasons behind this and nearly all of them can be addressed. I believe the reasons that apply to collaboration between firms also apply to collaboration within the firm, so, in no particular order:

1) Mutuality. Collaboration is mutual and has common goals. I have often heard a firm use the term ‘strategic partner’ then fail to apply strategic thinking (“we’ll put you on the approved supplier list”) or partnership behaviour (“can we see your accounts”). Collaboration has to be about both sides putting something in, to both get something out. It requires common, agreed upon (i.e. mutual) goals. After all, you both have to have skin in the game.

2) Intent. You must have intent to do it. Collaboration is about adaptation between partners, it’s about joint working. While there can be lots of intentions towards doing it, one party has to move first otherwise we end up with this:

Soldiers

3) Social bonds. Good collaboration needs lots of rich information sharing and deep social bonds. This can be achieved by putting people into cross-functional teams, co-locating staff in a supplier or customer, or structuring working spaces to encourage social connections. One European car manufacturer structures its design offices in a ‘hub and spoke’ where the design teams work in the spokes and the hub contained shared services (photocopiers, coffee, water etc.). People mingle in the hub, informal information flows, collaboration occurs and (hopefully) better design occurs. If it’s not possible to create these interactions structurally, for example your customer or supplier is eight time zones away, then social bonds must be created differently. Frequent visits is one way to do this but the relationship needs to be kept ‘live’ in between visits so pick the phone up and ask them how they are, share information and knowledge to demonstrate your goodwill and intent.

4) Incentivisation. In a previous post I discussed the need for metrics and incentives to be aligned to what the organization wished to achieve. Well, the same thing holds here. If collaboration is to be nurtured, then incentive mechanisms need to be established that foster a win-win environment. They need to be jointly agreed and adhered to. It’s no good looking for “price down”, when the resources of your collaborator are complementary and are tricky to substitute. After all. Collaboration is about leveraging synergies between organisations, not maximizing gains within companies.

5) Trustworthiness NOT trust. This old chestnut, but with a twist. Too many times have I heard that ‘trust’ is key, but the reality is, trust is a pretty difficult thing to grab hold off and influence. That’s why I always say that trustworthiness is more critical (so, are you a person of your word?). It’s then up to the other person to determine whether they trust you (and are they therefore trustworthy?). So, in the end, it’s just about doing what you said you would (and having a person that understands that on the other side)…

So, there we have it. Possibly simplistic, possibly naïve, some simple prescriptions for getting along.