Page 326 - The Toyota Way Fieldbook
P. 326

Chapter 12. Develop Suppliers and Partners                301


                view of extended value stream excellence. Part of this process is tran-
                sitioning from a focus on price to that of a cost-based reality.

                In 2004, aggressive three-year targets were set:
                1. Single digit ppm quality and flawless launch
                2. Thirty percent model-to-model cost savings and focus on total
                   cost
                3. Developing lean processes with core and near core suppliers
                4. Investment and product coordination with business lines

                5. Faster design cycle times
                6. See technology early in products
                7. Discontinue relationships with marginal suppliers
                Moving away from marginal suppliers seems like an obvious thing to
                do. However, Delphi buyers were not always encouraged to do this.
                To select strategic suppliers, Delphi developed a matrix and sorted
                commodities into four cells: core, near core, niche, and commodity. For
                core and near core-commodities, Delphi is gradually developing a set of
                strategic suppliers who sign a master supply agreement modeled after
                Toyota and Honda. This several page agreement lays out principles of
                working together (such as recall and warranty responsibility, financial
                terms and conditions, R&D responsibility, and long-term commitments to
                source from the supplier). It is not a specific contract for specific parts,
                but a set of detailed agreements on how each will behave. When the
                strategic sourcing agreement is established, purchasing decisions are
                almost nonevents. The cost model basically locks the supplier into a price.

                Delphi’s director of cost management describes the cost management
                concept as “reality improvement.” Unfortunately price-based purchasing
                is not based in reality. In many instances market prices were established
                and buyers chose an arbitrary target for price downs (e.g., 5 percent
                price reductions across the board next year). Toyota’s system is based
                on cost-management models that reflect the reality of actual costs, with
                target prices based on what customers are willing to pay for automobiles.
                Toyota sets a target profit and proceeds to develop the car to meet
                the cost targets necessary. Suppliers are given target costs to meet and
                must develop their components to meet these targets, building in their
                own profits. When Toyota asks for price reductions, it is based on
                actual knowledge of true costs, so they know where it’s necessary to
                reduce costs and where suppliers are in danger of losing money. Price
                is important, but behind price is cost, and behind cost is reality.
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