CASE STUDY C
On July 5, 2000, the unit general manager of Billings Equipment, Inc. instructed the Supply
management team to renegotiate existing agreements for a 10 percent reduction with major
suppliers because of target costs exceeding expectations. Jeff Martin, a supply management
engineer, was instructed along with the entire purchasing staff to contact his suppliers
immediately with what they would view as very bad news.
Jeff had to face his suppliers with this demand.
Company Background:
In June 1998, Billings Equipment, Inc., formed a new business unit and opened a plant in
Seattle to produce a new line of earthmoving machines for the construction industry. The
organization had a history of impeccable ethical treatment of suppliers and was considered to
be a leader in the industry. For two years, Jeff was actively involved in reducing costs and cycle
times of his suppliers. Everyone involved would agree that the process was emotionally heated
on occasion, with shedding of cooperative blood, sweat, and tears. Jeffs suppliers had invested
many personal hours and sizeable expense to reach this point in time. It had evolved into a
strained, but working, relationship.
Relationship with Suppliers:
During the start-up period of the program, a very aggressive timeline and target cost drove
emotions to a frenzied pace. Early supplier involvement in prototype and testing activity was
cultivated to encourage active participation in the development of this new product line by all
that had equity in its future. Suppliers were pushed to the limit on material and tooling lead-
times, exhausting goodwill and testing commitments. Everyone involved, including suppliers,
invested personal time and effort toward meeting the market timelines. Purchase agreements
were negotiated, and parts now were being received to support production ramped-up toward
market introduction.
The Problem:
The push to production forced acceptance of early design of many components, which inhibited
additional cost reduction. Customarily, 80 percent of cost reduction occurs during the design
phase. Tooling was developed during early design configurations to meet the production
schedule. As designs became frozen and cost information became more complete, the
projected total costs were going to exceed target levels by as much as 20 percent. As the costs
for the bill of materials (BOM) continued to rise above target levels, it became clear that this
increase was not simply because of procedural or accounting errors, but rather represented
true costs. The general manager realized that the rising cost situation was beyond recovery and
would impact the market pricing and success of the entire product line. At this time, Billings
Equipment, Inc. had invested $20 million to $30 million in sunk costs for the plant and pre-
production efforts. Something drastic would have to be done.
The Ethical Issue:
In an effort to at least stop the bleeding, a letter was sent to suppliers on July 5 declaring the
regrettable necessity to reduce prices by 10 percent within 30 days. Buyers were to follow up
immediately by contacting their top 30 suppliers. The veiled threat for noncompliance to re-
open previously negotiated agreements indicated a possible cancellation of the product line
altogether, or at least a consideration of other sources of supply. Jeff believed he would be
violating a trusted relationship based on the heroic collaborative effort to meet demands over
the past year. How could he carry this message to the suppliers?
Even with some additional eroding of supplier tolerance for concessions, Jeff succeeded within
the 30 days to get agreement from four of his five major suppliers, which represented 80
percent of the cost of materials he purchased. Approximately 20 percent of the suppliers
complied promptly, within 30 days. Other buyers had mixed results. Everyone was
uncomfortable moving the supplier relationships from a cost-based approach to a simple
request for price reduction.
Now the Other Shoe Drops:
Shortly after the most faithful of the major suppliers reluctantly committed to cutting prices,
the general manager made an announcement during a strategy meeting with buyers. Because
some suppliers complied readily with the 10 percent price reduction, he said, we are now
going to push for an additional 5 percent. This implied that suppliers had padded prices and
further reductions could have been done all along. In effect, the suppliers who had complied
with the first request were to be penalized.
Jeff was now faced with an ethical situation pitting his responsibilities to the general manager
against carefully developed supplier relationships.
Assignment Question:
1. If you were in Jeffs position, what would you have done to preserve relationships?
Toyota, Ford, GM, Volkswagen
Some differing opinions about working with Suppliers.
It is interesting to see how large automobile manufacturers differ in their opinion about
working with suppliers & standardization of parts. Consider the following.
Working with Suppliers.
Tadaaki Jagawa, a Toyota executive vice president said the number one Japanese automaker
received an invitation from Ford to join the Ford Internet-based marketplace, tentatively
called AutoXchange, where automakers & their suppliers hope to do business more efficiently
& cut costs. Ford & GM are in a race to build the largest online marketplace to achieve greater
economies of scale, & both are trying to woo other automakers. The two companies have urged
that creating a marketplace in which hundreds of billions of dollars in goods & service are
traded would give their suppliers access to more business globally, allowing suppliers &
manufacturers to slash costs.
Toyota considers the internet marketplace only a means to efficiency & not an end in itself,
Jagawa said. Because the procurement process involves not only the price but also the quality,
lead time, & delivery of components, Jagawa said Toyota doesnt want to put competitive
components on the open market, such as GM TradeXchange; it would go against Toyotas
philosophy of treating suppliers as partners. We help suppliers cut costs through a guarantee
of a long-term contract; putting those parts on the open market pits us against suppliers in an
adversary relationship.
Jagawa stressed that Toyota is in discussions with GM with open mind. Although it may mean
Toyota would trade only raw material & commonly used parts on either GM or Ford system,
Toyota is interested in making its buying more efficient, he said.
Standardizing Auto Parts
Some of Toyotas talks with GM also involve standardizing components. That would allow the
two companies & GMs other participants to share a common electronic procurement
infrastructure & maximize the online networks effectiveness.
Toyota & Volkswagen are also trying to hammer out an agreement to standardize select
components for vehicles sold in Europe. Jagawa said the two companiess launched the talks
last summer to identify specific parts they can standardize. He added, however, that the
process has been slow because of a wide gap between what the two companies consider
common components. VW put on the table 20 to 30 parts as possible targets for
standardization; we identified several at most, said Jagawa.
Toyota has said it was considering standardizing components & platforms with the German
automaker to cut operating costs in Europe, where the Japanese company has had trouble
reducing costs because of its limited sales volume. Toyota sold fewer than 600,000 vehicles in
Europe last year.
In Toyotas discussion with both GM & Volkswagen, Jagawa said one problem that could
potentially delay an early agreement is their difference over the definition of competitive
components. Toyota considers a wider range of parts competitive, including steering wheels &
in some cases even wire connectors, whereas GM & Volkswagen seem to believe many
components can be standardized without hurting competitiveness. They think we can
compete on things like styling & packaging of vehicles; we believe we compete component by
component in creating vehicles, said Jagawa.
Questions:
1. GM & Ford have quickly pushed the development of large internet sites to create an
environment where suppliers must compete for business. Ford & GM argue that these
internet sites should reduce cost because the negotiations are streamlined. How do you
think the suppliers view these sites?
2. Rather than having vendors compete against one another, Toyota is interested in
treating suppliers as partners. Is Toyota just being old-fashioned in its view?
3. A major reason for differences in opinions may be the differences in what Toyota
considers competitive components. These are the components that would mostly be
bought using the internet trading sites. Who is right? Are steering wheels & wire
connectors competitive components?
*****************************************************************
