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Supply Chain Redesign: Integrating Suppliers Into New Product Development

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Companies must recognize that supplier involvement in new product development can have both positive and negative impacts on technology risk and uncertainty. Is it the right decision for your organization?
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Bob Lutz Shares His Strongly Held Beliefs at General Motors1

Focus groups? Over-used and unreliable. Design? Undervalued and "corporate criteria-ed to death." Content? Not at the expense of profit or shareholder value. So says Robert Lutz, freshly anointed product czar at General Motors, in a widely circulated memo entitled "Strongly Held Beliefs."

The memo, which was leaked almost immediately to the media, created such a buzz throughout the world's biggest car company that CEO Richard Wagoner felt compelled to issue a statement saying in essence, "Go, Bob, Go." Lutz, Wagoner said, was hired to challenge the status quo and that's what his memo does.

More than a half-decade of committee-laden "brand management" looks to be taking it on the chin at General Motors as Lutz pressures the corporation to develop more exciting products in less time and at lower cost.

Lutz, who declares his motto to be "often wrong, but seldom in doubt" assailed excessive democracy and "consensus building" as counterproductive and hailed the virtues of tension and conflict in the workplace.

He certainly generated some of the latter. Reaction to the memo, predictably, varies depending on its implications for the recipient. The memo is shown below.

MEMORANDUM

From: Robert A. Lutz

Strongly Held Beliefs

1. The best corporate culture is the one that produces, over time, the best results for shareholders.

Happy, contented employees, and an environment where nobody argues or disagrees, and everyone compromises because the other person has goals, too, is usually not the culture that produces great shareholder value. A performance-driven culture is often a difficult place to work, and it certainly isn't "democratic." Democracy and excessive consensus building slow the process and result in lowest-common-denominator decisions. As Larry Bossidy, former CEO of Allied Signal, so aptly said: "Tension and conflict are necessary ingredients of a successful organization."

2. Product portfolio creation is partly disciplined planning, but partly spontaneous, inspired all-new thinking.

A good planning process can be an excellent baseline tool, a means of generating solid data. But it cannot robotically create a good future portfolio. It will generate bunts, singles, walks, and the occasional double. But triples and homeruns come from people who say, "Hey, I've got an idea!! Listen to this!" Steven Spielberg does not research in moviegoer needs segments. Needs-segment analysis can find a "small minivan" niche. It can't find a PT Cruiser, or a new BMW Mini, or an H2!

3. There are no significant unfilled "Consumer Needs" in the U.S. car and truck market (except in the commercial arena). There are "consumer turn-ons" that research alone won't find.

4. The Vehicle Line Executives (VLEs) must be the tough gatekeepers on program cost, content, and investment levels.

After (and maybe before) contract, requests for "priceable" content (it never works out that way, anyway) or "volume-improving" content can no longer be honored without offset. The VLE needs a program contingency, to be reserved for last–minute fixes or enhancements, (and maybe I need one, too). But the VLEs must evolve into often-unpopular "benevolent dictators" when it comes to protecting their cost position. It must be inviolable. Programs that miss their cost targets cannot be tolerated.

5. Much of today's content is useless in terms of triggering purchase decisions.

Most customers want a vehicle of new, fresh exciting appearance, with a rich, value-transmitting interior. They want a great powertrain, superb dynamics, and, obviously, safety and quality. But the thought that huge advances in voice recognition, or screen technology, or multi-function displays or ever-trickier consoles, or embroidered floormats, etc. will somehow override other deficiencies (or, worse yet, "averageness") is wrong. What focus groups say they would "really like in their next car" is not reliable, because they are, in the research, not really paying for it. ("Talking car" and all-digital instrument panels received high "want" ratings in their day.) The vehicles that are succeeding today (Honda, Toyota, Audi, VW) are not highly contented, or if they are, they charge for the option packs. A "base" Camry is really base!

6. Design's Role Needs to be Greater.

As one of you said to me the other day, Design is being "corporate-criteria-ed" to death. By the time the myriad research-driven "best-in-class" package, the carryover architecture, the manufacturing wants, the non-stone chip rocker placement, the carryover sunroof module, and on and on, are loaded in, and the whole thing is given to Design with the words, "Here, wrap this for us," the ship sailing toward that dreaded destination, "Lackluster," has already left the dock.

7. Complexity-reduction is a noble goal, but it is not an overriding corporate goal.

Standardizing options for the sake of simplifying the BOM, engineering and releasing effort, pricing, dealer stocks, etc. is very worthwhile. But it can be counterproductive if it reduces vehicle margins, i.e., the net revenue loss is greater than the demonstrated savings in the enabling disciplines.

A good rule of thumb is that, in the case of an option with a significant cost, where the freestanding "take" is less than 70-75%, the incorporation as standard will cost money. If "priced for," then a large proportion of customers are being asked to pay for something they don't really want. If it's "eaten" and not priced, we are reducing margins without enhancing value to those who don't care for the option.

My experience is that options running at 25-40% should remain options (perhaps grouped into packages); options running at over 75% should be incorporated as standard. The area between 40-75% requires judgment in each individual case, and a good dialog between affected parties.

8. We all need to question things that inhibit our drive for exceptional, "turn-on" products.

Edicts and criteria do some good; they create consistency and order, and they help someone achieve a goal that he or she feels is important. But many of our criteria are internally focused and prevent us from doing high-appeal, exciting, dramatically new products. A salesman cannot say to the customer, "It takes a bit of getting used to, I admit, but did you know that it satisfies 100 percent of GM's internal criteria?"

We don't want anarchy, but we do need more of a "Who says?" attitude. The focus has to be on the customer.

9. It's better to have manufacturing lose ground in the Harbour Report, building high net-margin vehicles with many more hours, than being best in the world building low-hour vehicles that we take a loss on.

10. We need to recognize that everything is a tradeoff, that we can't maximize the performance of any one function to the detriment of overall profit maximization. The same goes for every discipline: A gorgeous vehicle that disappoints in quality will fail. A car incorporating every conceivable new safety technology makes no contribution to safety if it becomes unaffordable to the customer or we can't afford to build it. A vehicle with a single-minded focus on "absence of things-gone-wrong" will fail miserably if it is dull, unexciting, a dog to drive, and ugly. Even if it's the best ever found by J. D. Power!

11. Remember the Bob Lutz motto: "Often wrong, but seldom in doubt."

None of us is infallible, and we all make errors. Remember baseball, where a batting average of .400 is unheard of! But pushing and arguing for what you believe to be the right course (while recognizing you just might be wrong, therefore, still willing to listen) is the key to moving forward. Errors of commission are less damaging to us than errors of omission. In our business, taking no risk is to accept the certainty of long-term failure. (Even Aztek, in this sense, is noble!)

Changes to the New Product Development Process

The reality in many markets today is that 40 percent or more of revenues come from new products introduced in the prior year. Thus, unless supply chain participants can create a continuous stream of innovative products, customers will take their business elsewhere. In the late 1980s and early 1990s, many Western organizations began re-evaluating and re-engineering their new product development processes. The combination of speed to market pressures and the need for product innovation forced many firms to experiment with new ways of bringing new products to market. For example, American automakers recognized that Japanese automakers were consistently able to design and build a new automobile in less than 30 months. Until very recently, the "Big Three" automotive manufacturers required from 48 to 60 months to accomplish the same task. Japanese automakers were consistently "leapfrogging" their American and European counterparts and in so doing, achieving a significant technological and marketing advantage in terms of quality, design, and performance. One common strategy that emerged during this time was to view new product development as more of a rugby game than a relay race, stressing the importance of getting the functional areas together early and frequently in bringing the product to market. The implications for manufacturing were significant. No longer was the manufacturing function notified after the product design was complete; instead, it would become involved throughout the process.

In the long run, competitiveness is the result of an ability to nurture and develop, at a lower cost and faster than competitors, the core competencies that result in unanticipated, innovative products. Core competencies include a firm's collective learning, especially its ability to coordinate diverse production skills and integrate multiple streams of technology.2 Firms must focus on those activities in which they have a learning and technological performance advantage. For example, 3M develops product lines around adhesives, while Honda considers their engine design and production a core competence.

As manufacturers focus more on their areas of competence and technical expertise, they must rely more on external suppliers to support non-core requirements. This is especially true in new product development. Firms are relying increasingly on suppliers for early design, concurrent engineering, and other product development support. To remain competitive, firms must receive competitive performance advantages from their suppliers that match or exceed the advantages provided by the suppliers of their global competitors. Firms are recognizing the strategic performance potential that collaborative relationships with suppliers can provide. They need a proactive approach to supplier integration into new product development; characterized by the formation of strategic alliances with core technology suppliers, open information sharing, co-location of supplier design personnel, and joint future technology planning. This approach must include strategies and tactics that directly promote supplier inputs into the new product development process. This practice suggests that a firm's strong commitment to internal technological development is not always necessary for competitive success. Successful technology acquisition or co-development is another means to achieve a sustainable competitive advantage. Some firms have been particularly successful borrowing innovative product and process ideas developed externally and applying them to better serve their market segments. In such cases, the borrowed technology could have been available for a long time. Among the most notable examples of this approach are seen in Japanese automotive and electronics firms that have competed very successfully in the world marketplace using many borrowed technologies. Other firms may not have adequate research and development (R&D) resources to allow much internal product or process development; such a firm must rely more heavily on external acquisition of innovative ideas to remain competitive. Thus, successfully acquiring and implementing a specific technology may well lead to a competitive advantage.

In this chapter, we review a number of important developments in new product development that have significant implications for value system creation, and present the key implementation issues involving supplier—customer integration into new product development, based on the results of a recent National Science Foundation study. Supplier development is then explored in the final section.

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