Supplier Integration Into New Product Development Process Model
Based on a detailed analysis of multiple company case studies that were conducted as part of a major research project funded by the National Science Foundation,6 a process model of supplier integration into new product development was created (Figure 63). This model is a compilation of supplier integration process "best practices." Additional insights into company practices at various stages of the model are also provided in this section.
Figure 63 Process Model for Reaching Consensus on Suppliers to Integrate into New Product Development Project
Identifying Desired Supplier Capabilities and Potential Suppliers
All the companies that participated in this research indicated that the design and manufacturing process is being subjected to a much more thorough analysis than in the past. An important initial decision in this process involves a formal statement on the level of insourcing/outsourcing that will occur in core technology development. In order to reach consensus on difficult insourcing/outsourcing decisions, successful organizations have developed a formal process for defining the level and types of product/process technologies to be outsourced. Whenever possible, companies are approaching the insourcing/outsourcing decision from a systems perspective, and are asking suppliers to increase their responsibility for the level of integration. This was observed across a variety of products and processes; including chemical molecules, computer components, installation and maintenance of new processes, and automobiles.
The decision-making process begins with an assessment of strategic core competencies in product and process design and manufacturing. At this level, the analysis involves decisions regarding core technologies, system integration, and return on investment for resource allocations leading to internal technology development. In general, companies trended toward outsourcing commodity-like items, and focusing internal efforts on value-added processes such as system integration. In all of the companies, this decision was made at higher levels in the organization, and involved a strategic vision regarding the organization's future markets and technology roadmap over the next ten to twenty years.
Once consensus is reached, executives formalize the insourcing/outsourcing technology strategy and communicate it to the divisions, who are then responsible for establishing current and future new product requirements. The process of cascading the decision to the next organizational decision-making level is achieved through a variety of means. One of the prevailing organizational structures used to interpret and deploy technology strategies is the advanced technology group. These groups are typically located centrally, and are tasked with identifying major new subsystem and component technologies required in new products. Another approach involves integrating suppliers into process development and start-up. Some companies use institutionalized "platform teams," responsible for new product development with suppliers on a permanent basis. Finally, other organizations employ a letter of intent that formally specifies the nature of the relationship. At this stage product development teams are typically making the decisions, guided by the executive core competence vision.
The final insourcing/outsourcing decision-making hierarchy occurs at the component level, where decisions are typically made jointly by the product development and purchasing commodity team. Purchasing is responsible at this level for identifying leading suppliers within a commodity class and sharing this information with the commodity team.
After completing this initial stage of the strategic process, teams should have identified a vision statement regarding the company's internal core competencies, established a set of requirements for success in current and future new products, and have a general idea of the technology needs within these product groups. In addition, the company should have a general idea of the specific roles and responsibilities it requires of suppliers selected for new product development. New product/commodity teams should seek to formally specify these objectives in as much detail as possible. These objectives become the primary criteria used in supplier selection, negotiation, alignment, and relationship management.
A number of case examples illustrate this process. At NEC, a major manufacturer of fax machines in Japan, the primary metric used to drive all supplier integration projects is target cost. A target cost for a fax machine is first developed based on marketing's input, and is broken down into different categories of parts based on historical costs. This target cost is submitted to suppliers. Suppliers share their cost data with engineers, and provide information on labor, overhead, and material costs. To achieve the target cost, changes in processes and materials are discussed first, avoiding the topic of profit margins. If the supplier still cannot meet the target cost, the company initiates negotiation of profit margins based on volume considerations.
Other considerations that may influence the decision to integrate suppliers include a lack of internal design capability and the need to develop a non-core technology. For example, Intel relies extensively on its suppliers to deliver state-of-the-art process technology that it cannot develop internally. The key strategy within Intel involves holding suppliers responsible for delivering, installing, servicing, and maintaining machine tools. Suppliers are responsible for process ramp-up and equipment maintenance. While the company is also involved in supplier integration into new product development, process integration represents a unique application in a non-traditional area. Suppliers are first fully responsible for the maintenance of these machine tools; the maintenance tasks are then gradually turned over to internal people. Each supplier is responsible for a single process, which is performed identically at multiple Intel facilities around the world. Intel demands the exact replication of processes across its facilities: this principle is emphasized throughout its business strategies. The principle refers to the fact that any time a specification or task is transferred between functions or suppliers, the other party is responsible for exactly reproducing the requirements.
In another case, Dupont considered portions of molecules as building blocks in assessing supplier competence. The company's strategy was to accelerate the rate of new product development by focusing on fewer compounds annually, and to integrate suppliers who have proven capabilities and can perform multiple steps in the intermediate production process. Instead of asking suppliers to only supply basic elements, the suppliers make the intermediate molecules with the final molecules in mind. This involved showing suppliers "the big picture" (not just a small piece of the process), posing the question more broadly, and getting the supplier to perform a greater share of the process. Supplier integration was facilitated by broader confidentiality agreements covering more issues as the supplier gained access to more pieces of the molecular puzzle. In some cases, Dupont even licensed parts of molecules from university research centers! The strategy driving this integration process was to push it increasingly higher up the compound chain, becoming more of an "assembler" of the final compound or molecule.
Supplier Risk Assessment
Once the new product commodity team has reached consensus on the key objectives for integrating suppliers, a set of specific performance measures related to customers' needs and requirements should be used to identify potential supplier capabilities and drive the subsequent selection. Cost, quality, and delivery are, of course, relevant, but evaluating suppliers for potential integration into new product development should involve criteria beyond those used to evaluate ordinary material/service suppliers. Based on the experience of the companies studied, the following elements are likely to be important factors in considering new or existing suppliers for integration:
Targets: Is the supplier capable of achieving the required targets regarding cost, quality, and product performance/function (e.g., weight, size, speed, etc.)?
Timing: Will the supplier be able to meet the product development schedule?
Ramp-up: Will the supplier be able to increase capacity and production fast enough to meet volume production requirements?
Innovation and Technology: Does the supplier have the required engineering expertise and physical facilities to develop an adequate design, manufacture it, and solve problems when they occur?
Training: Do the supplier's key personnel have the required training to initiate and successfully operate required processes?
All of the above criteria must be tied into the evaluation/measurement system, in order to develop a comprehensive risk assessment that answers the following questions:
What is the likelihood that this supplier can bring the product to market?
How does this risk compare to other potential suppliers?
At what point are we willing to reverse this decision if we proceed, and what are the criteria/measures for doing so?
What is the contingency plan in the event the supplier fails to perform?
It is no longer enough that a supplier be able to design and manufacture a prototype or start-up small volume production. Because of the intense competition and short product life cycles in many industries such as computer electronics, suppliers must also be able to meet product introduction deadlines and ramp-up their production volumes very quickly. Several of the companies studied assessed these criteria through a variety of means.
A good example is provided by a new product/commodity team from a computer manufacturer and a European supplier, who was selected after ten suppliers presented their design for a new project. The commodity team evaluated all presentations. During the course of the selected supplier's presentation, the team found that it could satisfy its requirements with an "off-the-shelf" chip set from this supplier. The team also visited selected supplier facilities, and the supplier deployed a dedicated engineering team over the course of the project. The commodity team also worked in parallel with other new product/commodity teams on the product development group. A key element in the structure of the teams in this company is that it is not a 100 percent engineering-led process, even though engineering has traditionally dominated decisions. The new vision is to retain a core set of knowledge to respond to end customer needs, and develop more interfaces with suppliers to identify which technologies can meet these requirements. The company cannot afford to be shut out of a new technology, so the group must constantly transfer knowledge from a variety of sources, including customer requirements, aftermarket (where new technologies often show up first), trade shows, competitive assessments, and alliances.
For another computer manufacturer, the supplier's capacity and flexibility are critical issues, and the team examines the type of agreements the supplier has with their contract manufacturers and how they affect the supplier's ability to increase output quickly. In this case, the supplier must have to the ability to increase productive capacity in the following manner:
25 percent in 4 weeks
50 percent in 8 weeks
100 percent in 12 weeks
A computer peripherals manufacturer faces the problem of having a very limited number of potential suppliers of several key components worldwide. However, because of the small number of suppliers, the company has done business with most of them, and recognizes their capabilities. Supplier selection is based primarily on the supplier's capability to design and manufacture the product in large volumes to performance specifications within the required time.
At another computer company, in the first stage of the new product development process (definition and planning), material support involves selection of technology appropriate to product requirements. Once this is complete, corporate materials can identify a potential list of suppliers. If the supplier is new to the company, the supplier will first perform a self-assessment survey. Then the new product/commodity team conducts a comprehensive assessment of the supplier's capabilities and arrives at a performance score.
When the supplier's capabilities are not at desired levels, the new product/commodity team has two options. If the technology is not critical to the product's functioning, a different supplier may be investigated. However, if limited numbers of suppliers are available and the technology is critical to the product, the company may undertake a more detailed technical assessment of the supplier in order to develop and improve the suppliers' capabilities early in the product development process.
Several companies in the study carried out detailed assessments of the supplier's technical capabilities prior to selecting them for a new product development project. In most cases, both formal and informal approaches were required to develop a reliable assessment. A typical approach would start with a standard survey augmented by informal evaluations by the buying company's engineers based on face-to-face discussions with the supplier's technical personnel.
A good example of how this decision is made involved a component supplier who made lead frames and over-molding for a semiconductor manufacturer. Although the company had the capability to manufacture these parts internally, they chose to team up with the supplier to produce them after the new product/commodity team (engineering, design, quality, marketing, and procurement) made an insourcing/outsourcing decision. The team decided to outsource because the internal process could not meet the customer's quality requirements (0-6 parts per million). The supplier was selected after the new product/commodity team reviewed the supplier's product, process, and control plans. Next, the team was expanded to include the supplier, to determine if it could meet the customer's requirements. Once the supplier's capability was established, it became a full-time member of the team.
In another case, an oil and chemical company's new product/commodity team evaluates suppliers involved early in its development efforts using a number of criteria in a "Total Cost of Ownership" model that considers:
Reputation for meeting requirements
Cost/availability of raw materials
Difficulty of the process matched against the supplier's capability
Waste generated in the supplier's process
Number of steps required of the supplier
The choice of supplier is made by the whole team. Following the recommendation, the company audits the supplier's facilities for contamination, environmental compliance, quality, technical capability, and cost.