Nick Clifton

OUT-SOURCING IN THE AUTOMOTIVE INDUSTRY:A CASE STUDY OF ASSEMBLER-SUPPLIER COLLABORATION

International Journal of Applied Management, Vol.1 No. 2, 37-52.

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Abstract

This paper is concerned with the nature of assembler-supplier

relationships within the automotive industry.These are set within

the context of a transition from mass to lean models of production.

New modes of assembler-supplier relations are described, in which

the benefits of a collaborative problem-solving approach outweigh

those of traditional adversarial methods. The impact of these

changes at the operational level is then examined, through the

presentation of case study material relating to the out-sourcing of

a complete system by a major assembler. It is shown that improved

levels of information exchange and commitment have facilitated a

successful relationship, in which the assembler acquires a

superior product cost-effectively, and the supplier is able to

improve value-added and invest properly in their specialist skills.

Finally,the role that information technology (IT)can play in this

process is acknowledged.

Keywords: Automotive industry, Assembler-supplier relations, Out-

sourcing,Collaboration.

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Introduction

Much has been written concerning the diffusion of “lean”

techniques in the automotive industry, and the nature of the

observed transition from mass to lean production (Schonberger,1986;

Womack et al, 1990; Womack and Jones, 1996; Altshuler et al, 1984;

Hoffman and Kaplinsky,1988).At the heart of this is the elimination

of “waste”, defined as any activity which adds cost but not value,

therefore inciting the compression of lead times in design,

development and supply.In moving towards this new paradigm,buyer-

supplier relations have undergone significant restructuring

towards a less confrontational approach, involving a smaller

number of “full service” suppliers (see for example Lamming, 1993;

Lamming et al, 1995; Leverick and Cooper, 1998). This has

significantly reduced the numbers of direct suppliers to the

vehicle manufacturers.Between 1986 and 1992 Ford in Europe reduced

its supply base from 1250 to 1000,GM from 2000 to 1200,and VW from

around 1700 down to 1200 (Lamming, 1993). These reductions are

continuing, with the remaining “first-tier” suppliers taking on

responsibility for systems (i.e.as opposed to component)design and

production, and also managing their own supply chain. Within this

regime, facilitating supplier input in design and development is

seen as a key challenge for OEM-supplier relations,particularly in

the role this can play in shortening product development and

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introduction lead-times. These relationships have been found to

provide a significant contribution to the generally superior new

product development performance of the Japanese automotive

industry (Clark and Fujimoto, 1991).This is contrasted with “old-

style” mass production projects, which typically made only modest

use of suppliers’ design and engineering capabilities, while

relying more heavily on the use of common parts. To this end, lean

production ideally employs a rational framework for establishing

costs, agreeing prices, and sharing profits, which is contrasted

with the adversarial situation typically found in mass production.

In order to explore this area, this paper focuses on a case-study

involving the out-sourcing of a complete system (seating)by a major

OEM, examining how the process is managed, and highlighting the

impact at the operational level.

Assembler-Supplier Relations

In extensive research for the International Motor Vehicle

Programme (IMVP),Helper (1991a;1991b,and with Mari Sako,1995a;1995b)

classifies assembler-supplier relationships by the methods with

which the parties involved resolve problems arising in the

relationship. At the most simplistic level, in an “exit”

relationship the customer finds a new supplier,while in a “voice”

relationship the customer works with the original supplier to

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resolve the problem. The voice/exit framework is therefore

concerned with the range of options available within the “buy”

alternative, whereas approaches such as those of Williamson (1975;

1981)have emphasised the “make” or “buy” dichotomy.

Within this context, the nature of the relationship is defined by

two dimensions:information exchange and commitment.At the lowest

level,the only information exchanged is the price of off-the-shelf

products-this is the “market” as defined in classical economics.At

an intermediate level,the parties involved may share information

concerning issues such as finances, plant and equipment, and the

like. At the highest level of exchange, both supplier and customer

provide constant feedback which includes suggestions for

improvements in the other’s operations.

Commitment refers to the supplier’s degree of certainty that the

customer will maintain the relationship with them. The customer

firm can demonstrate this commitment in a number of ways, ranging

from vertical integration (i.e. total equity ownership), legally

binding long-term contacts,through to unwritten agreements backed

up by a desire to preserve a reputation for “fair” trading. It is

worth noting that customers can be committed by restricting

themselves (or having no choice if no viable alternative sources

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exist)to a single source of supply,so that any threat on their part

to leave the relationship is unlikely to be credible.

A high level of information exchange must exist for the cooperative

(i.e.voice) approach to problem solving. This flow of information

necessitates a high degree of commitment in the relationship for

three reasons:

1. It is costly to establish and maintain extensive communication

systems with multiple sources (although see comment on IT,below).

2. The exchange of proprietary information requires trust.

3. Customers and suppliers can achieve mutual benefits from

knowledge of each other’s products,gained from working together

over time.

In the converse situation, for an exit strategy to be pursued

successfully, the customer must maintain a credible threat to leave

the relationship.If this is to be the case,customer commitment must

be low, which requires the availability of a number of viable

alternative sources to ensure that they are not dependent on any

single one. It follows, from the reasons outlined above, that if

commitment is low then the exchange of information must also be

limited.

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In her historical review of OEM-supplier relations within the US

automotive industry, Helper (1991b) sees the present situation as

one in which the assemblers are exposing themselves to potentially

higher levels of opportunism,through undertaking a greater degree

of out-sourcing. They are willing to do this because the increased

transactional risks incurred by this strategy are exceeded by the

potential gains that now accrue from gaining access to suppliers’

innovation.Exit strategies boosted assembler bargaining power at

the expense of this access- but technical change is becoming an

increasingly important part of competition. Therefore, the voice-

type relationship is seen to be consistent with assembler-supplier

interaction as advocated within the “value-chain as a whole”

approach of lean production (Clifton,1999;Lamming et al,1995).The

work of Helper and Sako (1995a;1995b) does indeed demonstrate that

there has been an increase in the adoption of voice-type relations

within the automotive industries of Europe and more specifically

the UK.

Furthermore, in addition to changes in automotive technology,

developments in IT are having an impact on the industry. The three

key potential affects of improved IT are summarised by Clemons et al

(1993):-

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1. IT reduces the cost of exchanging and processing information,

thus reducing the costs of coordination.

2. IT increases information availability and processing capacity,

thus facilitating monitoring the performance of other

participants in the relationship.

3. IT is increasingly standardised and interconnective, thus

reducing the relationship-specificity of IT investments, and

therefore the risk involved in these investments.

The last point is of particular interest in the context of the

automotive industry, with the trend towards the use of common

standards in Electronic Data Interchange (EDI),and the utilisation

of existing facilities for data transfer, typically telephone

lines.Clemons et al (1993)suggest that this should lead to more out-

sourcing as firms realise the production and specialisation

economies of outside suppliers,without incurring the prohibitive

transaction risk associated with dedicated investments in

physical or human capital made for similar purposes.

Research Aims and Methodology

The point of this case is therefore not to directly “test” the

diffusion of lean production- rather the transition from mass to

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lean is effectively taken as the context within which an assembler-

supplier relationship is changing. This example provides an

illustration of a successful JIT relationship, incorporating

voice-type features (Helper 1991a; 1991b), efforts towards trust

building (Sako,1990;1992),and the use of EDI.The study is therefore

not necessarily “representative” in terms of product/process etc.,

but provides a good case in which to examine themes central to the

transfer of responsibility from assembler to supplier,who in turn

faces tight schedules,and an increased need for R&D,but who is then

able to take greater control over their activities. This can only

take place in the context of a relationship that realises mutual

gains through the application of specialised knowledge and skills,

facilitated by improved levels of cooperation and trust.Moreover,

many studies of buyer-supplier relations take the perspective of

either the OEM or the supplier,often for practical reasons-it can be

very difficult to obtain matching data sets. This study seeks to

examine both sides of the equation, which is desirable, as it is of

course combined efficiency that should be the ultimate goal.

This case presented can therefore be seen as examining changes at

the “micro-level”,to illustrate how a decision to out-source arises

and is evaluated, how the resulting relationship is managed, and

what the impacts are on the companies involved. Therefore, within

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the climate described above (i.e.the wider context of the automotive

industry, and more specifically the example presented),one could

reasonably expect to observe:-

A trend towards a higher information exchange,higher commitment

relationship- particularly in an area in which supplier

technical capability is an important contribution to assembler

competitive advantage (for example items with significant

performance and/or styling impact, or involving product and/or

process technology outside the OEM’s core).

More relationship-specific investment, within a closer

relationship.

Also- the existence of, or efforts to achieve, factors which

facilitate more successful voice-type relations (through reducing

the scope for opportunism):-

Convergent expectations of the trading partners, regarding

standards,working practices,and so on.

A raised perception of interdependence (i.e.awareness of the

supply chain as a whole).

Background

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The material presented was gathered through interviews,visits,and

on-going contact with the two organisations concerned,beginning in

late 1996.Contact was typically with the relevant purchasing staff

of the vehicle manufacturer,and with the corresponding sales staff

within the supplier company. In order to gain the level of access

required,anonymity was guaranteed as a condition of the research.

The vehicle manufacturer involved in this case (referred to

hereafter as “the Assembler”) is one of the truly global players,

with a number of manufacturing plants in the UK, and a domestic

turnover of over several billion pounds. With this in mind it is

reasonable to suggest that the Assembler is in a position to

restructure its out-sourcing at a strategic level,rather than as a

reactive cost-cutting measure necessary purely for survival,as has

been the case with some of the smaller players in the industry.

The company taking over responsibility for the system in this case

(referred to as “the Supplier”)has its headquarters in the US,and is

one the worlds leading suppliers of automotive seating. The

Supplier has a European turnover in the region of £500m,and a number

of facilities within the UK. The Supplier is currently the sole

source of seats on two of the Assembler’s compact and sub-compact

model ranges,with expansion planned to mid-size models if success

continues. The supply of complete systems (as opposed to basic

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seats)now accounts for around 65% of the Supplier’s UK turnover,as

compared with a figure of below 25% in 1988.Over half of the total UK

turnover derives directly from dealings with the Assembler. On

average, the Assembler takes delivery of just over 2000 seating

units per day to its UK operations.

The Case Study

The Seating System

Seats are an interesting case in which to examine inter-firm

relationships, in that the product possess a mix of performance,

safety-critical (i.e. subject to legislation), and styling

implications. As such, although it may be that the Assembler is

“testing the water” by devolving responsibility for a system that

could be seen as less critical than some of the other candidates,

seating is not necessarily as peripheral and “low-tech” as it may

initially appear (see section below on recent developments).

The Boston Consulting Group (1991)identified the product area of

seats, along with those of bumpers and suspensions, as the most

significant in terms of the propensity towards the supply of

systems.Moreover,Lamming (1993:p152)sites seats as a prime example

of the “value of specialism”, in that the nature of the processes

involved (particularly with respect to labour skills)are different

from those typically found in automotive assembly.In terms of the

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product itself,seats are bulky,requiring a large amount of storage

space relative to their value, are difficult to transport, and

vulnerable to damage. These factors have facilitated the trend

towards making to order,with high stock-turns,and the location of

supplier plants near to the OEMs. As such, assembler-supplier

relations tend to be closer than is the case for the majority of

components1.

According to both the Assembler and the Supplier,the seating system

has changed dramatically over the last five to ten years. An

increased emphasis on safety has lead to changes in the framework of

the seat, and therefore an impact on the metal-working part of its

manufacture. Attempts to achieve greater variability in seat

adjustment have greatly increased the complexity of the mechanisms

required, particularly for three-door cars, where flexibility to

improve access to rear seats, and the utilisation of space in

general have been priorities.

The Supplier underlined the emphasis that they place on value-

adding proprietary technologies, and are currently investing

1Notes

? Andersen Consulting (1994)note that seating plants tend to supply 1-2 assemblers only.With respect to the Japanese industry,Fujimoto and

Takeisi (1994)have identified an average of 2.2suppliers per customer and 1.3customers per supplier in the seating sector,while for all components the figures are 2.7and 2.9respectively.

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significant resources in a number of research projects in this area.

These include the development of a “drop bolster” seat, which

automatically lowers the bolster closest to the door when the door

is opened. Such an innovation is important for the improvement of

vehicle entry and exit, especially as the population ages, and is

significantly less costly than the lowering of the vehicle, which

would involve a complete suspension system redesign. Allied to

these developments,they have recently begun the production of a new

motorised seat adjuster system, which is designed to provide the

range of adjustment currently found in luxury models,but at a cost

that will allow it to be fitted to mid-range models. Programmable

position adjusters are also currently being worked on. Other

research projects include the development of an “off the shelf”

child seat designed for improved safety,which all assemblers could

potentially utilise,along with work on a self-adjusting seat which

senses body pressure and heat.

In addition to the factors highlighted above, there have been

significant changes in the styling requirements of vehicle seats.

These have also been driven to some extent by the issue of comfort,

but a distinct emphasis has been placed by the Assembler on the

achieving of a more “modern-looking” appearance,accommodating the

increased use of curved lines.The Supplier has recently introduced

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a process which facilitates such developments-a method of bonding

seat covers to foam cushions,producing seats with deeper contours

and increased durability, while reducing the need for labour-

intensive stitching of seat covers.

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The Out-Sourcing Process

This process began for the Assembler in 1992 with the new sub-

compact model,in what is described by the Assembler as a “gray box

situation”, meaning that the supplier was given the necessary

specifications,along with a number of second tier suppliers to be

used.This situation was extended in early 1994 with the seating for

the new compact model introduced in 1995.A redesign of the seating

system had been necessary,and had “gone horribly wrong” -Assembler

purchasing executive.The situation had arisen due to a combination

of two principal factors. The Assembler carries out “consumer

clinic” type appraisals for all aspects of their cars- these are

particularly important for seats where aesthetic/subjective

approaches to quality are at least as important as the systematic

testing of objective quality standards. During the course of this

process the Assembler discovered that they had a problem with their

seats in terms of comfort, when compared with competitors’

corresponding models. It was noted that these competitors were

achieving the superior results while devolving a very high degree

of design responsibility to their suppliers. The second important

factor in the redesign was the introduction of new European Union

safety legislation.As a result the Supplier was brought in,and were

able to carry out a full redesign in 18 months,in readiness for the

model launch.

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In deciding which supplier to use for this enhanced role, the

Assembler carried out a market test with what they considered to be

the three leading companies in the area, which included the

Supplier. As always in such situations, the price quoted was an

important factor;-when undertaking the out-sourcing process for

the new compact model, by working back from the proposed market

price of the car, the Assembler arrived at a unit cost for the

seating systems above which they felt it would not be possible for

them to go2 . With this figure in mind, and once the potential

suppliers had demonstrated a minimum standard for quality,

technical resources and so on, a competitive bidding process was

undertaken. On the Supplier’s side of the equation, the process of

providing a quote was more complex than had previously been the

case. This was because in addition to the usual factors of product

specification, complexity, volume, etc., they were required to

evaluate the additional factors involved in being a supplier of

systems. These include increased product development, the

management of the second tier, along with warranty and service

considerations.

2 Although no exact price could be obtained,an estimate from the data available gives an average figure of just under £400per unit.This is

broadly in line with the figures reported by Andersen Consulting (1994).

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With the ultimate selection of the Supplier, in addition to the

issue of cost,the Assembler also stressed their superior technical

resources. The Supplier posses its own foam plants, rubber hair

facilities, and has technical and manufacturing expertise for the

full range of individual seat components (such as frame,adjustment

mechanisms,and trim),in addition to a knowledge of the system as a

whole. This is borne out by a Supplier purchasing executive who

suggested that the supplying of systems had enabled them to

consolidate this situation, by allowing the Supplier to “get

control over the main components,to keep them in-house,which allows

us to exclude competitors to some extent”. This evidence is

interesting in that it stresses the advantages of vertical

integration, which might suggest that at this level of the supply

chain,particularly where relatively low-tech parts are concerned,

the benefits to be derived from integrated structures outweigh the

negative aspects which have been experienced by the assemblers in

their backward integration strategies.

As well as the opportunity to gain a better design,there were also

economic advantages for the Assembler.In looking at “make or buy”

decisions all the relevant variable costs (i.e. for materials,

labour, etc.)are taken into account. This part of the decision is

relatively straight-forward; “The difficult bit is costing the

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complexity involved in the fitting of the system together.When we

out-source we remove the direct costs, plus we save on this

complexity”-Assembler purchasing executive.This recognition that

in the past decisions may have been based too heavily on direct

costs alone, and that the elements of total cost that are more

difficult to quantify3 are at least as important, has lead the

Assembler to develop a more rigorous system (which they are in the

process of finalising)for the evaluation of such decisions.

As a general rule in such cases, the Assembler looks to achieve an

overall minimum cost saving of 5%. The economies achieved in the

deal with the Supplier were reported to be “well in excess” of this

figure.Given that the deal was worth in the region of £110m for the

Supplier in 1996, rising to above £200m 2 years after this, this

represents an estimated saving of at least £6m for the Assembler in

1996 alone.

The Assembler considered the implications for their seating

workforce before taking the decision to out-source. After

consultation with the unions involved, it was agreed that there

would be no compulsory redundancies. The workers who were to be

surplus to requirements either took voluntary redundancy or early

3 i.e.the costs arising from this complexity-the managerial time and effort involved in coordinating the constituent parts of a single system,and such

like.

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retirement,or were re-deployed within the Assembler.In addition to

this, a significant number were offered employment at the

Supplier’s purpose built just-in-time supply facilities,which had

been located near the Assembler’s plants. The exact numbers

involved in transfers are not known, but the workforce at the

Supplier’s South East plant has increased from 600 to over 1000 in

the last few years,making it significantly larger than the average

seating facility in terms of total headcount (Andersen Consulting,

1994).Both companies were keen to stress that workers were free to

make their own decision, and it is worth noting that, as far as the

Assembler is concerned,the possibility of labour force resistance

to any changes in working practices necessary in keeping the in-

house supply of seats viable was not an issue in their decision to

out-source.

Major changes to seat design usually only occur at the model change-

over (as is the case with the various other systems), when the

Assembler works with the Supplier on possible improvements in

safety, style, fabrics, flexibility, and so on. Suggestions arising

from the various consumer appraisals are costed,and a decision made

as to whether they should be implemented. The Assembler stressed

that they take great care at this stage to ensure that any

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modifications are actually what the customer wants and, even more

importantly,that they are prepared to pay for them.

The actual number and the impact of design changes has been reduced

in recent years.This is essentially because the modification of one

component or design specification will often impact on another

part of the seat assembly,and so when the Assembler was integrating

the system themselves this would often require the alteration of

specifications to several different suppliers.The overall result

was a generally ad hoc procedure for implementing any redesigns

necessary. Now the Supplier have responsibility for the supply of

the entire system;this gives them “the whole picture-they can sort

it out much more easily” -Assembler purchasing executive.This is a

clear illustration of the advantages that can be realised through

effective systems supply.

Perceived Advantages Of The Relationship

The Assembler suggests that they would have been able to cope with

recent product developments under the old sourcing regime,but that

large investments would have been required in order to produce the

new systems on an equal basis to the Supplier. These costs are

associated mainly with the organisation of the production process.

For example, in the just-in-time system at the Supplier the

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production line is organised in a U-shape, allowing material to

arrive on to it from both sides.This enables,amongst other things,

the achievement of a high number of stock-turns4 ,and therefore the

need to hold only very small levels of inventory. In contrast, the

lines at the Assembler’s plants operate in a straight line; to

emulate the process at the Supplier more transport would be

required,the road system would have to be changed,and possibly even

the whole production line moved.The cost of doing all this can only

be speculated upon,but it is worth noting that the present deal with

the Assembler required an investment by the Supplier of £15m- and

this from a position further up the learning curve.

The Assembler also feels that the use of out-sourcing has allowed

the achievement of unit cost reductions that otherwise would not

have occurred. These are seen as essentially arising from the

Supplier’s superior knowledge of their product- for example they

know if a part is “over-designed” for its strength or safety

requirements.The Supplier themselves expand on this point;“We can

focus.For the OEM’s seating is something of a “cinderella” area of

the group- often under-resourced and over-staffed.We are forced to

deal with these issues, because seating is our business, and our

reputation is on the line”.They go on to suggest that they have been

4 A figure of approximately 120was given with respect to the Supplier in 1995.Andersen Consulting (1994)identified 89 as the average for seating

suppliers,with 135representing world class performance.

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able to reduce unit costs through the use of simultaneous

engineering teams,and that these have had an impact on the overall

efficiency of assembly, through the improvement of labour

productivity, and the use of superior materials coupled with

improved design.

The deal with the Assembler specifies a target price reduction of 6%

per year (as opposed to a typical figure of between 1 and 2%),which

has been achieved so far. Given that the Supplier has been able to

use what they refer to as their “European purchasing power” to

realise a reduction in costs of materials of between 1 and 2 %,

coupled with the fact that there has been no apparent reduction in

their margin, this would suggest that the improvements above have

realised a cost saving in the region of 4% per year,representing a

sum of just over £4m. This is of the same order as the £1.25m that

Nissan saved in one year, over a smaller volume, as a result of

improved productivity from the Supplier’s operations in the USA.In

the terms of the contract,any further productivity gains achieved

over and above the 6% required by the Assembler are distributed

evenly between the two companies.

In addition to the above,in the opinion of an Assembler purchasing

executive there are also advantages that are not directly

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financial.The operations managers in their plants are more able to

focus their time on the efficient working of the assembly line,and

in turn this allows full concentration on the actual fitting of the

various vehicle systems together. In addition, the removal of the

actual assembly of the seats frees up floorspace,as the holding of

stocks of individual components is then unnecessary (it is

estimated that several thousand square feet have been made

available through this process)5 .This also means that operations

managers do not have to worry about looking through large amounts of

different stock for a specific part, since making sure the right

system arrives at the right time is now the responsibility of the

supplier.

The Assembler also feel that they gain an indirect benefit from the

arrangement in that the Supplier deals with several other car

assemblers in the UK and Europe. This means that for these rival

companies they have a reduced need to “bench-mark” their products in

order to ascertain their relative performance in terms of style,

comfort and safety, as at least some of this information is

available from the common Supplier.This of course has implications

5 As a result of the introduction of JIT methods at the Supplier’s plant in Germany,only one third of the original 10,000square metres of floorspace is

now needed for the supply of a second multi-national assembler,moving the plant closer to the 34 units per square metre identified as the average for world class seat suppliers by Andersen Consulting (1994).A significant

amount of the area freed is now used for the supply of the Assembler’s European plants.

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for the Assembler’s own individuality and confidentiality, as the

corresponding information is presumably available to their

competitors.However,there is very little potential for carry-over

from one assembler’s system to another, as they usually retain

sufficient influence over style, and therefore the design, to

prevent this being a real problem.

The Assembler also stressed the savings involved in dealing with

the supply of a system;“it is much more work (and more costly)to buy

and coordinate hundreds of individual parts than it is a complete

system”-Assembler purchasing executive. Such benefits are

compounded by the use of the Supplier as the sole source for the

entire seating system;“the main advantage by far is only having to

deal with one contact for design,delivery,just-in-time issues and

so on”- ibid .As yet the Assembler have not experienced to any great

degree any of the potential problems associated with the use of sole

sourcing6 in their relationship with the Supplier. They have

expressed some concern about the loss of control that results from

the transfer of technical and cost information required by the new

relationship, but they feel that this is dealt with through the

continual review of target costs. Also, it was noted that as the

Assembler have the opportunity to examine a supplier’s entire cost

6 Typically arising from the increased dependence involved in therelationship.

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structure “we try to reciprocate this to them. We don’t tell them

everything ,but we want to provide them with mutual assistance”.

The designs for the seating system on many of the Assembler’s models

have a common origin,and so in theory re-sourcing would be possible.

However, the complications involved in making the various

modifications necessary, coupled with the fact that suppliers are

provided with long term agreements,means that such actions are not

feasible.As far as the Supplier are concerned,the chief benefit of

being a sole source is that of a guaranteed high volume for their

product, and there is no realistic potential for exploiting their

status in terms of price. This is due to the rigid monitoring of

costs by the Assembler,in which every penny must be justified,but

also to the fact that such actions would be counter-productive in

the long-run,both in the on-going relationship with the Assembler,

and for the Supplier’s reputation with its other customers.

The agreement with the Assembler runs for the entire current model

duration (which is becoming standard practice in the industry),a

period of five years in this case. The Supplier feels that this is

vital if they are to be a “full service” supplier;“Time is required

to develop all the necessary associated responsibilities with

becoming more than just a component supplier, such as the

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administration of the second tier suppliers” -Supplier sales

executive.They also felt that such an agreement was vital in order

to undertake the necessary capital investments involved in the

supply of entire systems.A period of five years is needed to recover

the £400,000 that a single CNC machine can cost,and as highlighted

above, over £15m was invested in 1996 alone for the new Assembler

business.

As mentioned earlier, in the past secon-tier suppliers were

specified for components such as spring mechanisms, and

particularly for fabric. The Assembler will continue to have a

strong influence in this latter area,as it is obviously vital that

this matches the door trims and so on.As far as the other components

were concerned,it was a case of honouring agreements that existed

with sources prior to the Supplier taking over, and when these

expire they will be free to source from wherever they choose. The

Supplier does regard this as a constraint on their business,but they

are confident that such restrictions will be relaxed as confidence

grows.

The contract specified no additional special conditions, such as

escape clauses relating to quality and so on.These type of items are

standard terms in most contracts, and the Supplier was of the

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opinion that “if quality and delivery were consistently that poor,

then you deserve to lose the business”.

As indicated above,the capital investments that were necessary for

the Assembler contract were all made by the Supplier, and then

included in the price agreed,in order for them to be recouped over

the duration of the contract.Distinct from capital investments are

tooling costs7 ,which were met by the Assembler at the beginning of

the contract life. The Supplier was also wholly responsible for

developing the necessary process technologies involved in the

deal. Such an arrangement was possible as there was no transfer of

capital equipment involved in the switch from in-house production

at the Assembler to the purchase of complete systems from the

Supplier.In addition, the shift occurred at the model change-over,

and involved a total transfer of supply,meaning that there was no

gradual scaling down of production at the Assembler and

corresponding ramp-up at the Supplier.This was possible because as

a full transfer had been decided upon at the beginning of the

redesign process, 18 months were available for the planning and

implementation of the necessary arrangements.

7 The tooling is defined as any piece of the process equipment that actually comes into contact with the component.

28

The increased role of the Supplier has allowed them to design their

product more effectively so that they “can manufacture it in the

best way”. This, combined with their specialist centres of

excellence and the need to achieve cost savings of 6% per year,has

lead to an increased focus of their process technologies. This

essentially means that they “don’t have to test what we can’t make”.

In addition, the Supplier is continuously seeking and evaluating

ways of reducing weight, and therefore materials costs. The metal

framework of the seat has been a particularly fruitful area in this

respect.Increased efforts in design and development are reflected

in a doubling of the Supplier’s automotive R&D budget from 1% to 2%

of sales revenue in recent years.This represents a current spend in

Europe as a whole approaching £10m.There is no direct collaboration

in this area between the two companies;this is essentially because

as a “full service” supplier the Supplier feel it is expected that

they should provide “all the answers”. This does not mean however

that information of this nature is not passed on to the Assembler,

and the confidentiality of their expertise and technology is a

continued source of concern for the Supplier.

In purely financial terms,the short-term benefits of the Assembler

deal are highlighted by an expected 60% increase in European sales

over the contract life. Further into the future, the Supplier also

29

anticipates increased opportunities in new markets such as South

Africa,South America and India,as a direct result of being part of

the Assembler’s new global strategies.

The Importance of Inter-Firm Coordination

The commitment required in inter-firm relations is also a very

significant factor,and face-to-face contact between the Assembler

and the Supplier now occurs on a daily basis.The Assembler is of the

view that effective communication is vital for JIT-they are driven

by customer orders which can change on a daily basis. This view is

echoed by the Supplier; “JIT is never duplicated on one model [i.e.

Compact or Sub-compact,etc.].We are notified when the car comes out

of the paint shop as to whether it’s a [Variant A or Variant B],right

or left hand drive. You just can’t duplicate that sort of

coordination”-Supplier sales executive.This type of schedule lead

time is of the order identified as world class by Andersen

Consulting (1994)- an average of 1.4 hours from final order to

delivery,as against 4.1hours for non world class seating suppliers.

Schedule stability is also reported to be improved,such that it now

compares favourably with the world class (ibid ) benchmark

variability of under 2.5%.

30

An important factor without which the present relationship would

be impossible, a fact that is recognised by both parties, has been

the advent of electronic data interchange (EDI).This is essentially

a system of standard data protocols, designed to facilitate the

integration of buyer and supplier re-order point material control

systems, call-offs, schedules, etc.,across the interface of their

respective computer systems. The on-line link between the two

companies was supplied by the Assembler, with the Supplier

providing support with the placement of an engineer at the

Assembler’s facility.The link allows an extension of the open-book

policy,which means that the information required for the Assembler

to “get to the root of any problems” is readily available. The

resulting reduction in administration is stressed by the Supplier;

“it [EDI] allows us to do away with much of the paper-work.The system

is self-billing- there are no invoices and so on.Also,if there is a

problem or whatever,we can input directly into the system,without

having to fill in a form and pass it on”-Supplier sales executive.

Conclusions

From the evidence presented above it can be seen how it is possible

for both parties involved to benefit from the out-sourcing process.

The question of “who gains most” is not really an issue here, as

should be the case in any situation in which the process is managed

31

correctly, with each firm profiting in ways that are not directly

comparable to those of the other.

The Supplier has taken advantage of the trend towards out-sourcing8,

in order to gain an increased volume of guaranteed business,which

in turn enables them to invest properly in their core technologies8 The Economist Intelligence Unit estimates that in 199568% of the seats

used by European assemblers were purchased from external suppliers, compared with only 58% in the preceding year.

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15-28.

32

both in terms of plant and R&D.This has ultimately allowed them to

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market has risen sharply in recent years to around 40%. This

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33

to this,they now have increased scope for future opportunities in

potential new markets around the world. Moreover, involvement in

greater levels of development activity provides an important link

between the two organisations, in terms of being a clear

manifestation of commitment.However,any increased R&D activity by

suppliers needs to be based on the understanding that the

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Acknowledgments

I would like to gratefully acknowledge the support of BBA

(Automotive Products), for their support of the above research.

Thanks also go to the various employees of the two companies

involved in the case study, who found the time in their busy

schedules to participate in the research.

34

assemblers will not exploit the results in an opportunistic

fashion-therefore trust is an important part of the equation.

The Assembler is able to obtain a superior system more cost

effectively through utilising the knowledge of a specialist, and

can therefore concentrate on their core activities. These are

essentially powertrain, vehicle assembly and the integration of

the constituent sub-systems, within the bodywork styling and

marketing concepts. The Assembler can save on monitoring and

inventory costs, while the Supplier no longer faces yearly

contractual bidding. Furthermore, in an increasingly technical

environment,the “information-rich” evaluation of alternatives is

important: it is sensible (and practical) to do this for a limited

number of (core) activities only. This process, combined with the

increased capital lumpiness of new production technology is likely

to make greater inter-firm specialisation more efficient,and hence

reduce the advantages of traditional vertical integration, at

least at the top (i.e.more complex)end of the supply chain.This has

been seen in the out-sourcing of seats,facilitated in recent years

by the rapid increase in the technical complexity of the system,

which has further reinforced the “value of specialism” referred to

earlier.

35

These developments are only possible with a change in the nature of

the assembler-supplier relationship,in which the increased levels

of information exchange and commitment invested in a long-term

relationship are associated with a greater degree of trust, and

therefore reduced transactional difficulties. Finally, a

contributory factor to this process has been the advent of the

technology that is embodied in EDI. This has allowed improved

coordination at a relatively low cost,and without the large amounts

of sunk (i.e.relationship-specific)investment in coordination that

mitigated towards the vertically integrated structures of old-

style mass production.It is suggested therefore that the impact of

Information Technology on assembler-supplier relations will prove

a fruitful area for research in the automotive industry over the

next few years.

36