Supplier involvement in automotive component design

Int. J. Technology Management, Vol. 23, Nos. 1/2/3, 2002

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Supplier involvement in automotive component design: outsourcing strategies and supply chain management Mauro Caputo and Francesco Zirpoli Università degli Studi di Salerno, Department of Mechanical Engineering, Via Ponte don Melillo, 1, 84084 Fisciano (SA), Italy Fax: 0039 089 964037 E-mail: [email protected] E-mail: [email protected] Abstract: In this paper the analysis is drawn on the motivations, modalities and consequences of supplier involvement in automotive component design. Outsourcing decisions affect the set of core competencies of buyer and supplier and, given certain circumstances, induce a migration of competencies from OEMs to suppliers. An in-depth exploratory multiple case study on a major European car maker and two of its suppliers revealed that this migration of competencies should not threaten the leadership of car makers within the supply chain if it is associated with (1) a strong competence of the car maker as system integrator and (2) a new way of conceiving supply chain management. Keywords: Outsourcing; development.

buyer-supplier

relationship;

new

product

Reference to this paper should be made as follows: Caputo, M. and Zirpoli, F. (2002) ‘Supplier involvement in automotive component design: outsourcing strategies and supply chain management’, Int. J. Technology Management, Vol. 23, Nos. 1/2/3, pp.129–154. Biographical notes: Mauro Caputo gained his degree in business economics from the University of Naples and his PhD in Science of Industrial Innovation from the University of Padova. He worked for some years as a researcher in the Department of Industrial Engineering at the University of Cassino and as Associate Professor of Economics and Business Organisation in the Faculty of Engineering at the University of Pisa. Now he is Associate Professor of Economics and Business Organisation in the Faculty of Engineering at the University of Salerno. His research interests include manufacturing planning and control systems, logistics, supply chain, new product development and business strategy. Francesco Zirpoli graduated in business economics from the University of Naples in 1994. He gained his MPhil in Management Studies from the University of Cambridge, UK and his PhD in Business Administration from the University of Naples. Now he is Associate Researcher at the Department of Mechanical Engineering of the University of Salerno. His research focuses on new product development, buyer-supplier relationships and outsourcing strategy in the automotive sector.

Copyright © 2002 Inderscience Enterprises Ltd.

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1

M. Caputo and F. Zirpoli

Introduction

At the end of the 1990s new challenges have contributed to reshape the automotive sector inducing new strategies for product development. The competitive environment has shortened product life cycles and at the same time improved product variety. This has boosted development costs and complicated the whole business inducing most car companies to re-engineer their new product development process [1]. An important role in the organisational change that has followed has been played by ‘black box’ sourcing, i.e. design and manufacturing outsourcing of complete systems of components to suppliers [2–4]. Most literature on the automotive sector, mainly inspired by the management practices and the industry structure of Japan, has considered both vertical ‘disintegration’ of up to 70% of the car components manufacturing and a dramatic increase in engineering design outsourcing as significant aspects of the lean production paradigm [2,3,5–9]. The underlying assumption of these studies was the superiority of Japanese practices and industrial structures and their transferability to Western businesses [10]. Literature has supported and demonstrated the idea that a close network of affiliated suppliers can greatly contribute to reducing lead times and costs of development [2,8,11,12] and, given some circumstances, to improving overall product quality [3]. Nowadays, due to the cultural movement toward this direction and environmental constraints, suppliers are often involved in automotive component design and their contribution to the product has strongly increased for US and European manufacturers as well as Japanese ones [11,13–15]. Overall, new product development performances of Japanese and Western manufacturers are converging [9]. In this paper the analysis will be drawn on the motivations, modalities and consequences of supplier involvement in automotive component design. The typical approach to the issue frames the involvement of suppliers in operational terms. It is argued here that supplier involvement has to be related to strategic considerations that go beyond the target of NPD efficiency, effectiveness and subsystem integrity. Outsourcing decisions affect the set of core competencies of buyer and supplier [16,17]. The decision to externalise design and manufacturing is sometimes the consequence of a deliberate strategic choice and at other times is taken in order to react to new environmental settings, and can be viewed as necessary and path dependent. The analysis on a leading European car maker’s strategic drivers toward outsourcing confirms this assumption and indicates the car makers ability to act as integrators of subsystems and modules as a new core competence itself. The business of making cars seems to be more based on the ability of putting together different technologies than nurturing most of them. The case study underscored that the counter actions to contrast a very probable migration of certain key competencies from OEMs to suppliers, and the loss of bargaining power in the presence of design outsourcing decisions lies in the development of new relational tools. These can both, facilitate the management of the risks linked to the new relationship with suppliers and contribute to preserving the bargaining power of OEMs within the supply chain. The description of the study is followed by the analysis of the logic of outsourcing and the buyer-supplier relationships. Strategic drivers and operative settings at one of the major European car maker and two of its suppliers have been investigated through the use of in-depth case studies, and confronted with the dominant literature.

Supplier involvement in automotive component design

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The study

2.1 Research background and purposes As affirmed by much literature, the very nature of the shift from a ‘fat’ to a ‘lean’ paradigm is, not only evident in the tendency towards major outsourcing of production, but is also evident in the outsourcing of design capabilities in order to reduce product complexity and development time. This tendency, however, is both the consequence of car makers’ strategic choices and the result of new environmental constraints in which suppliers have played an active role. The fact that deserves attention is the development of new technologies with several applications in modern cars [18]. In this kind of environment innovating firms have to share complementary assets [19] and rely on several sources of innovation [20]. Powell et al. demonstrated that: “when there is a regime of rapid technological development, research breakthroughs are so broadly distributed that no single firm has all the internal capabilities necessary for success.” [21, p.117]

The locus of innovation, according to this perspective, will be networks of firms rather than single firms. Similar conclusions seem to be implied by Cohen and Levinthal. The firm’s ‘absorptive capacity’ is strongly based on individuals who play a role of interface between the firm and the environment. “A difficulty may emerge under conditions of rapid and uncertain technical change, however, when this interface function is centralised. When information flows are somewhat random and it is not clear where in the firm or sub unit a piece of out-side knowledge is best applied, a centralised gatekeeper may not provide an effective link to the environment. Under such circumstances, it is best for organisations to expose a fairly broad range of perspective ‘receptors’ to the environment.” [22, p. 132]

A network of suppliers and strategic alliances has become an effective strategic solution both for gaining competitiveness at the firm level and for enhancing innovation and introducing high-technologies at the system level. Moreover, the broad scope of applicability of high technology (electronics, new materials, new form of energy) has induced big companies like Siemens or Motorola to invest in R&D related to application in the auto industry. As technologies become more ‘intelligent’, in fact, they become more flexible and easier to tailor to a greater range of applications. Economies of scale and scope which are now exploitable have substantially increased the average dimension of suppliers and boosted their investments in R&D and manufacturing capabilities [23]. These trends have overlapped with the strategic direction of car makers of reducing the number of suppliers, setting partnerships with first tier suppliers and sustaining their growth. Resource dependence (in terms of specialised competencies), bigger size of existing suppliers (Visteon, Delphi, Siemens, Robert Bosch, TRW, Valeo and Magneti Marelli are multinational companies) and technologically ‘cross-border’ companies have contributed

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to even out the bargaining power between suppliers and car makers and to the reshaping of the automotive industry. These considerations seem to induce a rethinking on the role and strategies of car makers, suppliers and on the origin and consequences of ‘black box’ sourcing [3,4]. What emerges is that the suppliers involvement as partners in NPD processes is both the result of a new industry organisation and the consequence of an attempt to diffuse the so-called Japanese Style Partnership [12]. Car makers implementing the prescription drawn from the lean production paradigm could lose strategic competencies and bargaining power in favour of suppliers when these latter control critical technologies and their dimension grows. If the harnessing of R&D and production is considered fundamental to increasing performance both in R&D and manufacturing processes [24], and if the pattern of developing capabilities is path dependent and the very source of a stable competitive advantage [25], the outsourcing strategies must be analysed case by case in more depth. This is indicated by the Resource Based View literature and implicitly suggested by Clark and Fujimoto [3], because they can heavily bias the future competitiveness of ‘lean firms’ [26]. In the new context described above, ‘make or buy’ decisions should be taken according to the following steps [16]: 1

Define products and services offered;

2

‘Decompose’ them in subsystems;

3

Classify every single sub family of components in terms of technology, complexity, grade of influence on customer’s perceptions;

4

Identify where there is a significant likelihood of gaining a clear technological lead (in other words, the location of the core competencies of the firm);

5

Identify where the suppliers have a superior non achievable technological lead;

6

Evaluate if there is enough knowledge to control the outsourced subsystems in terms of architectural knowledge [27].

Major subsystems that are non strategic, essentially the products of mature technologies and for which there are several qualified suppliers, may be outsourced. The main point is that outsourcing is not based exclusively on cost and efficiency considerations. The task is focusing on resources through which the company can achieve a sustainable competitive advantage [28]. Firms distinguish themselves according to the ability to define and improve the performance and technology of key business processes [29]. The major challenge for car companies, according to this perspective, becomes the right choice and proper implementation of the competencies to focus and invest in. For those competencies not considered strategic, the best solution becomes outsourcing and relying on specialised suppliers. In this fashion, according to Sabel et al., car makers would become pure systems integrators [30]. However, as noted by Chesbrough and Teece such a model can be implemented, as happens in the Toyota case, only when the system integrator has strong dimensional and technological supremacy over its suppliers [26].


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Given the new environmental conditions of rapid change and the leadership of suppliers in key technologies [31], outsourcing decisions, when related to ‘systemic innovation’ such as those of car components [26], can threaten the future competitiveness of car makers. These observations lead to the need for more investigation on the rationale for outsourcing decisions concerning automotive component design and their consequences. First research purpose: definition of the drivers of design outsourcing decisions and their effects on supplier involvement in automotive component design. Unit of analysis: motivation for supplier involvement. Second, as underlined in literature, despite a convergence of Japanese and Western practices there are subtle differences in the implementation of relational practices (i.e. use of target costing, target pricing, value engineering and profit sharing) [4,32] and in the type of outsourcing (the Japanese are traditionally more concerned with the dominance of the process more than the product itself, in a conception of design and production defined as ‘holistic’) [33]. These differences are not marginal. Risk management techniques and level of supplier technology control can have a strong impact on the ability of the car maker to prevent or to manage a probable migration of competencies to aggressive suppliers. Second Research purpose: analyse the nature of buyer-supplier relationships, the techniques of supply management for NPD with reference to a European leading car manufacturer. Unit of analysis: supplier-buyer relationship.

2.2 Research method The consideration of process-related, historical, and contextual features and the need to explore ill-defined and sensitive issues in-depth call for longitudinal research by means of the comparative case study method [34]. The nature of the research questions and the aim of testing the existing theories made the choice of the exploratory multiple case study method the most appropriate [35,36]. The research design is based on four theoretical assumptions: •

there is a linkage between new environmental settings and outsourcing decisions;

•

there is a linkage between outsourcing decisions and supplier involvement in automotive component design;

•

the strategic drivers for outsourcing decisions might be different from those indicated by the existing literature;

•

European historical and contextual features could have resulted in a different evolution of car makers’ outsourcing decisions, supplier involvement and related management techniques.

The cases were chosen from the European car manufacturers and the European components manufacturers. Sampling within the population has been theoretical and not random. It started with the definition of the car maker. Fiat Auto was chosen for the following reasons:

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•

It has, in 1996, reengineered its already successful NPD process reporting outstanding performance;

•

Dramatic changes during the last ten years in the supply base characteristics;

•

Dramatic changes during the last ten years in the supply chain management;

•

It is a ‘global’ car assembler, seventh in terms of sale volumes in the world;

•

Access to data was facilitated by the common language and nationality of the researcher and Fiat’s top managers.

Having chosen Fiat Auto as car maker, the choice of the suppliers was constrained by the existence and the characteristics of their relationship with Fiat. Magneti Marelli and StampiTre were chosen for the following reasons: •

Magneti Marelli (MM) is among Fiat’s first tier suppliers of sub-systems and has specific competencies in electronics;

•

StampiTre is among Fiat’s detailed parts suppliers and operates in the field of metal plate cold forging, which is extremely important for its interfaces with die makers [11].

Two data collection methods were used. The first was the study of archival sources to define the characteristics of the sector and the history of the selected companies. The second consisted of extensive semi structured interviews with managers from Fiat, Magneti Marelli and StampiTre (Table 1). The direct interviews were carried out by the researchers and were based on a questionnaire organised in three sections (see Appendix). Questions on the outsourcing structure and characteristics, the OEM’s relationships with supplier, the organisation of the NPD process and strategy have been structured in order to allow a comparison between data gathered in the case study and data provided by literature. Table 1

Distribution of interviews

Company

Location

Date

Length of the Position of the person interviewed interview

StampiTre

Avellino

April 17, 1998

4 hours

Plant Manager

Magneti Marelli

Milano (Corbetta)

April 21, 1998

2 hours

Program Manager (Electronics Division)

Magneti Marelli

Milano (Corbetta)

April 21, 1998

2 hours

Program Manager (Power train Division)

Fiat Auto

Milano (Arese)

April 27, 1998

3 hours

Director of Division for Platforms Development

Magneti Marelli

Milano (Corbetta)

April 27, 1998

1 hour

Product Director

Fiat Auto

Torino

May 25, 1998

2 hours

Purchasing director Segment C


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The sample allowed for a unique perspective. The same units of analyses were observed from both the viewpoint of the car maker and that of its suppliers. This confirmed the reliability of the data in those instances in which they were consistent and induced a new round of interviews when inconsistent. Given the units of analyses, inconsistencies have been considered indicative of different perspectives and used to better explain the very nature of buyer-supplier relationships. The comparison of quantitative and qualitative data, and the fact that managers from different organisations were interviewed according to the same unit of analysis made triangulation possible and extremely effective. In addition to the intrinsic limitations of case study research [36], the sample could be partially biased by the fact that MM is owned by the Fiat Group. This could represent a limit to the generalizability of the findings to all the supplier-buyer relationships at Fiat, despite the fact that both Fiat’s and Magneti Marelli’s managers confirmed that the motivation for outsourcing and supply chain management techniques were not influenced by the Fiat Group interest as shareholder. As a consequence, further investigation on independent sub-component suppliers of Fiat can be useful to validate the existing findings together with the investigation on other car manufacturers and their suppliers. In what follows StampiTre and Magneti Marelli cases will be mentioned only when specific needs require this.

3

The Fiat trend towards outsourcing

Fiat Auto’s outsourcing decisions have been strongly linked to the characteristics of the Italian components industry that was composed of two major segments: a small number of large companies, mainly owned by Fiat or heavily dependent on it as their principal customer, and a large number of small firms (about 3000) that were either reliant on Fiat or on major Fiat suppliers. Most changes in this structure have been managed and ‘forced’ by Fiat Auto. At the end of the 1980s, Fiat began to recognise, together with other car manufacturers, that new economic forces would soon reshape competition in the sector. The pressure on OEMs to become global manufacturers, to improve the quality of their products and, above all, to reduce production costs called for a new supply strategy [37]. The achievement that Fiat considered crucial was to lower production costs and, at the same time, to improve the standard of quality. Moreover, Fiat desperately needed suppliers loyal and strong enough to support the new globalisation strategy based on the 178 project. At the beginning of the 1990s Fiat launched a world car project based on the Palio. The latter was the first Fiat car to be manufactured entirely outside Italy and to be distributed in countries other than Italy before its launch on Fiat’s domestic market. Fiat reacted in three ways. It examined its interests in components and assessed those areas in which the companies involved could compete internationally and those where the volumes were too small, or the advances in technology too expensive, to maintain a viable and profitable interest. The businesses that were considered viable enough to face the challenge of global competition were merged into two large companies: Teksid for castings and heavy metalwork and Magneti Marelli for other automotive components. Many other businesses, including in-house operations were sold off. Often, these were

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sold to large foreign companies which were already world players in their particular segment, or aspired to be so [37]. The underlying Fiat strategy was to rationalise its portfolio of automotive activities, differentiate its supply base in order to benefit from major competition on price and quality, create two independent but loyal suppliers able to compete with foreign companies and to support Fiat in its globalisation strategy. Fiat, today, can certainly not be considered vertically integrated. It outsources, for example, about 72% (in terms of the production costs) of a Fiat Punto (one of Fiat’s best sellers). Fiat’s outsourcing strategy, however, has only recently, with the re-engineering of the NPD processes in 1996, been enlarged to the design of entire systems of components (interview, April 1998). Fiat’s pattern towards outsourcing has been based on two phases. In the first phase, rationalisation needs were a priority and most efforts were put into building a local supply base that was competitive in terms of quality and production costs (end of the 1980s beginning of the 1990s). Between 1990 and 1992, Fiat experimented with the socalled driven growth programmes. Suppliers which demonstrated the potentiality, (in terms of quality and cost of their products), to comply with the new Fiat standard, were provided with continuous managerial support from Fiat together with tailored contractual agreements, such as long-term contracts and a steady increase in volumes purchased. In exchange, these suppliers had to respect an improvement schedule. Only in a second phase (mid 1990s), together with the success of this rationalisation that led to a drastic reduction of the supply base (Figure 1), did Fiat begin to frame suppliers’ contributions to develop complementary capabilities in terms of strategic partnerships and to outsource the design of components. Figure 1

Supplier number rationalisation

Source: Fiat Auto


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Fiat is beginning to outsource complete systems of components (a system of components is a group of inter-linked components that share the same technology and manage different functions, i.e. a computer with instrument panel and an electronic switchboard form a system). The direction for the next few years, however, is to outsource preassembled modules (a module is a group of components inter-linked by physical proximity but based on different technologies. Fiat has defined seven modules, such as the front module that includes lights, bumper and radiator or the complete shock absorber) (interview, April 1998). On the whole, Fiat’s outsourcing strategy has been strongly constrained by its local environment and the existing competencies. In order to respond quickly to global competition and to the loss of market share in Italy (from 73.6% in 1970, to 58.5% in 1990, to 42.3% in 1998) [6,38], Fiat decided to revolutionise its internal (especially at the plant level) and external organisation (characteristics of suppliers). This shift has been extremely rapid and has had dramatic consequences on the Italian components industry [37]. Fiat’s new strategy has implied a radical modification of its approach to the management of supply. Fiat’s strategic goal was to become a systems integrator with a leadership based on the distinctive style of its models. The pattern toward the status of system integrator was strictly linked to a new relationship with its suppliers that starts from a major involvement in the NPD process (also defined co-development [11,39], co-design [17] or bilateral design [8, p.125]). The rationale for supplier involvement in the NPD process, as underlined by Fiat’s managers, is the management of complexity. The complexity has increased to the point where it has become difficult to manage ‘in-house’ due to two main factors: new technologies development (first electronics and new materials) and globalization. For these reasons, Fiat considers crucial the development of stable partnerships with highly competent suppliers that could be able both to integrate Fiat’s capabilities and support Fiat’s process of globalization. Fiat has set a strategy that by 2006 should lead to the complete outsourcing of nine subsystems (Figure 2). Figure 2

The nine systems

1

Air conditioning

2

Brakes system

3

Power train

4

Acoustic comfort

5

Exhaust system

6

Steering system

7

Safety system (passive)

8

Electric system

9

Interiors

Source: Fiat Auto

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As can be noted, Fiat is not planning to outsource either engine or chassis design and manufacturing. These, in fact, are considered to be Fiat’s core competencies and are the product areas that can form the basis for product platforms on which to develop the whole range of models. Examples of this strategy are the development of the ‘FIRE’ engine (a line of engines for small cars) and of the ‘Space Frame’ project (basis of the chassis for the new Fiat Multipla) in which a great deal of resources have been invested in pure R&D. Suppliers in charge of developing the outsourced systems are defined by Fiat codesign A and B. Figures 3 and 4 respectively provide a synthesis of Fiat’s supplier segmentation and involvement in Fiat’s NPD. Nowadays Fiat has a selection of first-tier suppliers among which are Delphi, Valeo, Bosch and Siemens. Figure 3

A synthesis of Fiat’s suppliers segmentation

Suppliers

Involvement in

Influence

NPD Co-design A

From concept

Very high on

Example of

Component lead

component

time (months)

Power train

about 30

Interiors

about 26

Metal sheets

overlap with

style and vehicle performance Co-design B

During style

High on style and

definition

vehicle performance

Simultaneous

Integrated in

High on

Fiat’s platform

technology

Detailed

After final design

Not relevant

controlled

freezing

Fiat’s Small metal or

about 7

plastic parts

parts Commodities

Not involved at NPD stage

Generally low

Spark plugs

not relevant

Supplier involvement in automotive component design Figure 4

The Fiat NPD process and supplier involvement

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140

4


Interpretation: back to the first research purpose

Fiat Auto’s strategic pattern toward outsourcing has been straightforward and quite recent. Quality, costs and lead times in NPD and manufacturing have been drastically reduced. Fiat was, at the time of the study, the European car manufacturer with the youngest average life per model. The new Fiat Punto, on the market in July 1999, have had a lead time, from style freeze to launch, of approximately 24 months. The role of suppliers has changed in the last decade and there are good reasons to believe that such achievements are also due to a new supply chain management strategy. However, despite the fact that suppliers’ early involvement in development and ‘black box’ sourcing have contributed to the improvement of subsystem integrity and quality and to reduce lead times, these are not the main motivations for Fiat’s strategy. The supplier involvement rationale in Fiat’s NPD has been the result of both competitive pressures on costs and environmental complexity. These have to be framed in a path dependent historical perspective. The strategic position of Fiat and the loss of profitability of its business at the beginning of the 1990s called for a drastic program of cost cutting and rationalisation. Within this program, the reorganisation of manufacturing and the stress on practices such as ‘just-in-time’ led to more efforts in developing a new efficient supply base. Soon after, Fiat realised that, in order to be a ‘fast follower’ and to aspire to become ‘leader’ in the market by securing leading technologies on its vehicles, it had to reconfigure its way of managing the business. In this respect, Fiat’s vertical ‘disintegration’ in some key technologies, is explained by the fact that, despite the expansion of Magneti Marelli and Teksid, Fiat has traditionally been weak on electronics applications and has decided for reasons of efficiency to hand over much of its power train activities, such as the diesel engine related ones. Fiat’s strategic goal of becoming a systems integrator with a leadership based on the distinctive style of its models meant: •

having suppliers capable of developing entire subsystems in total autonomy and

•

reducing the NPD lead time from the style freezing to the product launch.

Fiat needed and needs suppliers involved in the NPD process mainly because its core business is ‘assembling’ systems (in the near future modules) whose technology is too costly and complicated to manage in-house. In other words, Fiat needs its suppliers to reduce the complexity of its business to enable it to focus on the development of the competencies it considers strategic. From Fiat’s experience a more general and wider rationale emerges for supplier involvement that goes beyond the operational aspects (costs, lead time and quality) stressed by the literature. Supplier involvement is a direct consequence of overall strategic decisions. Outsourcing design capability, hence, is framed in a new configuration of the business of making cars. It implies new capabilities, very often completely different from those developed by ‘traditional’ car makers. The ‘new’ car maker must be able to manage complex systems. Crucial to this success is: 1

knowledge of different technologies and

2

of technology trajectories.


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A systems integrator which failed to monitor the state of the art and the future of technology would lose what at Fiat is called ‘the ability to make and to buy’. Given the level of outsourcing, the ability ‘to make’ is daily becoming more dependent on the ability to purchase state-of-the-art and inexpensive subsystems. The theoretical implication is that, although the strategic importance of supplier involvement from the operative point of view (cost and time savings) is not neglected, the very nature of supplier involvement lies in the process of managing the growing complexity in the competitive environment. When new technologies become too complicated to handle and their impact on the overall value of the vehicle becomes particularly important, the car maker has to make a decision on building and developing certain capabilities and outsourcing others. Fiat, for instance, has not handed over the engine and chassis related technologies and development competencies, but does not develop electronic subsystems in-house anymore.

5

Supplier management techniques

Management techniques, together with the timing of involvement, characterise the process of suppliers’ involvement and its strategic consequences in the long-term. The underlying philosophy that Fiat managers relate to the new relationships with suppliers is partnership which means risk sharing and co-design. Undoubtedly the most interesting relationships are those with co-design suppliers (Figure 3). These relationships, in fact, represent the very new Fiat approach to supplier management and involvement in NPD. As it emerged from direct interviews, when subsystem suppliers are involved very early in the NPD process (Figure 4) and hold specific competencies on component design this has several consequences for the management of the relationship from both sides, i.e. buyer and suppliers. In what follows we present the data gathered from the case study. Selection. At Fiat, supplier selection is considered a crucial phase because of the enormous costs that a wrong choice would produce. Given the specific investments required by the implementation of co-design activities, once a relation is begun, switching to another supplier would be too costly. Moreover, since most subsystems outsourced are not defined when suppliers are fully involved, these cannot be selected on the basis of price or quality of component supplied. Suppliers’ offers are based on a very broad definition of the features and performance of the new subsystem. The final decision is taken on the basis of two criteria. The first is technical. The development team evaluates the offers on the basis of fourteen parameters that encompass the characteristics of the supplier and the consistency in terms of technological content, cost and performance of the subsystem offered with the model under development (Figure 5). Most criteria relate to the supplier and not to the content of the offer. This is a consequence of the impossibility of evaluating the product offered at an early stage. The second criterion can be defined as political. The purchasing department, together with the Component Development Platform and the Product Platform, makes the final decision after an evaluation of the supplier’s portfolio. Portfolio evaluations are based on the explicit policy of balancing the volumes of outsourced subsystems among suppliers.

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Figure 5

Supplier selection criteria

Economic and Financial Evaluation

Service evaluation •

Lead time of development

• Earnings before taxes/ Sales

•

Overall level of service

• Balance sheet analysis

•

Equipment charged to the supplier (proposal) Technical Evaluation

•

Contribution to the Process of Component Development

•

Development performance

•

Technical evaluation of the proposal

•

Quality system

Process Evaluation •

NPD process

•

Production process Economic competitiveness

• •

Quality of supply Price level

•

Economic competitiveness of the proposal

Source: Adaptation from the so-called ‘radar’ diagram of Fiat

Controlled Competition. Portfolio evaluations are based on the explicit policy of balancing the volumes of outsourced subsystems among suppliers. This is a consequence of a clear attitude toward the creation of controlled competition between suppliers. This competition is not based on a multi source strategy on the same model (this would not guarantee volumes to suppliers each of which, on average, supply 90% of the total need of components for a single vehicle) but is based on different suppliers for different models (for example, suppliers for the Fiat Bravo/Brava supply 90% of components for these models yet they do not supply any components at all for the Lancia Y). An exception to this principle is the supply of component for models that are sold in very large volumes, such as the Fiat Punto. But again, suppliers involved will not supply the same component. Through this controlled competition Fiat achieves two objectives: 1

control over price and quality through a continuous benchmarking between suppliers;

2

secure, up-to-date technology in its cars, even when technology is not under Fiat’s control.

These two benefits are particularly relevant when Fiat does not manage the technology used by the supplier. In this case optimal price and quality, as well as state-of-the-art technology, might become very difficult to monitor if only one supplier is involved. What enables Fiat to pursue this strategy is the possibility of guaranteeing each supplier enough production volumes. This can be achieved for two reasons. First, the length of the supply contract is usually the life of the model (five or more years). Second, Fiat is a global volume producer. Price Setting. Price is another crucial variable of supplier-buyer relationships. In early supplier involvement, a contractual price setting cannot be agreed before the susbsystem


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specifics have become more precise. Final price is only agreed when suppliers are selected and have already invested resources in the feasibility study (Co-design A and B). The first price indication, that is one of the selection criteria, is based on very broad economic targets and refined when the subsystem definition becomes closer to the final version. This refinement allows the two parties to write a supply contract and agree a final price at the moment of the offer. However, this contract includes several cost drivers that can modify the final price of the subsystem according to the variation of one or more specifics during the development phase. The final price is set only when Fiat validates the component subsystem (for Co-design A and B this takes place approximately 24 and 21 months before the start of production). After this point, any variation requested by Fiat implies a new price setting. Profit Sharing and Target Costing. This price setting procedure makes provision for a negotiating phase, between the supplier offer and the definition of the contract, in which, according to Fiat’s managers, the risk sharing and cost savings at the production level are considered. There is not, however, a formalised procedure for profit sharing between Fiat and its suppliers. Usually Fiat shares the benefits which result from suppliers’ suggestions equally with the suppliers. However, when the suggestion of components improvement or cost cutting comes from Fiat, it is the sole beneficiary. Usually, Fiat asks for cost reductions and quality improvements on an annual basis (the approximate cut is about 5% despite the request for quality improvements). There is a formalised procedure to encourage suggestions from the suppliers during the production phase of a model. This scheme of suggestions involves a profit sharing between Fiat and the supplier. This system is very recent and has not been completely implemented yet. Information Sharing. Finally, Fiat makes substantial use of techniques for information sharing such as allowing the presence of guest engineers. Suppliers’ engineers, in particular, visit Fiat for long periods of time during the co-design phase. Engineers of simultaneous (Figure 3) suppliers become members of the Fiat platform team and work at Fiat during the whole of the new product development process. The New Component Development Platform (CDP). The CDP plays a crucial role in involving suppliers in the NPD. It has three major tasks: 1

Concept development of major systems prior to vehicle application.

2

Component plan to satisfy multiple scenarios.

3

Explicit up-front application planning.

When the CDP has not developed or is not willing to develop a specific system in-house, which is the case in the majority of situations, it contacts a panel of suppliers to produce a long-term plan to develop that system. The tendency is to involve suppliers before the concept phase begins so that when NPD starts the platform core team can choose the appropriate component from a range of solutions. This enables the NPD platform to have an early and precise idea of the technological and economic contents of the car that is being created. Usually this early involvement is finalised to a specific application in a future model and the CDP and the supplier work on the existing subsystem as a basis to improve it. For example Fiat and one supplier were working on the ‘door module’ of the future Bravo/Brava which, in early 1998, had not yet entered the concept phase of development.

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This kind of collaboration is not very common at the moment but is growing considerably. The trend is certainly moving in this direction, especially for the nine subsystems mentioned above.

6

Interpretation: back to the second research purpose

From the description of Fiat’s set of supply management practices, it emerges that Fiat’s approach is quite different from the Japanese one despite some similarities. Fiat is aware of its strategic goal of creating a true partnership with its suppliers. However, unlike the Japanese, it does not manage the supply risks which are linked to the relationship with dedicated and co-located suppliers. For example, as underlined by Magneti Marelli managers a target price is not set by Fiat who prefer to leave it to the competition between two or more suppliers. Price setting in the cases where Fiat does not have specific competencies on the component technology is a risky tactic. When, in the past, Fiat have attempted to set a price, it often committed overestimation errors. In such circumstances, Magneti Marelli managers found it very easy to meet the target price (interview, April 1998). The same consideration can be made for the implementation of value engineering and value analysis. These are not always carried on by Fiat and, as a consequence, suppliers are asked for systematic, but not sustained and guided, cost cutting and quality improvement. This is clearly a result of Fiat’s weak control on some technologies, as opposed to a strong one at Japanese car manufacturers. Moreover, due to the history of the Italian supply base and Fiat’s supply strategy, Fiat does not have equity participation in suppliers who are large and competent enough to be classified as first-tier suppliers, except for Magneti Marelli and Teksid. This represents another significant difference from most successful Japanese car makers as they tend to have an equity stake in all strategic first tier suppliers [12]. Despite a situation whereby supply risks seem to be quite high Fiat’s managers are confident enough to maintain a strong bargaining power over suppliers together with the ‘ability to buy’ state of the art components. Thanks to its market success and its high volume models, Fiat has been able to develop a system of controlled competition between suppliers that seems to be extremely effective in avoiding dependencies and compensating for weaknesses in terms of single system development and technology management. When suppliers are involved at an early stage, the ‘adversarial’ model is not practically viable while the Keiretsu model can induce dependency in the absence of full technological or equity control. Also in this respect some differences with the Japanese system are apparent. Despite the fact that authors such as Liker et al. [4] and Richardson [40] have noted that in Japan a sort of controlled competition is being implemented, the Fiat system still presents elements of differentiation. The same authors [4], highlighted the fact that Japanese suppliers were very much dependent on their largest customer due to the percentage (about 61%) of global sales that went to the ‘first’ customer. In our sample, Magneti Marelli sold only about 35% of its global sales to Fiat (despite the fact that it is partially owned by Fiat). This figure was even lower for other Fiat first-tier suppliers. Moreover, other authors [12] showed that kankei-gaisha (companies affiliated to the car maker) play a more important role in the Keiretsu system than dukuritsu-gaisha


145

(independent companies) and have several substantial advantages in the case of competition for a long-term supply contract. This was not evident in the Fiat case. Fiat relies on a stable group of first tier suppliers who continue their relationships with Fiat contract by contract on the basis of the business profitability. Their involvement does not seem to be based on trust but rather on making the best offer to win the supply contract. In fact, long-term contracts and single source supply are mere instruments to guarantee volumes that could justify dedicated investments especially for the suppliers [11]. They do not mirror mutual loyalty, trust or equity stake. Suppliers and Fiat do not feel any special sense of commitment. Their relationships are not mainly based on trust. (The level of trust involved is that of a typical long-term contractual agreement). Concerns about reputation [41] and mutual dependence [42] seem to have more power in explaining limitations on hold up risks than loyalty and trust do. Selection criteria, as well, are based on technical evaluation but also take into account ‘political’ considerations. Hence, suppliers and car makers, can both benefit from ‘polygamous’ relationships. Diversity can improve the learning process implicit in a supply relation from both sides. The controlled competition model, as it has been described above, has several important advantages: • control over price and quality through continuous benchmarking between suppliers; • exposure to several sources of learning; • secure up-to-date technology, even when technology is not under the car maker control. The model also has several consequences: •

suppliers will dedicate specific investments only when the car maker can assure high volumes;

•

only global car makers with high volumes will benefit from control over both supply costs and technology level;

•

only global car makers will benefit from first class subsystems and produce first class cars;

•

only global car makers will have suppliers willing to invest in co-located plants and co-specialised world wide investments.

Fiat’s model of controlled competition is an example of how market based logic and long-term cooperation can work together. This supply management scheme is an effective counter action to contrast the loss of technology control and, as a consequence, bargaining power over competent suppliers. Fiat tends to give key suppliers long-term contracts and a portfolio of jobs but, at the same time does not fully implement techniques such as target pricing, target costing and value analysis. What is worth noting is that the coordination mechanisms which are at work here seem to be market power [28] and reputation [41], rather than the technological leadership of the car maker, or equity control and trust.

146


In order to implement the controlled competition model, ‘global’ volumes are necessary and more than one brand may facilitate its adoption. It is likely that suppliers of ‘local’ car manufacturers will be reluctant to offer dedicated investments due to low volumes, forcing these car makers to develop some of the new technologies in-house or to purchase ‘second hand’ subsystems. The first strategy seems to be appropriate for niche producers, while the second might be suitable manufacturers who are targetting lower segments of the market. Both these types of car makers are dying out or, more likely are acquired by volume producers (for example, Saab, Skoda and Volvo were purchased by GM, VW and Ford respectively).

7

Discussion and conclusions

Despite the risks of idiosyncrasy in the case study findings some observations will be of interest to practitioners and researchers. The recent trend towards an increase in design outsourcing, confirmed by Fiat’s strategy, is in line with the suggestions expressed by the literature sustaining the lean production paradigm. However, it also contrasts with the approach explaining the ability to conceive and develop new products by harnessing manufacturing experience and R&D efforts and underestimates the strategic warning with regards to ‘extreme outsourcing’ which is provided by the Resource Based View literature. In some cases, as underlined by Prahalad and Hamel [43], Western manufacturers have gone beyond their Japanese competitors by the way of implementing outsourcing. Chrysler, unlike Honda, has tended to view also engine and power trains as simply one more component. In this respect, many Japanese companies tend to view manufacturing in an holistic way. Despite the high involvement of suppliers in NPD, they hold a strong control over process design and production chain [33]. This control is without any doubt a core competence itself, which is very difficult to learn and impossible to acquire on the market. The point is to avoid dependency when a design outsourcing strategy is defined. The concept of dependency is very subtle. Only, in fact, when the company can presumably ‘make’ the ‘strategic’ subsystem (i.e. it is independent in terms of knowledge) the efficiency calculus can be made and the component outsourced (i.e. it is dependent in terms of capacity). Toyota, for example, manages this risk because it controls both the process and the technology employed in its cars and tends always to be independent in terms of knowledge [44]. Fiat seems to follow this logic only partially as shown in Figure 6. Figure 6

Fiat competence map

Fiat outsourcing and strategy choices Independent for capacity Dependent for capacity

Independent for knowledge Engine Metal works

Source: Adaptation to Fiat from Fine and Whitney [44, p.18]

Dependent for knowledge Electronics


147

In this respect, the fact that Fiat does not develop electronic subsystems in-house might become a weakness in the future. Moreover, most of supply base rationalisation and outsourcing decisions operated by Fiat have been based on the viability and efficiency of ‘in-house’ production in the shortterm more than on strategic considerations. As underlined by Venkatesan [16], this can reveal itself to be a dangerous strategy for the overall competitiveness and independence of the firm in the future. Fiat’s decision to outsource design and development of three quarters of its cars seems to be a consequence of two approaches: ‘economising’ and ‘strategising’. These are the two points of view familiar to scholars who are trying to get to grips with the Transaction Cost Economics and the Resource Based View perspectives. Fiat, in fact, kept engine and chassis production in-house because it considered the related know-how as strategic. On the other hand, Fiat did not heavily invest in key technologies, such as electronics, because these were, given the current situation, too costly and complicated to implement in-house. This strategy will probably only succeed if the volume of sales and the related bargaining power with suppliers is maintained. Evidence on the dimension and level of vertical integration of world leaders in the sector show how risky this strategy can be. The Fiat case, on the other hand, offers a perspective in which, as already noted by Prencipe [45] for the aero-engine industry, the ability to be a system integrator is considered a core competence itself. Fiat’s future success is based on the ability to effectively manage design and manufacturing on the basis of its unique interpretation of future cars’ concept and architecture. The management of modularity and the ability to leverage similar technologies on extended platforms so that they apply to many different models represents much of the task of a modern car maker [46–48] that would not risk any hollowing out. In other words, the core business of the modern car maker is not the management of single technologies but the ability to put them together. The controlled competition model, moreover, is demonstrating itself to be a promising hybrid. Despite the concerns expressed by Fiat’s suppliers which highlight the need for better implementation of practices such as profit sharing, value analysis and value engineering, the model provides interesting hints for car makers strategic management practices in the presence of vertical ‘disintegration’ which is associated with weak control of key technologies. In conclusion, the risk of migration of specific competencies in technologies such as electronics, telecommunications and new materials in the presence of strong outsourcing of design capabilities to suppliers should not threaten the leadership of car makers within the supply chain if they are associated with: 1

a strong competence of the car maker as a system integrator and

2

a new way of conceiving supply management.

The successful implementation of outsourcing decisions is, hence, dependent on a clear understanding of the outsourcing rationale and a consistent use of relational techniques. On the whole, the case study confirms that ‘make or buy’ strategies, manufacturing strategies, and supply chain management must be analysed in a unified way. This ‘holistic’ approach to supplier involvement in automotive component design offers a fruitful way ahead for management practice and further research.

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3 4

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8 9

10 11

12 13

14 15

16 17

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Appendix 1 Questions to the OEM management a Outsourcing Structure and Characteristics 1

OEM Relationships with Supplier Partners

Company Percent of Direct Sales to Fiat

Percent of Shares Owned by Fiat

Executives transferred from Fiat

Size of Supplier Management Team

Percent of Supplier Management from Fiat

Major Products

2

Are there some categories of component that you outsource? (ask about development of infrastructure such as robots, CAD systems, machines)

3

What is the total cost of components outsourced in terms of the overall cost of a car?

4

Do you classify your suppliers in categories (joint development, black box, off the shelf, make to the drawing)? Can you allocate a percentage to each category?

5

Have you changed the number of suppliers during the last years? When, Why?

6

Have you changed the supplier for any component in recent years (use specific example)? How many years does the average relationship last?

7

What is the percentage of supply contracts renewed when the existing product is dismissed and a new one is developed?

8

Can you indicate the percentage of suppliers competing for the last manufacturing contract (one, two or more than three competitors)?

9

Do you use parallel sourcing?

b

New Product Development subsystem, i.e. dashboard)

(with

reference

to

a

specific

vehicle

and

b.1 Structure 1

Can you indicate the percentage of design related expenditure devoted to basic R&D (over the last five years)?

2

Can you indicate the number of product technology patents (over the last three years)?


151

3

Can you indicate the number of process technology patents (over the last three years)?

4

Can you sketch the organisation structure for NPD (then ask the number of design staff in: technical administration, product designers and engineers, engineering analysis and simulation, prototype making, prototype testing, other technical staff. Average work experience)?

5

How many projects are you developing at the moment?

6

How do you classify your development projects (technology, product segment, etc.)?

7

Can you describe the process from its beginning to its end? Do you have any formalised procedure for NPD. If yes, which one?

8

How long did it take to develop the last car? (from concept to production)

9

Do you use a project team? (level of responsibility for the person in charge)

10 How many people work on a development project? 11 How many projects per person? 12 Do you use techniques such as CE, VE, and VA? Can you explain me how? 13 Is manufacturing coordinated? Are the R&D facilities located close to production sites? 14 Does your product and process development overlap? 15 Have you experienced cost reduction prior to production and during the first year of production? (specify percentage in terms of total costs) Could you give an example? 16 How long does production take to settle down to a normal level of productivity and quality after the product launch? b.2 Suppliers’ involvement 1

At what stage do you involve your suppliers? Does it change according to their status (joint development, black box, off the shelf, make to the drawing)?

2

Do you outsource design capabilities to suppliers? In which product area and why?

3

Do you use the same evaluation criteria in choosing these suppliers?

4

In which of the previous categories can these suppliers be included?

5

Has there been a move from off the shelf to joint development in terms of suppliers characteristics? Within black box and joint development what has been the degree of supplier responsibility for design over the last 5 years? (from 0-5) Can you give an example?

6

Do you share the vehicle concept with your suppliers? (from 0-5)

7

Do you learn from them informally? (from 0-5) How, can you give an example?

8

Do these suppliers influence design specifications? (from 0-5) How, can you give an example?

9

How often can first design specifications change? (number of times)

152


10 Once the relationship has begun how frequently do you communicate with your suppliers? (with reference to design and manufacturability, possibly indicating: first prototype stage, full production stage; face-to-face, phone, fax-mail) 11 Do you have suppliers’ engineers in-house during the NPD? How many, how does it work? 12 Do you often experience problems with suppliers (lack of knowledge)? (from 0-5) b.3 Use of techniques and risk control 1

Do you use Target Price, Competitive Bids, Negotiations or both?

2

Can you split this figure according to the type of supplier or component purchased (black box, etc.)?

3

Once a price is set, who benefits from further cost reductions?

4

Do you use parallel sourcing for design?

5

Can you indicate the percentage of suppliers who competed for the last design contract (one, two or more than three competitors)?

c Strategy 1

Would you say that you are outsourcing design capabilities?

2

If yes, can you give a percentage?

3

In what area are you pursuing this strategy? And why?

4

How do you choose what to design in-house and what to outsource (technology mapping)?

5

How do you choose what to make and what to buy?

6

Do you think there are two different choices?

7

What areas are you investing in in terms of development of new products?

8

Do you believe you should internalise competencies that at the moment are outsourced?

9

Do you see any risk of dependency related to technology or competencies that cannot be developed in-house?

10 How would you define the European and world context? 2 Questions to the supplier management a The company 1

In what component product areas is your company present in the automotive industry? Other sectors?

2

What is the number of customers? What is the share of sales of the first five customers?

3

What is their geographical distribution?


153

b New Product Development (focus on specific automotive component, i.e. dashboard) b.1 Structure 1

Can you indicate the percentage of design related expenditure devoted to basic R&D (over the last five years)?

2

Can you indicate the number of product technology patents (over the last three years)?

3

Can you indicate the number of process technology patents (over the last three years)?

4

Can you sketch the organisation structure for NPD (number of design staff in: technical administration, product designers and engineers, engineering analysis and simulation, prototype making, prototype testing, other technical staff. Average work experience)?

5

How many projects are you developing at the moment?

6

How would you classify your development projects?

7

What are the real motivations to develop a new component (market pull, cost reduction, market power through technology push)?

8

Can you describe the process from its beginning to its end? Do you have any formalised procedure for NPD. If yes, which one?

9

How long did it take to develop the last car component? (from concept to production)

10 Do you use a project team? (level of responsibility for the person in charge) 11 How many people work on a development project? 12 How many projects per person? 13 Do you use techniques such as CE, VE, and VA? Can you explain me how? 14 Is there coordination with manufacturing? Are the R&D facilities located close to production sites? 15 Does your product and process development overlap? 16 Have you experienced cost reduction prior to production and during the first year of production? (specify percentage in terms of total costs) Could you give an example? 17 Do you test your prototype in-house? (from 0-5) 18 How long does production take to gain good productivity and quality level? Does it happen before mass production or after? 19 Could you give me an average number of years of experience per product? b.2 Involvement in FIAT new product development 1

What has been the degree of your company’s responsibility for design over the last 5 years? (from 0-5)

154


2

What is the number of parts in subsystem or assembly component? (give example)

3

In which stage of FIAT product development are you involved?

4

What is the process of component concept creation?

5

Do you share the vehicle/component concept with FIAT? (from 0-5)

6

Do you learn from FIAT informally? (from 0-5)

7

Do you influence design specifications? (from 0-5)

8

Do you push Fiat on certain technology aspects? (Moving train model)

9

When do you show your new component to Fiat?

10 How often can first design specifications change? (number of times) 11 How complete is the first prototype? (from 0-5) 12 Do you provide test data with prototypes? 13 How many prototype tests does FIAT repeat? 14 Once the relationship has begun how frequently do you communicate with FIAT? (possibly indicating: first prototype stage, full production stage; face-to-face, phone, fax-mail) 15 Does Fiat have always a correspondent (to the component) engineering group to deal with? 16 Do you have FIAT’s engineers in-house during NPD or vice versa? 17 Do you often experience problems with FIAT (getting requirements)? (from 0-5) b.3 Use of techniques and risk control 1

Are you subjected to Target Price, Competitive Bids, Negotiations or both?

2

Can you split this figure according to the type, customer or component supplied (black box, etc.)?

3

Once a price is set, who benefits from further cost reductions?

4

Can you indicate the percentage of suppliers competing for the last manufacturing contract (one, two or more than three competitors)?

5

Can you indicate the percentage of suppliers competing for the last design contract (one, two or more than three competitors)?

6

How do you protect your intellectual property?

c Strategy 1

In which areas are you investing in terms of the development of new products?

2

Are you developing technology with no immediate employment in current products?

3

How would you describe the actual situation of the European and world component industry?