Page 210 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Unit 10: Building of a Supply Chain

This concept has important implications: if a company can accelerate its production experience, Notes
it could gain a cost advantage in its industry that would be difficult to match.
This linear relationship between costs and cumulative production became known as the Experience
Curve.

Notes The Experience Curve has had profound implications for business thinking and
practice. As a strategic concept, you can predict cost declines with experience due to large
scale procurement and the relative experience between the different suppliers can be used
to provide competitive advantage.

Consolidation alone, however, does not provide the complete competitive advantage. The
advantage is enhanced when limited resources can be focused on a manageable number of
suppliers, which can then receive the attention they need to achieve top performance. Relationships
with suppliers improve since there is no competition between suppliers and company. Once the
supplier and manufacturer begin working together and a long-term commitment is established,
the need for additional suppliers also diminishes.
Eliminating redundancy also reduces overall costs, cutting out dual sourcing, dual tooling, and
dual process development. With the security of part-for-life agreements, suppliers are much
more open to suggestions about cost reduction and are more willing to invest in optimizing
their processes. Suppliers receive enough volume from the company to warrant investing their
own internal resources to optimize their production process and thus produce a component at a
more competitive price.
For example, one firm had over 300 suppliers in the late 1980s. It identified the following
problems which resulted in high costs for purchased materials and low profitability:

 Many suppliers were low-quality manufacturers;
 Many were geographically dispersed; and
 There were multiple suppliers for the same part family, so that suppliers saw no long-
term economic gain in working with the company.
The company undertook a three-part initiative to consolidate its supplier base and upgrade its
approach to supply management:

1. The first phase eliminated suppliers that were poor-quality performers or whose
relationships with the company were irreparable.
2. The next phase was to train the remaining suppliers in just-in-time, statistical process
control, and continuous improvement. They were asked to develop plans to meet the new
cost, quality, and delivery goals required for just-in-time. After evaluating these plans,
the company eliminated more suppliers.
3. In the last phase, the remaining suppliers of the company were asked to invest in value
engineering to reduce the cost of the part to the company. The company supported them
through dedicated teams who visited suppliers’ factories and help improve their
manufacturing operations.
As the suppliers had sufficient volume to justify making improvements to tooling and operations,
the company was able to improve the quality and reduce the total costs of the product significantly,
allowing the company to advance from a declining 17 percent market share in 1982 to the 83 per
cent market share, it enjoys in 2005.

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