Lost in a Merger, this Supply Chain Strategy Deserves a Comeback

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Even though I only met him once, one of my professional role models was Thomas Stallkamp, who, along with Bob Eaton and Robert Lutz, made up the executive triumvirate responsible for Chrysler’s financial successes in the 1990s. Stallkamp was father of the Extended Enterprise approach to supply management. In fact, the term Extended Enterprise became so important to Chrysler that in 1999 leadership obtained a trademark for it, as follows:

Extended Enterprise: Extending business relationships by providing process management consultations and workshops to … suppliers and supplier tiers in order to reduce cycle time, minimize system cost and improve the quality of the goods or services provided by the suppliers.

Unfortunately, after the Chrysler-Daimler-Benz “merger,” Stallkamp and other top Chrysler executives got pushed aside by their German counterparts and many of the strategies they had installed—including Extended Enterprise supply management—were abandoned. Probably related to this, numerous business school case studies have been written on how Chrysler fared under Daimler-Benz management and they all pretty much agree that things didn’t go well.

Before further discussion on what I now believe should be the basis of progressive OEM supply management strategy, I’ll lay out a couple of definitions that will be referred to in the remainder of this column:

Build-to-demand-capable suppliers are those able to respond to changes in OEM customer demand from what was forecast, thus minimizing reliance on pre-built inventory. 

Lean supply chain performance is possible when an OEM has developed a critical-mass of strategic suppliers (see below) with build-to-demand capability.

Strategic suppliers—as opposed to commodity suppliers—are incumbent sources in which:

• It would be resource-intensive to find/develop an alternative source and/or take an excessive amount of time to implement.
• Resourcing their business would dramatically increase OEM risk of lost sales due to supplier order-fulfillment failures such as excessive “true” lead-times; deliveries of less than the ordered amounts; transportation-related infrastructure bottlenecks; etc.
• It would be difficult to move business due to the supplier’s intellectual property and expertise, both in design and processing.

I personally got excited by Chrysler’s Extended Enterprise approach to supply management because it offered a new strategy for achieving lean supply chain performance—which , in my mind, should be the goal of all original equipment manufacturer (OEM) supply management functions.

Many OEMs tout that they are world-class manufacturers. For most, though, this is not true. An OEM should not be considered world-class unless its supplier chain is also world-class. And suppliers/supply chains that do not have the manufacturing agility to respond, with a minimum of pre-built inventory, to changes in the market dynamics vs. what was forecast are not world-class. What I mean by this is that when OEMs source without consideration of a supplier’s ability to agilely satisfy the demand dynamics of the markets they serve—including demand that comes in over forecast—to satisfy incremental sales, they are not world-class. Why? Because customers are not as willing to wait for out-of-stock products as they have been in the past.

I recently had personal experience that illustrates this last point. I just ordered a car through a local dealer that currently charges MSRP on new cars.  Our car will arrive in four months, which is “OK” with us since the vehicle it is replacing is serviceable. This same dealer also had a one-year-old car of the same model/options that was also available. It was listed about 7% above the MSRP of the new car we ended up ordering.  According to our salesman, this higher price was possible because most customers are willing to pay more for a car that is immediately available that wait for a less expensive new one!

In my mind, the natural evolution of Extended Enterprise is an OEM treating its strategic suppliers as “departments outside of its own factory walls.” What do I mean by this? Let’s say an OEM both produces machined parts within its factory and purchases them from suppliers. How can it make sense for the OEM not to have suppliers that have the same manufacturing effectiveness and order-fulfillment agility as their own internal processing? The short answer is, “It doesn’t make sense.”  Why? Because the supplier/supply chain’s lack of order-fulfillment agility significantly reduces the OEM’s own order fulfillment agility.

Bottom line, it is in an OEM’s best financial interests to provide its strategic suppliers with the same level of improvement support they would receive if they were internal factory departments. Under this approach, strategic suppliers would no longer just be given tactical performance goals and expected of their own accord to achieve them. Instead, OEMs would collaborate with and assist them—as needed—in their strategic continuous improvement efforts.

To adapt to this will require the OEM to build a supplier development function, either through a dedicated group, their own internal resources or—most effectively—a  combination of both. If you are interested in exploring this strategy, I have laid out a road map for doing so in Part 2 of my book “Better Business:  Breaking Down The Walls of the Purchasing Silo,” which can be ordered through IndustryWeek.

The best of example I’ve seen of operating under such a strategy is by Oshkosh Corp.  Sean Ketter—a senior vice president of Supply Management at Oshkosh—presented on the positive financial impacts of their Extended Enterprise efforts at last November’s IndustryWeek conference in Cleveland. The results he presented were impressive both in piece-price and “true” lead-time reduction, as well as a smooth product start, all achieved through the elimination of non-value-added waste. The resources Oshkosh dedicated to this effort consisted of a half-dozen dedicated manufacturing engineers as well as over 100 other employees, as needed. I haven’t heard of any other companies working to this extent at developing a lean performing supply chain.

I guess, in the end, an OEM’s decision to change its strategies and processes to ones that will facilitate development of lean supply chain performance is based on whether it wants to be a world-class manufacturer.

FYI, I and Rick Bohan—also a regular IndustryWeek contributor—will be presenting at IndustryWeek’s 2022 Manufacturing & Technology Show & Conference, to be held October 18-22 in Cleveland. Our topic discusses the relationship between prioritizing lean supplier development and order fulfillment agility, as well as the positive financial benefits this can have on an OEM’s bottom line.

In addition to ours, there will be many other presentations on interesting and timely topics. I highly recommend looking into the content of the conference, and to attend if you think they will have potential to improve your own operations.

I guess the question boils down to whether an OEM wants to truly be regarded as world-class.

Paul D. Ericksen is a founding member of The Onshoring Project (TOP). If you are interested in learning more about TOP’s goals and objective,  you can contact him directly, request follow-up information from TOP’s website,  TheOnshoringProject.com; or check out TOP’s booth at the IMTS conference September 17-22 at Chicago’s McCormick Place.