A Case Study of NUMMI and Its Suppliers
The arrival of the automotive transplants from Japan over the last decade has brought about a different method of dealing with suppliers. Long known for close working relationships with suppliers, the Japanese transplants brought a new focus on supplier relations. After developing its own "corporate culture," the joint venture between General Motors and Toyota, named New United Motors Manufacturing Inc. (NUMMI), embarked on a program of supplier development. This program encompasses effective communications with the supplier as well as a sharing of information which is essential to supplier performance. The NUMMI approach may have significant implications for supplier relationships throughout American industry.
Over the last decade the Japanese investment pattern has largely shifted from a passive approach of capital investment in nonmanufacturing ventures to an active model. In the passive mode, the Japanese merely supply the capital investment and let the company operate as usual. They take no active managerial role. In the active approach, the Japanese owners occupy key positions in top management, design engineering, quality assurance, and manufacturing. If the relationship is a joint venture, the Japanese typically are actively involved in those areas that impact product design, manufacturing, and the financial side of the business.
This shift has been most evident in the automotive industry, with the building of six "green field" facilities in the Midwest. The green field facility is a new plant that is built from the ground up on undeveloped land. Everything, including utilities, must be brought to the plant site.
The only exception to this approach has been the renovation of the General Motors facility at Fremont, California. It is now the home of New United Motors Manufacturing Incorporated. NUMMI, as it is called, is a joint venture between General Motors and Toyota. It is unique not only because it is housed in a renovated facility, but also because it employs former GM workers who are represented by the UAW. None of the other Japanese plants are unionized.
The arrival of the Japanese has resulted in significant changes in the way business is conducted within the industry, as well as how the work force is managed. From the perspective of organized labor, the change has been almost revolutionary.
The U.S. automotive industry historically has been characterized as a constant clash of titans. Cooperation and consensus sensus are not words that have characterized the relationships between the "big three" and the United Auto Workers. As recently as 1988, the press carried references to the two class system: "workers pay the price of failure and managers survive, no matter what happens." On the other hand, quotations can no doubt be found that paint the picture as seen from management's perspective. But regardless of one's perspective, the fact remains that antagonism and disagreement are what characterize the management-labor culture encountered by Toyota and the NUMMI venture. It is a distinctly different culture from one in which the worker comes early to the plant and stays late. It is also significant that NUMMI should be located at the permanently closed General Motors facility at Fremont, California. This facility was closed in 1982 due to its low productivity record coupled with a recession-induced sales decline. Hiring over two thousand former GM employees represented by the UAW, Toyota embarked on an ambitious plan. They would "build the higher quality automobile in the world at the lowest possible cost to the consumer."
NUMMI AS AN ENTITY
While the other transplants and joint ventures were green field operations, NUMMI had to establish a "green field mentality." This was important to Toyota from several perspectives. Toyota was unwilling to find itself saddled with any of the preexisting conditions of the former GM facility, even while in partnership with GM.
NUMMI believed it had to implement a two-part strategy to be successful. Initially, it had to develop its own operation, structured to conform with Japanese operating principles. And second, it had to develop relationships with its suppliers based on Toyota's purchasing practices. The first part of the strategy was accomplished by overcoming some formidable barriers. The second part involved the introduction of new and unique working relationships.
Full appreciation of the skillful planning required by this strategy can be gained only by a brief look at the transition process. The Japanese are a process oriented society. Their industries continually focus on improvement of the production and distribution processes. Clearly, NUMMI had to establish a solid base of support among its own people and operating groups before it was in a position to export the concepts to suppliers. NUMMI purchasing, for example, had to believe in the system and trust the results before attempting to impose it on its suppliers. As in the rest of the plant, the focus was on simplicity and the avoidance of waste.
The traditional Japanese automotive employment plan was to hire workers at the completion of high school. By following this practice, the automotive assemblers obtained a trainable and untainted work force. There were no bad habits to unlearn. Another major consideration was to avoid any legal or quasi legal entanglements. Yet, there were approximately one thousand grievances and numerous disputed firings still backlogged at the time of the GM plant closing in 1982.
The American tradition of utilizing a large number of skilled trade and production line job classifications was abandoned and replaced with a simplified system that included the security of long-term stable employment. The collective bargaining agreement between NUMMI and the UAW provides for that security, as illustrated in the following paragraph:
The Company will take affirmative measures before laying
off any employees, including such measures as reduction
of salaries of its officers and management, assigning
previously subcontracted work to bargaining unit
employees capable of performing this work, seeking voluntary
layoffs and other cost savings measures.
The implementation of the Toyota method meant replacing confrontation and conflict with cooperation and consensus. This entailed a careful and almost painstaking development of a work environment conducive to the acceptance of the new ideas. The process included heavy emphasis on team building activities that produced both a cooperative and a moderately competitive work climate.
The success of the effort was considerable, to say the least. The next challenge facing the new organization was to extend this culture to the supplier organizations, most of which were only vaguely familiar with its underlying value system.
NUMMI AND ITS SUPPLIERS
While suppliers wanted the business from NUMMI, they were not obliged to accept the Japanese approach. Traditional relationships between suppliers and customers in Japan take on a family-type relationship. Using the term Kieretsu (the family-like relationship between buyer and seller), the Japanese characterize the relationship as a partnership in which the supplier constantly strives to increase value provided to his customer. The Kaizens (constant improvements) provided by the supplier are expected by the buyer and represent a part of the normal relationship. Cooperation and consensus have often been viewed as the cornerstones of the business operation in Japan. Both sides exhibit a natural disdain for waste, and each shares the objectives of efficiency, increased quality, and lower costs.
The NUMMI operation moved into a culture that thrives on competition and views the competitive processes as a daily challenge. The Japanese are often dismayed by some of the U.S. business practices, which they perceive as wasteful. The distant relationship between buyer and supplier, for example, is a natural creator of waste. Communications must be duplicated, and often suppliers are made to absorb mistakes in forecasts or alterations of schedules. How can there be a "win-win" philosophy when one partner in the relationship absorbs the costs of the other's mistakes?
NUMMI was transplanted into a culture where the dealings with suppliers could hardly be described as harmonious. The relationships were almost always "at arms length." The constant bypassing of purchasing by sales personnel from the supplier was a common occurrence. This "back door selling" strained many buyer-supplier relationships. During periods of economic austerity, some buyers played one supplier against the other. When the economic fortunes changed, suppliers retaliated with often unjustified price increases, delivery allocations, and apathy toward customer needs. Until very recent times, these practices were rather common. Significant and lasting buyer-supplier cooperation has really only begun to gain acceptance in this country.
Finding itself in this environment, NUMMI had three possible supply options:
1. Import all parts and components and simply assemble
the end product in the United States for sale in the
2. Wait for the arrival of the next wave of Japanese parts
makers to come to the United States and do business as
3. Buy some parts and components in the U.S. market,
and assemble and sell in the United States.
Each option had its rewards and its risks. The first option was perhaps the most satisfying. Business would go on as usual. The customer was dealing with established sources of supply and the mode of operation would be basically the same. The only variables that would change from past operations would be the distance of the shipments and the lead times.
A major risk associated with this option was the possibility of being seen as the user of lower cost foreign labor. Additionally, this process of assembly could be viewed as an attempt to evade the U.S. content laws. Continued U.S. concern over its budget deficit and the imbalance in trade between the United States and Japan could have wide ranging consequences should NUMMI be viewed as an exploiter of labor. It was not in the interests of Toyota to "poison the well" by using the labor force in any type of perceived manipulative or exploitative role.
The second option was to wait for the arrival of the next wave of Japanese suppliers, coming as joint ventures or as transplants themselves. It was expected that this would eventually occur, and it certainly could be a longer range solution to the Japanese problem of reliable sources. Various midwestern states had made significant expenditures and promotional efforts to attract such foreign business.
The final option was to work with the domestic suppliers. This appeared to be the most difficult option in the short run, but perhaps the most productive over the long term. Competing with the major U.S. producers probably would be somewhat easier if the finished product had a significant "local component" in it. The task would be that of structuring the relationship into a win-win model.
In the final analysis, NUMMI opted for the third option - that of primarily using domestic suppliers. The major problem the organization faced was that of convincing American suppliers to accept NUMMI's unique way of doing business. Although it was a difficult, time-consuming effort, NUMMI was successful in orienting its potential suppliers to the new operating culture and related buyer expectations. By focusing on the values of efficiency and on long-term benefits for successful suppliers, the transplant organization was able to develop an effective, reliable group of suppliers.
The pragmatic NUMMI objective becomes clear when reviewing the firm's New Supplier Manual. The desired result is the integration of NUMMI suppliers into a network. All suppliers are expected to use Toyota production control techniques and, in turn, to require their suppliers to use these techniques also. The network can be compared to a spider web in which all the spokes are linked to the center, and the cross threads supply the support. The cross threads in this case are the tools and techniques developed by NUMMI for dealing with suppliers.
This objective is made viable by NUMMI's development of a simple, systematic approach to buying, which integrates the functions of production control, traffic, purchasing, and accounting. The role of these internal functional areas and the role of the supplier are clearly defined in the flow of material from supplier to user. The system is designed to facilitate maximum communication, reduce paperwork, and ensure timely delivery and supplier payment. The wastes inherent in the process are eliminated by close coordination and a clear understanding of the role of each party. Each has clearly defined responsibilities, and the emphasis is on constructive problem solving, not on placing blame when things go wrong. The entire process can be seen as a series of concurrent activities taking place in a carefully planned environment.
NUMMI APPROACHES TO SUPPLIER
INVOLVEMENT: TOOLS AND TECHNIQUES
The techniques used by NUMMI to bridge the cultural and technical gaps as it moves into the American supply market are brilliant, yet uncomplicated. The simplest way to examine the techniques of supplier involvement is through a brief discussion of some of the unique aspects of the NUMMI system - and how they impact the supplier in both a positive and a negative manner.
At the heart of the NUMMI system is the just-in-time concept (JIT). To NUMMI, JIT is not simply the arrival of inventory at the correct time; rather, it is a total manufacturing philosophy. As cited in the New Supplier Manual, this "total approach" encompasses the route layout, scheduling, manufacturing, engineering, packaging, quality, inventory, and the organization structure. The concept utilizes Kanban (the Japanese card system in which an empty parts container triggers the release of a replacement container filled with the part), which is a supply-pull system in which material is reordered on a consumption basis. Stockpiling of inventory is considered wasteful, and only that quantity needed is ordered. Kanban is used commonly on the shop floor, and is also extended backward to the supplier's operation in the same manner as it is used in the plant. Each supplier is simply an extension of the manufacturing capability of NUMMI. The supplier is viewed as an integral part of NUMMI, both from a philosophical and an operational perspective. Information is shared, and communications flow directly to the affected people, not through an intermediary.
To maintain quality, the quality principle of Jikoda is used. Simply stated, this means that a problem is not passed on to the next operation. It is corrected at the point where the problem is found. The quality objective for incoming material is 100 percent defect free! Defect prevention is planned to take place at the supplier's facility. It is in his interest to apply the principle of Jikoda (defect or problem prevention) to his own operation by having his suppliers provide defect free materials. If this is not the case, the supplier generates two types of waste: the waste of inspection and the waste of correction. Neither adds value to the product.
The elimination of waste is accomplished by searching for continuous improvement. Called Kaizen, it is a cornerstone of the relationship between the supplier and NUMMI. The supplier commits to continuing improvement of the product in the form of higher quality or reduced cost. Constant improvement is considered to be a requirement for economic survival.
Heijunka is the process of leveling or providing evenness of work. This principle stresses consistency in the daily activities. Non-consistent actions create waste. As an example, consider the orderly pick up system (OPS). OPS is a group of techniques devised to handle deliveries from distant suppliers on a timely basis. Suppliers have one day's requirements ready for pick up on a daily basis at a prescribed time. A dedicated truck will stop at the appropriate supplier's operation, pick up the daily load, transport the load to a consolidation point, and transfer it to a rail carrier for shipment to NUMMI. Every day the process is repeated. There is a level flow from the supplier to the user in lot sizes needed to support the scheduled day's production. If a shipment is missed, the tardy supplier must pay for the premium form of transportation. Added to this is the cost of the space not utilized as scheduled on the truck and the rail car. Under normal circumstances NUMMI pays the freight, but it will not pay for waste or supplier errors.
Further leveling is accomplished by the use of smaller packaging. Reduced container size reduces operator walk time on the floor, and it refines the JIT operation.
Key elements in the NUMMI system lie in the following three areas:
1. Its approach to scheduling
2. Its communications
3. The relationship between planning and order release
The four major components of the scheduling system include:
1. The preliminary forecast
2. Order releasing and the Final Requirement Sheet
3. Production preparation plan
4. Electronic communication
In traditional purchasing systems, information directly related to the production schedule typically is not divulged to the supplier. The supplier usually is told the delivery date and little more. The NUMMI "open window of communication" philosophy sees the error of this secretive approach. Providing planning data to the supplier is simply reinforcement of the importance of the supplier to NUMMI. Providing a forecast nine weeks in advance, by part number, gives the supplier adequate time for planning, while legally not committing NUMMI. As the name indicates, it is a preliminary forecast. Its variation is limited to a 20 percent range on a week by week basis, thereby supporting the principle of Heijunka (leveling or consistency).
The Final Requirement Sheet is the actual order or commitment to the supplier. Generated on a weekly basis, the commitments will not exceed a week's production requirements. In this highly structured system the supplier is a key player. It must ship the correct quantity, in standard NUMMI specified packaging units, at the correct time - and it must be defect free. As a result, there is no computerized safety stock system. Team members use a visual system to warn of shortages. Supplier cooperation is essential. A significant portion of this cooperation is achieved through communication and compensation.
The production preparation plan is the document used to alert the supplier to a model change or a major engineering change. As a two-way communication document, the supplier completes his portion of the plan and documents any problem meeting the start-up schedule. It serves as a request for help from NUMMI by the supplier before a significant problem arises.
Finally, the entire communication process is enhanced by the use of electronic data interchange (EDI). The speed with which information flows is critical to the whole process. "Not getting the word" is not an acceptable excuse. Standardization has become a key factor in this area, since NUMMI wants all suppliers to be capable of receiving schedules electronically. This efficiency reduces the wasted time of mail in transit.
Closely allied with the operating system is the payment system for suppliers. Prompt payment for completed orders is a strong stimulus for supplier performance. Since NUMMI specifies the quantity to be shipped and establishes the cutoff date for payments, the supplier does not have to invoice NUMMI. Again, the waste of duplication of paperwork is avoided. Interestingly, payment problems are resolved by production control, not by accounting. After all, production control has been involved with the transaction during its entire cycle and is in a position to have the data and information readily available. This approach eliminates an extra step in the communication process and usually improves the efficiency of communication.
The supplier does not stand alone in its relationship with NUMMI. Buyers visit suppliers at least twice per year. Managers visit sources once during the year. The purposes of the visits are to discuss areas of mutual concern, offer suggestions for improvements, and cement the relationship between the buyer and the supplier. Supplier evaluation is an ongoing activity with frequent interfacing between NUMMI and specific suppliers.
Should a supplier have problems, NUMMI stands ready to provide technical assistance to its suppliers. This includes maintaining a resident engineer at the supplier's facility. In turn, several dedicated suppliers have resident engineers at the NUMMI facility, supplying on-the-spot problem solving in technical areas. Finally, supplier meetings are held periodically to define supplier goals and objectives over a wide range of functional areas including purchasing, production control, and quality control. NUMMI suppliers are kept informed.
In reality, this total system represents a sophisticated form of supplier management by NUMMI. The planning and control aspects of management follow the NUMMI philosophy of teamwork. A supplier becomes part of the team and, in turn, is responsible for structuring its operation to meet team requirements. Crossing traditional organization boundaries is acceptable because these boundaries really do not exist. Traditional functional responsibility has given way to responsibility for improvement and information flow. For example, the supplier may talk with production control on a scheduling problem, traffic on a transportation problem, and purchasing on a contract problem. Compartmentalization creates waste by requiring the same message to be repeated to several people. It closes the NUMMI "open window of communication." Control over the supplier is accomplished by interfacing, not interfering.
IMPLICATIONS FOR SUPPLIERS
Clearly the NUMMI system holds many positives for suppliers. There is clear and uniform communication to each supplier on the key issues of price, quality, delivery, packaging, and engineering changes. The specific responsibilities of NUMMI and its suppliers are carefully defined. The rewards for good performance are present in the form of prompt payment, profit, and reduced paperwork. At the same time, poor supplier performance detracts from profit. The NUMMI policy of constant feedback to the supplier in a variety of ways is the constant reinforcement of its operating principles. Throughout the duration of the relationship, constant improvement is sought. Obviously, there is a constant need to review and examine the relationship to insure the win-win result. This is the cornerstone of the relationship with the suppliers.
Of significant interest is the subtle way in which this highly organized, yet simple, system is being transferred for use in supplier organizations. A perceptive supplier can see the value of adopting segments of the NUMMI system and integrating them into its own operation. As suppliers communicate and plan with their own suppliers, the system continues to expand.
While no generalizations can be made from a single case study, the simplicity and the orderliness of operation make the NUMMI approach one worthy of close study. It is not a theoretical construct, but a real, living operating system. It is structured to provide stability, yet is flexible enough to respond to change. Its greatest value lies in its ability to show the inherent waste of poor communications and organizational compartmentalization. Knowledge is power, but in this case only if it is shared.
The case reveals some interesting aspects of competition, as cooperation is superimposed on a normally competitive environment. Traditional organizational culture and expectations of the suppliers are altered by the needs and wants of the customer. Part of the process involves the immersion of the supplier into the business culture of the customer. This includes the use of key Japanese words as descriptors of concepts. In this manner, both the technological meaning and the philosophical underpinnings of the words are conveyed. These are not just words to the Japanese. They are components of their manufacturing philosophy. These words convey the operating principles by which Japanese businesses flourish. Obviously the Japanese have been successful in applying these operating principles. Their success with the workers has been well documented.
If it works with the workers, it should work with the suppliers. It worked with the workers because they were told why certain actions were taking place and where the workers fit into the plan. The suppliers are being exposed to the same approach. Information is shared, responsibility is being accepted - and both parties are expected to win.
[1.] O. Bieber, "Total Involvement Requires Total Commitment," Journal
for Quality & Participation, vol. 11, no. 2 (June 1988), pp. A6-A8.
[2.] M.A. Fischetti, "Special Report - The Global Automobile: Banishing
the Necktie," IEEE Spectrum, vol. 24, no. 10 (October 1987), pp. 50-52.
[3.] Anon, "New United Motor Manufacturing Inc," in-house publication
by NUMMI, June 1988, pp. 1-12.
[4.] Ibid, pp. 15-21.
[5.] Agreement between New United Motor Manufacturing Inc. and the
UAW, July 1, 1988.
[6.] R.R. Rehder, "Japanese Transplants: A New Model for Detroit,"
Business Horizons, January/February 1988, pp. 54-61.
[7.] J. Smith and W. Childs, "Imported from America: Cooperative Labor
Relations at New United Motor Manufacturing Inc.," Industrial Relations
Law Journal, vol. 9, no. 1 (1987), pp. 70-81; S. J. Brown, "The
Japanese Approach to Labor Relations: Can It Work in America?"
Personnel, vol. 64, no. 4 (April 1987), pp. 20-29; D. Forbes, "The
Lessons of NUMMI," Business Month, vol. 129, no. 6 (June 1987),
pp. 34-37; C. E. Witt, "GM and Toyota Bring Strength, Wisdom to
New Company," Material Handling Engineer, vol. 42, no. 6 (June
1987), pp. 58-66.
[8.] New Supplier Orientation Manual, NUMMI, May 1987.
[9.] C. Reich, "Japanese Philosophy Puts Power in Purchasing Partnerships,"
Purchasing World, vol. 31, no. 3 (October 1987).