INTEGRATED SUPPLY CHAIN MANAGEMENT- A CASE STUDY

Transcription

1 INTEGRATED SUPPLY CHAIN MANAGEMENT- A CASE STUDY OF HARLEY DAVIDSON Shilpa Kamath Faculty, Institute: MSNM Besant Institute of PG Studies ISSN 146 Year February 2008 Volume 2, Issue 1/5 Keywords: Integrated Supply Chain Management, mutual learning, continuous involvement, IT, bankruptcy. Abstract: Suppliers form the first link in the supply chain of any organization. Hence utmost care should be taken in selecting the suppliers and ensuring their quality, cost, delivery and service levels on a regular basis for deriving value out of supply chain management. This can only happen if suppliers are provided with necessary inputs in the form of training and continuous involvement. The supplier s performance should be reviewed against set goals. Wherever shortcomings are noticed, counter measures emerging from mutual learning need to be put in place. All this will enable the organization to work with suppliers as partner so that full benefit of integrated supply chain may be derived. The paper briefly explains how integrated supply chain and supplier relationship along with IT helped Harley Davidson to emerge as a successful company from the bankruptcy position over time. Introduction: Suppliers form the starting point of integrated supply chain management. Hence their role and responsibilities in achieving the ultimate objectives of the supply chain becomes extremely significant. The organization should ensure that the suppliers carry the same understanding of the customer requirements and accord the same amount of customer responsiveness to the organization as organization accords to its own customers and end users. The only way supplier can achieve this is by being as close as possible to customers. The organizations should also provide necessary resources and inputs so that supplier is able to work as an extended arm of the organization within the integrated supply chain. The Harley-Davidson (H-D) motorcycle brand is undoubtedly an American cultural icon, along with brands like Coca-Cola, McDonald's and Marlboro. H-D's motorcycles had become a symbol of individuality and the spirit of freedom and independence, for customers in the US and in various other parts of the world. Success had not come easily to H-D. In the early 1980s, the company almost went bankrupt on account of severe competition from Japanese motorcycle brands such as Honda, Suzuki and Kawasaki. However, H-D

2 revived its operations by a rigorous, comprehensive restructuring of their supply chain management. Reason behind Harley- Davidson s decision to restructure their supply chain management: Before the turnaround, purchasing did not support engineering and design at all. Engineering department was performing its own design and test work, but was unsupported by production departments and other company disciplines. The small number of engineers who were there was juggling suppliers, handling their own logistical needs, and taking care of routine personnel functions. These activities not only distracted engineers from their true function of designing and testing, but also were simply beyond their expertise. The department's capabilities were diluted, and relationships with suppliers were sub-par and unsophisticated. Predictably, the engineers focused on a supplier's technical innovation and failed to consider whether the supplier could produce the necessary volume, deliver on schedule, or meet cost targets. There are suppliers out there who are good in technical innovation, but not in other requirements. They were low volume and didn't have a high degree of competency on the commercial side. Or they couldn't meet the scheduled requirements for manufacturing. Supplier components came in late. Production was often jeopardized. As problems increased, suppliers were chosen without the benefit of a portfolio analysis. They were brought on board regardless of their capabilities. Because of these reasons, the purchase cost and inventory cost increased tremendously. The operating expenses increased from 11% of revenue to 17.7% from year 1990 to In the year 1993 the company incurred net loss of $11885 thousands. Restructuring of Supply Chain Management: In 1993, Harley Davidson adopted following strategies and restructured their supply chain management. Integrate purchasing into total company operations. Harley-Davidson has a history of using cross-functional teams outside the Product Development Centers as well. Each line of motorcycles is supported by a team consisting of representatives from design, manufacturing, purchasing, and marketing. Occasionally a team may pull in a styling expert or a finance person for more sophisticated cost analysis. Harley-Davidson's Kansas City, Missouri, manufacturing plant for sport motorcycles is a highperformance work organization--an engineering management environment run by self-managed work teams with no supervisory level. In such an environment, effortless availability of resources and involvement by suppliers leads to high performance. To obtain this effortless availability, the four primary process work groups--fabrication, paint, engine assembly, and power train assembly- -are backed up by a resource group.

3 The resource group, purchasing staffs that are technical experts, supply the process work group with materials, personnel, and whatever else the group needs. Leaders in the resource groups are accountable to the Kansas City plant's general manager but actually report to Harley-Davidson corporate headquarters in Milwaukee. This reporting relationship is designed to align the Kansas City plant's procurement strategies with overall corporate strategies. One such corporate strategy is to establish common suppliers for materials used in all Harley-Davidson facilities. Develop purchasing professionals into knowledge specialists. The purchasing department contains two groups: operational purchasing, which supports day-to-day needs, and development purchasing, which works on new-product design and development. This latter group, which works in the Product Development Center, understands the product strategy for the company and determines if the current supplier base has the capabilities needed for the projected new products or if a new supplier is needed. In their role as purchasing engineers, members of this group work side-by-side with engineering staff early in the newproduct-design process. The purchasing engineers bring to the Product Development Center their knowledge of sourcing, availability of alternative materials, and awareness of new technology. They consider manufacturability using particular materials and the security of worldwide sources of supply. Creating the purchasing engineers has helped Harley- Davidson bring new products to market sooner. In the other purchasing group, operational purchasing, Harley- Davidson created the position of buyer/planner, combining the roles of buyer and inventory planner. This combination gives the same person responsibility for production planning and for purchasing a specific group of items. The buyer/planners are responsible for forecasting, inventory levels, purchasing, and asset management for their own line of parts and accessories for the motorcycles. This arrangement gives the person who holds the job a broad authority over a narrow group of supplies. The benefit for the company came in reduced lead times for supplies and lower inventory levels. Because of the combined function, the buyer/planners need extended skill sets that include analytical reasoning, forecasting, negotiating, and communications. Harley- Davidson requires people aspiring to the buyer/planner position to get two certifications: certification in production and inventory management (CPIM) from the American Production & Inventory Control Society (APICS) and certified purchasing manager (C.P.M.) from the National Association of Purchasing Management (NAPM). These certifications require extended study and examinations.

4 However, the two certification processes did not cover all of the 28 separate skills that the leadership in supply management identified for this position. The company gave individuals three years to fully train for the position, and within that time frame the individuals were responsible for developing a training plan and schedule. Harley-Davidson assigned each person a mentor who had obtained certification and who could give individual coaching on preparing for the certification exam and applying the knowledge. As an incentive for people to go through this training, the salary grade for the buyer/planner was set at one grade above the buyer position. Reap the benefits of e- procurement. Harley-Davidson's Internet-based supply chain management strategy is called SiL'K, which stands for Supply Information Link. Using the SiL'K portal, employees access supplier catalogs and process orders at their workstations. The system also fosters greater interaction with suppliers, including collaborative scheduling and demand planning. Suppliers using the portal see Harley-Davidson's picture of the retail demand for motorcycles and Harley-Davidson's schedule, thus giving suppliers information to determine their ability to meet deadlines. Available information also includes Harley-Davidson's quality expectations and delivery requirements. Suppliers can also conduct financial transactions online, thus reducing invoicing time. Supplier involvement- On-site suppliers play a key role at Harley-Davidson, taking part in new product design meetings and helping engineering teams find quality and cut costs. This supplier residency program's goal is to have 50 full-time seats filled, with 80 parttime residences. Harley-Davidson's Supplier Advisory Council, meanwhile, seeks out issues of strategic importance at Harley- Davidson. There are now 16 supplier delegates who serve on a four-year rotation on the council. Supplier relationships. Harley-Davidson has cut its supply base in half since 1990, an effort that consciously eliminated the suppliers who were not up to meeting the new objectives of cost, quality and timing. Harley-Davidson now sports a win-win philosophy with its remaining suppliers. Its goal is to help a small group of suppliers prosper, and help Harley-Davidson prosper. The company is now on track to move from in excess of 3,000 MRO supplier relationships to a concentrated 80% to 90% buy with three suppliers. In the area of supplier relationships regarding original equipment purchases, Harley-Davidson now concentrates 80% of its purchase with a critical group of suppliers who willingly take part in Harley-Davidson supplier strategies.

5 Cost Suppliers are expected to achieve real-time improvement in their costs. This initiative asks suppliers to think more strategically around cost and show how they are able to bring innovation through technology. They are expected to hit the targets established by Harley-Davidson. Quality Under the Harley-Davidson mantra, suppliers are expected to meet "twice the level of quality." They are asked to develop a strategic plan for how they will achieve this. They are expected to take a larger view of their quality processes and make strides in quality improvement. This plan is written down and provided to Harley-Davidson along with an outline of who is responsible for bringing it to fruition. Timing The suppliers are expected to take "half the time" to develop and deliver new products. They are expected to develop tools for faster development and come up with plans that are more supportive to Harley- Davidson's design and development efforts. To underscore all of this, Harley- Davidson supplies a master supplier agreement that is shared with all suppliers. It is jointly developed by a Supplier Advisory Council and Harley-Davidson. This clarifies the roles and responsibilities that Harley- Davidson and its suppliers share. Suppliers are now graded on a partsper-million basis. Harley-Davidson has a target of 48 parts per million on quality that they are expected to achieve. The company sends the suppliers a monthly report showing how they are performing when it comes to quality and delivery performance. If a supplier receives a bad report card, Harley-Davidson takes action. If the supplier is not doing well, Harley- Davidson sends resources to help them. If the supplier shows a pattern where they are not improving, they are placed on conditional status and given a period of time in which to show improvement. This time period can be anywhere from three to six months. If they make improvements during this time, they can either be placed on extended conditional status or unacceptable status. If they are placed on unacceptable status, Harley-Davidson searches for a new supplier. Three Important Element of Supply Chain Strategy: The three key elements of this supply chain management strategy are: - Cycle-time management - Relationship management. - Sustainability. 1. Cycle Time Management: Through the emphasis on cycle time, Harley-Davidson hopes the SiL'K strategy will improve and shorten the

6 company's own procurement cycle. The system should help Harley- Davidson modify its content management. Employees will use the portal to access supplier catalogs, extract information about components and process orders. They can use it to access trading exchanges and other open online markets. This should make the company's entire buying system more efficient, reducing cycle time of enterprise wide self-service requisitions, self-service workflow and approvals, online cataloging and electronic documentation generation from transactions. By shortening procurement cycle times, it reduces the amount of inventory in the plant. By cutting down on time spent on non-value areas, workers can instead spend time to spot quality defects in supplies. Thus notice quality defects from the supplier with a shorter lead time. 2. Relationship Management: It hopes to use the Internet to share information with suppliers and further enhance relationships with them. Suppliers will have access to Harley-Davidson's quality expectations, delivery requirements and other important data. Harley-Davidson has created an electronic supplier portal--possibly through an extranet--that would link suppliers to the company. This would give suppliers access to centralized transaction data. The window will help suppliers see what their current level of performance is and allow for collaborative planning and scheduling. Suppliers will see in terms of what's being consumed and replenished at the retail level, and plan with the distribution center. 3. Sustainability: The emphasis on sustainability will make sure the system can be easily upgraded as software improvements or technology changes come along. This means the SiL'K system should be around for a long time. The enterprise wide tool can be easily updated, is user friendly, and will enable Harley- Davidson to put this in and live for a long time. Results: Cost reduction- Purchasing Magazine estimates that Harley- Davidson reduced costs of purchased goods and services about $37 million from 1996 through now. Based on its old model of managing inflation (by allowing annual increases of 1.5%-2%) costs would have risen close to $40 million. Inventory strategy-harley- Davidson handles its inventory on a just-in-time schedule. The company now runs on six and a half days' to 10 days' worth of inventory. This is an improvement over 1995, when the company ran on eight to 15 days' worth of inventory. Quality improvement-roughly 60% of Harley-Davidson's supply base is now performing at 48 ppm defect levels or better.

7 Harley Davidson has achieved a compound annual growth rate of 22% in revenue over the past five years. Output of motorcycles increased 17.5 percent in one year and earnings grew faster than revenue. Order fill rates improved in four years from 85 percent to 99.6 percent. Other product development centers were opened in following years as the company experienced double-digit growth every quarter. Conclusion: Such performance from a company which was at the brink of bankruptcy in early 1980s was viewed as one of the best examples of corporate turnarounds in the world. The continuous involvement with the supplier at all stages from product design to the actual delivery of parts and after sales services helped Harley Davidson to achieve customer satisfaction.in the early 21st century, H-D was the only American motorcycle brand in the US, while the market was flooded with imported motorcycle brands from companies such as BMW, Honda, Kawasaki, Yamaha and Suzuki. Despite being dominated by imported models, which were technologically well advanced and more sleek and stylish, H-D remained the market leader in the US motorcycle market... Reference: Websites: 1. Sahay.B.S., Supply Chain Management in the twenty- first century, 2000, Macmillan India Limited. 2. Shah H.K., Supplier role in Integrated Supply Chain Management,