Inclusive Procurement Leadership Fiat Chrysler Automobiles (FCA) - Case Study Establishing a Second Tier Program Tier 1 experience & knowledge facilitates understanding of where opportunities for Tier 2s exist. 1 September 1, 2016 FCA
LEADING PRACTICE: Establishing a Second Tier Program The Chrysler Group LLC Supplier Development (DSD) Department was established in 1983. Now under the Fiat Chrysler Automobiles (FCA US) name, it launched its supplier diversity program in Canada in 1984. The company s vision is to be the premier supplier diversity program globally and champion a diversified extended enterprise that reflects its employee and customer base. It believes that such an environment positions the company to bring forward innovative ideas that sustain growth and contribute positively to financial performance. With passionate and committed leadership, its supplier diversity goal is to achieve 16.5% of its total spend with Tier 1 and 2 suppliers. The automaker launched a Tier 2 program in 1991 to expand the reach of its diverse suppliers using an enterprise wide approach that focuses on identifying suppliers and providing them access to opportunities that they might not otherwise have acquired. Focus on Identifying Suppliers and Providing Access to Opportunities Inclusive Procurement Leadership Roundtable Case Study 2
KEY PRACTICES AND PROCESSES Supplier Training is Provided Through Monthly Webinars External Balanced Scorecard is Utilized to Judge Suppliers > > FCA was well experienced at Tier 1 level with:»» Contract language requiring that suppliers have a supplier diversity program»» A good reporting system to consolidate and track supplier spend, and»» In-depth knowledge of certifying organizations that provide a network of diverse suppliers. > > Setting Tier 1 targets for supplier diversity spend with Tier 2 minority suppliers (ranging from 2% to 8.5% of contract value) holds suppliers accountable to reasonable standards. > > Supplier training is provided to Tier 1s through monthly webinars as well as presentations during FCA s annual Supplier Training Week to explain FCA s supplier diversity program and its requirements. > > FCA supports Tier 1s through FCA US Annual Matchmaker event to introduce them to diverse suppliers. > > Monthly reporting frequency is required from Tier 1 s. > > An external balanced scorecard (EBSC) is utilized to judge suppliers on five key metrics, of which supplier diversity is one. This assessment identifies tenuous areas that need development. > > FCA also introduced a High-Focus Program that identifies insufficient or struggling performers among the top 500 Tier 1 suppliers and monitors corrective action. A CLOSER LOOK Target Setting Since automakers like FCA US are such huge consumers of material, they normally buy from large multi-billion dollar suppliers, which doesn t fit the positioning of most diverse suppliers. FCA US recognized that, in order to expand its reach, it would need to incentivize its Tier 1 suppliers to start Tier 2 programs as a way of providing opportunities for smaller vendors. The company s success in establishing a Tier 2 program is attributed to being well experienced at the Tier 1 level first. This experience allows FCA US to comprehend the potential challenges inherent with this next step. It includes having a good reporting system in place that can track supplier diversity spend, and contract language in purchase orders that clearly identifies the expectations FCA US has of its Tier 1 suppliers. Having this Tier 1 experience and industry knowledge of its Tier 1 suppliers facilitates the corporation s understanding of key areas where opportunities for Tier 2s may exist. It is also imperative to have supports such as established sourcing mechanisms (i.e. certification councils like CAMSC) in place, and access to coaching expertise to assist companies to find diverse suppliers. The specific elements of the automaker s second tier program include: Subsequent to business being awarded, FCA US works with its Tier 1 suppliers to establish targets, which are then monitored and tracked. A set percentage of the amount of its annual spend with its Tier 1 vendors must go to Tier 2 diverse suppliers. 3 September 1, 2016 FCA
A CLOSER LOOK CONT The company wanted to be realistic and hold Tier 1 suppliers to reasonable standards so, unlike any other automaker, FCA US has three targets 2%, 5%, and 8.5%. These targets are linked to the type of commodity supplied and the geographic location of the supplier. Created five years ago, these standards have remained consistent, and over time most suppliers have been able to achieve those percentages. All suppliers including minority Tier 1 suppliers have the same targets as their close competitors. Supporting Tier 1s It s important to FCA US that it help its Tier 1 suppliers meet targets. First, it gets them on board by including supplier diversity expectations that are documented within the purchase order. More importantly, the company provides an educational element on supplier diversity including information and training to help them understand the benefits and business value so they can achieve their targets. The supplier diversity team is alerted when a new Tier 1 supplier has been awarded a contract. The team then begins to educate and support the Tier 1 on understanding supplier diversity, FCA s expected outcomes and FCA s expectations of this supplier using such tools as a detailed supplier diversity presentation, monthly FCA training seminars and supplier training conducted twice annually, explaining the supplier diversity program and processes. The automaker requires its suppliers to: Defined Monthly Reporting > > Assign a dedicated leader for supplier diversity; > > Join councils and take a leadership role; > > Develop a detailed spend analysis and opportunity identification within supply base; > > E-mail suppliers for updated certifications; > > Submit DSD improvement plan and review it with a buyer and DSD team; > > Provide monthly reporting in Supplier Gateway system (10th of each month); and > > Participate in Chrysler events (Matchmaker, Supplier Training Week, etc.). Tracking and Measuring Another key component in this step comes in the form of the FCA US Annual Matchmaker, a networking event that has been held for the past 17 years. This highly successful event has been designed to introduce Tier 1s to diverse suppliers and has resulted in some US$1.5 billion in diverse supplier spend. Held at FCA US headquarters in Michigan, and attended by 3,000 delegates comprising aboriginal, minority, women & veteran-owned potential suppliers and large Tier 1 suppliers. It is the largest supplier diversity focused trade show in the industry. This annual event features educational sessions, matchmaking between minority and nonminority suppliers, and a trade show evenly split between diverse exhibitors and Tier 1s. FCA US emphasizes the level of importance it places on its supplier diversity program by requiring monthly reporting from its Tier 1 suppliers. This frequency also helps the automaker track compliance levels more closely and hold its Tier 1s to their established targets. The Tier 1 suppliers compliance with monthly Inclusive Procurement Leadership Roundtable Case Study 4
2,000 Suppliers to Easily Report Key Metrics A CLOSER LOOK CONT reporting demonstrates that they actually have a working supplier diversity program. Initially, it can be a challenge for suppliers to report on the number of details required, but once there is a process in place, it is readily accomplished. The key to FCA s reporting is the implementation of Supplier Gateway, a reporting system portal. This portal is robust enough to allow its approximately 2,000 suppliers to easily report key metrics such as monthly spend with minority suppliers. This includes both the direct spend (eg. for a product that goes directly to FCA US) and indirect spend (eg. a service performed for the Tier 1), which gets allocated across the entire supply base. The system, in turn, allows FCA US to easily track the metrics reported and actively manage those suppliers falling short of targets. Another important tool to emphasize the value of supplier diversity is its external balanced scorecard (EBSC) that judges suppliers on five metrics: quality, cost, delivery, warranty and, under partnerships, supplier diversity. A full 20% of the scorecard is in the partnership category, and 5% of that is allocated to diversity. A less than 1% rating in diversity negates a supplier s entire partnership score. The scorecard is not only a tool to identify challenging areas which need development, but it is also used by FCA US to create long-range sourcing strategies. The automaker also stresses with its suppliers that their diversity rating is a critical factor in all sourcing decisions. The management team, including the Vice President, Directors and team managers, all have supplier diversity targets. Organizationally, FCA targets a 16.5% spend with diverse suppliers (inclusive of Tier 1 and Tier 2). High Focus Program High Focus Program Targets the Top 500 Tier 1 Suppliers While Directors and sourcing teams work to find minority suppliers that can be utilized directly and become Tier 1 suppliers, they are also instrumental in enforcing compliance to tier 2 targets. With over 2,000 suppliers, FCA US needed a way to manage its supplier diversity program effectively and to deliver as many opportunities as possible to minority companies. Noting that it is among its largest suppliers that the potential for diversity spend with second tier companies is greatest, FCA US introduced a High Focus Program that targets the top 500 Tier 1 suppliers i.e. those with multi-million-dollar contracts. Suppliers meeting their targets are labelled green, identified via the EBSC, which tabulates metrics from the monthly reporting system. Based on a percentage system, suppliers that are struggling or do not meet targets are labelled either yellow or red at which point the company intensifies its efforts to stimulate them to meet supplier diversity targets. Upon introduction of this program, approximately 33% (167 ) of the Tier 1 s identified were initially in the red category flagged for the High Focus Program. The program elements include: > > Supplier diversity plans are submitted by Tier 1 s, including projected progress for the year, for FCA s approval. > > An annual kick-off meeting, commencing with a graduation ceremony for suppliers that have achieved green status. 5 September 1, 2016 FCA
A CLOSER LOOK CONT > > An outline of diversity requirements, including events for the supplier to attend (eg. CAMSC and other certification bodies annual conferences providing other networking opportunities). > > Clearly communicating ramifications for failure to meet targets (eg. Being tagged yellow could affect future quotes as the supplier will be competing against green status companies whose supplier diversity performance is taken into account; being tagged red means that FCA s supplier diversity team must approve the Tier 1 s supplier diversity improvement plan before they can be granted a PO). > > Two additional meetings throughout the year held by sourcing managers with suppliers that do not reach goals to demonstrate progress on corrective action. > > Visits by the supplier diversity team and buyers to supplier locations take place to ensure their senior management are aware of FCA expectations and consequences of not meeting their targets. > > Huge part of the program is spent on educating internally and externally about the business case for supplier diversity- i.e. demographics changing, rapid growth and purchasing powers, appreciating the business value of the market, etc. NEXT STEPS There will be continuing concentration on the High Focus Program because suppliers will always be challenged by changes such as new leaders, internal struggles, and lack of focus, especially if Tier 2 programs are not consistently reinforced. FCA US will continue to increase awareness with its Tier 1 suppliers. It is currently working via site visits and direct meetings with the 15 red level suppliers that have not achieved their targets. High Focus Program Tier 1 > > Continuing > > Concentration > > Awareness > > New Leaders > > Challenges > > Increase Tier 2 > > Supplies > > Focus > > Consistently > > Acheive > > Targets Inclusive Procurement Leadership Roundtable Case Study 6
Results & Impact Enabled Amount of Diversity Spend Increased In 2011, the 167 suppliers were spending $150 million collectively with Tier 2 s; as a result of the High Focus Program, the amount of diversity spend increased to over $1.45 billion in 2015 and the number of suppliers that failed to reach their targets has been reduced to 15. In order to keep up with the globialization and industry changes to Purchasing and Manufacturing strategies FCA US identified the need for their Tier 1 s to develop a strong purchasing base of Tier 2 s. This led to the development of a successful Tier 2 program to provide opportunities to diverse suppliers. Opportunities to Diverse Suppliers Tier 1 suppliers spending over $200K must report diverse spending. Different Targets to Meet Dynamics & Challenges In addition to the new target goals as implemented in 2011, there are also different targets to meet the dynamics and challenges of various groups. For example: women-owned businesses have lower targets - 3%, 2% or 1% -, given the challenges of limited women-owned businesses in the industry. It is important to note that the targets are separated, eliminating competition and resistance of using one diverse supplier over another. FCA US conducts one of the largest automotive matchmaker events in the US, with 3000 people in attendance and approximately $1.5 billion in diverse spend. Largest Automotive Matchmaker Events 7 September 1, 2016 FCA
SPOTLIGHT ON SUCCESS Reduced the Number in the Red Level Zone Increased Diverse Spend by 900%. From 2014-2015, the High Focus suppliers increased their minority spend by $200M. In addition, during 2015, High Focus suppliers that participated in the program have achieved success and graduated with a green scorecard level or have moved into the advanced yellow list. Companies are continuing to find success and great value with the High Focus Program that focuses on Tier 1s embracing supplier diversity while achieving business growth. The chart below provides evidence that offering consistent support to High Focus suppliers actually reduced the number in the red level zone and increased their diverse spend by 900%. It shows progress made by High Focus Program suppliers from 2010-2015. Number of High Focus Suppliers in Red Level Zone 180 160 140 120 100 80 60 40 20 0 167 110 71 21 19 11 $2,000 $1,500 $1,000 $500 $- Minority Spend (millions) 2010 2011 2012 2013 2014 2015 Number of High Focus Suppliers Total Spend (167 suppliers) LESSONS LEARNED Focus on Tier 1 Suppiers First Will Yield Bigger Opportunities for Tier 2 Suppliers > > Companies new to supplier diversity should not jump to Tier 2 programs too quickly. Prior to creating a Tier 2 program, it s important to be well experienced at the Tier 1 level in order to understand the potential challenges inherent with this next step. Considerable research, experience and understanding of suppliers are imperative. If a company hasn t gone through that process of understanding how to find and develop diverse suppliers, it can t provide the necessary support for its supply chain. > > Through a Tier 2 program, more opportunities can be created for a greater number of diverse suppliers. The difference is that with a Tier 1 program, perhaps 10 diverse suppliers can become successful; with a Tier 2 program, that number can rise dramatically. FCA US asserts that there are companies that would likely not exist if it wasn t for its second tier program. > > Focusing on the largest Tier 1 suppliers first will yield bigger opportunities for Tier 2 suppliers. If you begin too broadly, you may struggle with the magnitude of the reporting required and miss opportunities. > > Ensure there is top level leadership support internally and externally. Visible, passionate leaders who are committed advocates are essential to ensure buy-in with both suppliers and internal buyers. Such leaders convey the importance placed on supplier diversity with the corporation, and make Inclusive Procurement Leadership Roundtable Case Study 8
LESSONS LEARNED CONT suppliers understand that if they don t meet SD objectives, they will be treated in a similar manner as if they did not meet cost or quality targets. > > Place supplier diversity targets in contracts and purchase orders to hold suppliers accountable. > > Start in a simple way to track Tier 2 spend ( e.g. start with the top 3 to 5 Tier 1 suppliers and use an Excel spreadsheet to track their diverse spend.) > > Develop and communicate the business case about why supplier diversity is important. Suppliers and internal staff need to understand the impact of changing demographics in terms of community growth, diversity engagement and the ensuing purchasing power, and the impact of these changes on the bottom line. Any significant reduction in auto sales will impact FCA s need for parts and services from its supply base. > > Convey the message that Tier 1 suppliers that do not have diverse suppliers will not be invited to bid on contracts. > > Recognize the importance of Tier 2 opportunities for diverse suppliers within the supply chain. As supply chains are being consolidated and becoming more global, there is a movement towards large global entities buying from other large global entities. Opportunities for diverse suppliers, therefore, will increasingly be at the Tier 2 level. As such, supplier diversity programs will have to adapt to the way corporations make, buy and deliver products and services. Convey the Message: Tier 1 Suppliers Without Diverse Suppliers Won t Be Invited to Bid on Contracts. Designed By: adlerbms.com CAMSC (Canadian Aboriginal and Minority Supplier Council) is a nonprofit organization created in 2004 to advance the economic strength of Aboriginal and visible minority communities through business development and employment. CAMSC s mission is to facilitate business relationships with Canadian corporations dedicated to diversity and supplier organizations owned by Aboriginals and minorities. Since its inception in 2004, corporate members have spent more than $2 Billion with CAMSC certified Aboriginal and minority-owned businesses. Visit www.camsc.ca 9 September 1, 2016 FCA