Integrating Suppliers: Moving Impact from Lean Programs to the Next Level

Many manufacturers that have applied lean concepts to their operations find that although they do achieve significant savings, their production costs remain high. This is, in most cases, attributable to material costs, which, depending on industry can range from 60 to 80 percent of total production costs. (See Exhibit 1.)

The challenge for these manufacturers is to discover how to extend lean concepts and practices beyond the walls of their own factories. The most effective way is to forge links with key suppliers on the basis of lean principles. In addition to yielding cost savings, this kind of collaboration can form the foundation of a profitable strategic partnership. More than simply an approach to eliminating waste in procurement, creating such relationships means leveraging existing lean techniques to the fullest and using them to transform a manufacturer’s entire supply chain.

The overriding goal is to create a spirit of partnership by identifying the potential for mutual improvement on a fair and collaborative basis. Although many manufacturers approach their suppliers seeking ways to reduce material costs, typical efforts produce only short-term savings. Few form the basis for sustained, close collaboration. Building trust comes first. If this is done effectively, savings and other benefits will follow. Because those benefits extend beyond immediate savings, it can be advantageous to form a lean-based partnership even with suppliers in low-cost countries.

The best results have been achieved using a three-step integration process, which begins with optimizing the way information and materials flow between supplier and manufacturer. It extends to the way the supplier produces and can lead to collaborative product design and redesign. Ultimately, the process involves the full integration of a key supplier into a lean culture of continuous improvement. The main focus should be on enhancing supplier innovation and responsiveness—along with cost reduction over entire product life cycles—rather than on quick savings. Supplier integration has been achieved successfully by major consumer-product manufacturers, especially in the automobile industry. Toyota is one of the notable examples. (See Getting to Win-Win: How Toyota Creates and Sustains Best-Practice Supplier Relationships, BCG Focus, September 2007.)

Before beginning the process, a manufacturer should analyze its own level of lean development and ambitions for the future. (See “The Three Leagues of Lean.”)