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Case Study:
Toshiba Division Substantially Improves Its Bottom Line
Through An Aggressive Supply Chain Management Program

BY DAVID TRONNES

Toshiba's Toner Products Division in Mitchell, S.D., has had great success with a three-year-old supply chain management program that has led to a direct bottom-line improvement of 20 percent. The Partners Plus program is re-engineering initiative launched between Toshiba and 19 suppliers responsible for 80 percent of the Toner Division's annual purchases. After its first year of operation, the program added 6 percent to our division's bottom line. Last year, we met our target of 4 percent overall reduction in material costs. In the process, our partners experienced similar benefits.

When we started the Partner Plus program in May 1998, our list of wishes included lower purchase price, lower transportation costs, reduced lead times on materials and supplies, higher quality supplies, increased communications capability and increased profits.

These goals were created for the Toner Products Division and our partners. They sought stability in their customer relationships, higher volume for their products and the ability to make useful forecasts. They also wanted open communications with Toshiba, as well as input into design and manufacturing.

The challenge was to maintain good relationships between our suppliers and in-house buyers, both of whom recognized the need to move past an adversarial relationship to one that was truly win-win for both sides. Together with the buyers on our staff, we worked out a partnership program that had eight requirements:

  1. Dollar benefits had to be shared with partners;
  2. Objectives would be known and understood by both parties;
  3. The process could not erode either party's margins or profits;
  4. To achieve a win-win situation, nothing could be sacred; everything had to be analyzed;
  5. Both parties had to share information;
  6. More emphasis would be placed on technology;
  7. Communicating between companies would be frequent; and
  8. The process had to be sold as being positive and exciting.

The program was focused on improvements suppliers could make in such areas as design, process/manufacturing, inventory controls, product volume, business practices, material handling, transportation and logistics and secondary supply networks.

Launching The Program

In January, 1998, the initial program was presented to management and our internal supplier committee. A month later, we started a pilot program with Smurfit Stone Container Co., a carton supplier of Sioux City, Iowa. We modified the program and then presented it to suppliers, who were now our "partners."

The reaction, for the most part, was positive -- the enthusiasm heartening. But some grumbled and felt threatened by the new approach, despite the promise of higher profits and more stability. In July, 1998, on-site visits began. That step launched Partners Plus, our program for managing the 21st century supply chain.

We studied Chrysler's supplier program but decided it wasn't right for us. We sought more sharing and partnering to gain success. We were more interested in offering carrots than in holding sticks over the head of our suppliers.

Rather than one party following directions, the Partners Plus program was designed as a two-way street. It was set up as an exchange of ideas, supported by mutual considerations of ideas with mutual support to carry out the accepted recommendations for change.

The program involves plenty of give and take, self examination and support to assist partners in carrying out the agreed-upon improvements.

Although the major "stick" -- finding a new supplier -- is always implied, Partners Plus relies primarily on the "carrot." To encourage participation, we instituted a program with specific rewards for specific achievements that went beyond reducing our suppliers' costs by encouraging them to achieve fixed goals.

How The Program Works

The process begins with recommendations for change, initiated either by Toshiba or its partners. These recommendations grow from on-site visits made from Toshiba teams to our partners. The site visits are aimed at gaining a better understanding of the operations and stimulating thinking about working outside the usual, "we've always done it this way" lines. During the on-site visit, the Toshiba team documents the current operational status.

The recommendations for change (proposals that can effectively be implemented for mutual benefit) can originate from either Toshiba or its partners. A partner's assessment committee determines the feasibility of a recommendation, assigns in-house responsibility and begins the investigation process. The recommendations are evaluated and either approved or denied by Toshiba and its appropriate partner.

Once the approved recommendations are implemented, changes are evaluated through detailed measurements of improvements in the operation. We have found that the recommendations fall into about a dozen areas of opportunity:

  • Cost, quality and delivery;
  • Lead-time reductions;
  • Productivity, systems and design improvements;
  • Material handling;
  • Sourcing as a factor in purchasing;
  • Sharing best business practices;
  • Logistics and transportation;
  • Accounting practices; and
  • Electronic data interchanges and electronic commerce.

Cutting their own operating costs is a strong incentive for partners to take part in the program. It makes them more competitive and improves their margins for other customers. But Toshiba offers many other incentives to its partners:

  • New contracts with business guarantees;
  • Increased volume orders for their products;
  • Developmental preference when new products are developed;
  • Performance awards; and
  • Public recognition through trade publications and honors banquets.

This "recognition" by using awards and banquets may not seem like much, but in the world of incentives they are surprisingly powerful engine in achieving and surpassing goals.

Using fiscal year 1997 as a benchmark, goals for each partner comprise a first-year reduction of 6 percent; a 5 percent reduction in the second year; a 4 percent reduction in the third year; and a reduction of 3 percent for the fourth year. For the fifth year and beyond, goals are to maintain reductions of 3 percent in the bottom line each year.

Reductions are accumulated based on the benchmark of sales to Toshiba from the previous year, but meeting the prescribed goals is not simply a matter of bottom-line reductions.

If the partner's bottom line reduction the first year is only 2 percent, it can still make up the difference (to 4 percent) through a point system. The system awards points for various achievements and translates each 10 points into a 1 percent reduction. In addition, some credit is given for recommendations received but not implemented and for recommendations implemented from a source different from the company itself.

Our program includes an 11-item criteria matrix for granting points to partners for implemented improvements.

  • Quality improvement, five points;
  • Safety/ergonomics improvements, five points;
  • Delivery improvements, four points;
  • Lead-time reductions, three points;
  • System improvements, three points;
  • Material handling improvements, three points;
  • Labor reduction, three points;
  • Productivity improvements, two points;
  • Design improvements, two points;
  • Purchasing efficiency improvements, two points; and
  • Service improvements, two points;

If a company with $600,000 in annual sales to Toshiba is able to reduce the prices it charges by $30,000 through its participation in Partners Plus, the company has achieved a 5 percent reduction. They are not quite there yet. The firm can submit three recommendations for improvements. One for a quality improvement is worth five points; another for delivery is worth four; and a third for systems improvement is worth three points. The 12 points translate to a 1.2-percent reduction, bringing the company's total reduction for the year to 6.2 percent. They're on target.

We don't simply give up on partners that do not meet their targets. We offer them more support in developing new efficiency and improvement ideas. We also re-evaluate their operations to assist them in identifying potential savings.

Of course, there are suppliers that choose not to participate in the program. Those suppliers receive no guarantee of existing purchase orders so they may not be suppliers for very long. But most of our targeted suppliers have chosen to join Partners Plus.

Our experience over the past two years has shown the program has benefited us in many ways by:

  • Lowering the cost of raw materials, supplies and services;
  • Decreasing inventories;
  • Increasing manufacturing efficiency;
  • Improving quality of finished product;
  • Reducing operating costs and the number of suppliers; and
  • Improving reliability of supply.

For our partners, there are also striking benefits. They have lowered their own bottom lines, giving them better profit margins and making them more competitive in their wider marketplace. They have increased sales volume, market share and manufacturing efficiency and have decreased inventory. They have lowered costs, improved their quality and process controls and have fewer customer complaints.

In our first full year of operation, more than 90 recommendations for change were received or were in the process of being implemented. Continuing improvements are always harder to achieve, but recommendations for change are still being generated. Our teams are being asked to visit partners and our bottom line continues to improve as our products and partners change.

Some of the partners that once grumbled are now true partners and those that were supporters from the start have become virtual missionaries. For instance, Cary Kettner, director of continuous improvement at Smurfit Stone, says Partner Plus has changed his company's former adversarial relationship with Toshiba to one with open discussion based upon a true partnership. Fitness, rather than price and specification, is now the determining factor in supplier selection, says Stone. Toshiba now focuses on one supplier rather than many. Decisions are made through team feedback rather than management fiat. Partners rely on self-certification rather than comprehensive quality control steps. Communication is at all levels, rather than only through top management. And continuous improvement has replaced minimum requirements.

Because of the close relationship, each shipment is acceptable when formerly there was disagreement from shipment to shipment. Long-term commitments have replaced monthly contracts.

An important, if little heralded by-product of Partners Plus is worker satisfaction. In a tight labor market, that factor is substantial. Despite our nagging, only a few partners have sought recommendations from workers. Those that have, received five times more recommendations from employees than from senior managers.

We have found that Partners Plus is worth doing. It is not simple. It requires hard work and diligence. To succeed there must be trust between partners, a sharing of manufacturing information, parallel, not one-sided, development, and the sharing of benefits.

Beyond that, there are danger signs to watch for. If your expectations are poorly defined you could lose time, leading to frustration and a lack of focus. If either or both partners fail to meet expectations, the partnership could get untracked and crash.

If the program is poorly organized, the participants can lose focus and fail to move forward or, you could run into conflicting cultures, making it impossible to meet goals. If management is not committed, the program probably has little chance of success. If the necessary resources are not committed, the program will fail.

You cannot succeed if the partners don't trust one another. You cannot succeed by setting impossible goals. Goals that are not based on both partners' experience are not achievable goals. You cannot succeed if there is not a well-defined measurement process in place.

Even if everything else is in place and you are operating with commitment and enthusiasm, you still risk failure if you have not established a good operating communications network. That means communication at all levels, not just between partners, but within the organizations.

Is it worth it? Absolutely! A process that can improve your bottom line by 20 percent and keep it improving, a process that encourages suppliers to do better, a process that improves employees' attitudes, a process that improves product is a process that is worth working at. We have tried it at Toshiba's Toner Products Division. It works.

--David Tronnes is vice president of manufacturing, Toner Products Division, Toshiba America Business Solutions