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What kitty litter clay does not have in common with platinum and indium, lithium, niobium and tantalum



Recent traffic on the limited or interruptible supplies of platinum and indium, lithium, and niobium and tantalum left me wondering how many buyers at tier were aware of the potential supply chain interruption risks, business continuity impacts and cost spikes in these materials pipelines. If they are not, and I suspect many are not, who is going to inform them - and I mean proactively inform them prior to the emergence of shortage? When will research commence on alternative materials? Have alternative designs emerged using the alternative materials? How cost ineffective is it? How much worse will it get as suppliers begin to pinch? Do buyers understand the geopolitical implications? My experience says no.


For example, when a colleague exulted over the potential for Bolivia to become a Saudi Arabia of lithium, my response was:

On the contrary. Expect Morales to be assassinated, rules shifted, a distorted infrastructure emerging. Expect the general Bolivian citizen's well-being to decline. Expect the Chinese to make a significant third world, anti-western approach to gain access control. Expect the cartels to move in as they are already in the region with sufficient force projection. Surely, you could not have forgotten Congo's coltan curse... All nations funded by primary extraction industries - energy, minerals, timber - have rising GNP coupled to sinking per capita. [private email]

Having supported purchasing organizations and buyers for more than two decades, it is my opinion that the OEM or top tier buyers are eyes-blind to many of these problems as they are too focused on immediate cost reductions, ignore costs and risks beyond the piece part cost, and have extinguished the willingness of suppliers at tier to proactively alert. This note deals with some causes for the refusal of a supplier at tier to alert the OEM or top tier. 


Chain mapping to discover supply chain interrupters


We were studying value chains in earnest by 1994, including the works of Charlie Fine at MIT, many of the threads of which culminated in his 1998 book, Clockspeed: Winning Industry Control in the Age of Temporary Advantage. The soon famous tier three "kitty litter" example was told to Fine by Chrysler’s executive director of platform supply, Barry Price, in 1995: 

As the clockspeed of the automotive industry accelerated in the 1990s, Chrysler and [Thomas] Stallkamp led the field in applying fast-clockspeed principles to supply chain design.


Chrysler estimates that approximately five million people and 100,000 organizations are involved in the company's Extended Enterprise. And each person and organization in this network can affect in some way the customer's perception of quality... Consequently, in the early 1990s, the staff of Chrysler's Procurement and Supply organization decided to begin mapping this enormous system.


The staff began with the jeep Grand Cherokee - one of Chrysler's most important products at the time. Going one step up the chain, they examined the source of jeep's V-8 engines - obviously an important subsystem in the vehicle - which are manufactured in one of Chrysler's own plants.


At the next level of the chain, the team traced the source of a roller-lifter valve - a small but critical component in the engine. This component was supplied by Eaton Corporation, a large global automotive supplier that manufactured the lifters in large quantities.


At the chain's next level, the team visited the source of the raw metal castings that the Eaton Corporation precision-machined for the roller-lifter valves. These castings were sourced by Eaton from a small shop near the Eaton factory. After visiting this casting shop, the Chrysler team chose to go back even further to visit the company that supplied the clay for the foundry where the castings were made.


Upon visiting the clay supplier, the team made a remarkable discovery: This supplier, which provided clay of a unique chemistry needed by the casting company, had for some time lost money in its business. Without informing any other members in the chain, the company owner had decided to get out of the unprofitable casting clay business and reorient his business to processing the same raw materials into kitty litter! Imagine how the Chrysler executives must have looked at each other in horror as they quickly realized that this strategic move into kitty litter could soon shut down manufacturing of one of the most profitable product lines in the entire Chrysler Corporation.

Unfortunately, the kitty litter example is left hanging in space. While supply chain mapping is identified as worthy, the means to get reasonably complete chain data at tier is untouched. One could be excused for assuming that the data was available by request.


Known contextually at the time Clockspeed was released, Chrysler was in the flower of its Extended Enterprise cooperative with suppliers. Information was more freely shared between tier and OEM than in periods before and after. The net opinion from suppliers today is that Chrysler’s supplier relations approximate the scorched earth days of the 'Spanish Inquisition' by GM's Ignacio Lopez de Arriortua's use of the Soviet forced cost reduction negotiation approach (the Lopez effect). Getting suppliers to share more than is required is often rare.


The rubber meets the... air


In our opinion Clockspeed was responsible for more heat than light, kitty litter notwithstanding. Fine had expanded his efforts to understand the rates of evolution of various industries, coming to call them industry 'clockspeeds', a term rising from the microprocessor clock speed. Fine’s Clockspeed proposed an interesting, if limited, model with the right questions but was unable to offer solutions except in very general terms.


Clockspeed commences with the biology lesson that both binds and blinds Fine to two cyclic dimensions, two degrees of freedom; then a good Intel-Inside chapter (which was the part that most suppliers seized upon), a nice description of the integration-disintegration problem, but then descends into vagueness and high level architectural generalities.


The central message of the first six chapters is that firms oscillate between flat and hierarchical, switching back when the residual cost/benefits tail off. The latter part of the book, chapter seven and beyond, I describe as "Where the Rubber meets the Air..." Clients would read the book and say, "That's what I want," and were then left hanging for a solution.


In 1998, copies of Clockspeed were on every purchasing desk at Ford. I don’t exaggerate; it was often commented upon by visitors. It was like leaflets over Thailand. Ford was so taken with Clockspeed that the firm was trying to do an interlinear translation into Ford-specific tasks, a process which predictably could not go far given the generalities of the book’s solutions. 


We knew the group driving the effort, and the individual charged with the 'translation' – my term, not theirs. Of course, this individual could not succeed but would not let on given that his superiors, with less knowledge of the mechanics, had stipulated it be done. We watched him write note after note about 'progress.' Finally we were in a position to quietly tell a senior manager that it was not doable, at least by this person.


Fine was directionally correct but supply chain tiers do more than oscillate back and forth; firms move in definable three axes according to statistically measurable criteria. Rising from collective research based on work by a colleague's father, Robbin Hough, also from MIT, we had the means to predictably define what a supplier’s structure should be given its purchasing tier, the technology, etc. We had the capability to actually evaluate the organizational capacity of an entire supply chain, to predict what the supplier’s structure should be in order to address the technical needs at tier. Based upon our earlier work at Ford, we were given an opportunity to present a solution to Clockspeed but, in retrospect, I think the solution was 'out of scope' for Purchasing beset with crushing pressure for cost reductions. We shelved it. The clock wound down on its own. Copies of Clockspeed quietly disappeared from the desks of Ford Purchasing.


Corrosive atmospheres in OEM-Tier relationships


It is difficult to get management focus, tools, supplier relations and cooperation aligned to spot kitty litter conditions. This short interchange from a cross-functional team on value chain management comprised of director level staff is all too typical:  

Our logistics are a nightmare. (speaker A) [In speaking of what I called the "historical accident" of their current supply chain:]  We wonder, "How did we get here?"  We take individual decisions, then another, and try to make sense of it. (speaker B) Our cost of linkages between suppliers is enormous. (speaker C) We need to use [value chain analytic tools] to get 'Cost Out' of existing systems and [prevent] 'Cost Ins' from new programs. (speaker D) Our level of sophistication grows [with value chain analytic tools]; we don't look at technology [of our suppliers] today. (speaker B) [personal notes]

Mary Walton's Car: A Drama of the American Workplace laid bare the relationship between Ford and Lear. The Ford-Lear relationship was one of many that prompted Pan-industry “beggar/maker-prince/maker” initiatives in supply chains on OEMs wresting back control of the their supply chains by suppressing the kings into beggars and elevating serfs into docile princes. Intel was on a similar supplier marginalization path, bending their support of the white book/white box architecture as a means to stamp out pesky high value added sub-suppliers.


Walton sets the tension between Ford and Lear:

Seats were the first thing the customer saw on opening the car door, and the biggest... In the past, Ford engineers had designed the seats, Ford purchasing had contracted out frames, cushions, tracks, motors, and other parts to various suppliers, and Ford workers had put them all together at the assembly plants and then installed the finished seat in the car. In the case of the new Taurus and Sable, however, circumstances had dovetailed to put the entire program, with the exception of the power seat tracks, in the hands of a single supplier, Lear Seating, on whom the company was now dependent for some 600,000 units a year. Ford had no fallback position, having disbanded its internal seat-making capacity, indeed, having sold a chunk of it to Lear. You could hear the nervousness in the voice of Shabbir Kathiria, the head of the interior trim chunk team whose turf for a time included seats. "First time we have to trust the supplier; give him the responsibility and just trust him."


There were people at Lear who couldn't believe Ford had gotten itself in this position. One Lear executive [told] Wendy Dendel [that] Ford was crazy - Lear had them by the short hairs. "They can keep saying they need more money and more money, and Ford has nowhere to go"... And indeed, [Taurus programme manager  Dick] Landgraff was already gearing up to do battle over Lear's request for an additional $4 million to cover unexpected engineering costs, plus an additional $70 per seat for content and labor.


It wasn’t supposed to be this way. Having single suppliers who developed and manufactured complex components was the direction in which not only Ford but the entire automotive industry was headed, having been persuaded by the Japanese that it was better to establish long-term, familial relationships with a few suppliers rather than play them off against each other with constant rounds of bidding. The result was supposed to be a harmonious give-and-take between supplier and supplied, not the acrimonious haggling that so far characterized the Lear-Ford union. In the Japanese model, the supplier became almost an extension of the customer's company, working closely to solve problems and reduce costs. Having a single supplier also reduced variation in the product, improved quality, and cut inventories. It was Mom and apple pie.


Not only was Ford shrinking its supply base, but it was giving more responsibility to those suppliers that remained. Ford wanted to concentrate its resources on "core businesses," ones in which it had a proprietary stake or that were critical to the success of the company... Certain other systems - seats, for example - could be farmed out. Where once Ford handed a supplier the drawings for a part and said, "Make this," now suppliers were to do the up-front design and engineering. So it was that Ford had disbanded its seating unit in body engineering and hired Lear Seating to do everything. In addition, Ford sold Lear three large Mexican plants that made seat covers, armrests, and headrests. Part of the deal was that these plants, which absorbed Ford management, would continue to make products for Ford cars... Lear was willing to design and engineer the seats, as long as they could manufacture them as well, because that was where the profits were... 

OEM-supplier relationships that have a Toyota architecture but an old style tub-thumping management approach do not prosper:

The programme for the new Taurus, Ford's flagship in the US, was based on the soundest principles of modern supply management. You choose a single supplier as a partner in both developing and making what you need... Ford 'had been persuaded by the Japanese that it was better to establish long-term, familial relationships with a few suppliers rather than play them off against each other with constant rounds of bidding. The result was supposed to be a harmonious give-and-take between supplier and supplied'...


Unfortunately, the style of the Taurus programme manager, Dick Landgraff, who believed in the high decibel school of management, was inimical to the new philosophy. If cost overruns were threatened, Landgraff would say, 'Let's bring these guys in and smash them'. At meetings with suppliers, he would 'close the door and yell at them about cost overruns. Landgraff didn't care if he wasn't Mr Nice Guy.' In one sense, Mr Nasty won: the Taurus came in on time and on budget. But Ford lost...

The relationship degenerated further as Ford experienced shock at an unanticipated competitor in an essential sector:

The Taurus held on to number one in sales for several years after the 1992 Camry launch, but this was mostly because Ford continually dropped thousands of units into unprofitable fleet sales just to keep factory lines running and to keep the car artificially on top. The Taurus may have been America’s best-selling car, but as many as 60% of the units sold were to outfits like Hertz rentals. Insiders at Ford knew they had a problem: if the Taurus was not restyled as the best in its class, its future success was questionable. So, in the early-1990s, Ford’s executives authorised one of the most ambitious vehicle initiatives in the company’s history: the Taurus remake.


Initially, the Taurus redesign was intended to best Honda’s Accord, the top-selling car at the time. But when Ford team members checked out Toyota’s new Camry during the research phase, they quickly learned that they had a new car to beat. Customers were still favouring the Accord, but the Ford team knew the Camry would soon take over; the vehicle was undeniably a wonder for the price. No other car in the class came close. When Ford engineers took a Camry apart piece by piece for study, many became mesmerised and others panic-stricken by the obvious quality, suggesting it was frightening to think Toyota could make a car so good.


[C]harged with leading the Taurus restyling programme [Landgraff] wrote the project’s mission statement: "Deliver a product competitive with the Japanese on quality and function and better in styling features and value. Beat Camry.

On the issue of supplier margin, we often cautioned Tier One staffers to avoid the OEMs when the suppliers were trumpeting their quarterly numbers to the street. The displeasure and sometimes blunt language OEM staffers directed at the tiers ran high for a two week period, quarter after (good) quarter. Amid the rudeness, one could hear comments that 'they eat the scraps from our table - while we struggle to make X%, they make 3X - how dare they.' Ford managers were displeased when Lear was advertizing 10 or 11 percent.


The problem is certainly not auto-centric. At roughly the same period, a major manufacturer of power supplies, Delta Electronics, had gross margins of some 30% for what many saw as a commodity component, in comparisons to their systems manufacturer clients had gross margins in single digits. If you are a fractional % business such as PCs, the top tier ODMs/OEMs earning a few dollars per PC are not overjoyed by a 30% margin supplier.


Malevolent or negligent negotiation and competitive intelligence analysis


The OEM-supplier exchange suffers a startling cost of conflict and lack of alignment. Both buyer-seller negotiations and buyer competitive analysis-benchmarking can further sour a supplier's willingness to share information useful to superior tiers in the chain.


 Of all the automotive OEMs, Toyota and Honda have best exerted control in their sector, yet they are the first to try to improve their performance. Getting the OEM's or the buyer's chimneys to align is one of the most vexing areas with which we have to deal.  It's no wonder that internal program staff have no time for it, or wish to endure the political exposure to overcome it. MIT's Lawrence Susskind cites research that 5% of the price of everything you purchase can be attributed to the cost of conflict. Using Susskind's criteria, we believe that this cost is far higher in sectors such as automotive. Certain relationships within automotive, such as that between Ford and Visteon, could be especially contentious.


Susskind's Dealing With An Angry Public lists a few key points for dispute resolution; Unfortunately, the automotive buyer-seller interface is marked by an abundance of what Susskind wants to avoid (defensive responses that try to deny the concerns or points-of-view of critics) and a dearth of what he wants to encourage (take a "mutual gains" approach that brings critics into the decision making process). Susskind’s negative resolution techniques that are frequently used despite their bad results are alive and well in supplier negotiations: 

  • Stonewalling, in which corporations or agencies refuse to answer questions.
  • The whitewash, in which the corporation or agency tries to minimize its responsibility for what may be upsetting.
  • The smokescreen, in which criticisms are deflected by the creation of task forces and "blue ribbon" investigative committees that can be counted on to both delay the process and dilute responsibility.
  • The false front, in which the corporation or agency tries to conceal its true interests behind a veneer of insincere activity for the "public good."
  • The block and blame, in which a scapegoat is selected to take the blame to get the corporation or agency off-the-hook.
  • The slash and burn, in which personal attacks on critics are used to divert attention from the substance of the issue.

In Supply Chain Analysis: Forensics or Fellowship I noted that: 

Kenneth Thomas has observed a family of definitions of conflict, all of which incorporate three themes: interdependence of the parties, perceived incompatibility of interests, and some form of interaction. Like it or not, we have just described a supply chain. Obtaining the necessary data in this environment is as much art as science. Corporations mimic human behavior. The lower the trust between buyer and seller, the greater the likelihood that a buyer’s request is perceived as intrusive and the less likely that data will be forthcoming from the supplier. When information is gathered externally by the buyer and presented to the supplier for comment and response, the lower the trust environment the more likely the supplier interprets it as entrapment or an effort to catch them out.

Conflict management, defined as "the use of strategies and tactics to move all parties toward resolution, or at least containment of the dispute, in a manner that avoids escalation and the destruction of the relationship," is often poorly affected in buyer-supplier encounters. Of the five fundamental modes or approaches to conflict management that Thomas and Kilmann identify, competition is often used by the buyer, avoidance is employed by the seller, and compromise, accommodation, and collaboration are too rare. (NOTE: if readers cannot access Thomas and Kilmann, Aschenbrener and Siders will provide an introduction.)


Again from Supply Chain Analysis: Forensics or Fellowship:

The timing and tenor [of supply] chain analysis can either poison the buyer-supplier relationship or promote the relationship into a sustaining partnership. Frequently, buyers are oblivious to the negative impact of their CI [competitive intelligence/chain analysis] efforts on suppliers. Suppliers may fail to rigorously examine their own costing and so remain oblivious to their uncompetitive position.


When and how CI is used can have an enormous effect on the health and welfare of the supply chain relationship under study... In every industry there is a Toyota [that understands] that supply chain analysis and design is one of their core competencies and one of their greatest strategic assets. [This is in contrast to the] many who seem to forget that trust in the supplier-OEM relationship is the influencing factor of success, and that continuing to focus solely on price is counterproductive.


In the latter group, CI unwittingly acts in a forensic role that damages the long-term health of the buyer-supplier relationship and the competitiveness of the entire supply chain. In the former, the same CI capacity hones the competitiveness and responsiveness of the entire supply chain, further improving the buyer-supplier relationship...


The most successful CI capacity performs a triple role in a supply chain engagements: CI analyst, Business consultant, and Informal ambassador between buyer and seller. This author has observed a common global trait that in dealing with others, "We fill in an unknown with a negative and act to preempt."


If the CI function is reduced to a narrow analyst function, buyers will be left to their own devices in interpreting the information on offer from all sources, the apparent unwillingness or resistance of the seller and its sub-suppliers to proffer information, and will engage by default in a zero-sum game with the seller in a confrontational manner. Supply chain cooperation and responsiveness withers in such an environment.

I fear that kitty litter will be remembered longingly. 


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