Situation Profile

This organization was faced by the need to improve costs and add value through improved technology.  Benchmarking competitors had brought about the realization that improvement of process technology through the integration of specialist supplier could bring about this result.  This particular process technology required that the supplier integrate their process on-site with the purchasing company.

Supplier Selection  A formalized process was carried out to select the supplier.  Both current local suppliers and offshore suppliers who were supplying their expertise to direct competitors of the buying company were investigated.  An international trade association report was used to benchmark the current process, and identify the top suppliers for the process.  A specification was prepared and issued to two local suppliers and two overseas suppliers who were perceived to be supplying first class products.

Early Supplier Selection for Design Work and Volume Production   Early in this process, a preliminary site discussion to evaluate proposals from each supplier was carried out.  The two local suppliers were not prepared to consider moving their plants on-site and deviate from their normal business objectives.  One interstate and one overseas supplier were prepared to offer an onsite plant and offer added technology based on their experience with other customers.  The criteria for selection was based on the most cost effective price and a strong emphasis on adding value to the purchasing company’s operation by introducing new practices and technology to improve the process.  After the suppliers had tendered their proposals it became obvious the overseas supplier had a technology offer and wanted to enter into a strategic alliance.  Furthermore, the supplier had already operated a plant in the country, and had formed a strategic alliance wherein both parties had 50% equity. 

Cross-functional Team Development / Execution  Customers were integrated into the decision-making process.  All customers that used the outputs (chrome rolls) from the new process  within the division were contacted to ensure that they had accurate predictions of their current workload and future requirements.  The strategy was not to specify how the supplier was to do the job, but to identify the outcomes that were required and then let the specialist within the supplier’s operation work together with internal personnel to achieve the objective.

Joint Development of Processes and Services  Once the supplier was selected, an internal manager from the purchasing company’s facility was selected and hired by the supplier.  The supplier’s objective was to teach this General Manager how to manage the process and provide customer service.  Every twelve months the supplier met with his twenty overseas managers in one location around the world to share problems and solutions, and transfer best practices.  This resulted in a very effective network which improved the process benefits.  Previously, the purchasing company had attempted a number of times to use the output of this process in a number of operations and failed.  By tapping into this network that was known by the contractor, information could be shared that significantly improved the life of the final product.

Joint Target Setting and Performance Measurement  The joint target measurement selected in this case was price rated capacity of the plant that would supply two chrome plated rolls per hour, and an improvement target that would effectively increase volume with a price discount.  Another target set was that price increases would only be accepted each year if the purchasing company’s business was having a price increased product.  If the business could become more profitable, than price increases could be handed on to the supplier.  On the other hand, if profitability was reduced, no price increases were accepted.  There were also inspection criteria built into the process which insured that if any defective product passed through the supplier’s inspection system, then both the supplier and buyer’s processes received a cost penalty for the rework. 

1) Minimum of one defect per thousand units as a quality target,

2) Minimum coating of chrome, 

 3)  Minimum output of two rolls per hour

4) Other improvement opportunities measured and monitored by both customer and supplier on a monthly basis. 

Performance measures were established after an agreed commissioning period for the plant.  After this period, the following performance measures were established: 

The contract was set up in such a way that the data was gathered and prepared at the customer’s monthly meeting, where the customer was able to verify that the work had been completed.  This forum allowed for issues and improvements to be raised and discussed by both parties.  A responsible officer from the purchasing company was nominated to administer all contractual arrangements to ensure that performance indicators were being met.

Program Planning Methods  A method known as “Kepner Trego analysis” was used to rate supplier proposals.  This methods provides a weighting scheme to separate the “musts” which are not negotiable, versus the “wants” which are “nice to have”  The system is considered very effective and is used widely throughout the division.

Technology Sharing  The supplier operated at twenty on-site plants around the world, fifty percent of which are strategic alliances with steel plants.  Every twelve months, the supplier shares their technology with the purchasing company, with the objective of improving the operation.  Most of the improvements focus on cost competitiveness and new technology to provide a competitive advantage.  The plant has recently been used to on trial runs of chrome plate rolls in another location allows the supplier to become a competitive force within this market.  Benefits of this strategy to the purchasing company include higher quality products to this downstream steel processing facility.

Licensing Agreements / Risk / Reward Sharing No licensing agreements were used, as there was no intention on the part of the purchasing company to reproduce the supplier’s process.  The duration of the contract was 9 years.  One of the stipulations of the contract was that the buyer supply the site free of charge (including power and water.)  The supplier was responsible for installation and operation of the plant for a period of 9 years.  No capital expenditures are required on the part of the purchasing company. 

Various clauses were installed in the contract to ensure that volume reductions below a certain level did not result in penalization of either party.  Confidentiality agreements have also been entered into by both parties.  Reward sharing opportunities are based on increased volume and cost sharing.  Reductions in operating costs through joint projects are shared.  For example, the transportation system between the two processes was a fork truck supplied by the supplier.  An interconnecting transfer car is  being explored in order to reduce transportation costs.  Sharing of cost benefits is based on an “open-book agreement” of cost savings sharing.

Trust Development Strategies  A sister company at another global location uses the same process.  This agreement set a precedent, since a  formal business unit strategy was already in place that established cost allocation between business units and distribution of power costs and water costs.

Cost / Technology Information Sharing  The operating costs were available on a monthly basis on the volume of rolls that  chrome plated and invoiced accordingly.  An open book agreement by both parties to analyze operating costs with the aim of further improving the operation was developed. 

Co-location Strategies  The property and building (which already existed) was made available, and the supplier was able to modify and install his plant on the site.  Power and water supply costs were shared.  Strict environmental policies were insisted on so that no liquid discharge to the purchaser’s drains on-site would occur, and also to ensure that smokestack emissions met national pollution control laws.  A price to share in cost of using amenities (lockers, showers, sanitation) was arranged.  After the supplier operated the plant for approximately 3 years, other rolls from different sections of the plant requiring different technologies were also directed to the supplier.  This provided higher volumes to ensure that the supplier remained viable and resulted in further cost benefits.  The lower cost of power in the facility due to negotiated rates by the buyer also provided advantages to the supplier.

Training Part of the contract included a contingency plan to ensure that in the event of a major plant failure, another plant owned by the supplier 60 miles from the site would be utilized to provide short term needs.  The operators of the supplier’s on-site facility were trained at an off-site location, and the contingency plan was instigated every six to nine months to ensure a response time of approximately 8 to 10 hours in the event of a major failure.  A risk analysis was carried out to ensure what spares were required and what major outages and durations could exist. 

Initially there were many reservations by employees about bringing a chrome plating plant on site, as there were health concerns.  To overcome these issues it was arranged for a number of employees to visit three or four chrome plating plants within 60 miles of the plant to give them an impression of good and bad plants.  A commitment was made to ensure that the plant would be above national standards, would not discharge to water supplies, and that stack emissions would be met.  In addition, health monitoring every 6 months for all employees was undertaken by an independent authority.

There were some concerns that people would lose jobs as a result of the supplier integration process.  There were also some reservations about bringing in overseas companies instead of using regular local suppliers.  While the local suppliers had given good service in the past, they did not have the network to advance the technology.  Subsequent meetings with these suppliers revealed to them that they had not kept pace with technology.

Common Information Systems  Common data was used in both plants to allow the monthly meetings to review operating performance (i.e. volumes, cost changes, etc.)  Manual systems were used to collect data, which was collated and reviewed on a monthly basis.  In addition, power and water usage were monitored to establish allocations.  The supplier was allowed on occasion to do work for an outside operation as a second priority to the core business work.  A 10% royalty was assessed in these cases to cover power and water.

Strategy Implementation

❐  Identified best integrated steel plant around the world using IISI Report

❐  Identified which chrome platers were supplying the best integrated steel plant in the world

❐  Prepared a specification for an on-site/ off-site plant that included target price per unit, as well as technical support and continuous improvement.  Sent to four chrome plating suppliers. identified in the search

❐  Analysis of “must-haves” versus”want’s” carried out on the four tenders.  Strategic alliance arrangement entered into with chosen supplier for a nine year period.

❐  An ex-employee of the purchasing company was hired into the supplier’s organization and put in charge of operating cold and temper mills.  This individual had a good understanding of customer requirements. 

❐  Extensive training program undertaken to teach the new general manager how to chrome plate by overseas trainers.

❐  Labor advertised to operate the plant, and rules put in place to ensure that maximum multi-skilling took place.  Casual hiring took place to cover peak periods or annual leave relief, to ensure that most cost effective labor arrangements took place.

❐  Nine months after plant was commissioned, a number of programs were entered into to ensure environmental compliance and accreditation. 

❐  ISO 9000 accreditation achieved in the first year.

❐  Regular overseas visits on an annual basis carried out with the general manager (along with twenty other similar plants around the world) to share problems, solutions, and discuss improvement-related issues.

Critical Success Factors

❐  Cost effective operation including safety performance

❐  Technical support with continuous improvement

❐  Detailed rate capacity objectives

❐  No environmental infringements

Performance – Hard Results

❐  Quality – 20% reduction in chrome peeling over 12 month period

❐  Cycle time – 400% reduction in processing time (rolls per hour) in 12 months

❐  Service – 300% improvement in service life (kilometers per ton) in 12 months

Performance – Soft Results

❐  Contractor onsite- results in significant inventory reduction ($120,000) and reduced transportation costs.

❐  Greater pressure on operator to consider improvement ideas since they are on site.

❐  Greater participation on small group improvement activities

What would they have done differently?

❐  To gain early acceptance it would have been better to market the advantages to the manager of the operating plant.  A manager in one of two different plants believed he had negotiated the best supply arrangement (contrary to the belief of the other plant).  He was therefore reluctant to consider any alternatives that disrupted the operation.

❐  Two operating plants three kilometers apart had two different operating managers.  Early research revealed that two different chrome plating contracts , two different thicknesses of chrome, two different prices, and two different transport companies were being used.  Consolidation of this operation was initially rejected by these managers , but was accepted once cost savings became evident.  Currently, the policy is to have one combined supplier which supplies services to both companies at a price through a strategic alliance.

❐  Accuracy of the volume predictions made by the operating managers were somewhat questionable in early stages.  In negotiations, conservative minimum levels were used.  Two years after the installation a major development plan increased the load on the plant by 25%.

❐  The pricing structure could have been negotiated to avoid major step changes in volume discounts and result in a gradual increase in price.  Although this has not been abused, extra rolls were kept on hand to ensure that the step function could be met.  A more gradual price increase would have been fairer to both parties.

❐  Cross-divisional projects are difficult to sell because plant managers often feel as though they are losing control in the early stages of the project.  Senior management support is critical at these stages.

❐  In carrying out trial chrome plating of rolls and grinding at another location, the rate of improvement was observed to be much faster than that experienced within our facility.  The process of introducing changes within our organization was underestimated, and took longer than expected.

Future Plans

❐  Transfer best practices of other operating plants to increase throughput and lower operating cost.

❐  Contingency plans have been put in place to allow other plants at a location 800 miles from out site to have a contingency plan on equipment that requires replacement every 3 months in the event of a major fire or fault in their operating plant.  In the event of a major discontinuance in a remote supplier location, production could continue.

❐  The chrome plating plant has exposed the plant to opportunities on other sites 800 miles from the location to install an on-site plant, and also consider other technologies being used by competitors.  This would permit increased market share using improved technology to end users.

❐  Extend chrome plating operations to make better use of capacity on non-operating shifts

❐  Utilize spare capacity by other suppliers to providing packaging for a small percent of rolls to utilize surplus labor during processing delays that exist, and provide additional cost effectiveness.