Ending adversarial commerce.
Everywhere we look, it appears that our established American industrial firms are under attack from more nimble and responsive competition. It comes equally from new small domestic start-up firms and from foreign companies entering our domestic markets. These firms can challenge the existing model in several areas of apparent weakness: They are less prone to follow our time-honored business tradition. They can be faster and, because they are relatively new, can operate with less structure and bureaucracy. Our well-established system has too many separate layers and transactions. The flow of goods, material, and information is hampered by the fact that the atmosphere between the parties is more adversarial than it needs to be.
While I was running procurement and supply for Chrysler, we spent some time looking at just how screwed up the system was. After diving into the picture, it turned out to be a lot more complicated than any of us realized.
The Roller Lifter Story
We had our supply group at Chrysler select one of the simplest parts that went into a car, and then we used it as an example of how complicated supply chains really are. The group selected a mundane little part called a roller lifter, a two-inch long machined metal component used in the valve train of an engine. If the roller lifter fails, the intake or exhaust valve fails to open or close and the engine misses or loses power. In addition, its failure pushes the emissions system out of legal compliance. In other words, this is a critical and vital part. The device was purchased from Eaton Corp., which sold it to Chrysler for about $2 each.
Working with the supply people at Eaton Corp., our people used an increasingly popular technique to "map" the chains of companies and events that went into the total production process of this part. We detailed each step, starting with Chrysler receiving the part and moving backward as far as possible through the process in the entire production cycle for the roller lifter. The resulting study amazed all of us, even those who knew the product was more complicated than it appeared. Exhibit 1, on page 48, shows the complete mapped chain of the roller lifter. This figure shows that this one simple part is actually made up of 12 subcomponents, including springs, seals, washers, and roller bearings. As the end user, at Chrysler we had paid no real attention to where these subcomponents came from because we assumed that Eaton either made most of them or closely controlled them. Actually, Eaton mainly did the final machining and assembly of the part and relied on many subsuppliers for critical operations outside Eaton's plants.
When investigating the origin of all 12 subcomponents, it turned out that this single part from one supplier actually was a complicated web of parts that came from 33 individual companies. That massive figure was roiled into a thing that cost less then $2. The supply chain includes the raw material used in making steel, the drawing of wire to make springs, and the ball bearings. Just for fun, we then traced every single item, including the raw materials used in making this relatively simple part.
We started with raw materials that naturally come from the earth. Our fist raw material subsupplier for the roller lifter, the American Colloid Company, is one of the world's leading suppliers of bentonite clay. That's a commodity that appears in thousands of products, including auto parts, building materials, diapers, and even kitty litter. In fact, we found out that the company sells as much clay to cat owners as it does to car companies. Imagine the feeling in Detroit that we were in some small way competing with kitty litter manufacturers for a commodity.
After the American Colloid people scoop up the bentonite that will eventually form part of the roller lifter, they ship it to their plant in central Michigan for processing. When they've finished, the refined clay is sent to a foundry about 100 miles away. The foundry uses lots of other raw materials in a process to anneal, blast, grind, machine, and heat-treat the housing of the roller lifter and ship it to Eaton to be assembled and sent to Chrysler.
But the chain isn't finished. Lots of other subcomponents are involved. Plungers come from two sources, one in Ohio and one in Australia. Add a retainer from Connecticut, a bearing from Tennessee, and cast sockets from Missouri, along with clips from Japan, springs from Ohio, and leak test fluid from Illinois. It all ends up in an Eaton plant near Detroit for final assembly.
By this point, you might be amazed by the complicated chain of events. So were we. The whole process involved no fewer than 33 companies. The seemingly simple act of building one small part for one engine turned out to be incredibly complex. Now multiply this for every part in a car (there are more than 5,000 parts in a finished car), and you can see why the auto industry touches so many companies and employees around the country. It is truly a massive extended enterprise that employs more people than any other manufacturing industry.
The fact so amazed our staff that we started to call all the suppliers involved along the chain to see if they knew what was happening to their product. We called one of our distant suppliers who made one component of the roller lifter. When he found out that we were calling from Chrysler, he said, "Gosh, my wife loves her Grand Cherokee!" So we questioned whether he knew if his part had a critical role in his wife's safety. We told him the thing be made went to a guy who did something else with it and then sent it to someone else, who did another thing with it, and then sent it to one of our engine plants--and if that part didn't work, his wife's engine would die.
He said, "Nope. I never know where the stuff goes after I ship it." That comment is indicative of what happens all the time. Smaller companies almost never know that their product is ultimately going to Chrysler or any other large manufacturer. That's because the different tiers in the supply chain typically don't communicate with each other through any medium other than purchase orders.
The management of these companies rarely ever has a clue about where they fit into the bigger picture. They run their companies from a perspective that they are isolated--and if they do know their place in the chain, they often assume they have no real impact on it. More often than not, the commercial system forces companies to remain distant and separate themselves from each other. The companies make a product and ship it to someone else. The communication is limited and seldom involves anything more than shipping or pricing information. When management does get involved, it often turns negative because it usually means that problems exist. This is a consistent trait of adversarial management culture: The managers rarely get involved unless there is a problem.
This illustrates the problems that exist in the way we currently manage the enterprise of business. It shows how seemingly unrelated companies travel through time without really knowing how they affect other companies. This remoteness is complicated by the fact that companies are all independent from each other in purpose, mission, management, planning, and communication.
Because we value our independence so dearly in this country, our businesses operate with a fierce sense of separation and single-mindedness. That is one reason acquisitions are favored over alliances. We seem to have a natural inclination to run our own show and look like we are in control of our own destiny. As the roller lifter story shows, the truth is that companies are much more interrelated than their management might want to believe or might even know.
Problems Created by Adversarial Commerce
Adversarial commerce has become so entrenched as the way business operates that we often are not aware of its cost or of the problems it can create. Certainly, its use is not very often intentional or deliberate; it seems to build up over time within companies without an overt decision to adopt some of the associated behavior. Understanding that it is often subtle, or hidden, might help businesses understand some of the more serious situations that can occur. At least four major business attributes drive the trend toward adversarial commerce: distrust, poor communication, limited planning, and a constant quest for complete control. These ultimately add costs to the way of doing business and slow the response to changes that occur in the marketplace. Not only are these deleterious effects costing companies money--they also are the main items hampering change.
Problem 1: Distrust and Suspicion
"All I want is a little trust, but you know it don't come easy." I'm sure that Ringo Starr wasn't referring to business when he put that line in one of his few solo hits, "It Don't Come Easy." But it is true just the same. The first major problem is that the historical independence between companies sometimes forces them to view each other with suspicion instead of trust. Business is controlled more by quotes and bidding process than by long-standing relationships. This is the result of concern over building conflicts in relationship between two firms. To avoid the appearance of any conflict of interest between supplying firms, most companies have policies that ensure at least three competitive bids in any major new transaction. This practice can turn every project or purchase into a standalone event without continuity or long-range planning. As a result, distrust arises between companies that should be working more closely together.
If mistrust and suspicion replace a trusting environment in business, both parties respond by building in protective mechanisms to ensure that their respective interests are protected at all costs. Adversarial actions--such as canceling contracts without proper notice, using unqualified sources for low quotes, inflating costs on a project to avoid paying royalties or other payments, or pursing legal action to intimidate or threaten--contribute to mistrust between companies. Although most companies do not resort to completely suspending further business when they mistrust another, they often make sure that pricing to the other company reflects the element of risk and difficulty experienced in the past. That is why, under the Extended Enterprise, we worked hard at Chrysler to create an atmosphere in which our actions were predictable and consistent. Those are elements that build trust and permit companies to create long-standing relationships.
It takes a lot of time to rebuild an environment of trust after it has been damaged. But many large companies seem to care less about creating trust than about using adversarial tactics to gain what appears to be advantages, even though these often prove to be short-term advantages. Many company financial systems often give more weight to maintaining current cost situations than to saving money in the future. The time-honored present value technique always favors a dollar saved today over one saved tomorrow. One reason for this is that future costs cannot be exactly quantified as much as current ones can. Thus, companies pay less attention to items such as warranty than to the piece price (the term used in the auto industry to mean the price of an individual part or piece) because warranty is a consideration of the future.
As many companies are finding now, much like adversarial actions, these future costs come home to roost eventually. Costs such as warranty and lost customer loyalty are very hard and expensive to reverse when they are finally recognized.
Problem 2: Poor Communication
The second problem is that, despite major innovations in data processing, meaningful communication remains poor and spotty throughout many supply chains. Using computers to pass order and shipping information between links in the chain has ushered in enormous advancements in productivity. Just-in-time shipments have reduced inventory requirements and improved quality in many manufacturing businesses. Shipments are even made hourly into some assembly plants, with the parts sequenced at the same pace as the production line. This has all been beneficial, and the advantages have helped boost productivity in the United States. But this communication is between one computer and another computer and does not usually involve human judgment or analysis. Hierarchy and policy still control and limit communication between executives and between middle management in companies. This same control logic makes some companies leery of becoming too close to other companies and establishing useful relationships.
Negative actions and the desire for independence come out clearly in the way companies communicate with each other. The roller lifter example shows that sometimes the only communication between firms is through an invoice and the resulting check for payment. That might be fine for commodity-type purchases or something that is not critical to the operation--no one really expects a company to share its inner plans and goals with its supplier of pencils or sandwiches in the cafeteria. Beyond such routine cases, however, the need for accurate and complete information is vital to any business relationship.
Some time-tested adversarial items here include spoon-feeding only information that is absolutely necessary to land a contract; ordering more than planned to get a discount, only to review the order later under some pretext of change; sending notification that a project has been canceled just before doing so; and dabbling in all sorts of other mischief. Again, much of this information control is done to keep the other party at odds or in tension. If the company's actions get too predicable or too visible, the subordinate party might decide to take independent actions that the dominant one might not want. An example of this is discounting anticipated volumes if the sales drop. Companies such as Wal-Mart provide real-time access to sales directly to other vendors so that they can see how material is moving and can help manage inventory. Wal-Mart might use some high-pressure leverage on pricing, but the company clearly sees the advantage of transparency in business information. I found an example of the opposite when I ran MSX International.
For six years from the initial launch in 1996 until its final production run in 2002, MSX had painted every Plymouth Prowler for Chrysler. This was a low-volume specialty vehicle that we had taken from concept to production in less than three years while I was at Chrysler. The car was never intended for high volume, so the painting operation was outsourced to MSX to reduce the internal investment. MSX operated a dedicated, labor-intensive facility that painted the primed aluminum bodies and shipped them to Chrysler so they could be made into vehicles, much like the way the industry operated in the early 1920s.
Because the project never was intended to be long term, MSX took a five-year lease on the paint plant. As the Prowler entered its fifth year, the fickleness of the specialty car market caused sales to drop, creating a glut of inventory. Having been one of the concept originators, I called my old employer to ask if folks there were planning to cancel production. I was told that they were planning to keep it for at least another year. Based on this commitment, we renewed our lease on the plant and extended our labor contract with our union. Sales continued to drop, and the car was suddenly cancelled only three months later. Chrysler ended up paying much more in cancellation to us than it would have if we had all discussed the situation openly. But Chrysler was so afraid that the word would get out that the car would be terminated that the news was kept from everyone--including dealers, who were stuck with more than a year's worth of finished cars in their inventory. Usually, sharing information can reduce costs, whereas protecting it can cause unnecessary ones.
Problem 3: Lack of Joint Planning
The third problem arises when there is little or limited shared planning and advance development. Too few companies now share their future plans with the members of their supply chain that they have built to support them. Many industrial companies do their advance planning in secret, fearing that their plans will be leaked to their competition. After the plans are developed and approved, the project is sent to the engineering department to be designed. Only after that task is completed are outside partners brought into the process. The whole process is too sequential and, in many cases, not united into a common goal or purpose.
The quest for independence and control also can contribute to a reluctance of companies to plan jointly. Instead of sharing a marketing plan or pricing strategy for a new product to facilitate ideas and galvanize others around a project, many companies keep their dealers, vendors, and often even their key employees in the dark about the objectives of a new project. True, many aspects might require confidentiality--but this is often used as a convenient excuse to avoid most joint planning. The other companies then are not prepared to react as quickly or to contribute resources to the project. They operate in the dark and often don't know whether their customers will accept the new products they work on after they fund and complete the project.
In an ideal situation, companies would work closely together to define future product needs. Wish lists defining joint development objectives would give suppliers the necessary, security to commit to their own research projects. For example, a computer company could outline what it needs in new hard drive technology and work with its suppliers to have them develop the device. A consumer electronics company might outline a type of microprocessor it needs to offer a smaller DVD recorder. A car company could define a tire that would still run if it lost pressure, thus eliminating the spare tier. In each case, the new product is either a feature or a component incorporated into a larger item manufactured by the dominant or major company. These purchasing companies would commit to incorporating the device if the supplying firm successfully developed it; This joint planning and sourcing would reduce the larger company's outlay for research and development and would ensure a less risky, more secure return for the supplier.
It might sound simple, but in practice this type of sharing is discouraged under adversarial commerce. If the company auctions the new product to a lower bidder or deletes its requirement without compensating the company, the resulting mistrust can stop further developments. The old expression "Once burned, twice shy" holds true in business just as in personal lives. The result, in this case, would be increased development costs and reduced speed to market for the dominant company. When the atmosphere between the companies becomes poisoned by negative actions and uncertainty, the cost of doing business between them increases. All this is unnecessary if management were more open and cooperated in more joint planning. We just have to change the mindset that corporations must have so many secrets that they need to protect from allied partners.
Problem 4: Tendency Toward Complete Control
The fourth trouble spot involves constant pressure for "control" of the process. The prevailing organizational mindset of most industrial companies is to be in complete control of a project or operation. Complete ownership is preferred over joint ventures, and acquisitions are preferred over alliances because that keeps control close at hand. The real reasons are often masked under the cloak of financial measures, but the truth is that it is easier to own something than to work jointly on a project or to share power with others. It is easier to manage, to make decisions, and to decide strategy when you have control over a company than when you have to share that power with another partner in a venture.
The greatest problem that adversarial commerce brings is escalation in the amount of control exercised though the company, both internally and externally. Control is a natural state that all people strive to achieve, and it is the same for corporations. We all like to be in a stable environment in which we primarily decide our own actions. Managers in corporations want the same, and they often use control tactics to try to stabilize and direct the business. Most people are disturbed by uncertainty; to remove that condition, managers often gravitate to using more aggressive command control styles. Strong control systems have been built into our organizations from very early examples including the military and the Catholic Church. It is no accident that our commercial system uses similar rules and direction to establish some degree of control.
Problems arise when the manner and tone of control gets too one-sided, too arbitrary, and often too illogical for the other party to accept. In these cases, using control steps beyond trying to bring order to the relationship and moves into trying to dominate it. In my current company, I have found a long history of this type of action in our negotiations.
Before I joined MSX, the company had established a joint venture with a minority partner to pursue business under an industrywide initiative to expand minority business. The problem was that MSX wanted to control the venture even though, by regulation, we had to own less than 50 percent. So we brought in a third party to hold 2 percent, making the final makeup 49 percent minority, 49 percent MSX, and 2 percent third neutral party (who happened to be a minority businessman with extremely close ties to MSX). This clearly defeated both the intent of the venture and threatened the actual certification of it as a minority company because majority ownership was not resting in any one party. Fortunately for MSX, the venture never really got off the ground--and one of the main reasons was our overwhelming concern for control. When I questioned our managers who set up the idea, they were floored that I would challenge the concept because they thought they were being imaginative in protecting our "interests."
Conflicts over control are common today because large companies sometimes mouth the words of mutual co-existence and partnership but still seek ways, as MSX did, to ensure that they have the final say in what happens. The current trend in industry is to tell employees and suppliers that they have more authority to manage their own decisions. But these statements cannot ring true if the buying company maintains its old-style monitoring and financial control reporting structure--the old financially dominated system that required a staff group outside of operating management to review everything. This defeats the purpose of letting people or suppliers manage their own actions. This act of not "letting go" of the military-like review is one of the most damaging effects of adversarial commerce.
These four problems--distrust, poor communication, lack of planning, and desire for absolute control--are present in most industrial organizations today. They help distort management's thinking and influence behaviors in a negative manner. They create waste by increasing the hidden costs of running a business. These are the types of decisions that are made daily in big companies primarily because these companies have a culture and ethic of wanting complete control. This comes with a high price that cannot be absorbed in industries such as automobiles that are under competitive threat from other manufacturers overseas that do not follow such philosophies.
Impact on Management Style
The impact of each of these four issues is magnified in their effect on our management system. Their cumulative effect is to isolate the firm from within and to turn the management culture into a more negative and adversarial one than is either necessary or productive. Using the example of the old U.S. Big Three manufacturing philosophy that the companies needed to make almost everything that is used in a car, you can see how that attitude evolved into one that did not trust outside suppliers. That logic was flawed, and it is not limited to the automotive companies. Many industries have gone through a similar mutation of culture that has caused them to mistrust not only their supply chains but also their own rank-and-file employees. Management's approach to its suppliers and its own unions turned into one that approaches the feudal king analogy.
The attitude is present in many companies. Suppliers are "tolerated" as long as they act subservient to the larger company and treat them with the proper deference. One reason companies are suspicious of the increasing power that large global suppliers hold is that they fear the fact that the supplier also deals with their competitors. These large suppliers, such as Bosch and Denso, count literally all of the world's automakers on each of their customer lists. On one hand, the automakers say they want suppliers that are global and serve the whole industry instead of ones that supply to only one firm. But they also have admitted that they fear that a supplier with a larger share at the competition will be more influenced by that larger commercial relationship. This is an unnatural fear because, although these companies claim to want independence, the current adversarial style drives what should be a close working relationship further apart.
The same situation occurs in dealings with the unions at a company. Senior management often complains about the union position being opposite to its own when both should actually be working to implement the same thing: profits generated through production of goods. Yet the history of labor relations is characterized by adversarial behavior in many industries--from automobiles to airlines, telecommunications to trucking.
The issues are similar in the treatment of both unions and suppliers. Large corporations establish internal departments to handle the unique relationship issues found in their labor relations and procurement areas. Although these specialized departments do manage the functions effectively, they also intentionally isolate the CEO and other senior management officials from both groups. The primary channel of communication to the top of the company is through these well-established and powerful departments. In most industrial companies, it is the unwritten rule that the CEO is not supposed to deal directly with the head of the union or the head of a supplier on business issues without involving the vice president of the respective departments. This practice can isolate the CEO and remove him from the real complexity of running his business. It also contributes to the CEO's possible belief that his company is more distinct than it really is in an extended enterprise situation.
Adversarial Commerce Limits Growth
The problems that adversarial commerce create and the impact on the style of management can actually limit the growth and competitiveness of the firm. With complicated and interrelated supply chains, no mature company can continue to operate in the isolation that it might have had in its early stages. But the communication problems and quest for complete control often slow the ability of a company caught up in negative tactics to respond to new competitors.
Thomas T. Stallkamp is the former vice chairman of DaimlerChrysler and the former chairman and CEO of MSX International. He now runs his own consulting firm, Collaboration Management. This article is excerpted with permission from Stallkamp's new book, SCORE: A Better Way To Do Busine$$ (ISBN 31435264), published by Wharton School Publishing. The book is available at book stores and from the publisher at www.informit.com.
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|Author:||Stallkamp, Thomas T.|
|Publication:||Supply Chain Management Review|
|Date:||Oct 1, 2005|
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