Sourcing & Cash

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Over the years, my relationship with Sourcing has not always been close. You might say we have respect for each other, but our methods of getting to the goal could be at cross purposes. For me, reducing cycle time obtained far greater cost savings than a simple cost-down policy.

I learned my Sourcing from Dave Nelson back in the late 90s/ early 2000s. He was at Honda as the V.P. of Supply Management, and I was managing two of Toyota’s supply chains (Corolla and Tacoma) in North America. At that time we were called “transplants” (a/k/a Japanese production transplanted to the U.S.), so we had that in common, plus. Dave was moving to John Deere and was recruiting a team to be “transplanted” to that second-oldest company in the U.S. So, I followed him to discover the alternate universe of heavy machinery and farm equipment manufacturing. Gone was Heijunka and JIT, to be replaced by a Job Shop. Every combine or cotton picker was unique to the farmer that bought it. Early on things were very high energy: ten of us had come over from either Japanese or domestic car manufacturers, and we were allowed to develop our own programs, roll them out to leadership, then go and do. It was a very creative time.

Dave taught us there were three parts to Supply Management:

  1. Cost Management
  2. Strategic Sourcing
  3. New Product Introduction

During my time at Toyota, I had learned a lot about supplier development, so I was able to look at my new world through this lens. The more you understand and nurture suppliers, the more they’ll do to help in times of crisis. It’s a partnership, and needs to be treated as such.

A great example was shortly after 9/11, when we needed one particular part to keep the lines running in the U.S. All air and sea movements had been suspended, so most of the world’s supply chains were down. I remembered that we’d taken care of a guy in Czech, and I managed to track him down at a pub on a Friday night to ask him to open his warehouse. He did and got me those parts, which I got to the purple guys in Memphis. We stayed open, never missing a beat. That was truly the meaning of JIT.

What you’ll read is a textbook mix of Dave Nelson, Toyota, and other lessons I’ve learned along the way. And as my dear friend, the late Robert Muir, used to say, “Sourcing is more than just buying paper clips.”

Sourcing From My Lesson Plans

People, Process, Tools

Key Supply Management Goals

  • Meeting the business objectives with a focused Sourcing strategy
  • To buy at the best price while meeting the required specifications
  • Ensuring that the right material is at the right place at the right time, with factory fresh quality
  • To receive a material forecast to manage inventory in line with strategic objectives and budget
  • To continuously develop the Sourcing team to meet existing and future requirements

This is Accomplished By

  • Maintaining information of available, qualified suppliers
  • Selecting suppliers and negotiating contracts
  • Establishing key performance indicators
  • Acting as an interface between the business and its suppliers
  • Providing training


  • Knowing the market for their commodities
  • Understanding the laws: tax, contract, patent, etc.
  • Understanding and improving lead times
  • Maintaining ethical behavior

Cost should not be the only key factor in choosing a supplier. Competitive pressures make Sourcing increasingly dependent on supplier performance, which means that quality and service can often be more important than cost.
There’s a three-pronged approach to working with suppliers:

  1. Cost Management
  2. Partnership on New Product
  3. Supplier Development (including an expectation of continuous improvement)

The Importance of Supplier Selection

  • Global Sourcing of materials is complex and specialized
  • Risk of product failure and/ or missed delivery dates (COPQ)
  • Interdependence of Sourcing with suppliers for lead and cycle time
  • Growing dependence of companies on each other’s technical prowess as products and processes become more complex

Types of Suppliers

Sourcing teams may not always be in a ‘command‘ position.

  • The supplier who can provide parts or materials at a lower cost
  • The supplier with unique technical know-how
  • Political interest

Mission of Sourcing

Develop a Sourcing plan for each product or service that are consistent with operations strategies:

  • Low production costs
  • Fast and on-time deliveries
  • High-quality products and services
  • Flexibility

Criteria for Supplier Selection

  • Product price
  • Quality of material
  • Reliability
  • After-sales service
  • Supplier location
  • Inventory availability
  • Financial stability
  • Technical capability
  • Product range

Barriers to Good Supplier Relationships

Common Barriers to Good Sourcing/ Supplier Relationships Include

  • Poor communication and feedback
  • Poor quality and/ or delivery
  • Supplier complacency
  • Misguided supplier improvement objectives
  • Poor perception by suppliers of customer credibility
  • Misconceptions of purchasing power
  • Mutual mistrust

Key Elements of Managing Supplier Capability

  • Supplier Service Agreements – Service levels, lead times, capacity commitment, flexibility, lead time to change, means of collaborative planning and performance measures
  • SIOP – All strategic suppliers and those with known resource constraints reviewed as part of the monthly SIOP cycle
  • Generate visibility on requirements out through the horizon
  • Assess changing requirements and review whether they are within the parameters of the existing service agreement
  • Develop a formal supplier review process with key suppliers
  • Capability and flexibility review
  • Communication
  • Impact/risk to the factory supply plan

Ways to Improve Supplier Effectiveness

  • Form partnerships with long-term contracts
  • Manage supplier base based on quality, cost and delivery
  • Develop opportunities for both parties to learn more about each
  • Solicit suppliers to provide input to product design
  • Provide full access to the supply plan and schedules
  • Build a continuous flow of data to the supplier about changes to specifications or operational requirements


  • Collaborate to improve cycle times and reduce costs
  • Reduce and eliminate receiving inspections
  • Cultivate joint training programs for mutual understanding of challenges

The Sourcing function has become increasingly important because:

  • All organizations have suppliers, which creates operational dependencies
  • The impact of material costs on the P&L can be > 60-70% of revenue
  • Supplier deliveries must be exact in timing, quantity, quality and cost
  • Globalization has created a growing competition for scarce resources along with longer supply chains
  • Therefore, Sourcing organizations must continually evolve + have strong relationships with its suppliers

Materials Management

Material Management is the coordinated effort between planning, sourcing, and suppliers to develop replenishment methods which provide for the highest availability at the lowest cost. The goal is to consistently deliver material while maintaining low inventories.

How much is needed?
When is it needed?
How is it to be triggered?
And how will it come in?

Buyer v Planner

Cost Management

Total Acquisition Cost (TAC) is a tool to evaluate the total cost of procuring a product or service from a supplier. It is an easy concept to understand, yet quite tedious to actually do. TCA was developed to:

  • Provide transparency for the procurement process
  • Define the true cost of sourcing material
  • Assist with supplier selection
  • Help with modelling and simulations


Supplier Development and Management

Supplier Development, Cost Controls

When Taiichi Ohno started his journey of the Toyota Production System, Toyota’s suppliers were not enthusiastic about the manufacturing system he developed. The prevailing production philosophy at the time was one of highly efficient equipment manufacturing producing large lots, with any surpluses stored in a warehouse because it was assumed that they would always be absorbed by the marketplace. The oil crisis of the 1970s changed this dramatically, as suppliers were suddenly unable to dispose of their inventories. As Mr. Ohno stated, “It’s funny how people don’t get serious about something until they are confronted by the necessity.”

Starting from the time a quote is taken through when material is rolled into production, managing supplier quality, cost and delivery is imperative in running an organization with lean principals and short cycle times. A company must be engaged in the development of their suppliers through a systematic approach of:

  • Improving service levels, quality, reliability, technology
  • Reduction in operating cost

A highly effective method of managing overall cost is to apply a Total Acquisition Cost model. This helps with measuring the cost per unit of acquiring material as well as cost as a percentage of sales in order to level out volume and mix changes. Additionally, this method is also useful in identifying the first steps of potential areas for improvement at both the plant and supplier level. By utilizing this method, we not only measure piece price, but capture all costs – logistics, warehousing, trade, packaging, factory floor, obsolescence cost and inventory carrying costs. We find the true costs of acquiring material into production.

Case Study

I had the idea to write this case study earlier this year when I was mentoring a heavy truck manufacturer, here in Portland. They were attempting to go down much the same road as you’ll read, only without taking the meticulous path we took to get it right. At this location, things had become a total cluster–with literally 8 digits of cash hemorrhaging per year. I felt bad for them, so it’s with that thought that I sat down to write up this case study.

Supplier Development and Cost Management

In 1995, the Japanese decided that we were going to four hours inventory inside the plant – no real discussion, we were expected to do it. We operated a 22 day Close Loop cycle that ran across the continent, east to west, including Mexico and Canada. We supported a build rate of 1000 Corolla and 600 Tacoma’s a day, day – in/ day out, like clockwork. I worked for Toyota Logistics Services who was contracted to NUMMI – the joint venture with GM & Toyota. None of this exist any longer, but at the time, we were tight and good – very good. My customer was Danny Miranda, who worked in Production Control for the plant. Together, we moved train loads of material from all over North America to Fremont, CA and this is where I learned to appreciate the hard work manufacturing really does.

So if anyone ever wants to know how to take your inventory down to 4 hours, just read on.

Project Description:

Multiple Daily Shipments from Suppliers to Plant


  • New United Motors in Fremont, CA was established in 1984 as a joint venture between Toyota and General Motors. During NUMMI’s time, it produced 230,000 Geo Prizms/ Toyota Corolla as well as 136,000 Toyota Tacoma Pick-up Trucks annually.
  • With growing political and monetary pressures in the early 1990s, Toyota committed to increase the purchase of North American-sourced parts for its worldwide production.
  • North American part suppliers were predominantly located in the Midwest, Southeast and Texas Border regions.
  • Philosophically, the plant was operated with the fundamentals principles of Toyota Production System, therefore Just-in-Time (JIT), Heijunka (Level Production/ Level Flow and Pull Systems were fully utilized. The term FRS stands for Final Requirements Schedule.
  • The plant supply chain was designed around a 22-day closed-loop cycle from supplier to plant and back, which also contained returnable containers and imported 2nd Tier material.

Other observations to note:

  • Toyota had little experience in Japan with long distant logistics, therefore a supply chain had to be designed to accommodate the production line being 2,000 miles away.
  • Plant inventories were to be kept at a minimum (one day), however it was viewed that they were excessively overflowing at lineside and line workers had to worry about parts being supplied correctly.
  • Suppliers were experiencing troubles from large Kanban fluctuations and quite often had to prepare material shipments early due to variability in the transportation process.
  • While each function worked to optimize their process, there was no macro view of Total Acquisition Cost.

Total Acquisition Cost

Project Goals:

  1. Recurrent Daily Processes
    • Equal interval of arrivals at manufacturing
    • Cyclical transportation operations
  2. Shorten Lead times
    • Shorten/eliminate sleep or stagnation times
    • Small lot shipments
  3. Provide Flexibility to Respond to Changes in Volumes
    • Maintain JIT level of service
    • Provide maintenance with little impact on preceding processes
Blueprint for Success
Blueprint for Success


  • Orders for daily material requirements were divided into four-hour increments and transmitted to suppliers and logistics providers on a daily basis based on agreed-upon lead times.
  • Quality checks and piece counts are eliminated at plant. These are moved to the supplier dock and performed by the logistics providers at time of milk run pick ups.
  • Material is verified and consolidated for rail shipments based on four-hour increments.
  • Container contents and supplier verification data is transmitted to plant for actions.
  • Suppliers and logistics providers are paid upon arrival of material at plant.
  • Plant inventories are reduced from sixteen to four hours for North American suppliers. Additionally, the entire networks’ Total Acquisition Costs are reduced by 5%.

The Plant Got to a 4-Hour Inventory – half a shift

New Product Intro

What Does a Product Really Cost?

Factors to be considered in evaluating which product to make available are Cost, Sales and Margin. Listed below are just some of the costs related to delivering a product to the marketplace.

Manufacturing Costs:

  • Changeovers
  • Schedule changes
  • Component part management
  • Tooling
  • Maintenance
  • Work in process inventory management
  • Overhead for complexity

Logistics Costs:

  • Warehousing and facility costs
  • Inventory management
  • Freight
  • Overhead for complexity

  • Supply management
  • Materials management
  • Design engineering
  • Developing and maintaining specs
  • Testing

Sales and Marketing Costs:

  • Training
  • Communications
  • Close outs


  • Warehouse/storage changes
  • Display changes

New Product Introduction—The Beginning of Life Process

NPI has to have a complete end-to-end business view, not just one of engineering, sales or marketing. Assumptions need to be incorporated into the SIOP & Sourcing processes with all changes tracked. Assumptions needed to create a forecast for the sale of a new product are:

  • Will it sell just like a product it is replacing?
  • If not replacing a product, what assumptions are needed?
    • Market size
    • Rate of market penetration
    • Final saturation
    • Replacement life cycle

    Then, it needs to be determined how these assumptions are monitored and tested as the product rolls out.

    A stage gate review process should be implemented with the key functions participating being:

    • Sales
    • Marketing
    • Engineering
    • Finance
    • Sourcing

    Final Thoughts on Sourcing

    The roles of Sourcing and Materials Management are vastly different. One is rewarded for price and the other for usage. These can be conflicting goals, but they don’t have to be. Bleeding someone dry is not a Sourcing strategy, and in these days of globalization, Robert’s words ring true – Sourcing is more than just buying paper clips.

    Supply Management is all about managing the process for the success of business. One person’s finished good is someone else’s raw. So as Dave Nelson taught, it’s all about:

    • Cost Management
    • Strategic Sourcing
    • New Product

    It’s that simple. Relationships can flourish between customer and supplier and shouldn’t be made contentious by solely fixing on price. Finally, give a read to Kate Vitasek’s Vested – good stuff, and the right way to do things.