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1.4 Outline of the study
The outline of this study is divided into 6 chapters. By now, the chapter one is basically
presented and familiar to the reader, therefore only the content of consequent chapters will be briefly discussed below. Figure 1 visualizes the outline of this study.
Source: this research
Figure 1: Outline of the study
The chapter 2 provides the reader with an overview of the literature related to the three research questions as well as on previous findings on the modular theory and modularity trap to provide the reader with necessary theoretical background.
Chapter 3 describes the frame of reference of the study, where in the light of the reviewed literature I do create a conceptual model for the study and subsequent research (and questionnaire) as well as an visualization of all the variable into a frame of reference. Also, I discuss the research method selected at this place.
Chapter starts with introduction of the four companies and their products and follows with the body of research, with presenting the cases content and data gathered during the interviews. I
1. INTRODUCTION
2. LITERATURE REVIEW
3. CONCEPTUAL FRAMEWORK
4. CASE PRESENTATION
5. CASE ANALYSIS
6. FINDINGS & CONCLUSION
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Chapter 2 – Literature review
The previous chapter provided the background and outline of the study, clearly showing what is the problem I want to analyze and leading to specific research questions. In this chapter, I review earlier cases and papers from within my research purpose area.
The aim of this chapter is to provide relevant literature in the fields of modularity, modularity trap and supplier‐buyer relationship management.
2.1 Buyer‐supplier relationship and New Product Development
The study of supplier‐buyer relationships was an important field of the management study in late 80’s and early 90’s.
The organizational studies were trying to explain the reasons why Japanese producers can be more efficient, have faster time to markets and overall higher innovative products with better quality than their American counterparts ‐ even after the cost issue in Japan and US narrowed.
Many studies point out that the reasons Japanese companies were able to get their momentum was due to their strategic and skillful vendor management.
This first part of the Chapter two is divided onto three major parts – on the Supplier pool management, Time frame of supplier involvement and Development responsibility and scope.
2.1.1 Supplier pool management
Here I introduce the reader with considerations connected on how to manage suppliers during the new product development. I will tackle on buyer`s considerations like how they choose the right suppliers, how they do analyze their capabilities and how to motivate them to be
interested and participate in the project – creating an relationship with the selling company being an integral part of all of these considerations.
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2.1.1.1 Supplier segmentation
Jeffrey Dyer (1994) in his essay on strategic supplier segmentation compares 3 models in the auto industry, all based on company nationality – his comparison includes Japan, Korea and American car manufacturers.
He defines two main ideas – the “arm length” and “partner” relationship. The arm length model is a traditional model, when buying companies (customers) try to minimize their dependence on suppliers and on contrary tries to maximize their bargaining power. The main idea is that the buyers “deliberately keep suppliers at “arms‐length: and avoid any form of commitment” (Dyer, 1996)
This model was generally accepted as the most successful model of managing suppliers until the rise of Japanese firms, who did not use this model but they employ rather very antagonistic type of model.
The other side of the spectrum is the Partnership model. The Japanese companies can enjoy superior position to the American companies because they can share more information and better coordinate all related efforts when managing their suppliers as partners, as well as invest in relation‐ specific assets and lower the costs, improve quality and speed in the product
development. (Clark and Fujimoto, 1991) The drawback can be that these partnerships tend to be more expensive to set up and maintain – and may reduce customers ability to leave such relationship once it meets the dead end.
The findings of Dyer`s study suggest, that historically the US companies managed their suppliers on the arm‐length basis, where Koreans incline to use the Partnership model. It is interesting to mention, that Japanese companies (Toyota and Nissan) would mostly choose the relationship depending on the nature of the component – and it were only Japanese companies, who would strategically segment their suppliers in such a ways, that they could benefit from both arms‐
length and Partner relationship. (Dyer, 1996)
In his further works1, Dyer suggests to segment suppliers into several groups according to the output they provide. The first group are suppliers, who provide necessary, but non‐strategic inputs where the other group provides strategy inputs. The meaning of strategic inputs are inputs, that are directly connected with the core competencies of the purchasing firm and may be useful in differentiating the buying`s firm product in the marketplace. This second group
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starting position in supplier management and assessment of their abilities and segmentation.
Kamath and Liker studied suppliers of the leading Japanese car companies, their business relationships as well as how can these relationships shaped during the time. They came up with four supplier roles, based on the competencies the car maker expected from these suppliers.
This is important and it show us, that there will be different relationship and trust models between different companies. These are partially based on the technology the suppliers provide, but they also state, that these might change over time – depending on to what level the supplier wishes to bring the relationship and what would they do for it.
They even strictly state: “Not all suppliers are equal” – meaning that the car company would expect different complexity products from different suppliers and would not ask them to participate on projects, if the complexity is far beyond the suppliers understanding and capability. Only a very small and elite group of the first tier suppliers does actually participate on the product development projects (typically Japanese automakers would have around 100 to 200 first tier suppliers) and these suppliers are merely treated as equals to the brand companies.
Of course, this is connected with their size and thus their ability to actually participate and invest into special tools necessary for product development necessary to keep such an
relationship (such as CAD, prototyping facilities and R&D capabilities). These suppliers must be valuable for the customers, so the customers would actually keep them on their list for future project developments – in case they are not able to deliver any value added, and instead specialize in assembly etc. they are easy to replace. The superb component knowledge and development capabilities are what the suppliers invest into these relationships. Of course, this implicates risks for the suppliers, since they need to decide what technologies to develop and what are the important investments connected with these. Therefore, the top suppliers must be very selective and choose their clients accordingly.
2.1.1.2 Supplier Roles
Kamath and Liker (1994) introduce the following four supplier roles. At the same time they note that these roles may not same for every relationship – some companies might choose to
become an partner with their customer (or even on the component level) to develop certain product critical for their (supplier`s) future, but in regards to other companies (or components) they might choose Mature or even Contractual role. This all depends on the strategic motives of the supplier and also the nature of its relationships with its customers.
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Table 1: Supplier roles
Source: Kamath and Liker, 1994
Partners are the top on the list and they often also are the leading companies among the suppliers. They might be thought as a full‐service providers, who are responsible for development and coordination of whole subsystems. Since in Japan, the car makers would frequently communicate only with the first tier suppliers, these suppliers are than responsible for further coordination on these projects.2 They usually participate in planning a new model even before the concept stage. It is very common, that the their understanding of own
processes and – and their component know‐how and technological capabilities are far superior
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out with the customer parts testing, as their insights might be beneficial. (Kamath and Liker, 1994) These suppliers are an “arm of the customer” –even during the pre‐concept phase the partner and the customer jointly determine the specifications of the subsystem – and because of the complexity of the subsystem – and its connections to the other parts of the whole system – the Partner must open intensive communication channels with the customer. The common strategy of Customer having supplier`s engineers present on their plant is mostly the case of Partners.
The Mature role in supplier distinction is very similar to the Partner`s, however the main difference is in their lack of technological capability of Partners. They are able to develop very advanced technologies, and they are able to accommodate most of their customer`s needs, however they usually are not able do so alone and mostly they also don`t participate during the pre‐concept stage – their technology background is not so strong, they may lack some of the necessary capabilities (such as dedicated R&D centers, deep knowledge about the
customer`s technology etc.) and thus lack the technology insight required by customer to invite them to participate on the pre‐concept phase. Still, they are able to develop systems in the cars based on a clear specifications given by the customers, and they are given a big freedom in doing so – as long as the system meets the rough specifications given by the customer, the Mature supplier is free to be creative. They do posses an extensive testing capabilities and the customer absolutely trust their results – they might not verify the data the Mature supplier provides along with the prototype – the customers simply trust that they are correct. The intensive communications between Mature suppliers and Customers however begins one step later than in the case of Partners – namely at the concept stage and then continue to the production
The Child role influence over the design in the product development phase is even lower.
Although it might be possible for the Child supplier to have a limited participation during the concept stage, this would be for consultations on a very specific design issues, or to provide insights thanks to their expertise commonly connected with procedures or materials. Also, the extent of these consultations would be rather low, with one or two meetings only and it is the customer, who will actually do the final decision – these consultations are of informational character only. Their major responsibility is to work out the details of the design and building up the testing prototypes. The customers will do on their own internal assessment of the data provided by the Child supplier among the prototype. As well the communication among the supplier and customer is rather low until the prototype and production phase, when it would eventually increase on intensity. Still, it won`t be of that intensity as with the Partners or even Mature suppliers. These supplier roles are often eligible when manufacturing part or systems that are very simple (and therefore does not involve much of coordination with others) or with only very little technology change – therefore no need for extensive communication and
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coordination. Often, these suppliers are simply not that big as Partners and Mature, so they simply cannot afford the huge investments into the development of new technology. Still, there might be cases of Mature or even Partner suppliers, who choose to pursue this (Child) strategy for some of their technologies, where they don`t see any further possible development, and thus it would be futile to further invest into it. On contrary, they would simply try to “Milk the Cow” – get as much as possible from an old technology and abandon it once its useless.
The Contractual supplier role is the lowest in the above presented chart – they simply manufacture parts based on exact customer`s requirements – which position these suppliers among the standard parts or commodity manufacturers. This is mostly the case, when they posses some sort of competitive advantage in the production capabilities (e.g. large scale automation) and the customer simply transfers his design over to the supplier so they can enjoy the low prices and higher flexibility than doing these parts by themselves. There is no need to communicate in the pre‐concept and concept stage, there might occur some communication in the late prototype stage as well as during the production phase, though the communication activity is still much lower than with the other roles. Supplier, who produce easy, routine products does not need to be treated as Partners. Although the suppliers often make their target to move up in the ladder this might be a very expensive and dangerous move from their current position. Since they need to broaden their technology base and also invest heavily, they should strategize ad choose their customers for such a move carefully.
It is important to note, that even though it might seem, that the health of the relationship is crucial to obtain the business with the customer, it is not the only variable. Often, more
suppliers compete on the same project and only the best will be granted the project – often the engineers dispatched to the customer on the supplier`s behalf find out, that they work along with other supplier`s engineers during the design, but sometimes even during the production phase. This might be true for all first three supplier roles (Partner, Mature and Child). This is due to the fact, that although the relationship is important for both suppliers and customers, it is the actual value the suppliers give to the customers that matters – not the other way around.
Timothy Sturgeon (2002) in his breakthrough essay “Modular Production Networks” creates a very similar concept to the Partner Supplier of Kamath and Liker. He calls these the “Turn‐key”
suppliers.
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number of small companies, that will choose to be highly specialized in one of these shed “non‐
core competencies” and these would ultimately become their own “core competency”. This however did not happen.
These suppliers, in order to meet their customer`s growing demands for full‐service outsourcing solutions, had to invest heavily into their technology development and often develop their competencies not only in few, but rather in many competency areas so they would meet their customer demanding needs, who would often outsource whole systems. Of course, hand in hand to this trend, they also had to push down their costs, rise quality, delivery as well as
increasing their scope of activities. This deepened the knowledge and abilities of these suppliers, however without much of assistance, or even dependence on the leading companies. Not necessary to mention, that this increased outsourcing, as well as having a great number of similar customers with similar products allowed these suppliers to grow significantly.
“Thus outsourcing has led to a deepening of competence and increase in scale at supplier firms”
(Sturgeon, 2002)
Table 2: Supplier roles in Product Development
Source: Kamath and Liker, 1994
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2.1.1.3 Supplier`s influence over the design
As mentioned earlier, the suppliers may have some influence on the overall product
architecture – due to their possession of some critical or strategic component, their extensive and unique insights into the technologies which might come handy during the early stages of the product development or simply due to their relationship with the customer, who might be willing to listen to them due to the long term cooperation history.
Kamath and Liker (1994) mention, that it is usually only the Partners who might have some actual and intended influence over the end architecture – they have the scope, posses great deal of technological knowledge which is praised by the customers as well as they usually provide the customers with system or subsystem solution of strategic importance, and it might be too costy to alternate these instead of changing the overall design. In this way, these companies are real equal counterparts to the customers and their negotiation power is huge – they have the strength to negotiate the customer into the direction they wish.
The Mature suppliers might have chance to influence the end design to their favor, but this influence is only very limited and usually they would have to reach some sort of understanding with the customer – their technology capacity is not that strong as of Partners and they don`t have the strength to make the customers move in the strategic direction they would like to.
Instead, its usually them, who would follow the customer`s strategic vision and develop the products as the customer wishes. Still, since they do understand the technology rather well as well as they posses quite good architectural knowledge, they have the strengths to raise their hand and point out possible problems to their components originating from the architecture design flaws – and have the customer change these.
The importance of the Child and Contractual is rather low and also their influence over the overall design is rather negligible. They develop the components based on the blueprints and even though they posses good component knowledge, their understanding of th overall architecture is usually superficial and thus they are not in position nor expected to raise concerns about their components functionality within the architecture.
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2.1.1.4 Reasons to integrate
The following or similar definition of early supplier integration (ESI) into New Product
Development was often used in number of studies about this topic. As we can see, it mentioned two major management issues – namely the co‐decision making ability as well as free
information sharing. In the text below, we will see why and how to do so.
‘Supplier integration into new product/process/service development suggests that suppliers are providing information directly and participating in decision‐making for purchases used in the new product/process/service. This integration can occur at any point in the five‐stage new product/process/service development model.’ (Ragatz et al, 1997)
ESI usually occurs at an early stage of the life cycle of product, generally at the time of product concept or design. This cooperation has usually a form of specific vertical coordination, when manufacturers involve suppliers. (Bidault et al, 1998)
There are numerous reasons to involve suppliers into the New Product Development. The main is often reducing new product development times – by using the supplier`s technical capability
There are numerous reasons to involve suppliers into the New Product Development. The main is often reducing new product development times – by using the supplier`s technical capability