Supplier Segmentation in the Global Auto Industry - Essay Example

Supplier segmentation in the global auto industry  The auto industry is the most globalized in the world but due to various factors it is now in a turbulent state. There is over capacity along with low customer satisfaction and shorter product life cycles. All these have forced the automakers to enhance the performance of the supply chain through efficient management. This has shifted the focus on supplier segmentation to achieve the economies of scale and efficiency. The justification for the research can be explained by the fact that most studies in supplier segmentation have been conducted before 2001 and the circumstances in the industry have undergone drastic changes recently. It would reveal great insights into the methods and models employed by car makers in segmenting suppliers across the globe. The process of research would be qualitative method through literature review. Academic databases would be use to extract academic literature on the subject and the reputed dailies would be considered for the latest industry information. It is expected that the outcome would reveal the bases of supplier segmentation and whether the automakers have a long-term perspective in this strategic decision making. While reliability and validity is ensured, the research has limitations as it will be purely based on the research of other people or new reports. However, since ample literature is available it is considered sufficient for the purpose of this study. 1. Background – context of the problem The global auto industry is facing alliances and consolidation, as well enhancing the efficiency in supply chain management in order to achieve competitive advantage. With trends towards outsourcing and downsizing supply chain management and purchasing performance is recognized as an important determinant’s of a firm’s competitiveness. Globalization and advancement in technology have challenged the supply systems and brought about major structural and strategic changes in the buyer-supplier relationships. The importance of geographical proximity has been reduced due to advanced information and communications technology thereby the car makers have shifted manufacturing base or have started outsourcing to low-cost countries. However, changed circumstances and changing customer demands require the suppliers not merely to have manufacturing efficiencies but to have core competencies. The car makers have thus started segmenting their suppliers to achieve the maximum from their supply chain. Debates ensue over which is the best basis for supplier segmentation but there appears to be no consensus over the issue. 2. Literature Review The auto industry is the most globalized in the world (Donnelly, Mellahi & Morris, 2002) but in the last decade several factors have contributed to the turbulence it has been experiencing – shorter product life cycles, global sourcing and advanced technology. According to a study by Deloitte (2003) there is over capacity in the industry along with low customer satisfaction and loyalty. Currently the global industry is dominated by Europe, US, Japan and very recently by China and India. The automakers are attempting to improve their global position by having an efficient supply chain management. Supplier segmentation is essential as it helps to align allocation of resources with the strategic goals of the organization. The relationships that are developed make sense in the context of suppliers’ roles, procurement goals and business unit strategy. It creates a roadmap for the relationship and helps define roles, responsibilities, actions and expectations at every point (EMS, 2009). While sourcing the auto parts can help in negotiating and obtaining the best prices, the duration of the contract is equally important. Supplier segmentation can range from collaborative relationships to commodity arrangement, strategic alliances or custom relationship and this would depend on the part being sourced or the level of expertise of the supplier. In addition, supplier segmentation helps clarify and manage supplier expectations, guides and negotiation strategy and determines the kind of supplier relationship to develop (Madow, 2007). In the auto industry various supplier segmentation strategies have been proposed and different models suggested by different researchers. The US traditionally followed the arm’s length model in which the suppliers were kept at an arm’s length thereby increasing the buyer’s power. Porter too suggests that the purchasing should be spread among alternate suppliers which improve the firm’s bargaining powers. The Japanese followed the partner model in supplier management in which more information is shared between the supply chain partners, enhancement in speed and efficiency is evident, and a highly efficient governance mechanism minimizes transaction costs. The partner model assures long-term business to the suppliers who are willing to make financial investments to enhance their productivity. Dyer, Cho and Ch (1998) contend that there cannot be ‘one-size-fits-all’ strategy for supplier management. The core competencies of each supplier have to be determined and the segmentation should realize the benefits of both the strategies. In the arms-length model, the automakers have several layers of suppliers and segmentation is done based on the competency level (Dyer, Cho & Chu, 1998). In some companies they have a stake and also send trained personnel as they make high-value components while in the second level they have suppliers who make components that are customized for particular models. They also have another tier where commodity like parts like tires and fasteners are outsourced. In the US the Big Three have non-exclusive arrangements with their suppliers, thus sharing a large number of common suppliers. This restricts the bargaining power of the US automakers. A study conducted by Kim and Michell (1999) revealed difference in supplier management between US and the Japanese automakers which has earlier been pointed out by Dyer at al. Besides, Kim and Michell find that all US car makers do not follow the same supplier strategy just as all Japanese car makers do not follow the same supplier strategy. The strategy differs across individual firms and this has also been pointed out Dyer et al. Furlan, Grandinetti and Camuffo (2007) studied the supplier segmentation suggested by different authors and found four different bases for segmentation of suppliers by the auto makers – market exchange, captive buyer, captive supplier and strategic partnership. Some others suggest that the segmentation should be based on the length of the relationship intended and hence it should demonstrate short-term or long-term focus. Since the suppliers are becoming larger and are no more willing to concede to the demands of the Original Equipment Manufacturers (OEM) a new outsourcing model known as ‘new adversarial’ has been suggested (SD, 2003). The Japanese automakers have several layers of subcontractors and suppliers in different regions and nations and invariably the power lies in the hands of the automakers and not the suppliers. Toyota collaborates with its suppliers and regards them as partners but they have several suppliers (SD, 2006). They have several suppliers and hence have a back-up plan. They share information with their suppliers intensively but they are selective in what information they share (SD, 2005). They disseminate knowledge but they maintain control. They exchange data and ensure that the data is accurate and timely which is the essence of the success of any supply chain partnership. Their strategy demonstrates that they have long-term focus on supplier strategy. It has been recognized that long-term relationships with suppliers can lead to better quality products (Theodorakioglou, Gotzamani & Tsiolvas, 2006). Supplier segmentation can be based on generic criteria such as the type of supplier, the type of logistics flow and the type of relationship (Svensson, 2004). The author found that different authors have used different models of supplier segmentation in the auto industry ranging from competitive bidding to securing continuity of supply. Supplier selection area has been widely explored by various authors as has been researched by Svensson but most studies that have referred to by him have been conducted before 2001. When Fiat wanted to revolutionize its business they built a local supplier base that was competitive in terms of quality and production costs (Zirpoli & Caputo, 2002). Fiat was initially very apprehensive about sourcing supplies externally but it subsequently started outsourcing almost 73% of its component requirement. One of the factors on which Fiat considers segmentation is the capability of the suppliers in new product development. This requires a strong technology base of the supplier and the ability to invest in technology. The supplier base in Italy is very strong and they switched to a diversification strategy of their customer base to other OEMs. There is now fierce competition in Italy’s auto industry which has forced the OEMs to segment the suppliers as there are now independent players and global suppliers. Several authors have conducted studies between the supplier strategies of the US and the Japanese automakers and all have found a difference. Most studies have been conducted in the late 1990s and the market place has undergone change in the last decade. All the studies however indicate that no one strategy is the right strategy and supplier segmentation has to be a strategic decision of the company. This justifies the purpose of this study which is to determine how the automakers in the current economic downturn have changed their strategies or whether their strategies were focused on long-term relationship. This study would also help to determine how and why the OEMs change and segment the suppliers as the situation changes. 3. Rationale for research Different automakers in different regions have been pursuing their own segmentation strategy and it becomes essential to determine which the right strategy is. Due to the current downturn most auto manufacturers are facing problems in managing the core function of manufacturing. For past several years the auto makers have been outsourcing most of the functions to suppliers and have assembly units. They are free to focus on the marketing and other related functions. This has led to the outsourcing of several functions including procurement, purchasing and servicing the customers. Nevertheless, the question that arises is whether the OEM are aware of the benefits of such outsourcing and whether they are able to focus on long-term gains in their decision process? 3.1 Research Objectives The OEM has been experiencing difficulties with their suppliers in the turbulent global auto industry. Each manufactures expects to achieve better synergy and greater scale and cost efficiencies through an effective supplier arrangement. Since different markets share platforms, the importance and value of trust in relationships has become critical to the success. Just as customer segmentation is important, supplier segmentation is also a management issue. It has thus become important to determine the basis on which the automakers segment their suppliers. 3.2 Research Questions With this objective, the aim of the study is to determine: 1. Do buyers have a short-term focus in appointing vendors in the developing countries? 2. Do buyers understand the importance of supplier segmentation in the auto industry? 3. What is the basis of supplier selection by the Original Equipment Manufacturer (OEM)? 3.3 Research Methodology Any research requires collection of data and facts and the research generates a new body of knowledge. Research strategy should be based on the purpose and subject of the research. Each method has its own advantages and disadvantages. While there are two commonly methods of study – qualitative and quantitative method of research – for the purpose of this study the qualitative research process would suffice. Quantitative method is concerned with numbers and measurements (UTAH, 2009) but this research requires understanding and words and hence qualitative method is preferable. Qualitative research process provides in-depth understanding of the situation as there is prolonged contact with the field of study. It has the potential to reveal complexity. An issue such as understanding the segmentation strategy by the automakers does not requires numbers but depth of understanding. Qualitative method values openness and flexibility against quantitative method that values control. Qualitative method has no predetermined constraints and is more controllable and operational. 3.4 Research strategy and data collection The qualitative method of study uses different processes such as case study method, grounded theory, focus group interviews or merely collection of data through literature review. The quantitative method would not bring to light the deeper underlying meanings and explanations of the data collected (Amaratunga et al., 2002). It would enable to understand the totality of the situation. For the purpose of this study secondary data in the form of literature review would suffice as ample literature is available on the subject. Literature review helps to understand what has been done so far and what remains to be done. While the theories and models would be selected from the academic literature available, the actual data and strategies of the automakers would be taken as far as possible from the latest magazines, newsletters or important dailies from different regions. A wide range of companies would be studied across the globe. Two or three automakers supplier strategy will be studied in detail and some others may also be looked into. Literature review has the potential to do something which a single quantitative study cannot. It can trace the changes and developments over a period of time but in quantitative study it is conducted for a limited period. A critical literature review can bring to light discrepancies, deficiencies, omissions or inaccuracies in the literature (Toracco, 2005). Hence for this study, the forces that have forced the changes in supplier relationships can be traced. No interviews would be conducted for several reasons. Firstly, it is difficult to apprehend how many would agree to participate because companies usually do not like to discuss their strategies with unknown sources. Secondly, even if they do agree to participate, managers do not like to disclose their failures. Thirdly, and most importantly, the managers keep switching jobs and it is quite likely that the person responding may not have been in the same position or even with the company at the time of the strategy formulation and would not be able to give the appropriate answers. Hence literature review and latest information from dailies is considered to be the appropriate method for this study. 4. Data analysis There is a large amount of unstructured data in qualitative research and the analysis of this can be quite tedious and monotonous. According to Amaratunga et al (2002) data analysis involves three steps – data reduction, data display and conclusion drawing and verification. Data reduction and analysis are same and is carried out through out the research process in qualitative method of research. Data analysis would be done by the process of data reduction. Due to the vast amount of literature available, only the most significant texts will be selected, which itself implies a process of evaluation and prioritization. Selection of the research design also is a part of the data reduction process. Conclusions will be drawn after extensive literature search. While data reductions starts early in the research process, data display, displays the data systematically so that it becomes easy for the researcher to draw valid conclusions and take decisions (Weerd-Nederhof, 2001). For drawing conclusions patterns would have to be formed and contrasts looked into. This would help to clarify the relationships of the various automakers with their suppliers and thereby make the understanding coherent. 5. Data sources Data will searched through academic journals available through Emerald Database, Science Direct, PROQUEST and other scholarly sources through search in scholar.google.com. For the latest information through dailies search would be made through reputed search engines like Yahoo and Google. Apart from this, the newspaper database of Thomas Gale would also be searched. These would ensure the reliability and validity of the data. 6. Expected outcome This research process would try to link the different segmentation models of various researchers with the latest trends that the automakers have been following in the past few years. It would then be possible to understand whether suggested theories and models are applicable to different situations or are generic in nature and are invalid in changed business circumstances. It will definitely give an insight into the basis of segmentation for suppliers, the need and benefits, for both parties, the current segmentation strategy and if it can be improved upon. It would highlight to what extent the automakers understand the benefits of segmentation and whether it gives them the bargaining power. It would also help to understand whether automakers have benefited by shifting their manufacturing base to low-cost countries. 7. Project planning Since this study does not require the process of formation of questionnaires or conducting interview, or collection of database of customers, the GNATT chart has not been drawn up. The academic journals would be searched first and then the periodicals and dailies. This project simply requires an in-depth study of the literature and for this an approximate period of three weeks is considered sufficient. This would take cars of the search process, the data reduction and the study. The most important stage would be the search process and the data reduction because this will give an idea how to approach the study. 8. Resource requirement Access to library databases is required for this study and a computer to access online journals. Computer with 24x7 internet facility is essential because this would facilitate to undertake the study at the researcher’s convenience. 9. Ethical issues There is no primary date to be collected which could bring up the issue of ethics. The journals that would be accessed are available through Universities and hence ethical. The facts and figures available online would be studied and hence there is no encroachment of privacy. 10. Limitations to the study This study would be based on the study of other researchers and that has to be relied upon. If the same result is obtained several times, the data can be said to be reliable. This can be verified once the actual study is undertaken. It is difficult to ascertain how much current literature would be available on the supplier segmentation strategy. All efforts would be made to extract the latest trends and data but access to some libraries may be denied. Nevertheless, efforts will be made to ensure reliability and validity of the data collected. Attempts will be made to arrange the literature chronologically as far as possible. Data analysis and the selection of the right data is also objective and depends upon the researcher. The conclusions will be entirely based on the secondary search. 11. Suggestion/Justification for supervisors References Amaratunga, D., Baldry, D., Sarshar, M., & Newton, R., (2002), Quantitative and Qualitative Research in the built environment: application of mixed research approach, Work Study, Vol. 15 No. 1 2002, pp. 17-31 Deloitte, 2003, Integrating Demand and Supply Chains in the Global Automotive Industry, Deloitte Research, retrieved online 28 April 2009, from http://www.deloitte.com/dtt/cda/doc/content/dtt_research_globalautomotive_021203.pdf Donnelly, T Mellahi, KM & Morris, D 2002, The European automobile industry- escape from parochialism, European Business Review, vol. 14. no. 1, pp. 30-39 Dyer, JH Cho, DS & Chu, W 1998, Strategic Supplier Segmentation: I THE Nwr “BESTPRACTICE” IN SUPPLYCHAIN, retrieved online 28 April 2009, from http://dspace.mit.edu/bitstream/handle/1721.1/1470/185a.pdf?sequence=1 EMS, 2009, Vendor Management: Supplier Segmentation, retrieved online 28 April 2009, from http://www.expensemanagement.com/article.cfm?id=368 Furlan, A Grandinetti, R & Camuffo, A 2007, How do subcontractors evolve?, International Journal of Operations & Production Management, vol. 27, no. 1, pp. 69-89 Kim, J & Michell, P 1999, Relationship marketing in Japan: the buyer-supplier relationships of four automakers, JOURNAL OF BUSINESS & INDUSTRIAL MARKETING, vol. 14, no. 2, pp. 118-129 Madow, E 2007, Supplier Relationship Management for Complex Outsourced Services, retrieved online 28 April 2009, from http://www.expensemanagement.com/ems-articles-folder/IDC%20Supplier%20Mgt%20Complex%20Outsourced%20Services.pdf SD, 2003, Back to the future with Fiat, Strategic Direction, vol. 19, no. 5, pp. 13-15. SD, 2006, How Toyota stays ahead of the pack, Strategic Direction, vol. 22, no. 10, pp. 32-35. SD, 2005, Strategic sourcing, Strategic Direction, vol. 21, no. 11, pp. 29-32. Svensson, G 2004, Supplier segmentation in the automotive industry, International Journal of Physical Distribution & Logistics Management, vol. 34, no. 1, pp. 12-38 Theodorakioglou, Y Gotzamani, K & Tsiolvas, G 2006, Supplier management and its relationship to buyers’ quality management, Supply Chain Management: An International Journal, vol. 11, no. 2, pp. 148–159 Toracco, RJ 2005, Writing Integrative Literature Reviews: Guidelines and Examples, Human Resource Development Review, vol. 4, no. 3, pp. 356-367 UTAH, 2009, Qualitative Research Network, retrieved online 28 April 2009, from http://www.health.utah.edu/qrn/what.html Weerd-Nederhof, P., (2001), Qualitative Case Study Research: The case of a PhD Research Project on organizing and managing new product development systems, Management Decision, 39/7 (2001) 513-538 Zirpoli, F & Caputo, M 2002, The nature of buyer-supplier relatinships in co-design activities, International Journal of Operations & Production Management, vol. 22, no. 12, pp. 1389-1410. 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