Production, Manufacturing and Logistics
Manufacturer cooperation in supplier development under risk

https://doi.org/10.1016/j.ejor.2010.03.041Get rights and content

Abstract

Supplier development involves efforts undertaken by manufacturing firms to improve their suppliers’ capabilities and performance. These improvement efforts can be targeted at a variety of areas such as quality management, product development, and cost reduction. Since supplier development requires investments on the part of the manufacturer, it is important to optimally allocate investment dollars among multiple suppliers to minimize risk while maintaining an acceptable level of return. This paper presents a set of optimization models that address this issue. We consider two scenarios: single-manufacturer and multiple suppliers (SMMS) and two-manufacturer and multiple suppliers (TMMS). In the SMMS case, we suggest optimal investments in various suppliers by effectively considering risk and return. The TMMS case investigates whether manufacturers with differing capabilities could gain risk reduction benefits from cooperating with each other in supplier development. Through illustrative applications, we identify conditions in which both cooperation and non-cooperation are beneficial for manufacturers. Under conditions of cooperation, we propose optimal investments for manufacturers to achieve high levels of risk reduction benefits.

Introduction

Manufacturing firms are incurring procurement costs associated with raw materials and components in excess of 50–60% of the firm’s total revenue and this trend is expected to continue [9], [25]. This phenomenon is resulting in increased dependency of manufacturing firms on their suppliers [16], [25]. Since a firm’s supplier performance has a significant impact on many of its product dimensions, such as cost, quality and on-time delivery [19], manufacturing firms are placing increasing emphasis on effectively working with suppliers by sharing demand information, production schedules, and technical expertise [29]. However, it can be argued that manufacturing firms would need to involve themselves in suppliers’ operations to a greater extent when suppliers’ future capabilities will likely fail to meet their changing needs and expectations [16], [17], [20]. Activities undertaken by a manufacturing firm to improve its suppliers’ capabilities and performance falls under the rubric of supplier development [14], [15]. Supplier development initiative can potentially lead to identifying suppliers for strategic partnerships [4]. Supplier development is intended to improve supplier process capability, delivery capability, product development capability, component quality and cost, which, in turn, lead to long-term benefits for the manufacturing firms [20]. Since supplier development requires firms to invest assets and resources in suppliers, it is a selective investment process [19], [20].

Toyota, Honda, Nissan, Chrysler, Ford, General Motors, and General Electric all have implemented supplier development programs to assist suppliers, which have resulted in quality improvement and cost reduction [6], [10]. In essence, supplier development is a strategic initiative that requires long-term commitment from manufacturing firms to achieve desired outcomes. Due to its lack of immediate return, firms are often reluctant to invest in supplier development [19]. Additionally, when the relationship between the manufacturing firm and a supplier is unsuccessful, the benefits gained from supplier development may not be enough to offset the expenses incurred [14]. Furthermore, the efficacy of supplier development programs depends on the existing capabilities of a supplier and the effectiveness with which the manufacturing firm can leverage these programs and investments. Thus, it is entirely possible that returns from these investments may vary across multiple suppliers, an indication of risk in terms of uncertain returns in supplier development investments.

Supplier development, however, provides an opportunity for collaboration among multiple manufacturing firms. It is not uncommon for manufacturing firms in the same industry to use similar or the same components that are sourced from the same set of suppliers. Examples from various industries include: electric motors in washing machines (e.g., Whirlpool and GE), engines in automobiles (e.g., Toyota and Pontiac), and PC boards in personal computers (e.g., Dell and HP). However, the issue of manufacturing firms cooperating in supplier development has never been studied.

This research investigates the supplier development problem from a long-term investment perspective to better understand its potential benefits. Specifically, we consider supplier development investments in the context of multiple suppliers who supply different types of materials and components to a manufacturing firm. We develop an analytical model that is based on three key aspects of investments in supplier development. First, the resources available for supplier development are not unlimited and should be optimally deployed. Second, we assert that supplier development is characterized by long-term, continual efforts, the benefits of which can be more thoroughly understood by tracking the returns on a regular basis over the investment period. Third, manufacturing firms can be involved in supplier development individually or collaboratively. When cooperating, firms share resources and benefits, as well as cost and risk.

Under conditions of risk, a manufacturing firm may decide how to optimally allocate its supplier development investments among multiple suppliers to minimize risk while maintaining an acceptable level of return. This paper presents a set of mathematical models to address this problem. We consider two scenarios: single-manufacturer and multiple suppliers (SMMS) and two-manufacturers and multiple suppliers (TMMS). In SMMS case, we recommend optimal investments in various suppliers by considering risk and return associated with supplier development efforts, and TMMS scenario investigates whether manufacturers with differing capabilities could gain risk reduction benefits from cooperating with each other in supplier development.

The development of this research relied heavily on a case company, Wistron Corporation, a Taiwan-based company that employs 20,000 workers worldwide. Wistron develops high-technology products such as notebook and desktop computer systems, servers and storage systems, information appliances, and networking and communication systems. Customers rely heavily on Wistron’s capability to provide a variety of design related engineering services to match their product development requirements. In turn, supplier development efforts have been an important part of the new product development processes at Wistron. These efforts have ranged from intensively integrated teamwork with its suppliers to financial investments in selected strategic partners. Suppliers that were involved in Wistron’s supplier development programs in the past include Catcher Technology (casing), ENlight Corporation (casing), Apacer (memory, IC), Tyco Electronics (connector), High-Tek Corporation (cable), to name a few. The development of our models and the corresponding numerical examples were motivated by Wistron’s supplier development efforts and results.

The rest of the paper is organized as follows. The next section reviews literature in the areas of supplier development and portfolio investment models and risk, which is followed by model development. We then discuss model results based on illustrative data and present managerial implications and opportunities for future research.

Section snippets

Supplier development

The topic of supplier development has received considerable attention from researchers in the past two decades [3], [12], [14], [15], [17], [18], [19], [20], [27], [31]. Supplier development may range from limited involvement such as supplier qualification and supplier performance evaluation, to more intense efforts such as training supplier’s personnel and assistance with new product design [14]. It is generally believed that success in supplier development will lead to better performance for

SMMS model

Fig. 1 depicts the case where a single manufacturer engages in supplier development efforts with multiple suppliers. The manufacturer has limited amount of budget (resources) for supplier development efforts that needs to be optimally allocated to multiple suppliers. Thus, the amount invested in a supplier is dependent on the amounts invested in other suppliers. In addition, investment returns vary among suppliers depending on their capabilities and execution competence. The goal of the

Numerical experiments and results

To utilize our models, firms need to estimate the costs of supplier development in selecting an appropriate total budget. Based on our discussions with the staff at Wistron Corporation, we conclude that while an exact monetary budget for supplier development may be difficult to obtain, it is feasible for firms to obtain a reasonable estimation. For example, investment costs associated with factors such as tooling, facility, and training can be obtained from the existing accounting systems

Managerial implications

The single-manufacturer case can assist managers in optimally allocating resources to various suppliers in the supplier development process. Thus, the proposed models have high practical relevance for the decision-makers in this area. However, the more interesting, two-manufacturer case has a number of useful managerial implications.

When both manufacturers’ historical performance is close to their expectation, they should always seek to cooperate with each other. Through cooperation, both

Conclusions

Supplier development is a long-term, resource-consuming business activity that requires commitment from both manufacturing firms and suppliers. It requires manufacturing firms to invest significant amounts of resources in suppliers. Considering the limited resources available, how to best allocate investments in multiple suppliers that produce different types of materials or components is a critical issue faced by manufacturing firms.

This study makes two main contributions. First, we propose

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      They used stock market returns and the cost of capital to assess the suppliers’ performance. Although researchers have paid a considerable attention to supplier development (Mizgier et al., 2017; Talluri, Narasimhan, & Chung, 2010; Worthmann, Proch, Braun, Schlüchtermann, & Pannek, 2016), their focus has mainly been on empirical and conceptual works, and only a few decision support models have been developed so far (Talluri et al., 2010; Mizgier et al., 2017; Bai & Sarkis, 2010; Meisel, 2012; Glock, 2016; Meisel & Glock, 2018). In contrast, the number of publications on mathematical modelling to solve supplier development problems has increased recently (Glock et al., 2017; Mizgier et al., 2017).

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