The Chrysler Extended Enterprise System
In the 1990s, Chrysler realized it did not have the cash to develop the new vehicles it needed entirely on its own, thanks to a CEO who squandered money on Gulfstream, Maserati, and Lambourghini, while allowing the strong product line of K-cars, minivans, and full-size vans to grow stale and obsolete. Circumstance forced Chrysler to lean more on its suppliers, creating a relationship with them which is similar to the way Japanese automakers interact with their suppliers - as the Harvard Business Review article called it, an American kieretsu.
The current version of that is the Chrysler (sometimes written as DaimlerChrysler) Extended Enterprise System. It is, in Chrysler's words, a "coordinated, goal-driven process that unifies and extends the business relationships of suppliers and supplier tiers in order to reduce cycle time, minimize systems cost and achieve perfect quality."
The goal is a global network which works together to surprise and delight Chrysler customers with quality and performance, on everything from shipping to component design. Rather than having a simple customer-supplier relationship, the goal is to have three or more members of the supply chain working together. (For more on this concept, see The Service Profit Chain). Vertical and horizontal supply chain management are essential to Chrysler's innovative development process and to its quality. Essential to this ideal are "effective communication, common visions, and mutual trust." It is for that reason that Chrysler was considered "lenient" to its suppliers, who in exchange for the right to earn a fair profit devoted resources to reducing the overall cost of Chrysler vehicles. One example is the brake systems in the second-generation Neon; rather than lowering the cost of antilock brakes slightly, the supplier threw in traction control for a small price increase. Chrysler's supplier cost reduction program, SCORE, saved the company $2 billion in about two years. When this program was mimicked by other suppliers, who used it for their suppliers, the costs were even greater. TRW's version generated $6.3 million in submissions before the year was half over.
To reach this goal, Chrysler uses many tools, including an extranet, common design tools (Dassault's CATIA) and processes, and supply chain mapping from raw materials to end users. Suppliers are required to map their own supply chains, so Chrysler can have a full picture. Supply chain mapping can be used to find improvements in processes and material flow to cut costs.
While trust is essential, trust without measurement might be foolish, so the Extended Enterprise includes measurements of quality, total systems cost (as opposed to individual component costs - suppliers have helped Chrysler to redesign systems so they are cheaper overall, without having to cut parts costs), cycle time, and technological innovation. The idea of total systems cost is not new - John DeLorean used it with advertising agencies while at Pontiac.
One key ingredient for success is involving appropriate people from all supply chain tiers early in the decision making process. With the design of vehicles in the early and mid 1990s, this included service mechanics and assembly line workers as well as suppliers.
One interesting example of cost savings from working more closely with suppliers is using Motorola's carrier (which carries supplier materials from Chicago to Texas) on the return trip, cutting inbound cycle time by 25% and cutting costs by 24%.
Another example is the sharing of different brake divisions' warranty data, which led to substantial reductions in cost through the resolution of quality problems and resource sharing.
What is the status of the Chrysler Extended Enterprise today? (2003)
Much of the system still exists on paper, but the atmosphere of trust has probably been dealt a fatal blow. Suppliers' trust in Chrysler - and their investments - were repaid by Dieter Zetsche's crude demands of 15 percent price cuts, across the board, from all suppliers. Suppliers who built plants in Brazil simply to supply Chrysler's new Dodge Dakota plant were told soon after construction that the plant was being shut down as part of Daimler's "rescue" of Chrysler, which had seen massive profits the year before, and had amassed an estimated $8 - 12 billion in cash to avoid having to resort to such actions.
To quote one insider, "At this time, SCORE no longer exists-there are no more payments for innovation and cost reduction by suppliers. Under the current thinking and direction, suppliers are not to be trusted and are to be bullied at every opportunity to 'demonstrate who's boss.' Think Lopez at GM in the 1990s...."
It is worth noting that the change in direction is not due to the failure of the Extended Enterprise, which has been held up as a model in both efficiency and effectiveness, but due to the change in leadership at Chrysler. There is no way to judge whether demands to cut component costs are more effective than cooperatively working with suppliers to lower overall costs, but history strongly points to the latter - in short, the Chrysler Extended Enterprise is, most likely, the more effective way to reduce costs while putting out a higher-quality, more innovative product. However, poor leadership and short-sighted "cost savings" can easily destroy a good system - or a good company.
Supplier relations are currently the domain of Tom LaSorda (2006).