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Subcontractors in a partnership environment:
Int. J. Production Economics 60—61 (1999) 165—170
Subcontractors in a partnership environment: A study on changing manufacturing strategy Ulla Lehtinen* Industrial Management and Entrepreneurship Unit, University of Oulu, P.O. Box 444, FIN 90571 Oulu, Finland
Abstract This paper discusses the development of the subcontracting system by Finnish subcontractor manufacturers during the past 10 years. The findings show that there has been a clear shift towards long-term, commitment-based supplier—customer relationships among the manufacturers. It is argued that the ability to manage the inbound logistics and to cooperate with other companies appear to be more essential for the success of subcontractors than before. The paper also demonstrates the altered strategy of subcontractors’ core business and presents the manufacturing strategy framework for subcontractors. 1999 Elsevier Science B.V. All rights reserved. Keywords: Subcontractor; Manufacturing strategy; Subcontracting system; Supply management
1. Introduction The context in which manufacturing companies operate is undergoing radical changes. Companies are reorganizing their value chains and focusing on a few core activities, where they can achieve and maintain a long-term competitive advantage, outsourcing all other activities in which they do not have a world-class status. Especially companies operating in volatile, high customized, or advanced technology fields find extensive outsourcing more attractive and strategically more crucial for survival, than before [1]. The vision of the future organizational model, the lean enterprise, is defined
* Corresponding author: Tel.: #358 8 553 2934; fax: #358 8 553 2904; e-mail: [email protected].
as a group of individuals, functions, and legally separate but operationally synchronized companies. The notion of value stream defines the lean enterprise [2]. A close co-ordination is needed between the companies of a value stream in order to provide maximum value to the final customer. In the present business context the importance of subcontracting manufacturers has rapidly grown, and these companies are also facing new challenges and demands now that they are operating with their customers within a long-term cooperative scenario. This paper discusses the problems of the manufacturing strategy issues of Finnish subcontractors operating in industrial markets characterized by long-term supplier—customer relationships, customized final products, small orders, and low repetitive production. The purpose of this paper is threefold. First it attempts briefly to summarize the
0925-5273/99/$ - see front matter 1999 Elsevier Science B.V. All rights reserved. PII: S 0 9 2 5 - 5 2 7 3 ( 9 8 ) 0 0 1 5 4 - 6
166
U. Lehtinen/Int. J. Production Economics 60—61 (1999) 165—170
partnership model and the subcontracting principles based on Japanese experience and describes the subcontractors’ performance based on case studies and a survey conducted among Finnish manufacturers. Second, a model of manufacturing strategy of subcontractors offering manufacturing services to customers is proposed. Third, the paper demonstrates the effects of changes in the supplier network and the purchasing policy on the subcontractors’ manufacturing strategy.
2. Partnership environment Today, the concept of customer—supplier partnerships is being adopted at an increasing rate by US and European, as well as Finnish, companies. The just-in-time concept of the early 1980s introduced this “new” philosophy of a supplier—customer interorganizational relationship based on the Japanese supplier policy. The main features defining partnership often mentioned in the literature are exchange of ideas, information and benefits, joint problem solving, research and technology development based on long-term trust and faith (see [3—5]). Lamming [4] presents the lean supply model of the customer—supplier relationship. Lean supply goes beyond partnership and the Japanese model, requiring the supplier to develop technologies and generate strategies for global cover independently of the customer requests. The supplier may thus become the technology leader, the “pushy” partner.
2.1. Subcontracting system One important reason for the competitiveness of Japanese producers is the nature of the Japanese subcontracting system, which emphasizes synergistic problem solving [6]. The evolution and performance of the subcontracting system in major assembly businesses, such as automobile and electronics industry, has been well documented (see [7—11,6]). The structure of a supplier chain favouring partnership is often described in assembly industries as a tier structure (see Fig. 1); sub-subcontracting in Japan may go down as far as five
Fig. 1. The model of a hierarchical subcontracting system (original).
layers below the prime contractor [11]. The firsttier suppliers have been given responsibility for product development, systems undertakings and JIT deliveries. The second-tier suppliers are smaller, have less expertise, generally specialize in a narrower range of products, and work on production and/or processing. The third-tier suppliers are even less sophisticated in terms of competence and activities [12,10]. The present Japanese subcontracting system is described as a “network-type” organization, with cooperation between a wide range of business enterprises, including small to medium size firms, each with its own professional skills and expertise. The “network” system is usually introduced on the basis of continuous business relationships with a special emphasis on the code of mutual trust [10,11]. An important outcome of this structural change in Japan was the emergence of multiskilled subcontractors who utilized their multifunctional technology expertise to serve their customers. Most of them were also involved in joint design projects with their customers [6].
3. Methodology The findings described in this paper are based on studies on subcontracting systems and strategies of subcontracting manufacturers in engineering and electronics industry since 1988. The term
U. Lehtinen/Int. J. Production Economics 60—61 (1999) 165—170
“subcontracting” is used to refer to the supply of customized semifabricated products (parts, components, modules) or services. The first research project was carried out in 1988—1991. The ongoing follow-up study focuses on the issues of development of supplier structure based on long-term partnerships. The findings presented in this paper are based on five in-depth case studies and a questionnaire survey. In the case studies, mostly personal interviews have been used for data generation. The first round of interviews in the companies was made in the years 1988—1990 and the second in 1995—1996. The questionnaire survey with basically the same research questions was conducted in the years 1988 and 1996. The objective of this survey was to gain insights into how the subcontractors evolve. A total of 18 companies responded to both surveys.
4. Subcontractors’ performance Earlier studies [13] have shown that the subcontracting system among Finnish manufacturers has changed and the importance of subcontractors has increased during the past decade. There has been a significant shift towards stable, commitmentbased supplier—customer relationships among the Finnish manufacturers, even though partnerships involving integrated R&D processes or mutual sharing of strategic visions have been rare. The questionnaire survey showed that the number of subcontractors whose production is based on long-term contracts increased from 66% to 83% between 1988 and 1996. The subcontractors studied have quite a large customer base, though 20% of the customers usually bring over 80% of the sales. According to the questionnaire survey, an average of 42% of the sales went to the main customer in 1996, while the same figure in 1988 was 38%. Furthermore, the number of subcontractors which are dependent on one customer has increased considerably. All of these companies were operating in electronics industry. In 1996, 35% of the companies were involved in product development, 65% also made subassemblies and 61% were using their own subcontractors, even though the number of sub-subcontractors had not increased
167
during the study period. Also, the number of companies which considered themselves having cooperation with other subcontractors had doubled. The main problems perceived by the subcontractors in both 1988 and 1997 were related to the delivery performance and that was also considered the most important order-winning criteria before product quality. The companies knew well their customers’ purchasing personnel, while they had less knowledge about their customers’ product development and the needs of the end customers. When the relationships between the case companies forming a network were studied, we noticed that while the level of information flow between the companies was considered quite good, there was little evidence of joint development of such operations as total quality and material management within the companies. The exchange of development aid was most common with regard to the manufacturing techniques and quality assurance of products. In spite of this, there was only some evidence of cooperation with a distinct improving effect on the effectiveness of logistic operations on the shop-floor level. We called these relationships “friendships”, i.e. relationships involving long-term faith and trust between the subcontractor and the customer, but no “pushy” involvement in the other party’s “domestic business and problems”. The present findings show that the importance of relationship skills — i.e. the ability to supply parts and materials and to cooperate with other companies — has increased among the subcontractors. Also, the subcontractors’ ability to plan their capacity flexibility has increased markedly. The reason for this is that the prime contractors (OEMs) have reduced the number of suppliers by assigning subassemblies to certain suppliers, which have become first-tier or system suppliers. Especially in the electronics industry, the first-tier subcontractors have rapidly grown along with their prime contractors and have taken over both sub- and final assembly. In spite of that, the supplier structure among Finnish manufacturers can be described as a stable horizontal network consisting of heterogeneous, independent manufacturing companies which make up the value chain for manufacturing the final products rather than the kind of hierarchical tier structure described earlier.
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U. Lehtinen/Int. J. Production Economics 60—61 (1999) 165—170
5. Manufacturing strategy concept of subcontractors The definitions of manufacturing strategy usually include some mention of building or positioning resources in a way that enhances the company’s position in the marketplace. Hill [14] provided a manufacturing strategy framework and a process that structured the relationship between competitive priorities (or order winning/qualifying criteria), structure (process choice) and infrastructure. The manufacturing strategy concept and frameworks are here applied to subcontracting companies, as shown in Fig. 2. Traditionally, subcontractors have been classified into different categories according to the degree of initiative in the product and the process (see [15]). In this study, two basic strategies of subcontractors were identified: the subcontractor is either process- or product-oriented. Most of the subcontractors studied were process-oriented, offering their customers process capacity and knowledge of manufacturability by their core technology, while product-oriented subcontractors specialize in certain customized components (e.g. bearings, springs). The strategy of the subcontractor includes the decisions on the operations and services which are offered to the prime contractors. The subcontractor can specialize only in a limited technology and a few processes in the supplier network; process- or product-oriented companies of this kind are usually second-tier suppliers, though they have an important role in the product development. On the other hand, the core business of the subcontractor usually evolves gradually as presented in Fig. 3. In the first stage the subcontractor usually offers only limited number of operations to its customers. When the relationship between the subcontractor and the prime contractor becomes successively more integrated with time, the subcontractor takes responsibility from production to system production as well as research and development. While a subcontractor evolves towards a system supplier, it starts to offer to the prime contractors other value-added operations, such as assembly and packaging. Especially the management of inbound logistics and cooperation with sub-subcontractors
Fig. 2. The conventional framework of the manufacturing strategy of subcontracting company.
Fig. 3. The evolution of subcontractors’ core business offered to the prime contractor (original).
is of utmost importance for these companies. Thus, when the business strategy evolves, the manufacturing strategy, especially the infrastructure decisions, should also be evaluated. The following two cases illustrate the problems. Case example I: Subcontractor I was established in 1982 and has now about 150 employees. It is part of a large corporation able to invest in capitalintensive automation and testing equipment. The core process of the subcontractor is PCB assembly. In the 1980s, all components were supplied by prime contractors and the subcontractor only offered assembly services, while today the purchasing of components is mainly done by the company itself. The business objective of the company is
U. Lehtinen/Int. J. Production Economics 60—61 (1999) 165—170
nowadays to offer to its customers systems including complete assembly, testing, component supply and engineering design. The subcontractor tried to limit its number of prime contractors to 18, while the five biggest customers brought in about 78% of the sales. The main manufacturing decisions have been on the production technology and systems. The main problems observed were related to the infrastructure. What makes the planning of the manufacturing strategy difficult is the large scale of customer order volumes and the high variation of components needed in customized products. Especially, the scheduling and control of production are nowadays more complicated. Also, more personnel management and relationships skills are needed. From small customers’ point of view, the logistics management of subcontractor I might be too inflexible, causing extra carrying costs for the customer. In spite of that, small prime contractors who assign whole assembly to subcontractor I are also expected to get help and information not only about the assembly technology, but also about the selection of materials and metal parts from the subcontractor. Case example II: Subcontractor II was also established in the mid-1980s. It is a family business with 16 employees in 1996. Until the 1990s, the company only did machining and purchasing of materials. Two main prime contractors bring in about 75% of the sales. These two customers have had a major influence on the subcontractor’s manufacturing strategy. Since the early 1990s, the prime contractors have also assigned subsystem assembly to subcontractor II, which has changed clearly towards being a multifunctional company. The importance of subcontractor II has increased and it could be considered a “system supplier” to the main customers. This change towards multifunctionality might require quite a long learning process: subcontractor II has had difficulties to understand how the scheduling and electronic parts and materials supply should be implemented. While production control used to be based on capacity planning of machines, a more advanced pull system is now needed. The altered process structure has clearly increased inventories within the company.
169
6. Conclusions The findings presented in this paper show that the development of a subcontracting system and companies is notably similar to the Japanese course of development. The altered supply policy of OEMs has also had a straightforward effect on subcontractors’ strategies. As a consequence of the altered supplier structure, purchasing and materials management have become a more important process in small- and medium-sized subcontracting firms. Likewise, the subcontractors are more often offering their customers system undertakings which demand more multifunctionality from their operations. While the business strategy of subcontractors evolves, it is equally necessary to reassess the supporting structures, controls, communications and other systems within the manufacturing system. The manufacturing strategy framework presented in the paper might be a useful tool for companies to identify the altered requirements. The main problems perceived by the subcontractors were related to delivery performance. The subcontractors consider the short delivery lead times and unpredictable order changes most problematic. In order to achieve a faster response to the final customers’ demand, the managerial focus should be on issues concerning material and information flow in the network and within the companies. In the future, more shared education and other mutual development projects are needed between the prime contractors and the subcontractors to overcome the problems in logistics management and to promote the development of subcontractors’ business.
References [1] A.J. van Weele, F.A. Rozemeijer, Revolution in purchasing. Building competitive power through proactive purchasing, European Journal of Purchasing Supply Management 2 (4) (1996) 153—160. [2] J.P. Womack, D.T. Jones, From lean production to the lean enterprise, Harvard Business Review 72 (1) (1994) 93—104. [3] J.P. Womack, D.T. Jones, D. Roos, The Machine that Changed the World, Harper Perennial, New York, 1990.
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U. Lehtinen/Int. J. Production Economics 60—61 (1999) 165—170
[4] R. Lamming, Beyond Partnership. Strategies for Innovation and Lean Supply, Prentice-Hall, Hemel Hempstead, 1993. [5] L.M. Ellram, Partnering pitfalls and success factors, International Journal of Purchasing and Materials Management 32 (2) (1995) 36—44. [6] T. Nishiguchi, Strategic Industrial Sourcing — The Japanese Advantage, Oxford University Press, Oxford, 1994. [7] H. Nakamura, Subcontractor System in Japanese Industry, JMA Newsletter 20 (1984) 1—4. [8] Y. Sato, The subcontracting production (Shitauke) system in Japan, Keio Business Review 21 (1984) 1—25. [9] M.J. Smitka, Competitive ties: Subcontracting in Japanese automotive industry, Ph.D. Thesis, Yale University, New Haven, CT, 1989.
[10] P. Hines, Creating World Class Suppliers, Pitmans, London, 1994. [11] J.T. Thoburn, M. Takashima, Industrial Subcontracting in the UK and Japan, Avebury, Hants, 1992. [12] L.-E. Gadde, H. Ha kansson, Professional Purchasing, Routledge, London, 1993. [13] U. Lehtinen, Partnerships among Finnish manufacturers, European Journal of Purchasing & Supply Management 2 (4) (1996) 161—167. [14] T. Hill, Manufacturing Strategy, 2nd ed., The Macmillan Press Ltd., New York, 1993. [15] B. Asanuma, Manufacturer—supplier relationships in Japan and the concept of relation-specific skill, Journal of Japanese and International Economies 3 (1) (1989) 1—30.
Subcontractors in a partnership environment: A study on changing manufacturing strategy Ulla Lehtinen* Industrial Management and Entrepreneurship Unit, University of Oulu, P.O. Box 444, FIN 90571 Oulu, Finland
Abstract This paper discusses the development of the subcontracting system by Finnish subcontractor manufacturers during the past 10 years. The findings show that there has been a clear shift towards long-term, commitment-based supplier—customer relationships among the manufacturers. It is argued that the ability to manage the inbound logistics and to cooperate with other companies appear to be more essential for the success of subcontractors than before. The paper also demonstrates the altered strategy of subcontractors’ core business and presents the manufacturing strategy framework for subcontractors. 1999 Elsevier Science B.V. All rights reserved. Keywords: Subcontractor; Manufacturing strategy; Subcontracting system; Supply management
1. Introduction The context in which manufacturing companies operate is undergoing radical changes. Companies are reorganizing their value chains and focusing on a few core activities, where they can achieve and maintain a long-term competitive advantage, outsourcing all other activities in which they do not have a world-class status. Especially companies operating in volatile, high customized, or advanced technology fields find extensive outsourcing more attractive and strategically more crucial for survival, than before [1]. The vision of the future organizational model, the lean enterprise, is defined
* Corresponding author: Tel.: #358 8 553 2934; fax: #358 8 553 2904; e-mail: [email protected].
as a group of individuals, functions, and legally separate but operationally synchronized companies. The notion of value stream defines the lean enterprise [2]. A close co-ordination is needed between the companies of a value stream in order to provide maximum value to the final customer. In the present business context the importance of subcontracting manufacturers has rapidly grown, and these companies are also facing new challenges and demands now that they are operating with their customers within a long-term cooperative scenario. This paper discusses the problems of the manufacturing strategy issues of Finnish subcontractors operating in industrial markets characterized by long-term supplier—customer relationships, customized final products, small orders, and low repetitive production. The purpose of this paper is threefold. First it attempts briefly to summarize the
0925-5273/99/$ - see front matter 1999 Elsevier Science B.V. All rights reserved. PII: S 0 9 2 5 - 5 2 7 3 ( 9 8 ) 0 0 1 5 4 - 6
166
U. Lehtinen/Int. J. Production Economics 60—61 (1999) 165—170
partnership model and the subcontracting principles based on Japanese experience and describes the subcontractors’ performance based on case studies and a survey conducted among Finnish manufacturers. Second, a model of manufacturing strategy of subcontractors offering manufacturing services to customers is proposed. Third, the paper demonstrates the effects of changes in the supplier network and the purchasing policy on the subcontractors’ manufacturing strategy.
2. Partnership environment Today, the concept of customer—supplier partnerships is being adopted at an increasing rate by US and European, as well as Finnish, companies. The just-in-time concept of the early 1980s introduced this “new” philosophy of a supplier—customer interorganizational relationship based on the Japanese supplier policy. The main features defining partnership often mentioned in the literature are exchange of ideas, information and benefits, joint problem solving, research and technology development based on long-term trust and faith (see [3—5]). Lamming [4] presents the lean supply model of the customer—supplier relationship. Lean supply goes beyond partnership and the Japanese model, requiring the supplier to develop technologies and generate strategies for global cover independently of the customer requests. The supplier may thus become the technology leader, the “pushy” partner.
2.1. Subcontracting system One important reason for the competitiveness of Japanese producers is the nature of the Japanese subcontracting system, which emphasizes synergistic problem solving [6]. The evolution and performance of the subcontracting system in major assembly businesses, such as automobile and electronics industry, has been well documented (see [7—11,6]). The structure of a supplier chain favouring partnership is often described in assembly industries as a tier structure (see Fig. 1); sub-subcontracting in Japan may go down as far as five
Fig. 1. The model of a hierarchical subcontracting system (original).
layers below the prime contractor [11]. The firsttier suppliers have been given responsibility for product development, systems undertakings and JIT deliveries. The second-tier suppliers are smaller, have less expertise, generally specialize in a narrower range of products, and work on production and/or processing. The third-tier suppliers are even less sophisticated in terms of competence and activities [12,10]. The present Japanese subcontracting system is described as a “network-type” organization, with cooperation between a wide range of business enterprises, including small to medium size firms, each with its own professional skills and expertise. The “network” system is usually introduced on the basis of continuous business relationships with a special emphasis on the code of mutual trust [10,11]. An important outcome of this structural change in Japan was the emergence of multiskilled subcontractors who utilized their multifunctional technology expertise to serve their customers. Most of them were also involved in joint design projects with their customers [6].
3. Methodology The findings described in this paper are based on studies on subcontracting systems and strategies of subcontracting manufacturers in engineering and electronics industry since 1988. The term
U. Lehtinen/Int. J. Production Economics 60—61 (1999) 165—170
“subcontracting” is used to refer to the supply of customized semifabricated products (parts, components, modules) or services. The first research project was carried out in 1988—1991. The ongoing follow-up study focuses on the issues of development of supplier structure based on long-term partnerships. The findings presented in this paper are based on five in-depth case studies and a questionnaire survey. In the case studies, mostly personal interviews have been used for data generation. The first round of interviews in the companies was made in the years 1988—1990 and the second in 1995—1996. The questionnaire survey with basically the same research questions was conducted in the years 1988 and 1996. The objective of this survey was to gain insights into how the subcontractors evolve. A total of 18 companies responded to both surveys.
4. Subcontractors’ performance Earlier studies [13] have shown that the subcontracting system among Finnish manufacturers has changed and the importance of subcontractors has increased during the past decade. There has been a significant shift towards stable, commitmentbased supplier—customer relationships among the Finnish manufacturers, even though partnerships involving integrated R&D processes or mutual sharing of strategic visions have been rare. The questionnaire survey showed that the number of subcontractors whose production is based on long-term contracts increased from 66% to 83% between 1988 and 1996. The subcontractors studied have quite a large customer base, though 20% of the customers usually bring over 80% of the sales. According to the questionnaire survey, an average of 42% of the sales went to the main customer in 1996, while the same figure in 1988 was 38%. Furthermore, the number of subcontractors which are dependent on one customer has increased considerably. All of these companies were operating in electronics industry. In 1996, 35% of the companies were involved in product development, 65% also made subassemblies and 61% were using their own subcontractors, even though the number of sub-subcontractors had not increased
167
during the study period. Also, the number of companies which considered themselves having cooperation with other subcontractors had doubled. The main problems perceived by the subcontractors in both 1988 and 1997 were related to the delivery performance and that was also considered the most important order-winning criteria before product quality. The companies knew well their customers’ purchasing personnel, while they had less knowledge about their customers’ product development and the needs of the end customers. When the relationships between the case companies forming a network were studied, we noticed that while the level of information flow between the companies was considered quite good, there was little evidence of joint development of such operations as total quality and material management within the companies. The exchange of development aid was most common with regard to the manufacturing techniques and quality assurance of products. In spite of this, there was only some evidence of cooperation with a distinct improving effect on the effectiveness of logistic operations on the shop-floor level. We called these relationships “friendships”, i.e. relationships involving long-term faith and trust between the subcontractor and the customer, but no “pushy” involvement in the other party’s “domestic business and problems”. The present findings show that the importance of relationship skills — i.e. the ability to supply parts and materials and to cooperate with other companies — has increased among the subcontractors. Also, the subcontractors’ ability to plan their capacity flexibility has increased markedly. The reason for this is that the prime contractors (OEMs) have reduced the number of suppliers by assigning subassemblies to certain suppliers, which have become first-tier or system suppliers. Especially in the electronics industry, the first-tier subcontractors have rapidly grown along with their prime contractors and have taken over both sub- and final assembly. In spite of that, the supplier structure among Finnish manufacturers can be described as a stable horizontal network consisting of heterogeneous, independent manufacturing companies which make up the value chain for manufacturing the final products rather than the kind of hierarchical tier structure described earlier.
168
U. Lehtinen/Int. J. Production Economics 60—61 (1999) 165—170
5. Manufacturing strategy concept of subcontractors The definitions of manufacturing strategy usually include some mention of building or positioning resources in a way that enhances the company’s position in the marketplace. Hill [14] provided a manufacturing strategy framework and a process that structured the relationship between competitive priorities (or order winning/qualifying criteria), structure (process choice) and infrastructure. The manufacturing strategy concept and frameworks are here applied to subcontracting companies, as shown in Fig. 2. Traditionally, subcontractors have been classified into different categories according to the degree of initiative in the product and the process (see [15]). In this study, two basic strategies of subcontractors were identified: the subcontractor is either process- or product-oriented. Most of the subcontractors studied were process-oriented, offering their customers process capacity and knowledge of manufacturability by their core technology, while product-oriented subcontractors specialize in certain customized components (e.g. bearings, springs). The strategy of the subcontractor includes the decisions on the operations and services which are offered to the prime contractors. The subcontractor can specialize only in a limited technology and a few processes in the supplier network; process- or product-oriented companies of this kind are usually second-tier suppliers, though they have an important role in the product development. On the other hand, the core business of the subcontractor usually evolves gradually as presented in Fig. 3. In the first stage the subcontractor usually offers only limited number of operations to its customers. When the relationship between the subcontractor and the prime contractor becomes successively more integrated with time, the subcontractor takes responsibility from production to system production as well as research and development. While a subcontractor evolves towards a system supplier, it starts to offer to the prime contractors other value-added operations, such as assembly and packaging. Especially the management of inbound logistics and cooperation with sub-subcontractors
Fig. 2. The conventional framework of the manufacturing strategy of subcontracting company.
Fig. 3. The evolution of subcontractors’ core business offered to the prime contractor (original).
is of utmost importance for these companies. Thus, when the business strategy evolves, the manufacturing strategy, especially the infrastructure decisions, should also be evaluated. The following two cases illustrate the problems. Case example I: Subcontractor I was established in 1982 and has now about 150 employees. It is part of a large corporation able to invest in capitalintensive automation and testing equipment. The core process of the subcontractor is PCB assembly. In the 1980s, all components were supplied by prime contractors and the subcontractor only offered assembly services, while today the purchasing of components is mainly done by the company itself. The business objective of the company is
U. Lehtinen/Int. J. Production Economics 60—61 (1999) 165—170
nowadays to offer to its customers systems including complete assembly, testing, component supply and engineering design. The subcontractor tried to limit its number of prime contractors to 18, while the five biggest customers brought in about 78% of the sales. The main manufacturing decisions have been on the production technology and systems. The main problems observed were related to the infrastructure. What makes the planning of the manufacturing strategy difficult is the large scale of customer order volumes and the high variation of components needed in customized products. Especially, the scheduling and control of production are nowadays more complicated. Also, more personnel management and relationships skills are needed. From small customers’ point of view, the logistics management of subcontractor I might be too inflexible, causing extra carrying costs for the customer. In spite of that, small prime contractors who assign whole assembly to subcontractor I are also expected to get help and information not only about the assembly technology, but also about the selection of materials and metal parts from the subcontractor. Case example II: Subcontractor II was also established in the mid-1980s. It is a family business with 16 employees in 1996. Until the 1990s, the company only did machining and purchasing of materials. Two main prime contractors bring in about 75% of the sales. These two customers have had a major influence on the subcontractor’s manufacturing strategy. Since the early 1990s, the prime contractors have also assigned subsystem assembly to subcontractor II, which has changed clearly towards being a multifunctional company. The importance of subcontractor II has increased and it could be considered a “system supplier” to the main customers. This change towards multifunctionality might require quite a long learning process: subcontractor II has had difficulties to understand how the scheduling and electronic parts and materials supply should be implemented. While production control used to be based on capacity planning of machines, a more advanced pull system is now needed. The altered process structure has clearly increased inventories within the company.
169
6. Conclusions The findings presented in this paper show that the development of a subcontracting system and companies is notably similar to the Japanese course of development. The altered supply policy of OEMs has also had a straightforward effect on subcontractors’ strategies. As a consequence of the altered supplier structure, purchasing and materials management have become a more important process in small- and medium-sized subcontracting firms. Likewise, the subcontractors are more often offering their customers system undertakings which demand more multifunctionality from their operations. While the business strategy of subcontractors evolves, it is equally necessary to reassess the supporting structures, controls, communications and other systems within the manufacturing system. The manufacturing strategy framework presented in the paper might be a useful tool for companies to identify the altered requirements. The main problems perceived by the subcontractors were related to delivery performance. The subcontractors consider the short delivery lead times and unpredictable order changes most problematic. In order to achieve a faster response to the final customers’ demand, the managerial focus should be on issues concerning material and information flow in the network and within the companies. In the future, more shared education and other mutual development projects are needed between the prime contractors and the subcontractors to overcome the problems in logistics management and to promote the development of subcontractors’ business.
References [1] A.J. van Weele, F.A. Rozemeijer, Revolution in purchasing. Building competitive power through proactive purchasing, European Journal of Purchasing Supply Management 2 (4) (1996) 153—160. [2] J.P. Womack, D.T. Jones, From lean production to the lean enterprise, Harvard Business Review 72 (1) (1994) 93—104. [3] J.P. Womack, D.T. Jones, D. Roos, The Machine that Changed the World, Harper Perennial, New York, 1990.
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U. Lehtinen/Int. J. Production Economics 60—61 (1999) 165—170
[4] R. Lamming, Beyond Partnership. Strategies for Innovation and Lean Supply, Prentice-Hall, Hemel Hempstead, 1993. [5] L.M. Ellram, Partnering pitfalls and success factors, International Journal of Purchasing and Materials Management 32 (2) (1995) 36—44. [6] T. Nishiguchi, Strategic Industrial Sourcing — The Japanese Advantage, Oxford University Press, Oxford, 1994. [7] H. Nakamura, Subcontractor System in Japanese Industry, JMA Newsletter 20 (1984) 1—4. [8] Y. Sato, The subcontracting production (Shitauke) system in Japan, Keio Business Review 21 (1984) 1—25. [9] M.J. Smitka, Competitive ties: Subcontracting in Japanese automotive industry, Ph.D. Thesis, Yale University, New Haven, CT, 1989.
[10] P. Hines, Creating World Class Suppliers, Pitmans, London, 1994. [11] J.T. Thoburn, M. Takashima, Industrial Subcontracting in the UK and Japan, Avebury, Hants, 1992. [12] L.-E. Gadde, H. Ha kansson, Professional Purchasing, Routledge, London, 1993. [13] U. Lehtinen, Partnerships among Finnish manufacturers, European Journal of Purchasing & Supply Management 2 (4) (1996) 161—167. [14] T. Hill, Manufacturing Strategy, 2nd ed., The Macmillan Press Ltd., New York, 1993. [15] B. Asanuma, Manufacturer—supplier relationships in Japan and the concept of relation-specific skill, Journal of Japanese and International Economies 3 (1) (1989) 1—30.