Putting it All Together at Harley-Davidson
Pete Schmitz, a twelve year Honda veteran whom I first met in Marysville, moved onto another motor company, Harley-Davidson where he combines procurement, design,
manufacturing and cost expertise in a unique job function. Reporting up ultimately to Harley’s CFO, Schmitz describes his ten year Finance Product Cost Manager position as “the cat bird’s seat…. we are the neutral third party in product development - getting the whole organization to work together.” Because the theme of this issue of Blue Heron is integration – it’s time to put the pieces together, folks – it’s worth understanding better how this all works. Product development is so important to Harley-Davidson. When Marketing or Styling identifies a need or an opportunity, “the product development process kicks off, with Engineering laying it all out and then supply—Manufacturing or Materials--working on the parts,” says Schmitz, “but Finance undergirds it all. I’m playing in that realm. I understand how all the multiple functional pieces come together and I’m uniquely positioned to have visibility to the whole process. It’s fun.”The group of professionals in H-D Motorcycle Cost Management is a mix of both cost analysts and cost engineers. This function uses Robin Cooper’s product cost approach with the addition of up-to-date supplier selection, auditing and control techniques.LEGO TECHNIC Chopper from LEGO Systems, Inc., with permission.
Harley-Davidson’s strong culture of innovation recognizes the value of product development and bringing suppliers along for successful and profitable launches. Schmitz cites the new Switchback motorcycle as an example of the expanded team approach.
The Switchback was designed to give people more flexibility and a different ride. Touring bikes, says Schmitz, “are heavier and expensive, but riders still want to be able to go in comfort and take some of their stuff along. Marketing saw an opportunity here – ‘Hey, wouldn’t it be neat if we could make a bike that would work for long rides, but then you could take off the saddle bags and / or windshield for cruising around town and still look good – you know, like a transformer.” The launch was a great learning exercise in starting to use the new product development costing process.
It’s a four step-process:
1. The team had to identify what was changing with the launch – the type of bags that might be added, the markets affected, the sources of materials
2. Put a value to it. Working with Marketing, Styling, Engineering, Purchasing and Manufacturing, the first step is to outline what it’s going to cost – the windshield and bags, for example, both of which contained new product ideas that were patentable; 3. Next, the group makes a forecast; Leadership needs to see if the project idea is viable or not. Does it make business sense?4. Why? To Influence the cost. Here is where the process gets interesting because according to Schmitz “my group is there to identify what’s changing in the new design, put a value on it, make a forecast, then influence – so let the fun begin!… We’re dealing in product development, going beyond the purchasing function that you would have seen at Honda. This is where companies look at their product offerings and where there are behind–the-scenes machinations.” It’s a different perspective seen from this vantage point. Says Schmitz “When you are in Purchasing you see things from a sourcing viewpoint. It is a non-neutral opinion. It’s the same for Manufacturing, etc. But in Finance we are not Purchasing or Engineering or Styling. We are part of the PD team but we are the ones holding the purse, asking whether an idea is good or bad and can we as a team, as a company, afford it as it’s currently configured.” With the Switchback the team asked questions about whether they could make or buy it cheaper, how would the changes work, and what they would cost. The questions were strategic, but the activity had all the give and take of a scrimmage. So they combined Purchasing and Manufacturing knowledge with Finance to perform the financial analyses. “We all get a pretty good look at what’s going to happen that way.”“You design for the purpose and work the details, but if the company wants to change specifications or volume, that’s all part of the product development process. Every change has a cost impact.” Schmitz’s cost team was recognized for their contributions to H-D’s new innovative product development process with a Black Award plaque. “We’re moving closer to the heart of the beast,” he says, “and it gets more exciting every day. We feel that we have the support of the company behind us.” Both H-D motor company president Matt Levatich and Michelle Kumbier, senior vice president of product development, share past Materials Management leadership backgrounds that make them well-attuned to the power of strategic sourcing.The process differs slightly from Honda’s. “At Honda we set the target, and it would be aggressive, going from the request to setting targets to commitment. Honda really knows how to process and work through the design – their development systems are like a finely turned orchestra. Plus, at Honda we learned to never miss a target, to never make a commitment that we couldn’t keep.” Under Harley’s old PD system “people might have treated a request as a people-pleaser – they would try to deliver and then would miss it, and in the end nobody got what he wanted because part of the process is taking the request and translating it into what a bike is. The more specific it gets, the easier it is to measure.”
“And that was a big change,” he recalls. “At Harley we would set targets but we weren’t seeing or doing the whole process. Any slip led to finger pointing. It was hard to work with a broken process. Switchback was done before we had completely reworked the system, but it is hitting its targets. The future looks very bright for us. In the past if we hit the targets it was as much luck as anything, now it’s more deliberate. Now we have an adult conversation that can be converted into a target, a big negotiated process. We will only sign up for what we can deliver.”
The starting point is understanding where you are at – Schmitz calls it reality management, “like a 12-step program. To get better, you must first acknowledge where you are. The Japanese excel at working with reality management and getting everybody to play together.”
Supplier selection, Supplier auditing, Supplier control
Assessments
We asked Schmitz what he felt as a Honda, Black and Decker and Harley-Davidson veteran about supplier assessments. His answer was refreshing. “You can use technology tools to be faster at it. Assessment tools will help augment information and speed up the qualification process by storing information and data we gather from on on-set audits:
1. SSA or supplier self assessment. This is a simple introductory backgrounder that offers an opportunity for a company to describe itself. A good starting point, it’s limited in depth.
2. On-site – There are three types of audits - product review, process audit and the best, the system audit. The system audit takes 2 – 3 days on site.
“Companies that are not very advanced fall somewhere in the first or second, but the system audit looks at ten different aspects of a company.”
Dave Nelson, former head of strategic sourcing at Honda, Deere and Delphi believes that the up-front assessment work is critical to building strong supply networks. In fact, Nelson brags that during his tenure Honda only cut one supplier, a bankruptcy bound-producer outside Cleveland. Purchasing engineers appeared at this supplier’s Cleveland site on a Friday and by Monday all tooling had been relocated elsewhere. “The single most important thing you do,” says Schmitz, “is the selection of the supplier. Chose them right – sure, all this up-front stuff is good – SSA, SAE, on-site visits, but it’s your supplier relationship that really matters – not a one-night stand, you’ll live by a long-term commitment philosophy.”
Schmitz recommends using a computer system for data storage and manipulation to evaluate the business side of the supplier. “That’s all great, but at the end of the day it’s the people running the business behind the numbers that make the difference. BOLD: The tools are not a substitute for the on-site evaluation – they can never be primary.”
Never pave a cowpath…
“Here’s an example - long division. Could you do long division? Sure, you know how to do it, but could you still do it? There are calculators and spreadsheet tools to help you do
it, but as a teacher I believe we need an understanding of what’s behind it. It’s important to not lose that ability. Don’t pave a cowpath! We believe in never automating a bad process – first, fix the process, do a solid supplier selection, then automate it.” “The tools are only so good – at the core it is the philosophy. A company that has the right philosophy builds long-tem relationships rather than short-term deals.” Simple is best“I’m not anti-technology. That’s the point –don’t pave a cowpath. When it comes to supplier assessments and selection, there’s no substitute for selections based on the broad factors “QCDDM”--quality, cost, delivery, development and management. That’s how Honda and Harley do it. “Schmitz recommends that companies look at a supplier’s future plans and ask what are their next steps, whether they are leaders in their industry and if they have R & D. Some shops don’t do R & D, and there’s also a place for some suppliers like that in the supply base. Finally, evaluate the C-suite “feel.” ” We really look hard at management. We sit across the desk from the owner. We need to understand what these people are like. You might say it’s like picking a good husband – they may look pretty, but down the road, do they have morals, values? When you have a problem is he still going to be there - are you going to work together? It’s the old crackers in bed, the stone in the shoe story! “His final word on supplier selection? “Chose very carefully and then make it work.”***