Case Stusy 5. (Supplier Development)

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UNITED TECHNOLOGIES CORPORATION:
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SUPPLIER DEVELOPMENT INITIATIVE
In mid-2000, United Technologies Corporation (UTC) was two years into a supplier
development integration program. The major focus of this initiative was to strengthen
relationships with “key” suppliers to fully leverage the supply chain. The qualities sought in the
relationships included long-term commitments, confidential information sharing, cooperative
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continuous improvement efforts, and sharing risks and rewards. Both the nature of these
relationships and the associated behaviors were new for UTC and represented a significant
challenge. UTC believed it was making progress moving from supplier rationalization toward
supplier integration. However, some UTC suppliers believed that they were not receiving any of
the gains from these initiatives and viewed UTC as often focused only on cost cutting. UTC’s
Global Supply Management organization hoped to investigate individual supplier relationships
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and address supplier concerns. The objective was to assist high-potential suppliers so that they
could improve their performance and, at the same time, align better with UTC’s goals for a more
productive and less costly set of reliable supply chain partners.
UTC’s Pratt & Whitney Aircraft unit (P&W) had identified Dynamic Gunver
Technologies (DGT) as an important supplier in their forward planning. The two companies had
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signed a memorandum of understanding, agreeing to cooperate toward greater supply efficiency.

Neither organization had much experience in performing the tasks associated with gaining the
required improvements. Moreover, early efforts had disappointing results. Management at both
companies was concerned about meeting long-term objectives. Although the companies had a
history of working together, recent events had introduced stress into the relationship. In
addition, it was becoming clear that both firms did not share the same vision of their future as
supply chain partners.
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This case was prepared by Sam Farney, Principal, Supply Chain Advisor and was revised by Jean Gibbons,
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Research Associate at the Darden School. Both worked under the supervision of Robert Spekman, Tayloe Murphy
Professor of Business Administration. Copyright © 2000 by the University of Virginia Darden School Foundation,
Charlottesville, VA. All rights reserved. The case was written as a basis for class discussion rather than to illustrate
the effective or ineffective handling of an administrative situation. To order copies, send an e-mail to
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spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or
otherwise—without the permission of the Darden Foundation.
This document is authorized for educator review use only by zia haq, Other (University not listed) until Jan 2021. Copying or posting is an infringement of copyright.
Permissions@hbsp.harvard.edu or 617.783.7860
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United Technologies Corporation
In 1999, UTC had global revenues of $24.1 billion from its four major business
segments. Carrier Corporation was the leading global manufacturer of heating and cooling
equipment for both residential and commercial customers and contributed $7.3 billion in total
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revenues. Otis Elevator was the leading global manufacturer of elevators and escalators and
generated revenues of $5.6 billion. UTC had acquired both of these companies in the late 1970s
to balance a decline in UTC’s aerospace businesses. Pratt & Whitney (P&W), a leading
manufacturer of jet engines, was one of the original UTC companies and contributed $7.6 billion
in revenues. Flight Systems, which included both Hamilton Sundstrand and Sikorsky Aircraft,
contributed $3.8 billion.
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Increasingly, as firms competed more as virtual supply chains than as stand-alone
businesses, firms with significant manufacturing operations like UTC were subject to severe
price pressure. Cost control had become a major focus, and very aggressive cost targets had
been in place for a number of years. One UTC supply manager commented:
The aerospace marketplace has changed dramatically in the past five years in the
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purchase and sale of aerospace parts, both commercial and military. Today with
the Internet, mega-data storage and retrieval systems, and e-mail communication,
the customer/consumer is far more educated about the availability of products and
competitive products than ever before. In addition, the customer has information
as to who produces these products and can easily make comparisons and look for
the lowest prices.
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Compounding these pressures was consolidation among aerospace companies. Along with
consolidation came a greater reliance on suppliers, as it was too costly to be vertically integrated.
Outsourcing, closer relationships with one’s key suppliers, and other attempts to leverage the
skills of one’s supply base supplanted the traditional mindset of doing the work internally.
Despite price pressures, UTC had achieved significant earnings per share growth (near 20
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percent per year) in the late 1990s. This reflected years of streamlining businesses, attending to
quality, and improving processes. In the 1998 UTC annual report, CEO George David noted in
his Letter to the Shareowner:
The forces behind these results are years of restructuring and process
reengineering. Begun in 1991, and continued with increasing intensity since, they
are remaking UTC. Everywhere we turn, we see improvements—in costs, in
quality, in lead-time reductions, and in environmental impacts and other measures
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of corporate citizenship. Productivity and performance gains are limitless, and

companies like UTC demonstrate this every day.1
1
United Technologies Corporation 1998 Annual Report, Year in Review Letter to Shareowner.
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The letter continued that the most recent efforts in 1998 were to reduce cost and prices with
suppliers and gain efficiencies. The stated goal, announced in 1997, was $750 million in
lowered supplier costs annually.
Much of the early savings for UTC had come from rationalization of its vast supplier
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base. To build value across the supplier chain, UTC sought closer relationships with its more
valued suppliers. The process was intended to integrate the better suppliers into UTC’s
processes so that both could gain from the closer, more collaborative set of interactions. On one
level, the intent was to blur the boundaries of the firms; thereby making the procurement process
seamless. At another level, this integration should also reduce costs, improve quality, and
facilitate the transfer of skills and capabilities, all of which should improve end-use customer
satisfaction.
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The integration process began at the commodity class level where UTC developed its
sourcing strategy. First, UTC selected its best suppliers based on a number of criteria including
quality, cycle time, delivery, quality, and cost. Using historical data, UTC evaluated suppliers
based on two dimensions: their impact on UTC’s business, and how difficult it was for UTC to
obtain supply (Exhibit 1). In addition to these two dimensions, key suppliers were chosen
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mainly on the basis of their relative costs and quality. A UTC supply manager noted:
The driving metric is cost performance… If a supplier does not meet cost
objectives, it is seldom considered as “key” unless the product was unique and
had to be sole sourced. In addition to measuring costs, quality and delivery
performance were also monitored very carefully. Repeated poor delivery or
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problems with quality would quickly result in a supplier being downrated from a
potential key supplier to one that might soon lose UTC’s business. A reversal of a
negative trend was not an automatic reinstatement, but a slow climb back into
favor. Beyond cost, quality, and delivery . . . financial stability and risk, capacity,
capitalization, competition, design capability, materials and subcontract
management, and continuous improvement implementation were among the more
important performance metrics. From the set of remaining suppliers, UTC hoped
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to gain certain concessions and, in exchange, would commit to the longer term
agreement.
UTC Supplier Development
UTC had developed a seven-step process for developing key suppliers (Exhibit 2). The
first step in the process was focused on segmenting the potential suppliers based on each one’s
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strategic importance to UTC and the level of UTC’s dependence on the product/subassembly.
Through this analysis, UTC tried to determine whether to invest in and nurture the supplier. To
quantify their evaluation, UTC typically relied on metrics of quality, delivery, lead-time, and
cost performance. From the set of qualified suppliers, UTC further narrowed the set to suppliers
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with whom a closer relationship would be beneficial to both. UTC recognized that not all
suppliers who conformed to their metrics would be good partners. These suppliers were then
offered long-term contracts in exchange for price reductions as well as other commitments to
improve productivity.
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A key step in the entire supplier evaluation process was an assessment of areas for
improvement. DGT reached this step in the development process based on its past performance
and competitive market position.
Dynamic Gunver Technologies
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The merger of Dynamic Metal Forming and Gunver Manufacturing in early 1999 formed
DCT. Gunver Manufacturing had historically focused on “flat and square” parts like brackets,
liners, and supports, while Dynamic Metal Forming had focused on more sophisticated “bodies
of revolution,” like ducts, combustors, rings, and bands. Headquartered in Manchester,
Connecticut, DGT projected $100 million in annual revenues for the calendar year 2000.
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DGT had seen significant improvement in some of its other customer relationships. For
instance, DGT had recently signed a 20-year agreement with a major customer. Highlights of
the agreement included:
1. Year-over-year pricing to be adjusted up or down depending on actual changes in raw

material and labor cost. The adjustments would be applied only to the specific portion of
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the total cost (i.e., labor or raw material content) that was directly affected by such
market-driven changes.
2. The customer would provide 18-month forecasts of requirements, with rolling monthly
updates.
3. DGT would realize real growth in annual purchases of 20–25 percent.
4. Clear messages of the customer’s make or buy postures, allowing DGT to anticipate
future purchase requirements and to better plan for production and capacity utilization.
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In addition, DGT was particularly pleased with recent gains in its relationship with a
P&W competitor, Rolls Royce. Rolls had demonstrated its commitment to DGT by sending a
team of engineers to conduct a cost improvement project focused on a single part. At the
conclusion of the project, DGT presented design change suggestions to Rolls who agreed to the
changes in one day. Thirty percent of the six-figure annual savings was shared with DGT.
Subsequently, Rolls invited the DGT project sponsor to participate in an internal leadership
development session and sought other similar projects to help DGT improve delivery reliability
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through improved manufacturing flexibility. Rolls made corresponding changes to its own
forecasting and made firm order commitments that improved DGT’s ability to schedule.
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DGT had been hoping for similar involvement with P&W, its largest customer.
However, recent events had brought into question the mutual commitment of these long-time
trading partners.
Relationship with P&W
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Dynamic Metal Forming had been a UTC supplier for 40 years, and Gunver
Manufacturing had supplied UTC with parts for nearly 30 years. P&W’s experience with the
two companies before the merger had been different. Prior to the merger, Gunver had appeared
to be losing ground to its historic competitors in cost and delivery performance. To grow and
compete in more complex markets, Gunver had increased its engineering staff and updated
equipment and systems, significantly increasing overhead. As their sales volume grew, Gunver
did not keep pace with systems for cost analyses or for tracking parts in manufacturing. With
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thousands of parts to manage and deliver on a daily basis, they began to have significant,
recurring delivery problems and lost visibility of actual part manufactured cost. P&W felt that
Gunver’s performance had slipped in recent years.
Dynamic, on the other hand, had remained very price competitive by minimizing
overhead costs and had demonstrated good performance in quality and on-time delivery in
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response to P&W requirements. By continually improving in both quality and delivery while
remaining cost competitive, Dynamic had remained a formidable competitor in the marketplace.
Internal growth was steady, and the efforts by engineering and manufacturing allowed them to
continue building their skills while holding overhead costs in line with their increasing sales.
Dynamic had begun to court other customers and to work with several UTC competitors. By
leveraging its expertise and knowledge gained from working with UTC, Dynamic successfully
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won bids from Allied Signal, Rolls Royce, and General Electric.
Strong personal relationships had been built over many years between P&W and DGT; in
part, because many of DGT’s top executives were former P&W employees. This had meant that
the two companies were willing to go beyond the “hands off” supplier relationship. In 1994–
1995, amidst a significant downturn in the aerospace market, Gunver had faced the prospect of
filing for protection from creditors. P&W arranged funding to help Gunver through this period.
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Dynamic also had experienced difficulties during 1995. Rather than a loan, P&W agreed to
price increases at Dynamic to improve financial performance.
UTC had attempted to bring process improvements to DGT operations. DGT had
received substantial assistance from P&W in the form of workshops in Kaizen process
improvement, lean manufacturing, and UTC’s ACE program for quality improvement. In
particular, the manufacturing cell that produced brackets for P&W had been studied and
reworked several times. The result was improved productivity. At the time of DGT’s merger,
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the combined organization had sales of $85 million and 596 employees or $143,000 per
employee. In June of 2000, yearly sales had increased to $100 million and 546 employees or
$183,000 per employee.
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In 2000, DGT supplied P&W with over 1700 gas turbine engine components in the two
broad categories of metal fabrications and configuration hardware. Metal fabrications consisted
of 407 distinct line items including parts identified as liners, seals, shields, fairings, supports,
ducts, rings, baffles, combustors, bands, fairings, and cones. Configuration hardware was made
up of over 1300 different parts, including brackets, springs, and clamps. These items varied
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greatly in relative complexity and consequently in cost. Prices for individual piece parts ranged
from $1.25 to $24,254. The average price of metal fabrications was $220 for Gunver supplied
parts and $1187 for Dynamic Metal parts. In the purchase of less complex products, Gunver
parts averaged $44, and Dynamic Metal parts averaged $82. A number of the purchased items
were not critical to the P&W end product. One exception was the Augmenter Duct, a flight
critical part for the F100 military engine. However, if one examined the entire suite of parts
purchased by UTC, it was clear that UTC had become dependent on DGT for its broad range of
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product applications.
In recent years, both the absolute dollar value of sales to P&W and the percentage of
UTC purchases to total DGT sales had declined. (The past six years of purchase history between
P&W and DGT are summarized in Exhibit 3.) In 1999, P&W sales were $29 million, down
from $36.2 million in 1998. At mid-year 2000, P&W’s annual rate of purchases from DGT was
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projected to be $22 million.
UTC had selected Dynamic Gunver Technologies as a key supplier to Pratt & Whitney
for development. (Exhibit 4 shows DGT supplied parts and the relative importance to UTC.)
This decision was based on past performance, past mutual commitments, and the fact that both
companies had invested in the relationship In the spring of 1999, when Dynamic and Gunver
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merged, existing P&W contracts had been set to expire in December 1999 and December 2000,
respectively. Because P&W viewed DGT as an important future supplier, in late 1999 it had
proposed a new three-year purchase agreement with DGT to take effect in January 2000. Both
companies negotiated a long-term agreement with very aggressive cost savings goals that was
very much in P&W’s self-interest. However, there were many opportunities for DGT to improve
its quality, delivery, cycle time, and cost position.
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Despite its long relationship, DGT management had recently expressed some concern
about P&W’s future business, noting that P&W had lost market share to competitors, and that
DGT sales to UTC had dropped off in the last few years. DGT also felt that P&W was becoming
difficult to work with, demanding immediate cost reductions and focusing only on the short term.
Joint efforts to build a closer customer-supplier partnership and reduce costs over the past several
years had not materialized into new volume for DGT. In one instance, UTC had offered to use
its corporate purchasing volume in nickel alloy sheet to provide DGT with lower raw material
costs. However, DGT felt its cost structure had not improved, and any reduction in the costs of
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raw materials benefited only UTC.
DGT still hoped to achieve a mutually beneficial agreement with P&W. A potential area
for improvement was updating of the Materials Requirements Plan (MRP). DGT’s MRP system
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was updated as customer requirements changed. P&W’s bi-weekly updates of committed orders
reaching out several months were often incomplete in all time periods beyond the closest two-
week period. Problems in UTC’s forecasting affected DGT’s production scheduling and product
delivery. DGT’s three other largest customers, however, each provided an 18-month forecast of
all expected requirements. These customers sent monthly updates to reflect changes in actual
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customer commitments. Better information flow allowed DGT materials management to provide
better planning and higher delivery reliability. Planning and commitments were at the top of
DGT’s priorities in considering a new relationship with UTC. In fact, these issues were more
important than price and volume commitments.
A New Agreement and Conflicting Objectives
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The 2000 agreement between P&W and DGT contained provisions critical to both. The
most significant of these were price reductions given to P&W in exchange for the promise of
DGT revenue growth through 2002. When the agreement was signed in 1999, DGT had
committed to an immediate 2 percent price reduction. In addition, from 2000 to 2002, DGT
would reduce prices 5 percent annually. DGT had agreed to these price reductions, knowing that
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its competitors had given UTC similar commitments. In return, UTC promised to increase
annual purchases from DGT to $40 million until 2002.
The business growth promised to DGT would come not only from P&W, but also from
P&W Canada (PWC), Sikorsky Aircraft, and Hamilton Sundstrand. DGT executives believed
there was real opportunity with PWC and Sikorsky. At the same time, they were less
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enthusiastic about the possibility of additional work from Hamilton Sundstrand because of
differing strategic objectives. Specifically, DGT’s objective was to work on higher value-added
operations such as assembly. However, Hamilton Sundstrand wanted to outsource only the most
basic processes, retaining in-house its subassembly activities.
DGT’s concern for the apparent misalignment with Hamilton Sundstrand partially grew
from experience. Over the years, DGT could point to instances that illustrated the lack of
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agreement regarding the role played by DGT in its dealings with Hamilton Sundstrand. For
example, DGT had planned to supply Hamilton Sundstrand with combustors for auxiliary power
units. Originally valued at $500,000 and involving almost 40 SKUs, the relationship ultimately
yielded only $50,000 worth of new business on five parts. In another instance, Hamilton
Sundstrand had offered to consider the purchase of a number of parts produced by hydro-
forming, a process DGT considered to be its key capability. When DGT received the bid
package, the number of parts was smaller than anticipated. Moreover, the parts were offered in
an on-line auction using FreeMarkets, and DGT chose not to participate in the bidding. It
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became clear to DGT that Hamilton Sundstrand either did not see them as a “best performing”
parts supplier or did not value fully their skills and expertise.
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The economics of a jet engine are such that the majority of profits earned come from the
sale of spare parts in what is referred to as the aftermarket. Historically, companies like Rolls,
GE, and P&W sold spares parts even if the parts were made by one of their suppliers. DTG
(along with many other parts suppliers) understood better the revenue/profit implications of
being only a parts supplier to the engine makers and was eager to gain a piece of the spare parts
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business. In fact, DTG had begun to participate in the aftermarket for the sale of spare parts.
The aftermarket business had been a significant source of revenue for P&W. This lack of shared
vision contributed to the tension between the two companies. In the 1990s, P&W began losing
revenue to Gunver on the sale of parts to the U.S. government. To be sure, the Department of
Defense (DOD) had aggressively pursued a “breakout” of parts manufactured directly from
suppliers in competition with the aircraft engine producers to reduce costs to the Air Force.
DGT was motivated by the revenue potential, the implicit support and permission of DOD, and
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the opportunity to seek new business. DGT also saw this market as a hedge to offset the
potential loss of P&W purchases due to scheduling difficulties.
Moving Forward
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Efforts to improve P&W and DGT’s supply relationship were focused mainly on meeting
aggressive cost targets. To meet the 5 percent annual price reductions and preserve reasonable
operating profitability, DGT would have to reduce costs significantly. A series of management
meetings between UTC/P&W and DGT resulted in a number of specific improvement projects
(Exhibit 5). Further, DGT agreed to work on the recommendations made by UTC to improve
their performance (Exhibit 6). To ensure progress on all goals, key parties from both
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organizations agreed to meet every two weeks or as necessary to review progress and to provide
a formal monthly update to DGT’s management.
Still, P&W and DGT had not resolved two major issues: DGT had now seen the promised
increase in sales to UTC, and DGT remained committed to selling parts directly to the Air Force.
Also unresolved was the fact that DGT was pursuing its direct sales efforts to the airlines and
suggested that it assist P&W to develop preventative maintenance programs for this market.
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DGT already had forged such an agreement with another OEM. P&W would not entertain such
an idea for two reasons: P&W felt that there were legal “gray areas” around government
regulations that prohibited non-competitive behavior, and the aftermarket service business was a
coveted and profitable area for business. It was becoming clear that DGT was trying to capture
more of the value chain, and that P&W considered DGT’s main relationship to them as a
supplier of parts. Beyond the misalignment in roles was the concern that DGT was slowly
becoming a competitor.
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Given these challenges, UTC reflected on its supplier development program. Noting the
complexity of the process, they wondered about the patience needed to see improvements in the
suppliers selected for the program. Simply, how long should they wait to see results? Also, if
UTC devoted effort to sharing its process improvement programs and engaging in training to
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raise quality and reduce costs, how could they be assured that they would not create another
competitor? Their goal was to improve end-customer satisfaction while developing a cadre of
loyal and capable suppliers. Their goal did not include the scenario where the supply chain
partner sold parts into the aftermarket, competed with UTC for other business, and partnered
with UTC’s competitors. To be sure, the issues were very complex, the actual development
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process was time consuming, and the outcomes were not always as expected. UTC wondered
what had been learned from its experience with DGT.
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Exhibit 1

SUPPLIERDEVELOPMENT INITIATIVE
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UTC Supplier Evaluation Matrix
Leverage Partner/
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Integrate
High
Impact
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Shop Manage risk
Low
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Low High
No
Difficulty of obtaining
supply
Source: United Technologies Corporation

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Exhibit 2

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UTC Seven-Step Supplier Development Process
Continuous Improvement Loop
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11 22 33 44 55 66 77
Select Market to Establish Assess Train Implement Report

Supplier Supplier MOU Opportunity Team Project Results
& Plan
Project
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Analysis
Analysis
reclassifysuppliers
reclassify suppliers
supplier development
supplier development
noaction
no action
remedial action
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remedial action
Source United Technologies Corporation

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Exhibit 3

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DGT Sales to Pratt & Whitney from 1995 to 2000 ($ millions)
Year Dynamic Metal Gunver DGT combined Combined Sales

Forming Manufacturing (% of DGT Total)
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1995 11.5 16.7 28.2 --
1996 14.6 15.3 29.9 --
1997 22.3 22.1 44.3 --
1998 20.8 15.4 36.2 42.3
1999 17.3 11.7 29.0 31.2
2000 11.8 10.3 22.1 22.1
(projected)
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Exhibit 4

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Annual UTC Purchases from DGT
Part Family Dollar Value UTC total Spend % of UTC spend

from DGT for Part Family in this part family
Metal Fabrications
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(400+ line items) Total
Cases $600,000 $57,400,000
Liners Inc in combustors
Seals $100,000 $19,000,000
Shields $700,000 $2,800,000
Fairings & Shrouds $600,000 $2,500,000
Supports $1,500,000 $5,300,000
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Ducts $5,300,000 $72,000,000
Rings $2,700,000 $8,400,000
Baffles $900,000 $3,100,000
Combustors $2,100,000 $19,500,000
Bands Included in rings
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Covers $800,000 $2,900,000

Approx total: ~$15,500,000
Configuration Hardware $5,400,000 $50,000,000
(1300 + line items) Total estimate estimate
Brackets
Springs
Clamps
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Exhibit 5

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P&W/DGT Improvement Projects
1. Analyze inventory from Finished Goods through Raw Material. Target is reduction of
$3.6 million in total.
2. Reduce overhead burden by $900,000 (approximately a 3 percent reduction to $32.5
million in overhead). Benefit sharing: UTC represents 30 percent of DGT’s business. As
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a result, UTC receives 15 percent of $900,000 or a $135,000 reduction in price.
3. Increase DGT sales to $40 million.
4. ISO 9000 system improvements.
5. Increase machine capability.
6. Reduce costs of General Procurement (indirect materials and services).
7. Reduce escapes by 45 percent by year’s end.
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8. Establish a defect per unit measure across the board for DGT.
9. Value Engineering Projects—need Design Engineering Support.
10. Partner direct to P&W for Preventative Maintenance breakout. 200 to 300 P/N’s per year.

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Exhibit 6

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UTC Consultant Findings for DGT
1. There are systemic problems in managing inventory levels, and the DGT inventory
management system requires engineering.
2. Improvements are needed in planning and scheduling of production. Customer forecast
information is not coordinated with final production plans. A master production schedule
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is needed. Capacity planning should be added. Work Orders, a “push” system, should be
replaced with a “pull” system using kanban signals.
3. Purchasing practices can be improved through greater use of long-term agreements, in
subcontracted processes and in working with suppliers to implement lean manufacturing
practices.
4. Internal quality should be tracked and reported along with planned countermeasures.
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There should be a particular focus on elimination of rework.
5. The flow of production and applications of cellular manufacturing need attention at
several levels. Expand applications of Total Productive Maintenance and housekeeping.
Take time should be computed and made visible throughout.
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Case Stusy 5. (Supplier Development)

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signed a memorandum of understanding, agreeing to cooperate toward greater supply efficiency.

of corporate citizenship. Productivity and performance gains are limitless, and

UTC Supplier Development

Dynamic Gunver Technologies

1. Year-over-year pricing to be adjusted up or down depending on actual changes in raw

raw materials benefited only UTC.

A New Agreement and Conflicting Objectives

UNITED TECHNOLOGIES CORPORATION:

Source: United Technologies Corporation

UNITED TECHNOLOGIES CORPORATION:

Continuous Improvement Loop

Select Market to Establish Assess Train Implement Report

Source United Technologies Corporation

UNITED TECHNOLOGIES CORPORATION:

Year Dynamic Metal Gunver DGT combined Combined Sales

UNITED TECHNOLOGIES CORPORATION:

Part Family Dollar Value UTC total Spend % of UTC spend

Covers $800,000 $2,900,000

Source: United Technologies Corporation

UNITED TECHNOLOGIES CORPORATION:

Source: United Technologies Corporation

UNITED TECHNOLOGIES CORPORATION:

Source: United Technologies Corporation

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