Mending fences: OEMs and suppliers find that building better relationships leads to building better product

Automotive Industries,  Feb, 2004  by Gary Witzenburg

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Say you're in the widget business. After years of painstaking research, tedious hardware and software development and millions of dollars in investment, your workaholic techies come up with the global industry's benchmark High Tech Widget.

Every automaker discovers it needs your HTW to meet ever-tougher emissions and economy requirements. GM, Ford, DCX, offshore makers, everyone orders HTWs by the boatload. You run out of capacity, invest in new facilities and hire new people to meet demand.

Life is looking good for International Widget Works. After years of struggling, you're finally making money. Your techies get raises, your sales types are swimming in commissions, and everyone gets big bonuses.

Suddenly, Chrysler Group, struggling to survive, demands an immediate live percent price cut, followed by an additional 10 percent in the next two years (which it did in 2000). Ford, bailing furiously to save its own leaky boat, orders a 3.5 percent cut now and warns of more to come (which it did in 2003). GM demands retroactive cuts this year and more each year forever (which it does). Toyota, Honda, Nissan, everyone is squeezing your profits to dust. Unless you can find ways to cut costs quickly, substantially and continuously, you're looking at crippling losses. While your defect rate is excellent, it's not good enough for customers demanding zero defects. And you're having trouble meeting delivery schedules for tens of millions of HTWs every hour of every day all over the globe.

Everyone wants to inspect your facilities, audit your books and teach you how to cut costs continuously to meet their price-cut demands ... while improving quality, delivery and customer service. Because it's disruptive to resource (to one of your competitors, who quickly figured out how to beat your HTW's performance and price), they, want to help you survive while they're sucking your profits down to negative. They want to "fix" you or dump you.

Mending Fences?

"I see the supplier base consolidating, just as the OEMs have," said GM CEO Rick Wagoner in a Dec. 15 Automotive News interview. "We've said we'd like to get 20 percent material cost reduction in three years, which I thought was a stretch goal, until I saw that Toyota was going for 30 percent." Suppliers to GM have been finding a new clause in their contracts stating they can be canceled and business moved if they can't meet a competitor's lower price within 30 days. Wagoner later said the company would do that only in rare cases.

"The fact that we're consolidating is causing some friction," he added. "That's not unnatural. It's not particularly pleasant, but it's a realistic situation. The competitive bar just keeps getting raised, and people are saying, 'When is it going to stop?' And it's hard for any of us ... to say, 'It's never going to stop.' But we have an obligation to play these out in the fairest way we can with the supply base because they're so important to us."

"I've been working in the automotive business for 20-plus years," offers Visteon Corp. Quality and Materials Management VP Jon Maples, a former DCX Operations vice president. "I can't recall when there's ever been an easy year. If you want to stay on top of the market and maintain profitability and customer satisfaction, it's always going to be a challenge."

"Each OEM has its own situation," adds Delphi Corp. Vice Chairman and Chief Technology Officer Don Runkle, who was GM's North American Engineering vice president before moving to Delphi. "We deal with absolutely every OEM, we're working to improve how we deal with each of them, and I think in general we have good relationships with all of our major customers. Our customer teams digest how their purchasing systems work and do their best to get aligned with each customer's priorities. When we engage with an OEM, we need to sell them a lot of parts, and we need to make a profit, and the best relationship is one where they have respect for that."

Keith Lawrence, executive vice president, Procurement and Supply for Mitsubishi Motor Manufacturing of America (MMMA)--which has one very flexible U.S. plant--came out of the supplier ranks so has seen the purchasing wars from both sides. "Our philosophy going in," he says, "is that we want partnerships with our suppliers. We're tough but fair. We want to be a preferred customer. We need close relationships and a close understanding of each supplier's daily activities and how it supports us, not arm's length relationships."

New Approach

Runkle explains that Delphi has been fundamentally changing its approach to its own purchasing. The new approach, he says, "has a lot of Honda and Toyota in it" compared to the previous GM-like approach. Four strategies characterize it:

Cost standards--a technique borrowed from Toyota. This involves creating a database to comprehend the costs of materials, processes and even containers, so when buyers sit down with suppliers, they know in advance what things should cost. And if their cost is not at that level, they can discuss what can be done jointly to get to that level.