Lopez All Over Again?

Automotive Industries,  March, 2001  by Maryann Keller

• E-mail
• Print
• Link

It seems that Daimler has decided to take a page out of the Lopez playbook.

A rather extraordinary thing is happening at Chrysler that promises to turn upside-down the cooperative and model relationship the company had for years with its suppliers. I recall how, one very hot evening in August 1989, Bob Lutz stood in front of Chrysler's top 200 or so suppliers and asked for their help. During the cocktail party that preceded the dinner, executives talked among themselves about what they expected Lutz to say, with virtually all of them agreeing that he was going to ask for price relief. Every thing about that evening -- the tent, mess kits from which we ate and the uncomfortable seating -- was symbolic of a company in crisis. My role that evening was to follow Lutz on stage and describe the economic and competitive challenges confronting not just Chrysler, but the entire U.S. auto industry.

Lutz appeared to throw away his scripted remarks. He spoke extemporaneously about a culture that disregarded supplier suggestions that could have improved quality and lowered costs. Suppliers, he said, were partners in Chrysler's survival, but for any of their efforts to mean anything, things had to change inside Chrysler, and he wanted to make that happen. There wasn't a word about arbitrary price cuts, just an invitation to show Chrysler how to design, engineer and assemble a car for less money, with the savings shared by Chrysler and its vendors. He would make sure Chrysler changed to accommodate the suggestions. Suppliers would be paid fair prices and could count on longer-term contracts over which to amortize investments.

It was a brilliant speech, and it set the stage for the turnaround in Chrysler's fortunes, in part based upon supplier cooperation. Chrysler became the most profitable customer of the parts industry among the American Big 3. Chrysler's costs fell, even as its quality improved. Suppliers were motivated to find ways of helping the company because they were also helping themselves.

By contrast, General Motors Corp., facing its own financial crisis in 1992, enlisted the support of Inaki Lopez. Lopez, then purchasing chief for GM Europe, had been credited with saving the operation billions of dollars by ramming price cuts on current suppliers or moving contracts to those who would accept money-losing contracts. The quality problems his policies wrought were not yet apparent as he set forth his plan for the U.S. Lopez quickly assembled a team of "warriors" whose mission was nothing less than the total transformation of GM'S supply base. GM would be the beneficiary of savings that Lopez suggested could be as great as 20 to 40 percent. His warriors scrambled through factories, claiming they were finding inventory savings and productivity improvements that would enable the vendor to give most of the hypothetical savings to GM.

Chrysler revived and prospered by the mid-1990s, with suppliers rating it their favored customer. GM, by contrast, was waging an all-out war with its suppliers and creating unprecedented hostility with them. Even after Lopez defected to Volkswagen, his policies dominated supplier relations. GM never realized the savings projected by Lopez and saw its quality and performance deteriorate as chosen suppliers failed to deliver the quality and quantity GM needed.

Although these two strategies carry an important message for the auto industry, as does the success of Toyota's 40-year cooperation with its suppliers, it seems that Daimler has decided to take a page out of the Lopez playbook. The results will be the same for Chrysler as they were for GM. In the short term, some money will be saved; but in the long term, the costs will be greater. Suppliers will focus on profitable customers and ignore those where they can't earn a fair return. In 1990, Chrysler gave its vendors a shot at a fair return with longer-term contracts and more predictable results. It's fair to say that Chrysler would not have made it without their help. Will they care this time?

MARYANN KELLER is a veteran auto industry analyst and author of the books "Rude Awakening: The Rise, Fall And Struggle To Recover At General Motors" and "Collision: GM, Toyota and Volkswagen And The Race To Own The 21st Century".

COPYRIGHT 2001 Diesel & Gas Turbine Publications
COPYRIGHT 2008 Gale, Cengage Learning