Supplier management: Survival lessons from automotive buyers
In the midst of their most challenging market ever, automakers begin to really look at total costs while conceding that suppliers need to make money too if they're both to survive.
By David Hannon -- Purchasing, 11/13/2008 2:00:00 AM
The North American automotive industry has been sideswiped by a convoy of unexpected challenges in the past year and the purchasing organization may have one of the keys to getting the industry back on track.
In the not-so-distant past, automotive OEMs were often accused of driving suppliers too hard on price. In a presentation earlier this year, Tony Brown, Ford's group vice president of global purchasing, summed it up by saying: "The relationship between suppliers and domestic OEMs in the past has been just short of all-out warfare. It's tragic, but true."
But in the dramatically shifting North American automotive market, even the most hard-nosed OEMs have learned there's a lot more value to be gained from suppliers than just lower price and that a healthy supply base means a healthy OEM. And those lessons can be applied to nearly any industry.
Lesson one: Take the pulse
The type of supplier management strategy an OEM takes may vary based on the overall health of the supply base. So keeping a very close eye on the financial state of your suppliers is key and a lesson the automotive industry has learned the hard way. Most experts agree the North American automotive supply base is not healthy—some experts say it's got a small cold while others tell you it's got a terminal illness. But suffice it to say there are a lot of automotive suppliers at serious financial risk today.
David Andrea, vice president of industry analysis and economics at the Original Equipment Suppliers Association (OESA) in Troy, Mich. describes the financial health of the North American automotive supply base as "very fragile."
"In the past quarter the sales have dropped off dramatically and you're putting that kind of economic cycle over
 Our real intent is to teach the suppliers a methodology that they can leverage in all areas of their business and plants.”—Bob Nelson, Honda  “The best performing suppliers are the ones that adjust faster than the rest.” —Bo Andersson, General Motors |
the massive restructuring that has been going on," Andrea says. "Add to that the impending credit crisis and you've got a very fragile situation throughout the supply chain."
Those trends are driving automotive OEMs to pay closer attention to the financial state of their suppliers, from tier one and down. Bob Nelson, assistant vice president and division manager of North American purchasing for Honda of America Manufacturing in Marysville, Ohio, says Honda's closely watched supplier metrics can often indicate if a supplier is having problem and what kind of intervention might be necessary. "In today's environment we consider a strong healthy supplier as an asset to us and if they're profitable on all their business, we're happy with that," Nelson says.
At General Motors in Detroit, "We evaluate the financial strength of our suppliers all the time," says Bo Andersson, General Motors' group vice president for global purchasing and supply chain, who manages GM's more than 3,600 suppliers. "In some cases we have more contact with the tier twos and threes than we might have in the past. We have always had a good view of their financial conditions, but in some areas we will buy materials on behalf of our suppliers. So we have even more reason to make sure suppliers are financially viable."
Lesson two: Cost has its place
But that's not to say cost is no longer important—in fact it may be more important than ever. No matter how deep your partnership is with a given supplier or a set of suppliers, cost always has a place in the relationship. As Andersson says, "it's not a true partnership if suppliers are not competitive. I don't want to further the myth that cost is not a part of supplier partnerships—it is a big part of a partnership."
Suppliers are willing to work with buyers on price if they feel they are being treated as a true partner and the OEM is working to reduce overall cost—including the suppliers' cost of doing business with the OEM—say most experts. In fact, John Henke, president of automotive industry research firm Planning Perspectives in Birmingham, Mich., says his firm recently published research that proved clearly that high price pressure does not impact supplier relations. "It's not the amount of pressure, but the manner in which it's carried out that impacts supplier relations most," Henke says.
Suppliers tell OESA's Andrea that if their OEM customer has stable production schedules and processes, the cost of doing business with that customer is more manageable. "That customer may still be relentless on price reduction, but the overall cost of doing business with them will be less and the relationship may be more positive," he says.
And it's that difference between focusing on overall supply chain cost instead of price that may be the most important supplier management lesson the automotive industry can teach. "In the past the relationships focused more on getting cost out by price reductions," says David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "But now there's a real focus on reducing the overall cost in the supply chain and the OEMs are looking internally for cost reduction opportunities."
 “We look at our supply base as an extension of our manufacturing capability. It’s critical those suppliers are part of the process and they will make or break our ability to produce a quality product.” —Gene Tabor, Toyota |
Gene Tabor, general manager of supplier relations at Toyota Motor Engineering & Manufacturing North America in Erlanger, Ky., points out that the current tight credit market is piling up on other challenges including lower volumes for suppliers, so simply asking for price reductions doesn't achieve the goal of reducing total costs. "We have to work even more closely with suppliers to reduce our costs where we can and make sure we don't impose additional burdens on suppliers by asking them to do things that aren't necessary."
For example, Andersson says GM had some warranty issues with a compressor supplier, which were creating major cost issues. So it contracted with a new supplier that historically supplied another OEM but had strong ranking in warranty performance to reduce total cost for the product line. "Warranty issues can create a lot of cost," Andersson says.
Lesson three: Stick to the plan
Suppliers like consistency. Henke says the ranking of some OEMs such as Toyota and Honda declined in PPI's Working Relations survey because those OEMs altered their approach to supplier management based on the market conditions. "They saw lower sales and profits and took a slightly more adversarial approach to their suppliers," Henke says. "They pushed their suppliers harder which was inconsistent with their previous supplier dealings. But I think they see those results and will rectify that situation."
Henke says other OEMs have received more favorable rankings from suppliers in recent years because they have announced their intentions to suppliers and stuck to their plans. Andersson's success at GM, some market watchers say, has as much to do with his business style and personality as his strategies—he's often disarmingly straightforward in his style and conversation, which suppliers seem to appreciate.
Another good example of making clear goals and requirements visible to suppliers is Ford's Aligned Business Framework (ABF) initiative. Now three years in, Ford's list of 20 areas where it wants suppliers to meet goals has helped Ford separate long-term partners from suppliers on the brink. But the ABF program is not just about Ford asking more from its suppliers. Brown says the auto giant has made commitments to improve in areas its suppliers want. (Click here for a list of Ford's 20 ABF requirements)
For example, Dearborn, Mich.-based Ford now tries to minimize a supplier's risk by contracting with a given supplier for the life of a vehicle or program. This lets Ford provide more detailed information to the supplier and the supplier can plan investments and capacity without concern that it may not be the supplier of choice a year later.
"In return we want suppliers to share more of their financial data with us so we can accurately determine their financial health," Brown says. "If we're going to commit to a supplier for the life of a program we need to know the state of a supplier's ability to sustain that."
Henke says Ford's adherence to its ABF principles in dealing with suppliers is having results. "Communication with suppliers is critical and Honda and Toyota always did this well but Ford is making big strides in this area," Henke says. "Communication doesn't mean you're telling everyone everything, it means you're giving suppliers specific information about how they can meet the needs of the OEM in the short-term and long-term."
Lesson four: There's a right way and a wrong way to rationalize your supply base
 Emily Thompson, left, and Bart Connell, right, Honda associates in quality assurance, evaluate a sunroof in Honda’s Marysville Auto Plant (Ohio), with Lori Cecutti of supplier AY Manufacturing. |
"Every OEM, especially the domestics, would like to have closer working relationships with fewer suppliers," says Cole. "And they're rationalizing their supply base to get down to a number that allows them to have deeper relationships with them."
But how an OEM goes about the supplier rationalization process can have long-term implications for its overall supplier relationships. Andrea points out that an OEM can end its reliance on a given supplier in a year fairly easily. But in the automotive industry, it takes a supplier a lot longer than that to transition its business to another customer or industry. In short, he says OEMs need to give suppliers a chance to manage their way out of that relationship to avoid creating a trail of supplier bankruptcies and the loss of permanent capacity that an OEM may require in a future market.
Cole points out that there have been some less-than-ethical sourcing practices by OEMs in the past where an OEM would take a supplier's proprietary technology and shop it around for a lower cost. And while that kind of practice is less common today, it still lingers in many suppliers' minds and on their balance sheets to some extent.
At Toyota, "We have a corporate culture and a global philosophy that includes two major underpinnings, and one of those is respect for people," says Tabor. "That applies in all directions—suppliers and customers."
But it's not just a respect issue—there's a business reason to have a civilized rationalization—a smoother transition is less costly and less disruptive to the OEM's business as well.
"You pick a date, stick to that plan and let them make rational decisions and plan their way out," Andrea says, adding that a reduction in capacity should only be used as a reason if it's truly the reason for ending a relationship with a supplier. "If a supplier is told they lost the business due to supplier cutbacks but then hears the OEM is putting RFQs out to suppliers in other regions, that damages the relationship."
Ford's ABF program is centered around supplier rationalization. As Brown puts it, Ford simply has too many suppliers chasing too few opportunities. Some supplier segments have as much as 50% excess capacity, he says, so Ford is aggressively trying to determine who its key suppliers are and move business to those suppliers.
"You can imagine those suppliers that we're moving more business to are really happy and those that we're moving business away from are not sending me holiday cards," Brown says. "However in the end if that excess capacity does not come out, we can never have a really healthy supply chain."
One of the things Ford asks of its 65 ABF-approved suppliers is that they take on capacity of troubled suppliers if need be, sometimes on short notice. At the same time, Ford's supplier diversity goals are weighted into that supplier selection process. "As our customer base gets more diverse, they look at our supply base more in deciding if they want to buy from us," Brown says.
Lesson five: Be here now for suppliers
 Alan Mulally, president and CEO of Ford Motor Co. (left) and purchasing chief Tony Brown discuss business with a Ford supplier at the North American International Auto Show in Detroit. |
Being available to suppliers for meetings and input is another priority with automakers today. Andersson says he and his staff at GM have worked to become more available for meetings or phone calls with suppliers as often as possible. "That makes a difference to suppliers," he says. "They might not always get what they want, but they will at least get a fair hearing with the right people."
Tabor says Toyota has long subscribed to an "open door" policy with its supply base as well. "In the 22 years I've been at Toyota we have emphasized our openness in receiving ideas from suppliers."
At Honda there is a well-defined supplier improvement process that relies heavily on on-site visits to supplier plants. Honda's 3P process (Production Preparation Process) has a team from Honda meet with a supplier's cross-functional team on site to simulate the production process and look for areas to reduce waste. "We actually got this process from a supplier," Nelson says.
In addition to meeting with suppliers, OEMs are also getting better at putting the right people with the right titles in the supplier-facing positions. Toyota's Tabor says the title he's held for the past two years—general manager of supplier relations—"sends a clear message that we have an ongoing concern to improve the relationship and we believe those relationships translate into good ideas and quality products."
Along those lines, according to sources interviewed for this story, when Chrysler's new CPO John Campi ruffled suppliers' feathers earlier this year by overemphasizing cost cuts, Auburn Hills, Mich.-based Chrysler quickly recruited veteran Sig Huber from Toyota and put him into the newly created position of director of supplier relations. While Chrysler officials declined Purchasing's interview request for this story, in August Huber told the Detroit Free Press Chrysler plans to cut back on last-minute engineering changes to suppliers and offer more accurate production estimates.
Lesson six: Pull back the curtain
According to the OESA, two-thirds of the value of a finished vehicle is created by the suppliers and about 40% of the total R&D dollars in a vehicle are spent by the supply base. As automakers push more work out to the supply base, there needs to be a deeper level of information-sharing and trust between buyer and supplier. The OEM needs to give suppliers a better look at the product and technology roadmap without fear that suppliers will share that information with its competitors.
"If the customer involves the supplier in its product development process the relationship tends to be very good," says PPI's Henke. "Under those circumstances, there is more information passed back and forth and the supplier learns more and can see the other opportunities which could mean more profit for suppliers."
Tabor says Toyota regards its supply base as an extension of its manufacturing capability. "The relationships drive the value analysis. This allows them to submit their ideas and make proposals that will eventually make our product stronger in the marketplace."
At Ford, Brown and Derrick Kuzak, Ford's group vice president of global product development, meet regularly with small groups of suppliers to "give them a peek inside our product plans for as long as 8–10 years and show them physicals for near-term plans. We show them products we're going to launch in the next three years and show them the longer-term product line both in terms of vehicle and powertrain."
Honda's 3P Process also involves a much deeper sharing of information on both sides with the final goal of having a more streamlined process. "Overall we are a challenging customer but we are willing to roll up our sleeves and work with suppliers on the factory floor to find a better way to accomplish what can be considered a tough requirement," says Nelson.
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