Pressure still on tier-one suppliers to cut costs
"All of our suppliers are experts of particular components. We are trying to get them to generate ideas."; More and more automakers are seeking modularity from suppliers. They hope to reduce workload by procuring single instrument panels, for example, instead of panel components.; "The ability to work with tier two and tier three is a challenge we've all got."-Jim Wehrman, assistant vice president of purchasing, Honda of America; Representatives from Honda of America Manufacturing say the company is ru
By Brian Milligan -- Purchasing, 2/10/2000 2:00:00 AM
Tier-one suppliers must continue to cut costs. That's the word coming from automakers to their number-one suppliers in 2000.
But it's a challenging initiative--perhaps too challenging, some say--as major suppliers struggle to meet it. They say the ever-increasing pressure to cut costs is excessive and difficult to pass on to sub-tier suppliers. And they worry that quality may soon suffer.
"They are looking at the bottom-line price, not what the true cost is to make the product," warns James O'Dell, director of sales for the Tennessee-based Calsonic North America. Calsonic North America is a tier-one supplier for Nissan.
But automakers counter, saying it is time for tier-one suppliers to prove their worth by becoming leaders for the sub-tier suppliers. And they say they will hold tier-one suppliers accountable for cost-cutting measures across the board.
"Yes, the industry is putting more responsibility at the tier-one level," says Harold Kutner, group vice president of worldwide purchasing and Northern American production control and logistics for General Motors Corp. "And we expect that performance to continue through tiers two, three, four and five.
"Tier one has to have the capability of managing tiers two and three," he continues. "We look to them to do that. If we don't find them capable, they won't get the business in the first place."
It's a little more than a month into 2000, and once again automakers are laying down the law to suppliers. They want their suppliers to use the Internet. They want centralized procurement. They want communication with tier-two and tier-three suppliers, and tier-one suppliers that will be more involved in the design of new products.
All of these initiatives are happening at a time when suppliers find themselves under the pressure of new responsibility and facing the need to dig up or rope in sophisticated supply bases of their own.
Reducing costs
Horacio Woolcott, managing partner of supply chain management practice for Arthur Anderson's Pacific Region, says this sort of pressure is increasing. Woolcott says the suppliers--particularly second- and third-tier suppliers--are expected to reduce their costs by as much as 3% to 10% each year. "There is pressure on these suppliers to reduce their costs and pass that on to the OEMs," Woolcott says.
The pressure is hard, and the road to bringing cost-cutting initiatives to fruition is difficult to negotiate. Some automakers are trying to make it easier by backing up their demands with some form of payoff. Automakers like Honda of America Manufacturing, for example, are getting around supplier challenges by focusing on their existing suppliers instead of searching for new ones. Through this "strengthening" approach, Honda has provided favored suppliers with technical support and other rewards.
"We are looking at how to support increased volumes with a minimum investment so we can get more production out of the same investment," says Jim Wehrman, assistant vice president of purchasing for Honda of America Manufacturing. "We are strengthening our suppliers."
But even as it takes this approach, Wehrman says Honda is running into a roadblock as it struggles with the challenge of reaching suppliers beyond tier one. By their very nature, the sub-tier suppliers, he says, don't feel the need to pledge allegiance to automakers. They march to their own beat. "The ability to work with tier two and tier three is a challenge we've all got," Wehrman says.
Even the automakers agree. Honda, for example, has tried to leapfrog over tier-one suppliers so it can reach out to sub-tier suppliers with its initiatives. But the company quickly learned that this cannot be easily done. The distance is too great.
Wehrman says Honda has a different answer to the problem. The trick is to convince the sub-tier suppliers that they should have an allegiance to the tier-one suppliers. And then, let tier one worry about the hard job of bringing them online with Honda initiatives.
"We worked somewhat with critical tier-two or three suppliers, but we are trying to get away from that," Wehrman says. "We would rather push the responsibility of that on tier one."
"It's like working in a large auto plant," he continues. "The manager might not know everybody in every station. But he should know the key managers and coordinators. They have a face-to-face relationship and some sort of structure to efficiently manage the large facility."
By taking this approach, Wehrman says Honda is asking a lot. And frankly, he is not convinced that even Honda's best suppliers are up to the task.
"The challenge is that our tier-one suppliers aren't always or weren't always consistently at the same level as our own purchasing department," Wehrman says. "They don't have the resources, whether technical or analytical, to bear on tier-two or tier-three suppliers."
A dream world
Some suppliers agree that companies like Honda are existing in a dream world if they believe tier-one suppliers can break down the walls that lead to tiers two and three. They say that often, the commodities the sub-tier suppliers provide simply aren't going to come in at bargain prices.
O'Dell of Calsonic North America says in theory, there is nothing wrong with these initiatives. He says it only makes sense that the companies try to get all of the suppliers on board when it comes to keeping costs down. And he is seeing more than his share of directives in this area. One of the latest came in the development of a heating and air conditioning system for the Nissan Frontier. O'Dell is optimistic that Calsonic will soon develop an efficient, less costly system that will meet Nissan's cost requirements.
But will Calsonic be successful next time around? O'Dell says it must try--because tier-one suppliers who don't' take cost-cutting initiatives seriously today can face troubling reactions from the automakers. He notes how General Motors Corp. has taken to seeking tier-one suppliers by posting its needs over the Internet. That, to him, suggests that the automaker will seek alternative suppliers if its needs are not met by familiar tier-one suppliers. "It's a little bit unnerving to me," O'Dell says. "I don't think GM is taking the necessary precautions to really review what is being quoted, and it's going out the door to talk with people who will do low-ball quoting and don't intend to do the business."
O'Dell says Nissan's recently announced "revival" plan has thrown suppliers like Calsonic North America into high gear. The plan includes aggressive supplier cost-cutting measures, and tier-one suppliers like Calsonic were left with the responsibility of meeting them. That meant turning to its own suppliers and letting the pressure trickle down. The trouble is, O'Dell is not convinced that the sub-tier suppliers are feeling the pressure in the same way.
O'Dell says sensible suppliers will do all that they can to examine their operations and bring costs down. "I think most of our suppliers realize, as we do, that to remain in business we are going to have to become more competitive."
But that doesn't mean the increasingly aggressive cost-cutting initiatives aren't taking their toll. O'Dell says he is constantly worried that all of the cost cutting is going to lead to a situation where suppliers are forced to sacrifice quality in order to save money.
"Absolutely, they are putting too much pressure on us to cut costs," O'Dell says. "One of my biggest concerns is they start to sacrifice quality for cost.
"If that happens, I think we will be moving backward," he continues. "I see us moving in that direction, or seeing the automotive manufacturers going in that direction. I think they can push to the point where costs can't be cut any more."
But Kutner of General Motors says tier-one suppliers are not being left out in the cold. In fact, he says sophisticated automakers realize the pressure they are putting on these suppliers, and are trying to help them adjust.
He says, for example, that General Motors has an aggressive "equal partners" program that is designed to pump up suppliers that are having trouble meeting their initiatives. Through the program, General Motors provides business planning assistance, purchasing training, logistics planning and other things.
"Many of our partners are incorporated with less than the amount of capital and resources that are needed," Kutner explains. "We are engaging these suppliers to help them grow and develop and improve their business opportunities."
Uphill battle
But even with programs like this available, O'Dell says suppliers face an uphill battle when it comes to convincing sub-tier suppliers to cut their costs. Calsonic North America is a tier-one supplier for Nissan, and the company has had its share of directives telling it to cut costs and work with the sub-tier suppliers. In some ways, he says, the directives just can't be met.
"If you're seeking steel and aluminum, when you're dealing with raw material, there is not a lot of room there," O'Dell says. "Those products are controlled by supply and demand from the market."
O'Dell says Calsonic's strategy is to communicate with the sub-tier suppliers, telling them the market levels Nissan expects Calsonic to stay at or reach. A key part of this transaction is telling the sub-tier suppliers what they need to do to help Calsonic meet the expectations.
The communication is spearheaded by Calsonic's manufacturing association, which has set up a system of monthly meetings between the company and representatives from its suppliers. The association representatives use these meetings to review strategies, observe business forecasts, and network with major suppliers.
In past years, such meetings were more informal. But O'Dell says the constant cost-cutting initiatives from suppliers have forced Calsonic to formalize them and take them very seriously. Six months ago, Calsonic gave its supplier overseer group a name and identity--the Supplier Quality Group.
"I think we formalized this because of our realization that to get our suppliers to work with us and reduce costs, we had to be available to support them in any way possible," O'Dell says.
Through its meetings, the group provides the suppliers with information. The group members inform the suppliers about cost directives and other initiatives. Members of Calsonic's Supplier Quality Group then tour the sub-tier supplier facilities and look for possible ways that those suppliers could improve their operations and cut costs. The group likewise provides these supplier representatives with tours of its facilities in hopes that some of its own cost-saving measure ideas could by carried back to their plants.
O'Dell says this is a time-consuming process--Calsonic has more than 180 suppliers to work with. "Our quality people are spending most of their time on the road with the suppliers," O'Dell says.
And he also says this process is giving birth to a distinctly charged atmosphere. He says Calsonic is making it a point to tell its sub-tier suppliers that it will search for other suppliers if its needs are not met.
"We are not using threats, but we are certainly letting our suppliers know that we are doing market testing of other suppliers who make similar or the same products," O'Dell says.
By doing this, O'Dell says Calsonic finds itself upsetting a certain balance between tier-one and sub-tier suppliers. He says Calsonic is finding itself testing relationships that have been rock solid for many years. It is an unfortunate reverberation from the constant, price-driven incentives from automakers, O'Dell says. And suppliers on all sides have to learn to live with it.
Emphasis on loyalty
"In this industry, in the past, there has been a lot of emphasis put on loyalty," O'Dell says. "I mean working with suppliers and developing lifetime relationships. Now a lot of people are saying that those relationships no longer exist, that we are reneging on what we told them early on.
"I don't think people are so much angry, as it's an awakening," he continues. "And I think they have to understand where we are coming from, where our customers are coming from. It's more of a reality check--that this is not business as usual."
O'Dell says these relationships are being further strained by the sheer volume of suppliers that Calsonic relies on. With nearly 200 suppliers to deal with, he says Calsonic feels that it lacks the "buying power" it truly needs to have influence. He says this fact can't be offset by the Supplier Quality Group effort or the annual meetings that Calsonic sets up with its supplier representatives. In the long run, he says, the sub-tier suppliers simply don't feel they need to be overly influenced by the tier-one supplier. "We in a sense have lost our buying power," O'Dell says.
Kutner admits that all of these pressures are putting tier-one suppliers in a bit of an awkward position. But he also warns that some suppliers might be missing the bigger picture as they try to come to grip with them. He points out that the automakers are having to deal with their own initiatives, be they marketplace driven or driven by the Federal government. Everyone must play ball to survive, he says.
He also warns that the initiatives have a reason--to propel the automakers' into better standing in the marketplace. If suppliers can't keep up with these, he says, they run the risk of simply being left behind. "Economics in the marketplace is at the bottom of it all," he says.
"You can use whatever measure you want, but none of us is as good as we need to be," he continues. "Overall, the environment, global competition, they are all driving us to better perform than we ever did before. This is the price of entry, the price of survival."
Honda's Wehrman agrees, and he says the initiatives can be met by all. He says Honda's strategy is to ask its tier-one suppliers to take the same approach with sub-tier suppliers that Honda takes with tier one. This means showing the sub-tier suppliers what cost expectations are, and then providing them with whatever support they need to make those expectations.
"If there is a cost target, they should develop them for tier-two and tier-three suppliers," Wehrman says. "It it is a matter of technical resource. They should have the capability to give technical support to tiers two and three. That is the expectation."
Wehrman says Honda stops short of providing tier-one suppliers with the funding or technology necessary to bring initiatives to sub-tier suppliers. But it does provide them with people. To help bring the goals to fruition, Wehrman says Honda sends representatives to its tier-one suppliers to help them develop sub-tier support operations. In some cases, the Honda representatives will stay with the tier-one suppliers for an extended period of time in order to get things moving.
"We send workers to help tier one, and each case has to be handled differently," Wehrman says. "In many cases, we have people assigned on an ongoing basis because in some cases the suppliers require a significant amount of support. Our representative will spend the majority of his time trying to support them and help them develop these programs."
Step up to the line
Maryann Keller, like Kutner of General Motors, argues that this sort of help should make things easier for suppliers. But like Kutner, she says it is time that tier-one suppliers stepped up to the line and took more control of the supply chain themselves.
Keller, the chairman of the Chicago-based Society of Automotive Analysts, says the distance between the companies and sub-tier suppliers will always be problematic. But she argues that automakers would do well to work with tier-one suppliers and help them pull the others closer into the fold.
"Ultimately, the tier-one suppliers are going to have to demonstrate that they are capable of monitoring the quality and the ability of the suppliers that they themselves deal with," Keller says. "These relationships are not yet in place, and perhaps it should be a level of trust on the part of the auto companies on how much independence they will give to the tier-one supplier."
Complicating the process even further is the increased emphasis on auction buying. Donna Parolini, president of the New York-based International Business Development Corp., notes that auction purchasing is having a significant impact on the industry, and it's speeding up the interaction between automakers and tier-one suppliers.
But that same level of interaction is falling short on the tier-two and three levels.
"It's because tier one hasn't turned around and done it the other way," Parolini says. "You need to have both."
Keller also agrees that all the pressure on suppliers to cut costs can backfire. She says the automakers, ever trying to keep costs down, may find themselves dealing with suppliers that can't provide the quality or volume they are looking for.
"The low-cost, low-price supplier might not be building quality parts," Keller says. "So sometimes the single-minded obsession with the lowest price leads you to suppliers who are not capable of producing the volumes auto companies need or require."
And there is a danger here as more and more suppliers disappear. Parolini agrees that mergers and acquisitions will continue to consolidate the supply base. And the bright side of this, she points out, is that consolidation is performing a kind of natural selection. The best suppliers, she and other analysts argue, are the ones who are surviving.
But even as the mergers and acquisitions take place, Parolini says many automakers are making supplier consolidation paramount in 2000. She says the temptation to streamline and reduce costs is still high, and she expects the industry to continue to cut down on its number of suppliers. "Twenty-five percent on a worldwide basis will be cut again," she predicts.
But Woolcott says supplier consolidation is one thing--the loss of a good, innovative supplier is another. "It is the appropriate amount of pressure on the OEMs, but on the others, it is too much," Woolcott says.
"There is this expectation of continuous cost reduction," Woolcott continues. "Unless you are a savvy and cost-conscious supplier, that can be very painful to weather."
But on the plus side, Woolcott notes that those suppliers that do survive are providing more and doing the job more efficiently. It is a trend that harkens back to natural selection in the supplier base--the most capable will survive.
"You've got to have close relationships, and that often means fewer relationships," agrees Bill Windle, vice president of A.T. Kearney's North American Automotive Practice. "So the pressure is on to perform."
New directions
Even as the automakers try to finagle and encourage these relationships, Wehrman says other, new problems are popping up for suppliers. He says Honda has watched even competent suppliers fall down when it comes to project management and achieving aggressive development schedules. He notes, for example, that Honda is getting more aggressive in its requests for the development of new products. Today, the company expects a new product development time of less than two years. This means expecting suppliers to provide a quick turnaround time from the design stage to the development of a prototype. "Doing this with a minimum of problems is a challenge," he admits. "We should be able to start our mass production without any glitches, but it takes more management than we'd like to see."
And Wehrman says not all of Honda's suppliers are putting up with the pressure. In some cases, he says, it has caused Honda and some suppliers to part ways. "The supplier may lose interest in doing business with us for whatever reason," he admits.
Windle says automakers' increased efforts to shorten leadtimes is causing other changes in supplier/automaker relationships. The push for shorter order-to-production times is fueling the push for modular systems. This is because auto manufacturers that are determined to build a customized car for a buyer in a small period of time depend on the quick ability to integrate modules.
"That shorter delivery time will put more pressure to build modules than systems, so we are seeing more emphasis on modularity than before," he says.
Woolcott says more and more automakers are seeking modularity from suppliers. It is an initiative he expects to see more of in 2000. He says this will be particularly true in the production of midsize to small vehicles. This strategy of procuring single instrument panels instead of the panel components, for example, reduces the workload, and consequently, labor costs. It also makes the entire procurement process easier.
"Modularity is a way of reducing costs," Woolcott says. "Instead of dealing with something that was built by 20 suppliers, now you're dealing with just one supplier who is responsible for transaction processing and the quality of other components.
"It's a way of centralizing the transaction process," Woolcott continues. "You are buying in a more integrated manner and getting people that have more specialized skills in a specific area to work and cooperate."
Charles Talbott, vice president of purchasing for Nissan North America Inc., says this sort of direction is placing new emphasis on the suppliers that produce modules. It requires fine coordination between tier-two and tier-three suppliers. "With something like this, there is an opportunity for a lot of confusion, and that is why it's critical that there be very clear direction and good coordination to minimize those kinds of issues."
Talbott admits that this will be a particularly challenging area for Nissan to work in. It will mean the company must develop an array of suppliers who can produce modular systems as quickly as possible.
"This is because you are dealing with multiple layers of suppliers," Talbott says. "In the past, if we had a particular problem with a component, we could go straight to the supplier, coordinate that issue with them, and agree on what changes need to be made and implemented. Now, when we do that with a tier-one supplier and we want to integrate parts and components, it's more complicated on what the issue may be and who is responsible for that issue.
"The coordination of that with tier-two suppliers is just an opportunity to slow down the process," he continues. "That is where one of the challenges will be. We will have to improve the coordination processes to expedite that."
Internet opportunities
There is some good news out there. Most analysts say the Internet is opening up vast opportunities to involve suppliers in many areas--including the design phase of new products.
But Woolcott says automakers should go even further. He says they should look to the Internet as a way of reducing transaction costs when it comes to procurement. He notes that companies like GM and Ford are now sharing a lot of e-procurement technology.
"By using this technology, they reduce some of the paper shuffling that takes place," Woolcott says. "They are putting more components out for bid and auction and exposing the domestic supplier base to global sourcing for companies."
Woolcott says this strategy comes in handy for smaller suppliers that are trying to stay afloat. What essentially is happening is electronic shelves are being provided where multiple companies can display their product offerings and their ability to produce future parts. This is increasing their supplier opportunities, and giving them a strategy for survival.
"If I were a small plastics company in Peru, I would now have the visibility to see GM on the Web, looking to build new automotive design," Woolcott says. "They are exposing the domestic supplier base to global sourcing for companies, so the smaller companies that don't have the marketing muscle can get access to large OEM customers and quickly globalize the supplier base with bid and auction."
The project by GM and Ford, for example, will create an e-commerce venture that will link their suppliers, dealers and other businesses. GM plans to create GM MarketSite, which will act as an electronic marketplace for products, raw materials, parts and services. Ford, meanwhile, will create an Internet network linking it with its 30,000 suppliers.
Ron Iori, purchasing public affairs manager for Michigan-based Ford, says the company hopes to use the network to rope in suppliers well beyond tier one.
"This will involve suppliers beyond tier one, tier two, tier three," he says. "It is something that will eventually touch all aspects of our supply base when it is up and running."
Woolcot believes automakers will be able to use Web sites like these to quickly communicate needed changes in parts design and make for easy changes in product specifications. "The supplier can then communicate the changes and get the cost to the design team online vs. paper," Woolcott says. "So the communication allows the supplier to reduce costs, the manufacturer gets better quality parts, and there is quicker access to engineering design to change orders."
But Parolini is quick to point out that new supplier responsibilities like these are creating still more challenges for suppliers. Suppliers that once only had to worry about whether or not the automakers would buy their parts are now faced with the worry of how to actually engineer new parts.
"They are confused. It's a job they've never had to do," Parolini says. "Those are business decisions that they didn't have to make in the past. And now the supplier is in complete charge of the interior, in charge of what types of visuals will be behind the steering wheel, and decides if he wants to make it digital or put in a dial."
Ironically, Parolini says this increased pressure is forcing tier-one suppliers to try and find more sophisticated suppliers. The increased pressure on purchasing only adds to the level of responsibility for the tier-one suppliers.
"They've had a person who orders the toilet paper or the gloves for the plant, but now procurement for them is made up of tough decisions," Parolini says. "Should they buy needles? Or make the part electronic?"
A new challenge
All of the new design responsibility is creating a challenge for suppliers in other ways as well. They are, for example, being forced to spend more money in areas where they did not have to spend money before.
"The benefit of all this may be to the OEMs rather than to the suppliers," says Dennis Virag, president of the Michigan-based Automotive Consulting Group Inc. "That is the downside. Because with the additional engineering staff, prototyping, testing abilities, their costs are going up. So we are seeing a shift of the costs from the OEMs to the suppliers."
As they are drawn more and more into the design process, Virag says the savvy suppliers will learn that they will have the power to control costs. They can, for example, make recommendations for parts that can be made out of relatively inexpensive raw materials.
"One way you can control your costs is through the design process," he says. "Having this responsibility allows a supplier to design in quality and design cost out of the product. Some companies are very good at this. Most are in the learning process."
Parolini predicts the suppliers--from tier one on down--will go through a lot of trial and error as they face these increased responsibilities.
"We have a weakness in this area of the industry as a whole," Parolini says. "So procurement is one of the most important roles for the 21st century, and it will be the most difficult for suppliers."
Talbott agrees wholeheartedly. He says Nissan is seeing its own challenge as it works with suppliers that have been experts in particular components, and now must be asked to design and make modules.
"All of our suppliers are experts of particular components," Talbott says. "We are trying to get them to generate ideas, improve the product that we buy from them, and help them integrate other parts and components into the module."
The next level
Talbott says this system should help Nissan reduce its total cost while at the same time facilitate the vehicle assembly process. It will also, he hopes, help bring its suppliers to a new level of ability and productivity. He says the company is willing to provide the needed guidance.
"Currently the supplier may be specialized in a particular component, and not be an expert in other components that are integrated, and early on it will require a lot of assistance from us," Talbott says. "It will require a lot of assistance from us and coordination with tier-two suppliers, but the longer-term objective is for them to develop expertise and help us take it to the full level of cost-reduction opportunities.
"In the longer term, we are hoping to achieve greater benefits because the supplier will have developed the skills and abilities to become more of an expert in the area of modules," Talbott adds.
Parolini says major automakers, like Ford and General Motors Corp., hope to be able to complete all of their purchasing over the Internet by 2003. But the myriad of supplier challenges are slowing down the process. It can't all be done, she says, until all of the supply base is capable. She predicts the process will come in phases, starting with current products that can be purchased over the Internet and moving to the point where future products can be ordered. "It's not all done by point and click," Parolini says.
Iori says Ford also hopes that its new e-commerce venture will help grease the wheels of communication between tier-one, two and three suppliers. The company's present Web site is geared only for communication with tier-one suppliers, he says.
"Communication with tier two and three will get better as we depend more on the Internet-based joint venture we formed," Iori says.
"Obviously, when you are dealing with a few thousand suppliers, tier-one and tier-two communication isn't perfect," Iori says. "Through our joint venture, we will extend that capability down beyond tier one and include everyone, so it will be getting better."
Alice Miles, president of Ford B to B, ConsumerConnect, says the company's effort to optimize use of the Internet would be remiss if it didn't try to take into consideration sub-tier suppliers. Miles says she hopes the Internet venture will reach to the sub-tier suppliers by the middle of the year.
"Our vision includes them, and we are talking to our largest suppliers and asking them to kick off studies where we would extend the solution into tier two and tier three," Miles says.
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