Suppliers: Friend or foe?
Traditional supplier management strategies begin to blur in the automotive industry.
By David Hannon -- Purchasing, 2/6/2003 2:00:00 AM
Historically there have been two schools of supplier management in the automotive industry. The U.S.-based automakers over the years gained a reputation for focusing on price reductions from suppliers and the slumping automotive market in recent years has intensified some of that pressure. Japanese carmakers like Honda and Toyota, however, became known for building long-term, close-knit relationships with top suppliers under the keiretsu system, which had OEMs (original equipment manufacturers) owning a percentage of its top suppliers. But in recent years, the strategies of individual automakers have begun to blur the lines as consolidation continues in the industry and suppliers continue to diversify.
"It's no secret that GM, Ford and DaimlerChrysler have focused for the last decade on annual price reductions from suppliers as a strategy," says Neil DeKoker, president of the Original Equipment Suppliers Association (OESA) (Troy, Mich.), an industry group representing automotive suppliers. "We feel that margin compression is at an all-time low in this industry. The [domestic] auto manufacturers are making little or no money and the suppliers are making inadequate money or losing money here in the U.S. On the other hand, we have Toyota, Honda and Nissan which are growing in market share and their annual economic discussions with suppliers are focused primarily on cost reduction, not price reduction. They work better with suppliers in collaborative ways to find out where they can take out costs so both can win."
Officials from General Motors were not available for this article, but a statement provided by the company said, "Admittedly, some tactics and actions by OEMs have been aggressive and viewed as harsh by suppliers but they were deemed necessary given the financial situation. Today, at GM we're working closely with our top-performing suppliers in an effort to provide sustainability. OEMs and suppliers are working toward more collaborative relationships. At GM, it starts with clearly defined objective and performance requirements and cross-functional involvement. The best-performing suppliers are involved in the early stages of vehicle development and through proven performance and capability are growing their businesses with GM." This could be evidence that the OEMs have gotten the message from suppliers.
A year of discontent
In hindsight, 2002 will not be viewed as a banner year for the U.S. automotive industry. The sluggish economy brought new cost reduction goals from the Big Three automakers and already struggling suppliers felt an even tighter pinch. DeKoker says some OESA members were even under the impression that DaimlerChrysler buyers had a mandate in 2002 to market test all of its parts and suppliers to ensure it is getting the best price for every product it buys. But David Barnas, a spokesperson for DaimlerChrysler, denies the existence of such a mandate, saying, "Supplier performance is the basis for the selection of future business" and that all suppliers are measured on quality, systems cost, technology and supply/delivery and are assessed against their competition. While the exchange may seem like a small misconception, it is indicative of the environment that came to a head in 2002.
Ford Motor Co., which declined an opportunity to discuss its supplier management strategy with PURCHASING, may have had the most public disputes with suppliers last year. Early in 2002, tier one supplier Visteon issued a statement outlining its objections to former parent company Ford's productivity price adjustments, claiming the adjustments were just too steep for Visteon.
In April, Ford publicly blamed its suppliers for much of its quality woes and recalls but suppliers shot back, saying Ford makes too many last-minute design changes. Suppliers cited an annual survey conducted by Planning Perspectives Inc., which found that Ford was considered to be the most difficult of the six major automakers to work with in terms of late engineering changes, conflicting directions from business units, and internal quality efforts. (The same survey found Honda Motor Co. and Toyota Motor Corp. are the best automakers to deal with and put the most emphasis on quality.)
In December, tier one supplier Tower Automotive announced it would not bid on the contract it held to supply frames for the top-selling Ford Explorer simply because "the expected returns at (Ford's) targeted pricing levels did not meet our requirements," according to a statement from Tower. Tower's move sent a message through the supplier community that the breaking point had been reached. While a supplier electing not to bid on a contract may happen more often than noticed, Tower's public battle with Ford served as a rally cry for U.S. suppliers.
Team play
Ford did take a major step to repair relations with suppliers in 2002 when it instituted a new worldwide program targeted as a more supplier-friendly way of reducing cost. Team Value Management (TVM) is a program under which Ford creates cross-functional commodity teams with representatives from suppliers as well as various areas within Ford (manufacturing, purchasing, assembly, quality, etc.) to identify cost savings. Ford expects to cut 15% or $5 billion in cost under the program, which was launched in Ford Europe by David Thursfield (who was later named group vice president of international operations and global purchasing at Ford following the success of the program). TVM is now being used with 80% of parts purchased at Ford Europe and 15-20% of those purchased by Ford worldwide. Thursfield expects that to rise to 60% by year-end.
The results of TVM in Europe have been dramatic, but their supplier friendliness is a topic of discussion. In January, Ford Europe said it will save more than $300 million through the TVM program and now buys 1,800 parts from 140 suppliers, compared with 3,500 parts from 340 suppliers two years ago. Savings on individual materials and parts are up to 53% under the program. DeKoker says Ford's Tony Brown, vice president of global purchasing, came to an OESA meeting with 300 suppliers and detailed the TVM program for OESA members. "If they live up to what they are saying, the program will get a lot of supplier support because it focuses on taking cost out and not attacking supplier margins," says DeKoker. "But this will take a long time to implement. It will take all of 2003 for Ford to get the teams set up and running. And then it will take a year or two to build the level of trust needed for all of us to open the books and work together. Then you have time to evaluate changes and durability testing."
Steven Armstrong has a unique perspective on Ford's TVM initiative. As vice president of purchasing at Volvo, his company is about three months into the TVM process and expects 2003 to be the year that makes the program famous. "TVM uses a more data- or benchmark-driven approach to driving the optimum cost vs. value for the consumer," says Armstrong. "That's good news for all of us from a cost and value perspective. For example, Ford has looked across the different groups at what we pay for roof bar systems. We asked why we pay more for the same roof bars on one model than another if they are essentially the same system? That may not be a supplier issue, but the total cost issue where additional cost may be added in the process, but no additional value is added. It's just a set of roof bars and we're not being efficient in getting the optimum solution."
Armstrong says the suppliers he's talked to have been encouraged by Ford's efforts to work more closely to reduce costs. And Volvo's purchasing team also meets regularly with those at Jaguar and other Ford Europe companies to compare notes on suppliers. "Being a Ford supplier does not automatically make them a Volvo supplier. Traditionally, Volvo was built more on relationship management than was traditional for the North American OEMs. We want the best suppliers no matter who they are. But if you're a supplier causing a problem in one of our units, you're creating a problem for all of us."
Sayonara keiretsu
On the other side of supplier management strategy, there are signs that the Japanese OEMs are changing their tune as well. Nissan in recent years has moved 65% of its manufacturing to the U.S. and expects up to 90% of its manufacturing to be U.S.-based in the next five years. At the same time, Nissan has abandoned its traditional supplier management model. Under the Nissan Revival Plan launched in April 2000, Nissan has been selling its ownership in suppliers and adopting new strategies to collaborate more closely with its North American suppliers. The company also aimed to reduce purchasing costs 20% under the three-year plan, which it exceeded in only two years.
"Nissan and other Japanese companies used the keiretsu system of supplier management and with the Nissan Revival Plan, our CEO announced to all suppliers at one big gathering we were no longer going to maintain a keiretsu system," says Emil Hassan, senior vice president of North American manufacturing, purchasing, quality and logistics for Nissan North America. That meant Nissan was open for business to all suppliers with no preference to buy from any particular supplier, regardless of ownership and has been divesting itself of as many suppliers as possible. While Nissan still has a percent ownership in some suppliers, the company is no longer tied to using those suppliers exclusively.
"Suppliers are being sold as the opportunity presents itself. We are not having a fire sale, but we are doing it with prudence. The goal of the Nissan Revival Plan has been to increase our competitiveness from a cost viewpoint and production innovation viewpoint. We also wanted to deal with global suppliers with no regard to national origin or location. So, that meant we had to reduce our supplier base a good percent if we felt they did not cooperate with this mission. If they weren't global or didn't subscribe to Nissan's drive for competitiveness, we did not want to work with them."
Hassan says when the Nissan Revival Plan was announced, a host of suppliers feared the plan would drive suppliers out of business due to lower margins. But Hassan's response was to tell them to focus more on removing cost instead of lowering prices.
"I made a challenge to them. I said 'you look in your operations deep and hard and if you feel you have done everything you can and you still cannot meet our targets, then you should call me personally. And then I will walk through your operations. And if I cannot point out areas where you can reduce costs, I'll agree with you about our targets.' And I can tell you now, the phone never rang."
Nissan used five key criteria to evaluate suppliers in its new mission: quality, cost, delivery, development capability and management quality of the supplier. As part of the plan, it also set up Quality Supplier Support Teams, which go to suppliers' plants and evaluate production readiness and quality systems on the shop floor as well as facilities and tooling. To date there are about 65 teams with four to five members from engineering, manufacturing, design, and purchasing. Nissan tracked the financial results of 28 of its biggest suppliers with more than 50% of business from Nissan. And 22 of those 28 made more profits than the year before.
"We helped open their eyes and made them more competitive," says Hassan. "Because they were more competitive they got more business from other OEMs and it reduced the burden of their fixed cost. Also, our volume increased and our new products were more innovative and provided more ideas for savings."
As another motivator for suppliers, Nissan invited the executives of the top 200 suppliers and shared its internal plans and objectives including targets for launches, quality targets and improvement requirements. Nissan also gave each supplier an envelope with an overall rating and performance of how they stack up against the rest of the suppliers, which goes directly against traditional Japanese supplier management styles.
"That was done to kick off a 'rally' to get suppliers mobilized to take on this year's projects," Hassan says. "We're embarking on a bigger new vehicle launch program of any company our size in a long time. And without full support and commitment of suppliers we could not achieve those goals."
Online concerns
One of the strategies automotive suppliers are most concerned about is the increasing use of competitive bidding tactics, most notably online reverse auctions. Their concerns have been fueled by the resources put behind the Covisint auto exchange by the Big Three automakers in the past two years. Originally billed as a method of streamlining the automotive supply chain, Covisint's image has changed and is being shunned by some suppliers, according to DeKoker.
"To this point Covisint has created a negative image for itself," DeKoker says. "Covisint now has the image of being the guilty party because they are the tool for reverse auctions and market testing against the incumbent supplier. It is a bit of an unfair way to paint Covisint, because they don't conduct the auctions. They just provide the tool and it is the conduct of the buyer—either an OEM or a tier one—that creates concern."
DeKoker says some suppliers have refused to participate in Covisint while others say they are just more careful when they suspect a bidding event is merely a market test because they know it is a product currently being made by another supplier. In response to supplier concerns stating they felt about 80% of reverse auctions were market tests, OESA created a code of conduct for OEMs and tier ones to use in conducting reverse auctions. To date it has not received much backing from automotive OEMs.
Nissan took a giant step away from the keiretsu mentality and fully adopted Covisint and its e-auctions, mostly for non-engineered parts (Japanese competitor Toyota has taken a stand against e-auctions).
"We are committed to Covisint and would like to see the whole experience and capabilities improve," says Hassan, noting that Covisint would have been a major no-no under the keiretsu system. "The first year we only did seven or eight auctions but this year we expect to do more than 80 auctions. Our view is that the supplier needs to decide if it wants to be a long-term partner with Nissan. If auctions are a threat for that supplier, then they must not be serious about being a long-term partner. So most of our suppliers understood that and in some cases it opened their eyes about their own competitors."
Volvo has seen a long, slow education curve on the use of Covisint. When it was first announced, many suppliers had knee-jerk reaction thinking that all OEM purchases would be negotiated on Covisint. But Armstrong says that has not been the case at Volvo.
"We use the Covisint tool where it's suitable for us and have participated in online bidding events, but we only do it on those commodities and components where we think it adds value," Armstrong says. "Those are commodities that you can trade and move easily and not the integrated systems. We have learned how to use the tool better in the past 18 months. It's been successful in some areas and not in others, and where it has not been successful we don't use it."
Doug Grimm, vice president of quality and supply chain at tier one supplier Metaldyne in Plymouth, Mich., says the U.S. automotive market got caught up in the Internet hype and Covisint was laden with expectations it could never live up to.
"[Covisint] is still trying to develop its value proposition. It can't be all things to everyone," Grimm says. "I think people underestimated the complexity in the auto industry. There are more than 400 parts in a transmission alone. So the supply chain in automotive is more difficult than some other industries. And the just-in-time systems put in place in the 1990s already removed much of the inventory."
Supplier-side economics
The face of tier one suppliers is changing, with tier one suppliers leveraging OEM expertise. Grimm, an OEM veteran, says there are more and more purchasing executives migrating from OEMs to tier one suppliers, taking the philosophies of an OEM to the tier one level and further into the lower tiers. In short, suppliers are thinking like and acting like OEMs.
"We tier ones deal with a wide variety of suppliers from small private companies with $2 million in revenues to larger conglomerates and there is a lot of 'co-opetition' in the tier one," Grimm says. "We buy from, sell to and compete with the same company some times. I think the mergers and acquisitions recently add to that, which creates more complexity in the tiers. As the OEMs become more global, we in the tier one have to follow suit with plants all over the world to support the OEMs."
Grimm says OEM programs like Six Sigma are becoming much more common throughout the supply tiers as production and quality demands from OEMs increase. Metaldyne has trained 10 of its suppliers as Six Sigma blackbelts. Grimm says Metaldyne recently worked with Nissan on a Six Sigma cost reduction plan that reduced the scrap rate for a particular part by 93%.
"There is just more openness on resolving issues between suppliers and OEMs today," he says. "We used to be on opposite sides pointing fingers when something went wrong. Now, I think suppliers are stepping up and working to resolve issues. We are bringing in more engineering and supply chain and quality people to our own operations."
Delphi Automotive of Troy, Mich., in 1999 adopted a manufacturing system based on Toyota's production system. Delphi's version, called the Delphi Manufacturing System, has been seen as a success internally at Delphi and earned the company multiple awards for its manufacturing. The system has been so successful internally that this year Delphi is taking it out to its supply base. To date, Delphi has held meetings with six of its top suppliers to gauge acceptance of the new system and held two workshops before implementing. "Our suppliers are eager to do this with us," says Delphi's vice president of global purchasing, Dave Nelson, who learned the OEM side of the auto industry during his tenure at Honda. "We want to make our suppliers' operations just as cost competitive and efficient as what we do inside and that's why I'm here."
Building trust
The following are scores came from a survey of tier one suppliers conducted by Planning Perspectives of Birmingham, Mich.
| Trust Level | |
| General Motors | 2.12 |
| Ford Motor Co. | 2.21 |
| DaimlerChrysler AG | 2.26 |
| Nissan | 2.63 |
| Honda | 3.32 |
| Toyota | 3.40 |
| (Scale of 1-5 with 5 the highest) | |
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