Automotive suppliers tighten their own supply bases
Neil De Koker, president of the Original Equipment Suppliers Association, believes that a revamped supply base and a reorganized automotive industry will be a model of collaboration in the coming years.
By Tom Stundza -- Purchasing, 10/5/2006 2:00:00 AM
Automotive suppliers are being squeezed on all sides, forcing many to restructure. The Big Three are cutting production and losing market share, which translates into reduced purchasing and smaller orders from tier suppliers. At the same time, the traditional OEMs and the “new domestic” automakers want lower prices for parts even as costs of energy and raw materials increase. This has abetted the wave of Chapter 11 reorganizations in the supply base, and none of this buyer-supplier trauma is about to end soon, says Neil De Koker, president of the Original Equipment Suppliers Association. “The headwinds won't be gone overnight,” he says in a recent interview, “but they will subside.” When that happens, probably next decade, he insists that buyers and suppliers “will operate in a new environment of meaningful relationships.”
Q: Are business relationships between suppliers and the Big Three going to improve?
A: Actually, they are starting to get better. There's always dynamic tension between buyers and sellers; just by the nature of the relationship, somebody wins and somebody loses. And, it's true that the relationships between automotive suppliers and OEM buyers have not been good for a while—and actually hit bottom in 2005. There's still a lot of pressure for the car companies and their suppliers to survive. For all the doom and gloom we hear about, the North American market is hanging in there. Still, automakers and their suppliers all need to improve profit margins. So, there's still a lot of work ahead for everybody in the industry. The purchasing organizations at the auto companies have a long way to go in rationalizing their suppliers to comfortable levels. The top-tier suppliers have a long way to go in rationalizing their suppliers as well.
Q:How are parts suppliers weathering the storm?
A: A day doesn't go by that you don't read about some suppliers that are really struggling today and/or going bankrupt. We'd like to read more about those that are having success. In truth, it's rough for most parts suppliers these days. Domestic automakers are reducing the number of parts suppliers they are using. And their purchasing groups are continuing to seek cost reductions on parts. So, not many OESA members have made much money lately and it may be a while before profitability returns to the parts industry. Also, suppliers aren't as panicky as Wall Street about the future of North America automaking. There are few instances when auto parts firms, even those in reorganization, have failed to meet deliveries of necessary parts. Also, management of these firms now has to invest in the future, right-size their supply bases and develop new generations of parts and systems.
Q: Ford is accelerating its Way Forward restructuring program. How is this affecting buyer-supplier relationships?
A: Ford's goal now appears to be to relieve its problems quicker. It wants to have a clear plan to reduce costs, create an efficient supply chain and produce new cost-effective products. For the suppliers, all this is doing is creating a lot of uncertainty. At the moment, Ford's reality isn't the supply chain's reality. But that doesn't mean Ford and its suppliers can't come up with collaborative programs to iron out their supply chain kinks. At the same time, this highlights the need of parts suppliers to look past Detroit for more global business. Suppliers also need to develop parts or components that can help cars achieve better fuel economy or reduce emissions.
Q: Your group, OESA, represents automotive equipment suppliers. Will there be more consolidation among them?
A: The past 18 months have been especially painful for the part-supplier industry with, 17 of the auto parts companies in bankruptcy. And there will be some losers; some firms will be gone when it all shakes out. Some haven't been able to fine-tune their core competencies to remain profitable in bad times as well as in good. Our traditional customers are losing market share because they have cost challenges including raw materials, labor costs and legacy costs. And they are trying to force suppliers to absorb a disproportionate share of these cost reductions. But there also will be survivor firms with highly developed supply chains that will have strong relationships with their suppliers and their North American and overseas customers. The key is to have buyers and suppliers find ways to collaborate to eliminate the testy relationship of the past.
Q: How have the new domestics approached their relationships with suppliers?
A: There have been relationship-building efforts in play for some time between buyers for Toyota, Honda and Nissan and their suppliers. The new domestic companies have been restructuring purchasing organizations and strategies for a while. In fact, they've accelerated cost-control efforts over the past five years. Parts suppliers know that they have to feed their OEM customer the right parts and still control their costs to make money. Still, this is always easier when your customer is gaining market share.
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Q: Bo Andersson, vice president of global purchasing for General Motors, recently said suppliers need to be better communicators. Do you agree?
A: He's got a good point. Neither he nor the other purchasing chiefs at the auto companies can address specific issues with their suppliers until they know what the problems are. It's true that relations between parts makers and the automakers have been rocky due to industry cost pressures. That's not going to go away quickly. At the same time, the automakers have to realize that constantly shifting production schedules creates manufacturing, delivery and other cost problems for suppliers. Automakers want suppliers to lower prices on the parts they sell but suppliers have suffered under the weight of rising raw material costs as well. So, the buyers and suppliers have to discuss strategies and find ways to reduce all these tensions.
Q: What's OESA up tothese days?
A: OESA has focused on issues affecting the large Tier One suppliers, especially with regard to their customers. More than 70% of the firms in our industry have annual automotive sales of less than $250 million. So, OESA and SAP, the business software company, are partnering in a Supplier2Supplier Collaboration Initiative that quantifies the value of supplier-to-supplier collaboration, from the purchasing perspective, and quantifies the value of best-in-class performance, based on select key performance indicators.
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