Detroit needs a different driver
Detroit is looking at new purchasing strategies because suppliers are giving Japanese OEMs more of their business—and their innovations
By Mike Verespej -- Purchasing, 4/7/2005 2:00:00 AM
The difference in procurement strategies between Japanese and North American automakers has been a contentious issue for years with the industry's $950 billion parts supplier base. Most automotive suppliers tend to view the Japanese original equipment suppliers (OEMs) as more willing to partner with them and tend to view the Big 3 as relentlessly looking for price cuts and more than willing to switch suppliers at a moment's notice.
An amusing side skirmish in the battle for market competitiveness? Hardly. There are more and more signs that if the Big 3 doesn't take a new approach to procurement, auto parts suppliers will shift more and more of their loyalties—and product innovations—to Japanese firms.
In fact, it's already occurring. "A larger number of the new product innovations are now showing up on [the vehicles of] the non-Big 3 companies," asserts Kim Korth, president and founder of IRN, a Grand Rapids, Mich.-based, global automotive consulting firm. "A lot of suppliers find it easier to make money and protect their intellectual property selling to customers other than the Big 3." That meshes with a J.D. Power & Associates study that found Toyota the best at encouraging innovations among its supply base, Honda above average and Chrysler, Ford and GM below average.
Suppliers are also turning away from Detroit as a matter of economic survival. Return on shareholder investment among auto suppliers has shrunk each decade since 1970—from 1.1% to a negative 5.9%, says Aurobind Satpathy, head of the Detroit practice of Mc-Kinsey & Co. The number of auto suppliers has shrunk from 40,000 in 1990 to 10,000 and is expected to shrink further to 4,000 by 2010. That's reflected in the increasing number of bankruptcies in the auto supply industry—particularly by companies heavily dependent on the Big 3. A case in point: the recent bankruptcy filing by $3 billion Tower Automotive, which was 67% dependent on the North American market.
"Supplier profitability is not a pretty picture and will probably continue to be very difficult for the foreseeable future," says Tom Stallkamp, former Chrysler president and executive vice president of procurement and supply who now analyzes the feasibility of auto industry acquisitions as a partner with Ripplewood Holdings in New York. And he points to Tower Automotive's bankruptcy earlier this year and other high-profile instances where suppliers "encountered financial difficulty and either entered bankruptcy reorganization, refinanced with high-cost debt or merged with other suppliers to survive."
That's why most major suppliers are giving less and less of their business to Detroit, says Stallkamp, who is credited with saving Chrysler billions of dollars in purchasing costs and giving it the best supplier relations in the auto industry in the mid- to late-90s. "The U.S. supply base is responding by moving to balance their business more evenly away from the domestic U.S. manufacturers."
Research done by Mike Bruynesteyn, analyst with the Automotive Equity Research group of the Prudential Equity Group, supports Stallkamp's contention. Bruynesteyn's analysis indicates that by 2006, many of the major suppliers will have reduced its dependence—and exposure—to the Big 3 since 2003. Some examples of his projections: American Axle, from 90% to 85%; BorgWarner, from 52% to 35%; Delphi from 70% to 55%; Johnson Controls from 37% to 35%: Lear Seating from 59% to 50%; Visteon from 80% to 70%.
Detroit's changes
The troubled relationships with its suppliers—and the wave of innovation going to Japan—haven't gone unnoticed by the Big 3. Indeed, there are some quiet changes going on that indicate that Detroit's OEMs might start using tools other than a price hammer with their suppliers. For example:
-
Bo Andersson, vice president of worldwide purchasing, production control and logistics at General Motors is now factoring warranty costs into its purchasing negotiations and contracts in attempt to get his company's buyers to look at more than just price when making purchase decisions.
-
Daimler Chrysler is co-locating three suppliers in its Toledo, Ohio, North American assembly plant as a model for other collaborative partnerships.
-
Ford is working to align operations and opportunities with Tier 1 suppliers to ensure supply continuity and to keep Tier 1 suppliers healthy by making sure that they have insight into planning.
-
Delphi, a Tier 1 supplier, is buying materials and parts for its subtiers, to help ensure their health and profitability.
What's behind these initiatives? In addition to the independent surveys (see sidebar) that underscore the deteriorating supplier relationships with the Big 3, John Baron, cofounder and vice president of business development at Newview Technologies, believes that the current environment has become a driver in the new initiatives.
"The increased outsourcing, the pressure on raw materials, the added impact of China and the price of oil and ocean freight is causing North American OEMs to take a much more collaborative approach," says Baron, whose firm has developed procurement software solutions for companies like Ford, Delphi, Rolls-Royce and others. "With a shrinking supply base and supply constraints, they have begun to realize the need for visibility into materials and a common framework that works for both sides. With more and more parts manufacturing outside an OEM's four walls, you have to have more design and materials decisions shared at both levels and link procurement with part suppliers and materials in a common way."
Take DaimlerChrysler's collaborative model in its Toledo plant. "These suppliers—one Korean, one German, one American—will build and manage major body, paint and chassis operations, all within the footprint of our plant," says Peter Rosenfeld, executive vice president of procurement and supply for DaimlerChrysler. "It will be the first time that suppliers will operate as an integral part of an American auto assembly plant—but we hope it's not the last."
Speaking to the Original Equipment Suppliers Assn. industry outlook and conference in Dearborn, Mich., Rosenfeld stressed that DaimlerChrysler wants to "work with our suppliers—seeking new products, new technologies, new delivery systems, new processes—to gain mutual competitive advantage." An example: Honsel International Technologies—the prime independent European supplier of specialized aluminum castings such as engine blocks, transmission cases and suspension and body parts—is doing development work for DaimlerChrysler on engine and transmissions.
Such partnerships—in particular the development work by Honsel—"are an indication that old ways are changing," suggests Stallkamp. It's also just one leg of DaimlerChrysler's four-part strategy to move supplier relationships once again to the more collaborative ap-proach that existed in the mid-1990s when Stallkamp was there.
Rosenfeld says DaimlerChrysler has integrated its $100 billion annual spend globally, opened up growth opportunities globally to its top-performing suppliers and has created increased transparency for suppliers into their performance. And, "as a testimony to the strategic importance we place on supplier relations and operations, global procurement and supply holds a seat on DaimlerChrysler's board of management," says Rosenfeld.
In addition, he says DaimlerChrysler has created 240 "competitive sets" of components—each with a board of directors that consists of a buyer, a supply specialist, a quality specialist, an engineer and, where relevant, representatives from design or manufacturing.
"We [share] performance results … with our suppliers so that they always know how we view them—in absolute terms and compared to other companies in their fields … via an Internet portal which our suppliers can access 24 hours a day, seven days a week."
"Chrysler gets kudos for trying to get back to the Tom Stallkamp style," declares Korth. "They are holding supplier conferences, developing long-term contracts at the start of a program with provisions to protect suppliers and getting suppliers more involved in design."
Higher mountain to climb
But even as the Big 3 attempts to change its approach to purchasing and supplier relations, the scale of the mountain they need to climb to keep up with the Japanese keeps getting higher. Six weeks ago, Toyota announced that as part of its mission statement, "to achieve supplier satisfaction," it was making further strides in its approach to purchasing and supplier relations. To wit:
-
Suppliers will now get a daily online report card on the previous day's performance, rather than monthly feedback.
-
Toyota will assist in training a supplier's employees.
-
Instead of dealing only with Toyota purchasing or engineering professionals, suppliers will be able to call the head of Toyota's assembly plant.
What might work
If North American automakers are serious about changing their approach to procurement and sourcing, IRN's Korth suggests that they look seriously at integrating procurement with design as the Japanese have done, or model themselves on the way purchasing and design are integrated between OEMs and suppliers in the electronics industry.
"There is not enough of an integration of purchasing on the design end" among the Big 3. And that's one of the differences in style, she says, between Japanese OEMs and North OEMs when it comes to purchasing and working with the supply base. "The power center is engineering in Japan—that drives purchasing decisions. In the U.S, finance or manufacturing makes the decision—based on price."
That integration with engineering is important for two reasons: "About 70-80% of the cost savings in autos stems from design" and it creates greater knowledge among buyers of the technical aspects of the parts and components they are buying," she says.
The Big 3 should allow their buyers to stay in one portion of the business for longer periods of time, argues Korth. "Buyers in the Japanese OEMs are more integrated with engineering and understand better the technology that is in the parts and components they are buying because they stay in one area and become experts," explains Korth. "In the Big 3 OEMs, there is a conscious effort to move buyers around and they don't understand the technology of the parts they are buying" as well as their Japanese counterparts.
Will it work?
Yet, despite the current quiet attempts to rebuild trust with its supplier base, not everyone is sure that Detroit is ready to take a new approach to purchasing and dealing with its supply base.
"I am very concerned as to whether the Big 3 are willing to listen to this," says John W. Henke Jr., president of Planning Perspectives, Birmingham, Mich., which annually surveys Tier 1 suppliers on how they view supplier relationships at individual OEMs. "Yet it is very clear to me that if the Big 3 doesn't look very soon at their supplier relationships, the structure of the North American auto industry is going to dramatically change over the next 10-15 years with the domestics OEMs having a much reduced role."
And he cautions that it's not just a new approach to purchasing that Detroit needs to take, but a new approach to supplier relations. "Buyers at Honda and Toyota expect a supplier to be around for life and they don't hammer for price reductions … but rather expect a 2-2.5% savings from productivity improvements. The Big 3's constant hammering suggests that they are not selecting the right suppliers or using the wrong criteria for selecting suppliers."
If left unchecked—and if domestic OEMs continue to seek low-cost sourcing overseas based on price, rather than have buying team with suppliers—it could lead to an ironic paradox. Domestically assembled U.S cars could have more foreign content—and thus, less domestic content than Japanese cars assembled in the U.S., which typically have 60% or more of their components bought from U.S. suppliers.
But Stallkamp doesn't think that will happen. "The auto industry will soon be forced to move to a greater degree of collaboration—and do it quickly. If they don't, the companies in Japan, Korea and China will eventually continue to grow, while the traditional U.S. manufacturers will shrink."
Tier 1 auto suppliers rate Toyota and Honda far superior to North American auto suppliers
OEM—Supplier Working Relation Index for 2002-2004* (a rating of 500 is very good; zero is very poor)
| Year | 2003-2004 | 2002-2004 | |||
| *OEMs were rated on 17 criteria related to their ability to develop relationships, their strength of communication, help that they give suppliers, whether they hinder suppliers and their willingness to work together on profit opportunities. SOURCE: PLANNING PERSPECTIVES, INC. |
|||||
| OEM | 2002 | 2003 | 2004 | % Change | % Change |
| Toyota | 314 | 334 | 399 | 19.5% | 27.1% |
| Honda | 297 | 316 | 384 | 21.5% | 29.3% |
| Nissan | 227 | 259 | 294 | 13.5% | 29.5% |
| Industry Mean | 224 | 234 | 261 | 11.5% | 16.6% |
| Chrysler | 175 | 177 | 183 | 3.4% | 4.6% |
| Ford | 167 | 161 | 160 | -0.6% | -4.2% |
| GM | 161 | 156 | 144 | -7.8% | -10.6% |
Now Playing: 
