Mending Fences

Say you’re in the widget business. After years of painstaking research, tedious hardware and software development and millions of dollars in investment, your workaholic techies come up with the global industry’s benchmark High Tech Widget.

Every automaker discovers it needs your HTW to meet ever-tougher emissions and economy requirements. GM, Ford, DCX, offshore makers, everyone orders HTWs by the boatload. You run out of capacity, invest in new facilities and hire new people to meet demand.

Life is looking good for International Widget Works. After years of struggling, you’re finally making money. Your techies get raises, your sales types are swimming in commissions, and everyone gets big bonuses.

Suddenly, Chrysler Group, struggling to survive, demands an immediate five percent price cut, followed by an additional 10 percent in the next two years (which it did in 2000). Ford, bailing furiously to save its own leaky boat, orders a 3.5 percent cut now and warns of more to come (which it did in 2003). GM demands retroactive cuts this year and more each year forever (which it does). Toyota, Honda, Nissan, everyone is squeezing your profits to dust. Unless you can find ways to cut costs quickly, substantially and continuously, you’re looking at crippling losses. While your defect rate is excellent, it’s not good enough for customers demanding zero defects. And you’re having trouble meeting delivery schedules for tens of millions of HTWs every hour of every day all over the globe.

Everyone wants to inspect your facilities, audit your books and teach you how to cut costs continuously to meet their price-cut demands… while improving quality, delivery and customer service. Because it’s disruptive to resource (to one of your competitors, who quickly figured out how to beat your HTW’s performance and price), they want to help you survive while they’re sucking your profits down to negative. They want to “fix” you or dump you.

Mending Fences?

“I see the supplier base consolidating, just as the OEMs have,” said GM CEO Rick Wagoner in a Dec. 15 Automotive News interview. “We’ve said we’d like to get 20 percent material cost reduction in three years, which I thought was a stretch goal, until I saw that Toyota was going for 30 percent.” Suppliers to GM have been finding a new clause in their contracts stating they can be canceled and business moved if they can’t meet a competitor’s lower price within 30 days. Wagoner later said the company would do that only in rare cases.

“The fact that we’re consolidating is causing some friction,” he added. “That’s not unnatural. It’s not particularly pleasant, but it’s a realistic situation. The competitive bar just keeps getting raised, and people are saying, ‘When is it going to stop?’ And it’s hard for any of us…to say, ‘It’s never going to stop.’ But we have an obligation to play these out in the fairest way we can with the supply base because they’re so important to us.” “I’ve been working in the automotive business for 20-plus years,” offers Visteon Corp.

Quality and Materials Management VP Jon Maples, a former DCX Operations vice president. “I can’t recall when there’s ever been an easy year. If you want to stay on top of the market and maintain profitability and customer satisfaction, it’s always going to be a challenge.”

“Each OEM has its own situation,” adds Delphi Corp. Vice Chairman and Chief Technology Officer Don Runkle, who was GM’s North American Engineering vice president before moving to Delphi. “We deal with absolutely every OEM, we’re working to improve how we deal with each of them, and I think in general we have good relationships with all of our major customers. Our customer teams digest how their purchasing systems work and do their best to get aligned with each customer’s priorities. When we engage with an OEM, we need to sell them a lot of parts, and we need to make a profit, and the best relationship is one where they have respect for that.”

Keith Lawrence, executive vice president, Procurement and Supply for Mitsubishi Motor Manufacturing of America (MMMA) — which has one very flexible U.S. plant — came out of the supplier ranks so has seen the purchasing wars from both sides. “Our philosophy going in,” he says, “is that we want partnerships with our suppliers. We’re tough but fair.

We want to be a preferred customer. We need close relationships and a close understanding of each supplier’s daily activities and how it supports us, not arm’s length relationships.”

New Approach

Runkle explains that Delphi has been fundamentally changing its approach to its own purchasing. The new approach, he says, “has a lot of Honda and Toyota in it” compared to the previous GM-like approach. Four strategies characterize it:

Cost standards — a technique borrowed from Toyota. This involves creating a database to comprehend the costs of materials, processes and even containers, so when buyers sit down with suppliers, they know in advance what things should cost. And if their cost is not at that level, they can discuss what can be done jointly to get to that level.

Commodity strategies — for stampings, castings, fasteners, simple parts that are not highly engineered, Delphi has developed data and a strategy for each, including where it should be purchased and how many suppliers are needed.

Strategic sourcing — Delphi wants to grow relationships with suppliers who demonstrate consistent excellence and the right attitudes towards cost and ‘lean.’ Of the company’s roughly 4000 current suppliers, Runkle says it so far has identified 80-90 as “strategic.”
 
Lean supplier development — Delphi has installed nearly 50 supplier development engineers into Purchasing to work with strategic suppliers on cost and lean, and calls the results “phenomenal.” Attendees of a 2003 lean supplier development conference shared examples of 25-60 percent improvements in quality, cost reduction, lead time reduction, space reduction and inventory turns. Feedback included glowing remarks about relationship building.

“We’re building relationships,” Runkle asserts, “and we’re going to have fabulous relationships with our suppliers. Our new system has been in process for a year and a half, and the results and performance levels are good. This is huge to us because our suppliers are half of our cost, half of our quality, half of everything, and they impact our quality immensely. As a company, we’re running below nine ppm. We know it’s not zero, but we’re proud of that, and we’re going to get to zero. We have 60-70 percent of our sites at zero ppm now, and that’s largely due to our supply base. If we don’t have great relationships, we can’t be successful.”

Maples considers Visteon’s commodities strategy one of the most critical things it is doing. Where they may have 180 suppliers for a given type of component, they’re working toward maybe 35, and (like Delphi) they’re working with Manufacturing and Engineering on “should be” costs vs. current costs.

“If we consolidate and create improved economies of scale and improve interfaces between our engineers and suppliers’ engineers,” he asks rhetorically, “how much waste can we eliminate in our, and their, engineering resources? If we work with suppliers to rationalize capital investments, so we invest in our plants and facilities only what we need to match what they put in place, what can we save? We can take big chunks out of cost and set what the market levels should be for those products with the quality and technical features our customers want. Through that process, we can get step improvements in cost, maybe 30 percent improvements vs. where we are today.

“It’s not a process of sending out generic drawings for quotes so we can figure the low quote,” he adds, “but rather looking at the capability, the engineering support, the footprint of technical resources to make sure they match where we are growing on a global basis with our customers. Through that, we are significantly increasing revenue for those suppliers so they can concentrate technical resources on us, and we can have longer-term relationships where we understand each others’ business plans and eliminate waste between us. I’m happy to say we’ve made a lot of progress on that in the last two years.”

MMMA ranks its suppliers and reports to each how it has performed on cost, quality, delivery and customer service. “A supplier may have given us a five percent cost reduction last year,” Mardis says, “but if it’s struggling in delivery or quality, that is causing problems for both of us and costing us money.” This process also differentiates how a supplier providing simple “shoot and ship” parts is evaluated vs. one with a high level of technology that puts a lot of its own time, money and effort into product development.

In addition, MMMA has established a Supplier Council with representative companies of all types and sizes. “We ask them to come in and criticize us, give us advice and open and honest feedback,” Mardis reports, “and we work with them on projects to improve our working lives together. We’re not always successful in answering all their wishes and desires, but we do work very closely with them. It’s not the kind of council where we preach at them on our latest policies. I wouldn’t waste their time.”

Price-Cut Demands

How can suppliers deal with relentless costcut demands? “The best reaction,” Runkle says, “is to get into negotiations with the customer as quickly as possible and do your best to continue focusing on waste and costs between you that both of you can work on. There are things we do that create cost for our suppliers. Given a trusting relationship, when they come in and point those out, we can get at those things, which helps both of us. They make a little more money, and we get better prices.”

Visteon’s Maples, a former DCX Supplier Management VP, takes a dim view of blanket demands. “You can ask people to take one, two, three, five percent off the top,” he says, “but all you do with unilateral requests like that is undermine the competitiveness of the supply chain. This is a capital intensive industry, and a long-lead-time industry. Despite hyperbole on 12- month cars, it still takes at least 36 months to go from concept to volume production of a vehicle because of the highly complex interface of engineered components requiring significant capital investments, tooling, development and validation. To be able to afford the capital to compete in this business, you have to make money, you have to have positive cash flow and profits to put back into the business in capital R&D. It’s true enlightened self-interest to want a healthy supply chain to enable that, so that’s what we’ve been trying to do.”

To react to such demands, Maples explains that with a current product, about all you can do is intensify the continuous improvement effort: “For a part we’re going to run for three more years, are there design changes we could do? Is there a way to improve processing at our plant or at a supplier plant? Another aspect is to drive improvement through warranty reductions. If we see failures in the field, can we work with our customer to determine, a) how to stop that from happening in the future, and b) how to fix it faster and less expensively?”

Lawrence says MMMA strives to strike the right balance between cost and quality: “We’re not focused just on price but on total cost, which includes total qual-ity. We have quality engineers in Purchasing working in commodity teams. So if a buyer who made a supplier selection hears from the quality engineer that the supplier is struggling, they can work together to help it. Suppliers are an extension of our production line, and we have six models going down one line. So if there is a quality problem, it affects not just one model but the five others as well, and it’s a huge issue for us that ripples through our whole organization.

“We take great pains to make sure that our suppliers are up to speed and understand us from both quality and logistics standpoints. We don’t like to cycle through suppliers to chase a cheap price. That can cause huge disruptions for our organization. We tailor our pricing discussions individually by supplier, and it’s very much a private and uniquely designed program specific to that supplier’s performance and history with us. It’s not one size fits all.”

Different suppliers have different cost models, different overheads and responsibilities, and some have more ability to lower costs. “A supplier that has done a very good job for us, provides extra customer service, has a high investment and has given us solid cost reductions over the years because it’s an efficient organization,” Mardis says, “may get a lower target, while one that has more ability to give back may get a higher target.

“We don’t like to just say, ‘Give us a certain percentage reduction.’ We have our commodity teams go to the plant and determine whether its operation is efficient. Then we’ll sit down and give them good solid industrial engineering advice — maybe they could change their labor usage (hours per part) or cycle times. We try to help them fund a reduction through Value Analysis tools, to get to a lower price without giving up their profit margin. That’s our first goal.”

Lawrence adds that MMMA, when asking for cost reductions, must understand where they are coming from: “We want to go down the road together with suppliers, and we want continuous improvement. We know they receive tremendous pressure from customers across the board. We’re interested in cost reductions like everyone else, but we have to make sure we understand how they’re doing it and that our interests are protected from a quality standpoint.

“If a supplier were to come in here and give me a 10 percent price reduction, I’d be likely to take it. But I want to know if he cut corners, substituted raw materials or shut off errorproofing to speed up cycle time. Did he remove seasoned laborers and put in temporary operators to achieve the cost? We feel that by deploying our resources out to work with suppliers, we’ll know the truth, be better apt to make informed decisions and much be more comfortable with them.”

“If a customer says to a supplier, ‘I want that part for a dollar,’” Mardis adds, “they’ll build him a dollar part. But if the part we need for quality and customer satisfaction needs to be a dollar-ten part, we want to make sure they’re not cutting corners to give a commercial price. We ask them to show us every piece of material, what it is by specification and its commercial value. We ask them to document the process, the stamping, welding, assembly and finishing, the cost of automation, labor and materials, overhead rates and burdens and whether they have error proofing, and then obviously to add on a fair SG&A and profit.

“If they can trust us to do that, we can audit and do the value analysis together. Then we’ll feel they have a competitive, fair price that we’re willing to pay. Some suppliers were slow to come around, but once they realize they can trust us, we have them enthusiastically working with us. And now they’re applying some of our ways to help control their Tier 2 business.”

Can suppliers negotiate price increases in today’s environment? “If you go in straight forward, with as much benchmark data as you can collect, and demonstrate why your price is fair and valuable, that always leads to a good discussion,” Runkle says. “In a good trusting relationship, you’ll very quickly get to the cost. We don’t get many increases, but we’re in continuous discussions about the value proposition and how it looks like from our perspective.”

Such discussions also can lead to elimination of the need for an increase. “One supplier was losing money on something they were selling us,” Runkle relates, “a substantial amount of money, 20 or 30 percent of the sales volume. They came in for a price increase, and we had a really good interchange. We put lean supplier development people into their company to work with them, and it turned out that some things we were doing were creating cost in their plants.

“So we changed the design a little, because it was something they were having trouble making, and the price demand went away. They stopped losing money, and they have increased business with us because they had the right attitude. They were progressive enough to listen to us saying, ‘We can’t handle a price increase, so let’s get at the problem.’ If you can get on the same side of the table, with cost on the other side, magic can happen. The worst situation is when you’re on different sides of the table beating up on margins.”

Future Prospects

“The challenge for our suppliers right now,” Mardis concludes, “is to figure out how to be successful doing business with us and with others, especially when we’re so detail oriented and want to be in their plants and all these things. It’s a challenge for them to try to keep four or five different customers happy when we’re all asking for different things.”
 
Asked about suppliers’ prospects for the future, Visteon’s Maples believes they are great. “We have a 40 million unit industry on a global basis…that’s a huge, huge market. This is not an industry where everyone has to lose money. Through collaborative commerce — vs. adversarial commerce — I believe you can create common vision and purpose. If you collaborate to figure out how to eliminate waste and bring products to market more effectively, with the features customers want at the quality levels they demand in the timing that is acceptable to them, you will succeed.”