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Suppliers: Friend or foe? |
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Traditional supplier management strategies begin to blur in the
automotive industry. Traditional supplier management strategies begin to blur
in the automotive industry. |
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By David Hannon |
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Purchasing |
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February 6, 2003 |
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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) (
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.
In hindsight, 2002 will not be viewed
as a banner year for the
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
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
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."
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
"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."
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
"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
"[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."
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
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Building trust |
Trust Level |
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General
Motors |
2.12 |
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Ford
Motor Co. |
2.21 |
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DaimlerChrysler
AG |
2.26 |
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Nissan |
2.63 |
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Honda |
3.32 |
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3.40 |
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(Scale
of 1-5 with 5 the highest) |
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