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Auto Focus

By Julie Cridler
Senior Market Analyst, IRN Inc.
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The relationship between automotive suppliers and their OEM (or Tier One) customers has always been a tumultuous one. But after both sides suffered through the recession, emerged into the recovery and now stand on the brink of another potential pullback, have things changed at all? Have the two sides learned to work together and see the other’s perspective, even if they do not immediately cater to it?

Many fragments of examples so far this year point to the fact that the tension may be moderating somewhat. While the two will never be best friends, it seems as though mutual respect is emerging as the theme of the current times.

Who’s got the power?

The issue of power has always been at the forefront of the correspondence between suppliers and OEMs. For a very long period in history, it was clear that the OEMs wielded the power and suppliers felt they had to yield to their demands or risk losing business. Of course, this was a model that was largely based on getting the lowest costs.

Suppliers have been quick to vilify OEMs for their extreme focus on cost reduction. For example, when BMW announced back in 2007 that the company planned to cut nearly $5 billion in costs from its parts and supplies budget by 2012, suppliers bristled, fearing the OEM was putting too much pressure on them to reduce prices.

BMW’s goal was to increase their competitiveness and a healthy supply base is a key component of that. Subsequent surveys relative to supplier relations showed BMW understood that. Despite the aggressive targets, BMW ranked number two in popularity with suppliers in a 2008 survey by Automotive News Europe and SupplierBusiness. In the same survey for 2010, BMW rose from fifth place to number one in the category of attractiveness as a partner for components suppliers.

With more focus on value and less on cost, OEMs and suppliers can coexist on more of a level playing field. BMW completed its cost-reduction program ahead of its 2012 goal. Now that the initiative is completed, the OEM will intensify its focus on innovation and quality. Suppliers can thrive in an environment such as this where the customer, although astute about their cost structure, places a high value on quality and innovative technology. This also helps to balance out the power in the supplier-OEM relationship.

OEMs making strides

The Detroit Three have notoriously been more difficult for suppliers to deal with than their Japanese domestic counterparts. That, however, has begun to change as the Detroit Three work to improve their respective reputations with suppliers.

Chrysler, for example, has abandoned its nickel-and-diming mentality whereby it would switch suppliers midstream to recognize a few cents in savings per part. Chrysler’s purchasing head, who took over in June 2009 right as the economic recovery was beginning, has worked to change that dynamic.

Today, in the event that the OEM finds a supplier with a lower price, the incumbent is given a 30-day grace period to develop its own proposal to match the savings. In order to ensure that the values and principles are followed through the entire chain of command at Chrysler, Don Knott, the purchasing chief, now requires a training program for all of his people.

After the difficulty the industry experienced during the recession, Ford developed empathy for the supply base and has improved its payment schedule to accommodate. Rather than paying suppliers three times a month, the new schedule pays five times.

The company has made a great deal of progress in supplier relations overall since Alan Mulally joined in 2006. He made better supplier relationships a priority, and it appears his work and leadership has paid off. In the recently announced 2011 Automotive News Suppliers’ Choice Awards, Ford ranked among the top performers in the survey.

Ford creates partnerships through the Ford Aligned Business Framework, which is a group of preferred suppliers who have the opportunity to win global contracts with the OEM. The company’s goal is for two-thirds of all production contracts to go to suppliers in that network.

Global programs with 80 percent common parts throughout the world offer lucrative deals for those preferred suppliers. Ford, in return, is rewarded with better prices for those components as well as quality, technology and innovation from suppliers who know they are valued by their customer.

Many supplier relations programs and initiatives have come and gone through the OEMs over the years. The temperament of the relationship waxes and wanes, often in tandem with changes in purchasing leadership. Hopefully, all in the industry will keep the lessons of the recent past in mind and not fall back into the old way of working together.

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