Stop Bullying

May 8, 2003
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I remember hearing about a metrology equipment vendor last fall who had delivered an order to one of the Big Three automotive manufacturers. When the payment came in, the car maker had arbitrarily chopped 10% off the invoice amount, and basically told the vendor that was all it would pay for the equipment. Though angry and exasperated, the vendor was reluctant to protest too loudly, for fear of being cut off from future business by the car maker.

Reports of heavy-handed cost cutting by U.S. automakers are nothing new, of course, not only on factory equipment, but especially on parts and components. Back in the early 1990s, for example, former GM purchasing czar Jose Ignacio Lopez made big headlines for his controversial supplier price-squeezing tactics that some considered to be out-and-out bullying.

I have warned in this space before that overzealous price squeezing by the car makers could backfire, by forcing suppliers to reduce quality spending as a way to maintain their profit margins. In this month's Special Report on automotive supply chain quality, the same point is made by contributing writers from the Detroit office of consulting firm McKinsey & Co. Inc.

"Due to endless price squeezing by the (automotive) OEMs, profit-starved suppliers may be forced to drastically cut spending in key areas such as product development and quality management systems, in order to stave off bankruptcy," say McKinsey Director Anjan Chatterjee and his co-authors in the article that begins on p. 50. "The results could include a serious deterioration in U.S. vehicle quality."

To avoid that scenario, the McKinsey authors call for new kinds of collaborative relationships between U.S. automotive manufacturers and their suppliers. Instead of a laser-like focus on cost cutting alone, the automakers should foster relationships in which superior quality performance by suppliers is recognized and rewarded. Suppliers, likewise, must not only work closely with OEMs on cost and quality issues, but they should also work harder to exceed automakers' quality expectations.

One example of a new kind of collaborative approach is described in our second supply chain feature, by Jerry Rockstroh, an executive at automotive supplier Garrett Engine Boosting Systems. Like other suppliers, Garrett is under increasing pressure from automotive OEMs to simultaneously cut costs, boost quality and speed up its innovation cycle.

In the piece beginning on p. 54, Rockstroh describes how a new Web-based supply chain collaboration system launched by Garrett last year is helping the company meet those challenges. And the benefits go both to Garrett and its suppliers. Online "scorecards" that are part of the system, for example, provide real-time access to all parties on how well suppliers are doing on key cost and quality metrics. Garrett uses the scorecards to reward suppliers for superior quality performance, while suppliers learn exactly where they stand, and can make corrections as needed, benefiting both Garrett and themselves.

Cost will always be a factor at all levels in the automotive supply chain, especially given increasingly tough global competition. But for the good of the U.S. auto industry, the OEMs must stop throwing their weight around on pricing, and instead adopt an approach that affords a larger role to quality as well.

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