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According to John Henke, president of Planning Perspectives (Birmingham, MI), the automotive research firm that conducted the survey, "Suppliers are saying, 'We're not going to give them more quality if we're not going to be paid for it.'"
The survey of 261 suppliers suggests automakers are pushing suppliers for price cuts as the softening economy and stronger competition chip away at profits. Suppliers for Chrysler were hit hard when the company imposed an across-the-board 5% price cut in January, and the automaker wants to lower parts costs an additional 10% by 2003.
But Chrysler is not alone. Suppliers report that every OEM has demanded price reductions that can vary by 50% or more across commodity areas. For example, one OEM required an average price reduction in a commodity area of 3% while another wanted a 7.8% reduction. "This suggests that either there is either a complete lack of cohesive pricing strategy within the OEM, or that each OEM has implemented a rather sophisticated commodity pricing strategy. However, further investigation found the latter is not the case," says Henke.
The study reveals that suppliers are responding differently to the price reduction demands of the manufacturer, depending on how much they give back to the OEM and the opportunity to make an acceptable return on the manufacturer's business. Many suppliers who gave higher price reductions or who felt they had a lower opportunity for making an acceptable return on the manufacturer's business, say they are maintaining or lowering the quality of their products to achieve mandated cost reductions.
Neil DeKoker, managing director of the Original Equipment Suppliers Association, says the report reflects the struggle suppliers face to remain competitive and profitable. "It isn't that suppliers are saying, 'We're not going to give you quality,'" he says. "Quality is a given to stay in business, but if you can provide a satisfaction level to meet minimum requirements, as opposed to doing the ultimate, chances are you're going to do just what you need to get by."