I recently participated in a business forum sponsored by the Original Equipment Supplier Association (OESA) that focused on the need to change the way the domestic OEMs interact with their supply base. It was structured as a panel discussion where various members of the industry—from academia to several Tier Ones—presented their observations on the current state of OEM-supplier relations and recommendations for improvement. Dr. Michael Moch, an ethics professor from Michigan State University, began the forum with an overview of what he believes are the domestic OEMs’ destructive behaviors with their supply base that are accelerating their market and financial decline.
| Information Sharing Between Automakers and Suppliers (U.S. vs. Japan) (J. Dyer, Organization Science, Nov-Dec., 1996) | ||||||
| U.S. | Japan | |||||
Arms- Length | Arms- Partner | Arms- Length | Arms- Partner | |||
| Extent to which supplier trusts auto- maker with confidential information | 3.1 | 3.3 | 5.3 | 6.2 | ||
| Extent to which supplier shares data on costs | 4.5 | 4.3 | 4.3 | 5.9 | ||
| Extent to which automaker assists the supplier with cost reduction | 2.1 | 1.9 | 2.6 | 4.2 | ||
| Extent to which automaker assists the supplier with quality | 2.9 | 3.1 | 3.0 | 4.4 | ||
| Extent to which automaker assists the supplier with JIT/inventory mgt | 2.1 | 2.3 | 2.7 | 4.2 | ||
| all numbers are from a 7-point Likert scale: 1= not at all; 4= to some extent; 7= to a very great extent | ||||||
What this chart demonstrates is that domestic suppliers are less likely to trust the OEMs with confidential information, less likely to share data on costs, and less likely to receive assistance from OEMs than their Japanese counterparts. Dr. Moch also went on to quote from the article that includes this chart, as he noted that domestic OEMs employ more than four times the number of purchasing personnel per million dollars worth of goods purchased than the Japanese manufacturers do. While this information is from the mid 1990s, numerous recent studies corroborate the validity of the data.
One of the most insightful portions of the panel discussion was the presentation by Tom Stallkamp, current president of MSX International and former president of Chrysler Corporation. He referred to the state of domestic OEM-supplier relations as “Adversarial Commerce” and listed four major problems with this approach:
Problems with Adversarial Commerce
- It puts tension into the system.
- It brings back mistrust, which results in manipulation.
- It increases overall systems cost (i.e., you may win on one component, but you lose elsewhere in the system).
- It institutionalizes inefficiencies in the system.
And, most importantly, the one most damaged by this kind of approach is the OEM itself. By creating an environment of mistrust and manipulation, suppliers withhold needed innovations from the OEM (since they will not be rewarded for them), and the overall cost structure of the OEMs’ procurement process remains much higher than their Japanese competitors. The obvious long-term loser of this approach is the domestic automotive industry.
Mr. Stallkamp ended his presentation with several suggestions on how to improve your success as an automotive supplier:
Steps to Improve Supplier Success
- Say no more frequently. IRN has been one of the most vocal proponents of the “just say no” program on price reduction demands from OEMs. Until more suppliers aggressively protect their position, the continuous downward pressure on supplier margins is unlikely to stop.
- Establish supplier alliances. This is not merger-and-acquisition activity, but a proactive strategy to align complementary suppliers.
- Involve management at all levels. Successful supplier positioning is not a salesperson selling to an engineer or purchasing agent. It is a multi-tiered customer development strategy that includes CEO to CEO.
- Share more information and product plans. Make sure you do not mimic the self-destructive behaviors of your customers. Integrate your key suppliers into your system.
- Share componentry. The whole industry is over-capacitized, so the only way to be successful in many areas is to look for opportunities to share componentry.
- Demand adequate systems specifications from your customers. As more costs are being pushed lower in the supplier chain, suppliers must become more diligent in getting the necessary detail on the front end of every program.
- Significantly improve your program management capability. This is a necessity for both OEMs and suppliers.
- Diversify your customer base. Make sure that you are not betting your company’s future on whether or not the Big 3 regain lost market share.
As I emphasized in my remarks during this panel discussion, the one advantage suppliers have is choice. By diversifying their customer base and focusing on the improvement strategies listed here, suppliers can successfully participate in the non-Big 3 portion of the market. Most successful suppliers have already begun this transition, and, as a result, are already much less dependent on the ultimate fate of the Big 3.
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