The condition of the Chrysler Group, as well as the downturn in the fortunes of its former domestic musketeers, leads me to wonder what it is that makes one company successful and another in a state of decrying a change in fortunes. One of the key elements of the so-called "Chrysler Turnaround Plan" is a reduction in bill of material costs, a category that includes material, warranty, tooling, amortization, and transportation. All told, that area is the one where the greatest savings are to be realized during the next three years. According to the calculations, these costs are expected to decrease $0.9-billion this year and $4.4-billion in 2003. By way of comparison, the plan calls for a reduction in plant costs (e.g., manufacturing expense, burden, depreciation, PP&L, workers' comp, etc.) of $0.5-billion in 2001 and $0.7-billion in 2003. Fixed costs (headquarters, product development, etc.) are to decrease by $0.7-billion in 2001 and $0.9-billion in 2003.
Essentially, what this bill of materials plan means is that suppliers are going to have to make modifications in what they do...and what they charge. Dieter Zetsche, president and CEO of DaimlerChrysler Corp., when announcing the plan from Stuttgart on February 26, explained that in addition to the arbitrary 5% price cut that was effective at the start of this year, there is to be 10% additional savings that is to be realized through process improvements. Zetsche provided assurance that there are "100s, 1,000s of engineers" that DCX is prepared to send out to aid suppliers in realizing profit improvements. While Mercedes engineering is known to be impressive, I have never heard it characterized as being particularly economical—which I suppose goes a long way to explaining why the exceedingly clever Lexus engineers have managed to develop segment-leading vehicles—which leads me to wonder how effective this corps of price-busters will really be ("We're from HQ and we're here to help you." Yeah. Sure.).
Those suppliers that are providing a differentiated, technology-rich product will be in better positions than those that are providing what are essentially commodity products. Commodity suppliers are in a tougher situation because while the products they supply may be necessary, by the nature of being a commodity they are substitutable. Unless they can drive down costs—and let's face it, margins are already so thin as to be transparent in many cases—they can find themselves driven out of the market.
One answer for the commodity suppliers is to start working to become lean, something that will allow many of the operations to become more efficient even in the short run. But if an inefficient plant tries to undergo a massive reorganization in as short a period of time as will be necessary to meet what the Chrysler Group is looking for, then there will be disruptions that will long reverberate: think earthquakes and aftershocks. Such a seismic shift isn't pretty.
Think about one aspect of this: A cause of the problems that are being experienced by Chrysler Group is that it has cars and trucks that aren't selling particularly well. Consequently, its management has had to do things like offer rebates to people, incentives to get them to want to buy the cars and trucks. But if people for emotional or practical reasons wanted to buy them then there wouldn't be the need for the additional lubricant. There are several products on the market that don't require such incentives: When is the last time you heard a Mercedes commercial touting "cash back"? Arguably, the Chrysler vehicles (with few exceptions) are commodities. Mercedes vehicles are differentiated, technology-rich products.
Unfortunately for too many people at Chrysler—and for many more people at supplier companies—the need to be truly different, not different in the sense of labeling one's self so in advertising, has been overlooked.