The automotive environment is becoming harsher in terms of interaction between suppliers and customers, according to the results of IRN’s recently completed fourth biennial survey on price reduction dynamics. Apparently, the sky is the limit when it comes to expectations of suppliers’ ability to support cuts in input costs. On a case-by-case basis, though, the picture is a little better.
The accompanying chart shows how the dynamic has changed since IRN began studying the topic in 1997. While we wish this graphic demonstrated share prices or profitability, the sad truth is that the pattern illustrates how the five customers or customer groups (DaimlerChrysler, Ford, GM, the transplants collectively, and Tier Ones collectively) have been ratcheting up their demands for some form of price reduction from the suppliers responding to the survey. Overall, the average price reduction request has risen from 3.8% in the 1997 survey to 6.3% in 2003. According to the 412 questionnaires from 102 companies in 2003, Ford and DaimlerChrysler have been the most demanding lately, with requests averaging 7.6% and 7.5% respectively.
It is also clear from the chart that no single customer is consistently the hardest on its suppliers. Over the six years of data-gathering, the most aggressive customer has shifted in each survey: Chrysler in 1997, Ford in 1999, major suppliers and GM in 2001, and back to Ford in 2003. This is not surprising given the way each company also seems to take a turn being the industry darling. During periods when management decisions (e.g., diversification) appear to be panning out, and when the product-life-cycle planets are in alignment, the tenor of supplier relations might reflect less urgency.
On the other hand, no one has demonstrated a sustained commitment to a different approach to achieving lower input costs, so it may well be just coincidence that determines who the top dog is in any given year. Anecdotes from survey respondents suggest that every customer would probably get some votes as the most difficult to work with.
The exception to the hard line is the New Domestics (taken as a group), but although their average requests have always been at the low end, it is worth noting that their rate of increase has been the highest. If they were late to the party, they have been making up for lost time, but the style in which they do so is less disturbing to the supply base.
IRN’s survey results indicate that the percentage amount conceded by suppliers has also risen, up from an overall average of 2.1% in 1997 to 3.6% in 2003. Fewer suppliers reported being willing to just say “No,” and many of those who did refuse say they experienced or expect repercussions to their relationship or business development.
Slightly more than half of the respondents arrived at some type of compromise with the customer. The area of compromise is most likely to be where the action is for the foreseeable future, because automakers and large Tier Ones are not going to stop probing their supply base for potential savings. Unfortunately, this interaction consumes large amounts of time and energy, but suppliers can emerge from the process with margins more or less intact on the business in question. How is that possible? The macro view, with its averages and gross numbers, obscures the existence of individual transactions that follow a different path. Suppliers have been able to mitigate the demands in some circumstances with an argument that might be rejected in other cases. Rationale that helped suppliers protect their position at least some of the time, according to the survey, includes:
- Being the low cost supplier—a great position to be in at the end of a market test, but not one that many can claim.
- Use of a unique manufacturing technology that makes comparison, let alone substitution, more difficult.
- Critical components embedded in complex systems—harder to re-source.
- Existence of previously-negotiated multi-year contracts with annual price downs—a refusal to revisit has been honored.
- Greater flexibility to import materials and partially finished parts in return for price reductions.
- Credit for de-contenting of the product toward annual price reduction.
- Exemption of takeover work from cost-downs.
- Target price set before design equire-ments defined.
- A plethora of factors (health insurance rates, energy fluctuations, test require-ments, launch requirements, steel tariffs, directed sourcing, raw material price increases, engineering changes, volume alterations).
These arguments didn’t work for you? That is not entirely surprising. It turns out that there is still room for unique factors to influence what purports to be a cut-and-dried process. A compelling argument by one company on one job to one customer contact can yield a different outcome for another company. Although the process is fraught with frustration, it is heartening that the industry is still colored with shades of gray, not just black and white.
All suppliers should currently be engaged not only in rigorous and creative pursuit of cost-cutting opportunities, but also in strategic analysis of key customers and competitive differentiation. Through these activities, a supplier can tailor its proposed pricing to a specific product/program/customer situation and thereby improve its leverage with the arbiters of appropriate pricing. The existence of shades of gray means that there is recognition of the complexity of the supply chain, and room for interpretation. At least some of the time, then, a capable, competitive supplier and its customer may be able to agree on an ending for the tale of two prices.