In a recent blog post, I pointed out why automotive OEMs should play nice with their suppliers. Automotive customers have long been known as “difficult” for suppliers, given the OEMs’ penchant for fixating on price.
Other industries, including medical and aerospace, seem to have taken a page from the automotive OEMs' playbook over the years. An article in the August 3 issue of the Wall Street Journal noted that Boeing is nearing a settlement of “one of its thorniest supplier issues” by provisionally agreeing to a discount-promising, long-term deal for plane parts with Spirit AeroSystems Holdings Inc.
Spirit makes fuselages, large wing structures, engine nacelles, fan cowls and more using both composite materials and metals, and it is Boeing’s biggest supplier, said the WSJ article. Yet negotiations between the two companies have been “contentious at times as the two sides sparred over parts pricing.” Spirit said in April that “there was a significant gap on terms,” but as of last Wednesday, a “breakthrough” in talks had been achieved. Boeing called it an “important step forward in its Partnering for Success program in which the plane maker has asked suppliers for concessions in return for work.” (I’m sure that means price concessions.)
Does that sound familiar to any of you automotive suppliers? You’ll be guaranteed more work from the OEM, but you’ll have to reduce your prices to get it. That sounds a lot like the law of diminishing returns: The lower your prices, the more work you’ll get until at some point you're the sole supplier doing the work for free. These programs with titles that lead suppliers to believe that they will truly be “partners” and that it will be a win-win for everyone generally turn out to be a big win for the OEM, not so much for the supplier.
What makes it more interesting is that Spirit is Boeing’s largest supplier and Boeing is Spirit’s largest customer. It sounds to me like they really need each other! It’s interesting to note that Spirit was spun off from Boeing’s Wichita, KS, and Tulsa, OK, units in 2005, noted the WSJ article. That is also reminiscent of how the big automakers spun off various segments of manufacturing to form supplier companies, such as GM’s 1999 spinoff of its parts operation into Delphi Corp., which an article in Automotive News (Sept. 14, 2008) called a “spiral of disaster.”
All of this finagling that companies do seems to have one purpose in mind: Reduce costs. Yet according to a new paper from Advanced Purchasing Dynamics (APD), the constant focus on pricing “is counter to developing collaborative relations with suppliers that optimize design and production resources.”
Supplier relationships are about a lot more than just getting parts at a competitive price, said APD. “Companies need their supply base to help with a multitude of things including new product design, new product launches, expansion into new regions and keeping customers happy.”
I might also add that most large OEMs in the automotive and aerospace industries also want suppliers to perform R&D and develop new processes that can help reduce price and improve productivity. They want the suppliers’ new technology, but they don’t want to pay for it. That’s the real kicker.
APD points out that in an effort to establish competitive cost structures, “many companies adopt a competitive (we win, you lose) approach with their suppliers that focuses efforts on reducing the prices paid for goods and services. Such companies often maintain a larger than necessary number of suppliers (and suppliers in waiting) for each commodity to ensure competitive pressure.”
Additionally, many of these large OEMs “engage in frequent market tests to ensure pricing is competitive.” Market testing is another one of these esoteric terms with a hidden meaning. It’s better known in the plastics industry as going out for bids on molds and molded parts to see if someone will do the work cheaper to “keep my supplier honest.”
APD notes that in spite of the fact that this “competitive” approach of “market testing of multiple suppliers” is not optimal, most big companies still use it. However, there is an alternative: “Developing a deep understanding of cost structures used to manufacture the commodity. With this knowledge, purchasing can dependably validate or establish pricing without competitive market testing. Cost knowledge can be developed by:
- Obtaining and understanding detailed cost breakdowns submitted by suppliers;
- using software that develops unique cost estimates for each manufactured part;
- developing an understanding of supplier cost structures and should-be cost models that can be applied to a commodity or like family of products; and
- reviewing supplier manufacturing processes and costs, oftentimes referred to as open book costing.
That all sounds well and good for the OEM but here are the problems from the plastic processors' and moldmakers' points of view:
- Very few molders or moldmakers are willing to submit detailed cost breakdowns, i.e., material costs, design costs, cycle times, labor costs; and mold component costs, such as hot runner systems and specialty parts.
- There isn’t much software out there that accommodates molding and moldmaking job costing. A few weeks ago, I wrote an article on Facton, a company that has developed software that allows standardization of the quoting process. The company claims that it works even on one-off types of products such as molds. Many moldmakers have said in the past that they’ve yet to find a good software program for quoting and costing molds.
- Once the OEM understands the supplier cost structure and develops a “should-be cost model,” does it then become a stick with which to beat up the supplier to get the parts or mold to the “should-be”cost? Not really conducive to a good relationship.
- While many of the big Tier 1 suppliers might allow the OEM to review their manufacturing processes and costs (open book costing), many Tier 2 suppliers, such as the molders and moldmakers that I know, would be extremely reluctant to open their books to a customer. Again, the stick problem might arise.
It’s not that suppliers are dishonest—they’re not! Most are hard-working, honest business owners who are just trying to do their best to make a profit and grow their business. They just don’t want to risk what experience has taught them can come back to bite them when they open their books to an OEM customer.
Jeoff Burris, CEO of ADP, told PlasticsToday that the supplier needs to ask the purchasing person how the information will be used. Will it be used to create greater collaboration and a win-win for both the supplier and the OEM? Or will it be used in a “non-collaborative way as a hammer?” Ultimately, Burris notes, it really depends on the buyer and the trust that the supplier and the buyer share.
APD’s experience in working with companies on this issue over the years has been that companies that move from a competitive (price-focused) approach to a collaborative approach experience savings of 8 to 18%.
That, too, is good, but if the savings are gained by wielding a stick and digging into the supplier’s profits, then no one truly benefits. The OEM might think there is a benefit to getting the supplier to lower costs—squeezing the supplier for that last little bit of cycle time, for example—but if it comes at the expense of shrinking the supplier’s profit margin, he may not be able to stay in business, which could hurt the OEM in the long run. There have been a number of automotive molding and moldmaking suppliers who were pushed out of business through tactics that were less than honorable.
A quote in APD’s report from a chief purchasing officer pretty much sums up the perspective of many purchasing people: “I don’t want all my suppliers to go bankrupt; I just want them to be really close.”