Push for cost reduction means quality suffers

Now IHS SupplierBusiness has completed its 2014 Automotive Annual Supplier Relations Study (www.supplierbusiness.com], and it seems they have found what most of us were already thinking: "Quality suffers as OEMs put pressure on costs, 2014 IHS Supplier Relations Study finds," is the headline of their executive summary of the study. "OEMs pushing the boundaries of cost reduction," reads the sub-head.

Here's a news flash for all of you who deal with the automotive industry every day: "Cost reduction was cited as the key factor in deteriorating supplier relations." The survey results also show OEMs are not always willing to share these desired savings in a collaborative spirit. Gee! Have I heard that before? Like maybe 20 or 15 or 10 years ago? "Expanded product liability guarantees and a greater financial burden in the event of recalls are among the other concerns that are affecting suppliers' perception of their Profit Potential with the OEMs," states the summary.

The "kinder, gentler" automotive OEM that the industry was promising a few years back has vaporized in a puff of exhaust, and the study shows that what we have is a "return to unwelcome practices such as setting annual price reduction targets, which [suppliers] deem unsustainable. While the standard annual price reduction in the industry hovers around 2-3%, it is not uncommon for OEMs to request cuts of 5% year-over-year, and in some extreme cases, as much as 10%," said the study's summary.

I just about fell off my chair when I read that! How is a supplier expected to stay in business if they have to give all their profits back to their customers every year? This is a business, not a charity! After a few years they will just have to ship a dollar with every part. (Oops. Sorry, I don't want to give the OEMs any ideas!)

So to accommodate these price reductions suppliers have to think of "innovative ways" to reduce their costs to manufacture and still try to make a profit. As the IHS summary notes, "suppliers seem to accept the notion that they have to find innovative ways to generate savings on a year-on-year basis, but they find it difficult to accept that they receive little or no support from the OEMs in doing so. This lack of support often results in strained relations between the two parties, therefore resulting in lower ratings in the IHS Automotive survey."

And, I would venture to say; it might also result in the manufacture of shoddy parts that result in recalls.

The survey also revealed that "nearly 75% of carmakers have received lower ratings than in 2013," with the average index rating down 2.8%. Profit potential ratings were down 5.4% year-on-year in 2014.  Toyota was the only automaker that improved enough to rate it the first position in the Supplier Relations study, closely followed by BMW, which was also second in 2013. In spite of that seemingly "good" position for those two automakers, both received ratings that were "significantly down" compared to 2006 and 2007 highs.

Jaguar Land Rover was named the "Most Trustworthy" with a 16% improvement in 2014.

"OEMs' lukewarm response to global recalls and quality management misalignments resulted in the automakers being pushed down the Supplier Relations ranking." One supplier put it bluntly: 'It's all about cost - is purchasing or engineering leading quality?'"

I think we know the answer to that one.

It amazes me that only a year ago OEMs were worried about suppliers having the capacity to take on the number of new product launches they were anticipating in 2014. Time after time, other surveys showed that a skilled labor shortage and lack of equipment capacity might put constraints on launches. Is any supplier that is being pressured to cut costs year-over-year while trying to maintain profitability going to have the wherewithal to invest millions in new equipment or skilled employees when they are not even certain they'll make a profit?

Writing about the automotive industry and its suppliers for more than 20 years has given me some insight into this industry, and I don't like what I see. More than 100 years of manufacturing cars in this country and they still can't get it right. Henry Ford would probably be turning over in his grave at the thought that the industry can't make an ignition switch!