How Detroit Drives Off Suppliers

Mercenaries don’t do heroics.  If your company is thinking about outsourcing some part of your operation—you’d best keep that fact in mind. When the chips are down and you really need someone’s support—your supplier’s commitment to you better be based on more than short-term gain.  

In another article I talked about how, at the Battle of Agincourt, Henry V defeated a French army that was better equipped and nearly five times larger.  What you may not know is that the French army (like most Armies of Continental Europe at that time) had “outsourced” its archery to Genoans—who were viewed to be the best builders and operators of crossbows in the world.  Good with the crossbow they may have been—but when the battle broke out—the evidence is that the Genoans headed for the hills.  Who could blame them?  I mean, it wasn’t their country they were fighting for.  Besides, just fifty years earlier the French (with a contingent of Genoan cross-bowmen) ran into a huge English army at Crecy.  Rather than engaging the English with his French men-at-arms—the King of France forced 15,000 Genoan exhausted cross-bowmen to the front of the line—where they were promptly slaughtered.  No doubt the stories of the largesse of the French were still circulating in small Italian towns 50 years later.

It is a peculiar thing—as companies get more and more aggressive with outsourcing (now bidding out things that are closely linked to mission-critical factors)—they are also increasingly treating their suppliers like mercenaries for hire.  They always talk a good game in their rhetoric about “partnering” with suppliers—but that is usually a euphemism for getting the suppliers to take all the risk for rapidly diminishing rewards.  

Nowhere is this true more than in the U.S. automotive industry—where I happen to do a lot of work.  Purchase decisions at U.S. automakers and Tier 1 suppliers are increasingly made by purchasing personnel—some with little or no knowledge of design, engineering, or manufacturing.  They have one objective—and that is to drive for the lowest possible cost of a given component.  Now there is nothing wrong with trying to get a low price—and certainly there were huge inefficiencies in the automobile supplier chain that needed to be squeezed out.  But today the purchasing-office driven bid process is forcing out the very innovations which could make the U.S. auto industry more competitive.

A few years ago, a part failed on a car manufactured by a U.S. automaker that was going to cost millions of dollars in warranty claims.  They called a supplier and told them about the crisis, and the supplier—in just a few weeks—designed an innovative solution through a breakthrough in material science they had been working on for years.  
Keep in mind that the supplier invested his own money creating the solution—and that the solution allowed the car company to avoid millions of dollars in costs.  But when it came time to sign the contract for the replacement part, the auto company made the innovation available his competitors for bidding.  How’s that for encouraging innovation from your suppliers?

So what if U.S. auto companies are grinding their suppliers for lower costs.  They have to do it to compete with the Japanese, right?  Wrong.  Ask anybody who sells to the car companies and they’ll tell you they would much rather sell to Japanese or European manufacturers. Foreign car-makers are tough—but in the words of one supplier, “they appreciate what you do for them and don’t forget it.”  

So where is all this headed?  Crain’s Automotive News cited a survey of 259 automotive suppliers on where they are investing their R & D dollars.  Parts makers say they are raising research and development budgets and capital expenditures for Toyota, Nissan, and Honda and they are reducing expenditures for U.S. Carmakers.  Perhaps even more importantly, 63% of respondents reported having a good or very good relationship with Toyota, compared to only 3% for GM and 5% for Ford.  The auto parts “archers” are heading for the hills.  Look for U.S. automakers to fall further and further behind their foreign rivals.

The benefits that accompany the integration with supply chain partners bring with them an imperative for collaborative relationships.  Firms that fail to realize this may have short term success, but may find themselves like GM and Ford—alone on the battlefield at an inopportune time.  There is some evidence in recent months that U.S. Automakers is waking up to this reality—but only time will tell.