As we analyze the results of this year’s IRN supplier survey on price reduction requests and the dynamics of supplier-customer power, we have been thinking about the nature of collaborative efforts to reduce costs. The question first came up when we shared the results of our inaugural survey with participants in 1997. One supplier suggested, “It would be interesting to know if a price reduction request resulted in a joint OEM/supplier activity to drive out cost or if it was a one-sided demand from the OEM, with no genuine assistance from the OEM to reduce the cost of the value chain.” So while we’ve asked about that since then, the answers suggest no consensus on the need or the value of such initiatives.
(1) Is a customer obligated to help mitigate the effects of its demands for a reduction from the price that a supplier calculated in the ordinary course of its business? (2) Is the customer able to be useful in such an endeavor? (3) Does the supplier need or welcome the help? Based on our experience in surveying and working with component suppliers, the answers are, (1) “Apparently not;” (2) “Sometimes;” and (3) “It depends.”
IRN survey data since 1999 shows the ebb and flow at many automakers and Tier Ones on willingness for the OEMs to roll up their sleeves and engage with suppliers in seeking cost reductions. Not surprisingly, the New Domestics have displayed the most consistent involvement in joint efforts, with about 40% of survey respondents stating that customers like Toyota, Honda, and Nissan offered to collaborate for mutual benefit. This is a reflection of their deep-seated philosophy of working closely with the supply chain to optimize performance. We should note that this is not a strictly altruistic undertaking for them, though; the New Domestics also take a very sharp pencil to the profit margin in their supplier interactions, so they are very focused on reducing costs throughout the value stream.
Where do the Detroit Three stand on the subject? Back in 1999, Chrysler had a significant leadership position versus the others in town (e.g., Chrysler, 38%; GM, 7%); it was rated nearly as high as the Japanese. In subsequent years, Ford and GM quickly caught up, and in recent years have been more likely to assist suppliers than their once-leading-edge competitor Chrysler has been.
Automaker support for this kind of joint activity reached a peak in the middle of the last decade and has tapered off again, although for the New Domestics this means that they are back at the 40% mark. Interestingly, the Tier One customers have historically been less inclined to offer support to their suppliers in driving out cost, but the 2011 survey shows that they have embraced this activity to a greater degree. Forty percent of the lower tier suppliers indicate that they have received offers of help from their Tier One customers.
It is one thing to offer help, but another thing to accomplish something of substance. The type of assistance has taken various forms over the years. At times, for example, the OEMs have reserved a set of resources with deep expertise in lean manufacturing and process improvement that they make available to suppliers. Whether this is helpful seems to be in the eye of the beholder. We’ve had comments on the same subject ranging from “beneficial” to “hindrance.”
Many suppliers have had more favorable reactions to simple measures on the part of their customers to be more receptive to the suppliers’ own cost reduction initiatives. Suppliers have expressed frustration over the years with lack of action on their savings proposals, so if the customers exhibit a cooperative attitude, streamline their approach to addressing supplier requests, and show a willingness to share savings, that is enough to make many suppliers happy. One company noted that the best help it got from GM was that it “supported the implementation of design cost savings.”
Another trend in the industry for cost reduction at the OEM level has been to reduce the direct supplier base. As just one example, Delphi’s purchasing head was recently quoted as saying that it is targeting getting a core group of 100 key suppliers within its 600-company supply base up from 40 to 45% of Delphi’s annual expenditure to 60 to 70% of its $8-billion budget for purchased components. This consolidation is nothing new, but it will be interesting to see whether this structure drives customers toward more collaboration with suppliers on joint cost reduction efforts, or less. On one hand, the suppliers who are thus anointed to receive huge portions of a company’s spend are likely to be those that do not need external help in order to be world-class competitive in their costs. On the other hand, no company is an island, so it stands to reason that customers and suppliers that can share the best practices of each to collaborate for mutual benefit will outperform the industry.