The cost of being a bad customer

If John Henke’s calculations are accurate, General Motors could boost its operating income by $400 million per year just by improving its relationships with its suppliers. For Ford the number is $327 million, and Chrysler, $308 million.

We are not alone in claiming that suppliers don’t give their best stuff to their worst customers, but Henke, who is a Ph.D. and president and CEO of Planning Perspectives, Inc. has finally projected a dollar cost for bad relationships. He’s been studying supplier relationships and cost concessions within the automotive industry for many years, and he developed an index to measure it.

For the first time ever, however, Henke used proprietary data his firm has collected, public records, and media reports to calculate the costs when suppliers do such things as shift their innovations, A-Team support, or added value service to other customers. Foreign automakers have been able to take advantage of those shifts and have saved significantly over time as a result, according to Henke.

You might quibble with Henke’s formula, but the conclusion is pretty solid for any manufacturer in any sector. Beating up suppliers on price is a short-term tactic, not a long-term strategy for profitability. Are the Big Three listening? Here’s an Automotive News video report with Ford’s chief purchaser sounding like he’s read the study and is trying to catch up, while Toyota’s purchasing chief is taking steps to shore up his declining supplier scores.

 

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White House endorses quicker supplier payments

One of the maxims of this blog is, “Suppliers don’t offer their best ideas to their worst customers,” and one of the quickest routes to the category of “worst customer” is stretching out payments to 60, 90 or  120 days — as has been fashionable in the automotive and other industries. We generally applaud the idea of thinking like a CFO when you are a supply manager, but too often the finance-department led idea of pushing the cost of money onto suppliers by delaying payments results in tighter margins for the supply base that stifle reinvestment in equipment or research and development.

Apparently President Obama has come around to our thinking on the topic because he recently endorsed an organization of companies that have pledged to pay suppliers quickly, or help them find lower cost working capital.

In the White House announcement, the Administration claims its QuickPay program of paying small government contractors quickly has saved them $1 billion since 2011. The private business version of the program, called SupplierPay is an opportunity not just to save money, but to create better relationships that foster innovation.

 

Move over Big Three

A seismic shift may be coming in the automotive industry.

“Not even two years after the delivery of the first Model S, Tesla Motors has transformed from fledgling start-up to arguably the most important car company in the world.  We are not joking,” said Morgan Stanley analyst Adam Jonas in a quote to the LA Times.

According to the article, suppliers who once dismissed this manufacturer are now considering building dedicated lines and facilities solely for Tesla’s business.

At least four southwestern states are vying mightily to become the home of Tesla’s $5 billion gigafactory which will employ more than 6,000 people to produce enough battery packs by 2020 to supply 500,000 vehicles.

But suppliers and states aren’t the only ones to sit up and take notice. One of the largest automakers in the world, General Motors, established an internal “Team Tesla” to analyze that company’s culture and success. Managing and collaborating with suppliers is one key to success.

Dare we say the current may be shifting toward electric cars?

Calling all auto suppliers: fed money ripe for plucking

“An opportunity to hit the accelerator on U.S. auto manufacturing growth” is how Energy Secretary Ernest Moniz characterized the Advanced Technology Vehicles Manufacturing Loan Program (ATVM) and the $16 billion in low-interest financing that is available to support efficient-vehicle programs.  While auto suppliers have always been eligible to participate since Congress created the ATVM in 2007, none have secured funding to date. Well, it’s about time the feds recognized that innovation comes from the supply chain as well as OEMs.

Moniz announced in a speech last week that the program is being overhauled to make it easier to fund production of technologies such as lightweight materials, efficient engines and low-friction tires.  The changes also include legal clarification to show that suppliers are eligible for the program, a promise to respond more quickly to applicants and the creation of a new on-line application portal.

Roland Hwang, director of the transportation program at the Natural Resources Defense Council, weighed in and said focusing on suppliers is appropriate because automakers are increasingly depending on them to help meet new fuel economy standards, which can strain the suppliers’ finances.

Ford Motor Company, Nissan, Tesla Motors and Fisker Automotive all have participated in the loan program.  Auto suppliers, it’s your turn.

 

GM Chooses new CEO with Supply Chain Experience

If you weren’t already convinced of supply management’s role in developing and driving overall corporate strategies in global companies — take a look at what General Motors just did.

The board of directors for General Motors took a bold step this week by naming a woman as the company’s Chief Executive Officer, replacing Dan Akerson when he retires next month. Here’s the GM News release.   Mary Barra will be making history as the first woman to ever lead GM — or any global automaker — as Chairman and CEO, and that’s certain to receive plenty of attention.

It’s also very important to look at her experience because she is a 100% GM insider. Barra rose through the ranks at GM as an engineer and engineering manager, starting as a co-op student at General Motors Institute (now Kettering University).  She was named the senior VP for product development in 2011, and a few months ago, also assumed responsibility for GM’s global purchasing and supply chain organization (with a promotion to executive VP).

That last step — tying together global product development with global supply chain sent a very strong signal that GM expects to deliver innovative products through its relationships with suppliers. Selecting the executive holding that dual position as the CEO over others who have managed brands or regional operations says a lot about GM’s strategy for the future.

Ford seeks innovation from partnership with minority supplier

We regularly write about using your supplier base to bring innovation to your company, but here’s a twist on that theme. According to Crain’s Detroit Business, Ford patented a process for welding aluminum, then shared it with a supplier to develop the technology for production. The deal was made under the umbrella of minority supplier development because the supplier is minority-owned. But it also takes advantage of the supplier’s knowledge and experience. Who better to take an idea from the lab to the assembly line than someone who is already fabricating aluminum in production volumes?
There was a time when automakers would develop a new process from beginning to end, then simply dictate to suppliers how it would be implemented. In practice, that approach only gets you to the starting line. Sharing development responsibilities sets a better foundation for improvements even after the process is production-ready.
Automakers have a bad reputation for supplier relationships, so it’s good to see evidence of more collaborative approaches.

How Quickly We Forget

Last year the global auto industry was caught by surprise when the Japanese tsunamis knocked out the factory that makes a black paint pigment used by several car companies.
This week it’s deja vu all over again, as The Detroit News reports that an explosion in a single factory in Germany likely has disrupted 50% or more of the supply of a critical resin used in brake hoses and fuel lines by all three U.S. automakers. The News reports that 200 engineers, purchasers and others gathered outside of Detroit to figure out what to do next.
It turns out that the explosion at the Evonik Industries AG plant in Marl, Germany not only produces 25% of the world’s supply of nylon-12, a petroleum resistant resin, it also supplies a critical chemical building block used by suppliers of another 25% of nylon-12.  With automotive production up in the U.S., global inventories of the resin could run out in quickly.
Now, it does show progress that the industry responded quickly after the accident to sort out alternatives, but it’s still shopping for an umbrella after you’ve already been caught in the rain. If the OEMs had thoroughly mapped their supply chains before this happened, they would have seen the big red “X” where all fuel hoses and brake lines led back to Marl. And that should have led them to formulate risk mitigation strategies that could be implemented the moment the news of the explosion hit Twitter.

Ask GM About Getting Value from Indirect Spend

Marketing costs are a category of indirect spend that are notoriously hard to control. As one ad agency executive admitted a long time ago, “I know that half of every ad budget is wasted, but I just don’t know which half.”
General Motors has often talked about streamlining its marketing — but with so many brands and geographic markets it never really made progress. Automotive News reports that an earnest effort that started during the bankruptcy reorganization is taking a new turn — which might save $400 million per year, or about 10% of GM’s estimated global advertising budget.

GM expects $2 billion in savings from marketing overhaul

It will take discipline to make that number stick, because marketing is exceptionally prone to chasing whatever seems to be the latest hot idea — regardless of cost. But it is an eye-opening lesson that every dollar saved, regardless of where it comes from, is a dollar that can contribute to the bottom line.

GM’s Carbon Fiber Diet

I have a friend who trains and races on several light-weight, high-tech bicycles. He calls them his “carbon fiber diet.” I know golfers who have a similar appetite, and now General Motors seems to have acquired a taste for carbon fiber as well.

According to the Wall Street Journal, “General Motors and Tokyo-based Teijin Ltd. on Thursday disclosed plans to jointly develop lightweight automobile components using an advanced carbon-fiber materials process.”

WSJ reported that GM Vice Chairman Steve Girsky admitted that GM’s internal capabilities were limited in the new technology, so it went looking for a new strategic partner. That’s a significant statement coming from GM. Considering its long history of rocky relations with suppliers, this is another sign that GM is recognizing the value of the supplier community in delivering innovation as well as cost savings. We’ve been hearing executives talk the talk in the past, but this is concrete (or should we say carbon fiber) evidence that they have begun to walk the walk. What do you think?

BMW Gets It — Suppliers Bring Value Beyond Cost Savings

In a news release, BMW recently announced it has launched a supplier innovation award program — recognizing nine suppliers for outstanding technological advances. The innovations included a new automatic transmission, a camera-based driver assistance system, fully adaptive LED headlamps, and a new way to fuse lightweight aluminum sheets for greater structural strength.
BMW cut to the chase in a statment, “With its new award, the BMW Group aims to demonstrate that innovation is a crucial success factor for the company. Working closely with suppliers is extremely important to the BMW Group in expanding and reinforcing its leadership in the field of innovation.” That’s about as strong a statement as you are likely to see that recognizes the value of suppliers as an extension of a company. I think it’s very significant that BMW, which has a brand already so strongly associated with innovation, was willing to essentially share that recognition with its supplier community.  It is not likely that BMW would take such a step unless it had strong strategic relationships with those suppliers and felt comfortable that no competitor would be able to break them.