Choose Smart: Finding the Right Set of Customers
Earlier this spring, we had a conversation with the head of global sourcing for a major tier one automotive company, which supplies components and assemblies a mix of U.S., European, and Asian OEM s. What he had to tell us about the state of the domestic auto industry supply chain would shock even an industry naysayer. In his view, as much as forty percent of domestic automotive suppliers will be forced out of business in the coming decade. Why? Because of their over-reliance on serving the Big 3 (GM. Ford Daimler Chrysler), who have a long history of using sticks rather than carrots with their supply base.
According to industry research from Planning Perspectives, a Michigan based consulting and research firm that studies the impact of supply relationships, GM’s treatment of suppliers has gotten considerably worse in recent decades, and is considered “very poor” today. This is due in large part to GM’s continued cost reduction requirements known in the industry as “5-5-4-4-3” margin give-back programs, which force suppliers to reduce costs over the length of a-contract, but without collaborative partnering to reduce costs, benefiting all parties in the relationship. The Japanese automotive OEMs including Toyota and Honda, in contrast, also focus on supplier cost reduction, but they accomplish this through reducing supplier’s costs through joint cost take out initiatives, rather than targeting just suppliers’ margins.
After looking at the U.S./Japanese comparison, it’s easy to take a guess at which group of OEM’s would make better customers. Perhaps that is why domestic suppliers to Japanese OEM’s are willing to go above and beyond the traditional “supply relationship” by sharing new technology and opportunities. For example, a supplier might suggest providing an entire assembly—at a similar cost to the individual parts—to their customer rather than half a dozen separate parts for the OEM to assemble using higher cost labor.
Outside of automotive, there are countless case examples to cite that show the value of collaborative supply partnering. Consider the case of Boeing’s first twenty first century commercial platform, the 787. Boeing will only make a single assemble for this new airplane internally. Suppliers—many of which played a critical role designing their respective parts—will provide the rest of the components and parts for the entire plane, allowing Boeing to assemble a single plane in 3 days. According to AMR Research, an industry analyst firm, Boeing’s major change with the 787 is that it “started treating the 132 global build sites as partners, not suppliers. This involved three major changes: 1) Making suppliers responsible for delivering world-class design; 2) Having suppliers deliver subassemblies, and letting Boeing deal with final assembly; and 3) Offering standardized options and features for the platform.” Under this new approach, Boeing even lets suppliers take responsibility for the wing and fuselage of the revolutionary plane, modifying 747 cargo planes to allow suppliers to transport their components to Boeing s Seattle assembly line in a just-in-time manner.
Through collaborative two-way relationships like this, both buying and supplying organizations can thrive. But picking the right set of customers is not always as easy as it sounds. But fortunately, even for domestic automotive suppliers who feel trapped by past relationships, there is hope. By investigating other end customers in similar industries, or by branching out into closely related ones—such as aerospace and defense—it is possible to find a better set of customers who value innovation and partnership as much as the continued price reduction for an individual piece part.