Two interesting supply chain articles from the Wall Street Journal over the last couple of days. The first deals with the auto industry (Suppliers Balk at Working on Chrysler’s New Models, Sep 25). The Grand Plan to save Chrysler involves using Fiat’s engines in new fuel efficient Chrysler models. That plan is hitting a speed bump as some suppliers are leery of working with the company. The problem stems from the nature of development work and the new Chrysler’s unwillingness to follow Detroit contracting norms.
Chrysler is counting on suppliers to develop parts for its new offerings but that means spending cash upfront. Traditionally, car manufacturers prefer to let the suppliers recoup those costs by selling parts as opposed to subsidizing the design work upfront. This imposes some risk on the suppliers but the car makers can reduce that risk by agreeing that if the model doesn’t hit volume targets, the car maker pays a higher price. Thus while the automaker forecasts that a given model will sell at 50,000 units a year, it also agrees to pay higher prices when sales fall below, say, 40,000 units a year. Chrysler is apparently not willing to offer those terms and is now finding out that many suppliers don’t have a whole lot of faith in their ability to bring successful cars to the market.
In the words of Tom T. Hall, I like beer, but who knew that the beer supply chain could be intriguing? First, a bit of background. Following Prohibition, a three tiered distribution system was forced on much of the alcoholic beverages industry. Beer had to go from the brewer to a distributor to the retailer. The brewer could not sell directly to the local retailer. This was largely done to limit the competitive power of large breweries. Fast forward seventy years or so. The big breweries are even bigger BUT the stores where most of us get our suds also now bigger businesses. Most supermarkets are now parts of chains with large regional if not national reach.
Beer distributors, however, remain relatively small local businesses. Further these are regulated at the state level so a beer company has to sign up distributors in both Illinois and Indiana to serve the Chicagoland area. This apparently is getting to Jim Koch, the head of the Boston Beer Company who shows up in all those Sam Adam’s ads (Beer Chief Pushes for Industry Changes, Sep 26). He claims that
distributors should redesign their businesses to slash 20% from existing cost structures. He said the supply chain is filled with “deliberate inefficiencies.”
Those seem like big numbers, but I also think it reflects the difficulty of being a small player in the market. Boston Beer, on the one hand, produces “micro-brews” but, on the other, is the seventh largest player in the market. The problem would seem to be that the big firms are so big that it is hard for smaller players to guarantee distribution. A national retailer will always deal with the local Bud distributor but may not be willing to seek out a Sam Adam’s distributor in every market.