If you look at what it costs an automaker to build a vehicle, purchased components are going to represent a big, big chunk. How an automaker deals with its suppliers and how it chooses just who is going to make what is then critical to its overall success. Automotive News has a pair of stories that highlight how two carmakers are taking somewhat different approaches to managing purchasing.
First up is Chrysler which is opting for a kinder, gentler approach to sourcing. Specifically, it is floating the idea of assigning some parts without putting them out to bid (Chrysler pilots no-bid contracts on new minivan, Aug 5). Essentially, Chrysler is willing to guarantee that a supplier gets the work if it is willing to share a significant amount of financial data.
Chrysler Group is using its next minivan to pilot a collaborative, no-bid purchasing system that guarantees favored suppliers a profit but requires them to open up their financial books. …
The presourcing arrangements between an automaker and supplier are designed to allow both to cut engineering costs, build trust and improve long-term planning. They are common among suppliers at Honda Motor Co. and Toyota Motor Corp., but haven’t caught on among domestic suppliers. …
Long-term, no-bid agreements give suppliers more predictable revenue, allowing them to invest with reduced risk. And suppliers say they provide their best technology to automakers that are loyal to them and offer the best profit opportunities.
For automakers, the no-bid agreements help ensure an uninterrupted flow of parts and access to a supplier’s best technology.
A traditional argument for running an auction is price discovery. The process of bidding will reveal which supplier has the lowest cost and the buyer can then make an efficient sourcing decision. It seems that Chrysler thinks that by getting all up into a supplier’s books that it can at least guarantee itself a good deal. It may not pick the most efficient supplier to work with but it can at least get a fair shake given the supplier’s cost structure. Presumably if it can in the process make sure that the supplier feels that it is being treated fairly, it can get some benefits that go beyond just cost. For example, it may get access to new technology or be assured that its orders will be prioritized in the event of a capacity crunch.
What does a supplier get out of this? Steady revenue is nice. It may also get better information out of Chrysler that allows it to do more efficient scheduling. However, it is not clear to me that a really efficient supplier should want to play this game. If a supplier is pretty confident that it has a significant cost advantage over competitors, it’s not clear to me that they want to engage with Chrysler in this way. By letting Chrysler bid the work, they can win the business at a decent margin without having to drop their pants.
The second story is about GM and new verbiage it is inserting in its supply contracts (GM presses suppliers for future recall costs, Aug 5).
General Motors has adopted a new purchasing contract that would allow it to recover from suppliers the cost of safety recalls — even if a component met GM specifications, says a lawyer for suppliers. …
This language creates a “potentially catastrophic” financial liability for suppliers, Klein asserts. “As a practical matter, it’s not insurable,” he said. …
The new GM contract has open-ended implications, stating that the supplier’s components “will not, at any time (including after expiration or termination of this contract), pose an unreasonable risk to consumer or vehicle safety.”
So one take on this is that it is good to be king. If you can call the shots in the supply chain relationship, you can impose one-sided terms that shift risk to a weaker firm. This approach stands in contrast to what Chrysler is trying. GM isn’t aiming to build trust but as much as taking advantage of its size.
However, I don’t see how this can really work. One can imagine that the auto supply universe is divided into two types of firms. On the one hand, there are global behemoths who sell to everyone and can serve production anywhere in the world. These firms would have the deep pockets to help out GM in the event of a recall. But these are also the kinds of partners GM needs to work with worldwide. As the article notes, they likely have the bargaining power to demand more equitable terms.
At the other end of the spectrum are smaller firms that lack the resources to fight GM. They presumably are happy to get the work and accept whatever terms GM offers. But they will not have the deep pockets should something go wrong. Yes, GM can shift the risk to the supplier but it’s not clear that this is a meaningful requirement if all it does it create the possibility of pushing the supplier into bankruptcy.