Chrysler Wants Suppliers to Cut Costs, Not Profits

May 19, 2008
Pity the poor automotive supplier. Really. There was a time when this was a truly lucrative business. And a fun one, too. You were as likely to hammer out a deal over a game of golf as you were over a bargaining table. And the money, well, it paid for a lot of country club memberships.

Not anymore. Over the last decade, literally thousands of car parts manufacturers large and small have closed shop. And even the biggest and baddest of the breed, companies like Tower Automotive and Dana Corp., have undergone the indignity of bankruptcy, struggling to stay in business at the same time the domestic car market is going south.

Not surprisingly, automakers take much of the blame. Ever since that master tightwad, former General Motors purchasing chief Ignaki Lopez, came to town, the carmakers have been putting the squeeze to their suppliers, hoping to wring out every possible penny of savings. And do believe, this is an industry where purchasing managers will kill their grandmothers to save a nickel per car.

Recently, Chrysler’s EVP of Procurement, John Campi, sent a new wave of shivers through supply circles, when he announced plans to cut costs by 25 percent. You could just see parts company executives checking to see how far down to the ground it was from their office windows.

However, in a town hall meeting with supplier executives, Campi tried to get them back in from the ledge. In comments posted on Chrysler’s blog, TheFirehouse.Biz, the company noted, “Campi is not solely focused on the supplier's price, instead he has set his sites on taking cost out of the entire supply chain, which includes costs Chrysler has within its operations and are part of the supply chain.”

In lay terms, that means Chrysler itself will take actions to simplify the process of designing, engineering, manufacturing, and purchasing parts. And you can believe there’s plenty of waste in the system. It’s not unusual for a carmaker, like Chrysler, to order up a series of minor – but costly – changes in the specifications of even the smallest part, like a door handle, during the development of a new vehicle. The later the changes, the costlier and more difficult.

Meanwhile, Chrysler will continue to push, according to Campi, for the use of common parts. That means, for example, door handles – or batteries, radiators, and radios – that can be shared between numerous different vehicles. That’s what’s known as economy of scale.

According to the Chrysler blog, “these initiatives would help improve the cost structure of both Chrysler and its suppliers; generate cost-savings that would be shared equally (reducing the price Chrysler pays for components) -- and perhaps most importantly, without impacting the supplier’s profits.”

We appreciate the clarification, Chrysler, though we take umbrage to the comments that followed from Mr. Campi, putting the onus on we media types for allegedly getting things wrong in the first place.

“Not once in any public or private discussion have I ever suggested that suppliers would have to reduce pricing to meet the 25% cost out challenge without our mutual objective of protecting their profitability in dollars and percent. Our drive for cost reduction will only be accomplished with collaboration between Chrysler and our supply base. That simply cannot happen if it is not mutually beneficial,” said Campi, in the in-house interview.

We’re glad to set the record straight, folks, even if we find our early reportage was spot on.

Now, maybe those suppliers among our audience can get a good night’s sleep.

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