Auto makers, suppliers must cultivate strong relationships

Car makers need suppliers like flowers need bees. It's a way of life. Without suppliers that original equipment manufacturers can count on, the automotive industry could not exist. Major OEMs such as Chrysler Group L.L.C., Ford Motor Co. and Toyota Motor Corp. estimate at least 70 percent of their cost structures go to outsourced parts.

“We can't bring a vehicle to market without being able to count on our suppliers,” Ford Purchasing Chief Hau Thai-Tang said.

All three OEMs believe a strong relationship with their supply base gives them an advantage. And when growth is the end goal, any advantage that leads to the prize must be utilized.

“Supplier relations have become something that is very important to the industry,” said Sig Huber, director of supplier relations for Chrysler. “There is a lot more attention overall on supplier relations than there used to be. It's something that we take very seriously. Having those strong partnerships with suppliers gives us a competitive advantage.”

The 2009 recession didn't change the basics. Chrysler, Ford and Toyota each said safety, quality and delivery performance are mandatory for any supplier.

However, the downturn did force companies to re-evaluate capacity investments. Robert Young, Toyota's North American purchasing chief, said suppliers have been more selective in programs they are willing to support and in many cases removed capacity post-recession, something uncommon previously.

“I really don't think there's been a significant change as far as relationships,” Young said. “We work through those challenging times with suppliers. I'd say today there's much more discussion regarding capacity planning and forecasting. Suppliers are much more cautious in trying to make whatever type of investment they're making viable in the long term.”

But the recession that hit in 2009 wasn't the only problem. Major recalls also changed customer-supplier expectations—most notably, Toyota's unintended acceleration crisis in 2009 and General Motors Co.'s faulty ignition recall in 2014.

John Batchik, vice president of quality at Freudenberg-NOK Sealing Technologies GmbH, said expectations have been higher for suppliers over the last five years. Achieving zero defects was once looked upon as a goal; now it is an expectation.

“The demands and expectations have grown,” Batchik said. “There is a lot in the media with any range of OEMs, from Toyota, Ford or GM, focused on recalls and follow-up on issues. That's translated directly into their expectations for us as suppliers.”

Suppliers face more pressure for visible corrective action, with more face-to-face meetings involving developers to ensure requirements are understood.

Huber said the firm held discussions with its broad supply base more frequently in the midst of its bankruptcy. One of the first things the firm did was to implement monthly meetings and made them available online, allowing out-of-town suppliers to join.

“Five years ago, when we saw the industry go through such a difficult time, everyone realized there needed to be more ongoing dialogue and transparency both ways,” said Julie Fream, CEO of the Original Equipment Suppliers Association. “During the last five years, OEMs have worked to implement that in their own specific way.”

Chrysler evaluated ways it could improve inefficiencies for suppliers, primarily examining ways in which it was creating unnecessary waste. Suppliers voiced concerns such as these through electronic surveys. Huber said within the first two years out of its bankruptcy, suppliers shared more than 400 items for Chrysler to improve. And, according to Huber, it did.

Ford and Toyota said they offer similar feedback programs.

“It made a difference to the suppliers,” Huber said. “We were able to make it visible to them, and they were able to see some real tangible aspects to the progress we were making. Not just the fact that we were talking about it, but the fact that they could actually see results.”

Across the board, auto makers want suppliers they can rely on, who will go above and beyond the basics and who are trying to grow with their customers.

“Fundamentally, it comes down to trust,” Fream said. “Suppliers and OEMs that have strong trust relationships are able to work through whatever short-term issues might come up by staying focused on that longer term relationship. When they're able to do that, the relationship improves substantially.”

Thai-Tang said one benefit of a strong relationship is in times of crisis—such as political instability or a natural disaster. Often, Ford will call on another supplier to back stock suppliers who are caught in the middle of such instabilities.

Those aren't profit opportunities for suppliers; they offer their services out of their goodwill and because they value the relationship, Thai-Tang said.

“It's not fair for either party to take excessive advantage of that kind of shift because we need to keep into consideration what are the objectives on both sides,” Young said. “It does us no good if we fully exploit some shift and put a supplier in a very difficult financial position.”

On the heels of its unintended acceleration recall crisis of 2009, Toyota and other Japanese OEMs were hit with two natural disasters—an earthquake and tsunami—in 2011, both of which drastically affected the firm's supply base.

Young said in Japan, Toyota dispatched hundreds, maybe thousands, to the suppliers to help them get manufacturing online. In some cases, Young said the recovery was a joint effort between Honda Motor Co. Ltd., Nissan Motor Co. Ltd. and Toyota.

He said the North American unit had to deal with a significant amount of design changes and work with suppliers to try to ensure they remain viable.

“We would have survived as a company, but we truly recovered several months earlier than anybody ever anticipated,” Young said. “It's because we have suppliers who are dedicated to their customers, not just Toyota. They went above and beyond the call of duty to get back online as fast as possible.”

Technology can help distance one OEM from another. And in most cases OEMs are willing to pay the price for innovation.

It means suppliers need to get involved early, but it can't be just any supplier.

“For us to do pre-sourcing or early selection, what that means is in most cases we're not doing a competitive bid,” Huber said. “There needs to be a level of trust and transparency with respect to cost models that are being utilized. And that goes both ways. It's a process that does take time for the relationships to mature.”

A challenge in getting suppliers involved early, according to Huber, is auto makers don't always have the part specifications, design and cost targets of the part developed yet. In those cases, suppliers and car makers are co-developing targets together, which requires a level of trust that needs to mature before parties are comfortable in that arrangement.

And not every part is going to require that level of early engagement. Commodities that require more engineering and long lead times tend to require early supplier involvement, Huber said.

“How early we engage them really comes down to the nature of the commodity and the technology,” Thai-Tang said. “Is it something where we feel like we need to leverage our suppliers to deliver the technology? It really varies, but I think as a trend we are engaging our suppliers earlier in the process.”

Thai-Tang said Ford approaches its purchasing process holistically. Items that are true commodities are looked at by price. But other more innovative items—such as Ford's recent “open sesame” innovation that allows people to open their trunk with a kick to the bumper—are viewed differently if Ford feels customers will be willing to pay for it.

“Certainly we want to continue to have access to the latest technology and innovation,” Thai-Tang said. “Those things are enablers for us to differentiate Ford and Lincoln from our competitors. It's a huge enabler for us to improve our pricing power.”

Young, however, cautions putting too much focus on trying to nab exclusive technology. That's not to discount its importance, but Young said OEMs and suppliers can take other actions that will have greater impact in the long run.

“You may have an advantage for a little over a year, but at the end of the day, competitors are going to be able to catch up on technology,” he said. “The true long-term differentiators are the suppliers that can link, design and manufacture innovation.

“It's our job to try to foster this relationship because it's not going anywhere,” he said.