DCX drags suppliers down rocky road

After months of tumult in DaimlerChrysler's relations with its North American suppliers, the automaker is articulating a new way of buying components. For suppliers, it isn't pretty.

Through private meetings and public comments this month, DaimlerChrysler suppliers have been told the automaker is abandoning past principles. Chief among them: the tradition of favoring an existing part supplier with the contract to supply the part on the next-generation model.

Also gone is the practice of pre-selecting a supplier before settling on the technology that will be incorporated into the vehicle.

The changes are dramatic. They also are drawing chilled responses from DaimlerChrysler's parts makers.

'I don't think it will be successful,' said Ken La Grand, executive vice president and director of mirror maker Gentex Corp. in Zeeland, Mich. La Grand worries that DaimlerChrysler will take a look at suppliers' best technology and then look elsewhere for a better price.

'That particular scenario as it was explained to us is not going to work great,' La Grand said at a conference in Traverse City, Mich., last week, where DCX COO Wolfgang Bernhard proclaimed an end to the company's past ways of dealing with its parts makers. 'Suppliers will go to OEMs that protect their technology. If you make an investment in technology, you expect a return on it.'

Others responded similarly.

'My concern is protecting my technology,' said the president of one of DaimlerChrysler's tooling suppliers. 'How can I present them with my ideas and then have to bid against other companies on my ideas? I'm going to be very careful.'

It was coming

But DaimlerChrysler has been warning its supply base that changes were coming. Since its earnings picture deteriorated last fall, the automaker has been eyeing price cuts from its component manufacturers. Late last year, the company demanded 5 percent price cuts, and then informed them they must deliver 10 percent more in the next two years.

Suppliers knew that more fundamental changes were afoot.

Last week in Traverse City, COO Wolfgang Bernhard spelled them out.

'In the '80s, it was a dog-eat-dog relationship,' Bernhard told the audience. 'The '90s was a love-in relationship. In 2000 and beyond, we are going to have a right-sized relationship.'

Bernhard said business will go to only the supplier who brings the best technology to the table during the earliest stages of a vehicle development program.

'We do re-source, and we will re-source in the future,' he said, referring to the practice of dropping incumbent suppliers and giving business to new bidders. 'If you don't re-source, they drag you in their grave. You've got to cut yourself loose.'

In the past nine months, the automaker has re-sourced about $2 billion worth of components, Bernhard said.

DaimlerChrysler executives spelled out the plan in a private meeting with suppliers Aug. 3 at DaimlerChrysler's Auburn Hills, Mich., headquarters. According to supplier executives who attended, the company told them that its past relationship with suppliers kept Chrysler from getting the best prices. Chrysler executives believe they were fooling themselves by thinking the close relationship gave them access to better technology.

Culture shift

The moves are a marked change from a decade ago, when the then-Chrysler Corp. began trying to improve its supplier relations. Emulating the Japanese automakers it was benchmarking, Chrysler strove to assure parts makers of more congenial long-term relationships in which suppliers were more like partners. It began awarding programs to incumbents to encourage technology sharing and price considerations.

But Bernhard, who was sent from parent company DaimlerChrysler AG in Germany to Auburn Hills last fall, told his Traverse City audience that the former Chrysler approach was not as successful as it has been portrayed.

'In the '80s, we had a relationship of minimum trust,' Bernhard said of Chrysler's old supplier relations. 'We had no cost improvements. We had minimum r&d and technology involvement of our suppliers. And sometimes we had poor parts quality.

'In the '90s, the pendulum swung all the way in the other direction. It was small continuous improvements. It was SCORE (a program that rewarded suppliers for their cost-saving ideas), long-term relationships for most of our suppliers, and it was award to the incumbent. And material costs did increase over time from product to product for various reasons.

'In 2000 and beyond, this relationship will change,' he said. 'Supplier accountability will be very important. We will be very clear in terms of how we measure the performance of each supplier - not only in cost, not only in quality, but also in technology and also in delivery.'


As the new system comes into focus, suppliers are grumbling. One supplier who attended the Auburn Hills meeting said: 'It was frustrating. All suppliers are being blamed for the poor behavior of a few.'

Suppliers are complaining that, in the transition, even business that has been promised to them is up for grabs. One supplier executive claims the automaker recently asked for a 20 percent price cut on a component for which he had already won a pre-sourcing agreement. And when he refused, DaimlerChrysler said it would look for a lower price elsewhere, according to the supplier.

A DaimlerChrysler spokesman said the criticisms are not unexpected. But, he said, the approach will help the automaker obtain better technologies.

'We're not surprised that some suppliers are calling it a harsh program,' spokesman Mike Aberlich said. 'You will always find someone who is not happy with change.

'The new program is based on sound business practices, and it is better suited to get the best technology and innovation.'

Much of the transformation is driven by economics. DaimlerChrysler's German management has been tightening its control of the U.S. unit in the past year as the U.S. market - and Chrysler's brands in particular - stumbled.

But the sort of demanding approach DaimlerChrysler is taking to its suppliers is not the industry's only direction. General Motors, which took a hard-line approach with suppliers throughout the 1990s, has been softening its tactics - moving closer to the old Chrysler methods.

Tom Stallkamp, the former architect of Chrysler Corp.'s procurement strategy and who heads MSX International Inc. in Auburn Hills, warned that straining supplier relations is a risk for any automaker.

'If you have an extremely adversarial relationship, they're going to go where it's smoother,' Stallkamp said.

Bernhard is confident of his path. 'We will be very clear and open in communicating to our suppliers, where each supplier stands with respect to their competitor,' he vowed last week. 'We will reward for excellence, and on the other hand, we will also re-source, as we did last year with $2 billion of business.'

Robert Sherefkin and Richard Truett contributed to this report

You can reach Lindsay Chappell at lchappell@crain.com

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