DETROIT - Suppliers have another bitter pill to swallow from DaimlerChrysler, and they may have little choice other than to take the medicine or risk losing business.
In one of the early moves by new President Dieter Zetsche to reverse losses in the U.S. operation, DaimlerChrysler on Thursday, Dec. 7, told suppliers to deliver almost $6 billion in savings over the next two years.
Of that, $2 billion, or 5 percent of the Chrysler unit's $40 billion annual purchasing budget, is due Jan. 1. DaimlerChrysler will work with suppliers to gain another 10 percent by the end of 2002 through engineering and manufacturing improvements.
The net effect is a part that costs DaimlerChrysler $100 today should cost it $85 by Jan. 1, 2003. And with 78 percent of the automaker's costs tied up in materials purchasing, the initiative is a 'major cornerstone of the turnaround,' said Wolfgang Bernhard, the company's new COO and part of the German leadership team dispatched by parent DaimlerChrysler AG in November.
'We're not inventing the world new, but in the light of what's happening right now around the company, we need to move fast,' Bernhard said. 'We have to set ourselves challenging goals, and we have to get all of our people behind this.'
Painful hit for suppliers
The mandate will be a painful hit for suppliers, DaimlerChrysler executives acknowledge, but the cutbacks are necessary to secure the automaker's long-term health.
'They may not like the message, but it's sort of like taking your kid into the doctor and saying, `Hey, you know, it's time for a shot,'' said Peter Rosenfeld, DaimlerChrysler vice president of procurement and sourcing strategy. 'And they don't like the immediate part, but the reality is, at the end of the day, it's good for all of us.'
Suppliers and market watchers beg to differ.
Bear, Stearns & Co. Inc. analyst Eric Goldstein called the unexpected announcement from DaimlerChrysler bad news for the parts-making sector. Suppliers now have little lead time, about three weeks, to find cost savings in their own operations to offset the 5 percent cost cut, as well as declining revenue from production cutbacks. Those companies will take a significant hit to earnings next year.
Suppliers that have a large chunk of their business with DaimlerChrysler, based on a percentage of overall revenues, include Magna International, Tower Automotive, Johnson Controls, Hayes Lemmerz, and Gentex.
'This could be the straw that breaks the back of many big companies,' one supplier source said. 'We don't have any more blood to give.'
SCORE with a twist
The move makes for a drastic revamping of the Chrysler group's once-vaunted Supplier Cost Reduction Effort, or SCORE, program. The program, which pushed suppliers to cut costs annually by about 3 percent but also shared excess savings, was the linchpin of the former Chrysler Corp.'s highly regarded relationship with suppliers, who blanched at strong-arm purchasing tactics by other automakers.
Though DaimlerChrysler officials maintain that the SCORE program remains, they acknowledge it has changed. But by working with suppliers to find the 10 percent savings demanded in the new initiative's second phase, the automaker is putting more of the onus on itself, said Tom Sidlik, DaimlerChrysler's top purchasing executive.
Richard Schaum, DaimlerChrysler's executive vice president of product development and quality, cited examples in which the automaker already had achieved savings:
Using the same seat frame on some Chrysler and Mercedes vehicles for a savings of $46 a vehicle
Switching from an aluminum to a plastic intake manifold for a savings of $35 a vehicle
Using common airbag installation on several Chrysler trucks for a savings of $17 a vehicle.
But suppliers see a lot of fat in the automaker's fixed costs - bonuses, development costs, shadow engineering - that it could tackle before leaning so heavily on parts makers, the supplier source said. In the wake of the Dec. 7 announcement, parts makers are meeting with DaimlerChrysler to try and find ways to meet demands without handing over all the savings.
But come Jan. 1 suppliers are expected to cough up the first 5 percent, DaimlerChrysler officials maintain. If they are reluctant, DaimlerChrysler will judge the parts makers in question on cost, quality, technology and other factors before determining whether they remain in the company's sourcing strategy, Sidlik said.
Said Rosenfeld: 'We'll negotiate if we have to, but our expectation is that our suppliers will work with us on this.'
Staff Reporters Gail Kachadourian and Robert Sherefkin contributed to this report