WINDSOR, Ontario -- In the wake of the recession, Magna North America has tightened control over its former decentralized purchasing operations and expects to cut the number of its subsuppliers, the company's head of purchasing said Thursday.
Paul Stroz, senior vice president for procurement at Magna North America, a unit of Magna International Inc., held out little hope for smaller suppliers looking to add the Canadian giant to their customer lists.
“It's getting tougher to be a supplier to Magna,” Stroz said. “We have as many suppliers as we need and will be selecting only the best to move forward.”
Early evaluations indicate that subsuppliers in Michigan and Ohio are most at risk of losing Magna business, while those in Ontario and Mexico are less at risk.
One way to win business with Magna, he said, would be to offer innovative technology. “The first words coming out of the supplier's mouth,” he said, should be “what are you doing to differentiate yourself.”
The company does not have a target for reducing its supplier base, Stroz said. In fact, as the company grows and enters new segments, such as electric vehicles, it may need more suppliers.
But all things being equal, if Magna's sales remain stable, it will end up with fewer suppliers, he said.
North America's largest
Magna, of Aurora, Ontario, is the largest parts supplier to automakers in North America. Worldwide, General Motors Co. is Magna's largest customer, accounting for 18 percent of sales, followed by BMW AG at 16 percent and Ford Motor Co. at 15 percent.
Stroz was speaking at a suppliers' conference sponsored by Canada's Automotive Parts Manufacturers' Association and Auto21 Inc. in this city across the border from Detroit.
Magna's new purchasing policies are a response to what Stroz called a “tornado” that hit the North American auto industry: the credit crisis and recession of 2008 and 2009.
Prior to 2008, Magna's purchasing was extremely decentralized across the company's 238 divisions. “Supplier selection was done at the division” level, he said. One division might rate a supplier as “excellent” while another division called the same supplier “poor” and barred it from bidding on contracts.
In addition, there was very little pooling of raw materials across divisions. “We did not know how many suppliers we had on a consolidated basis,” Stroz said.
‘We got busy'
But when the recession hit, he said, “We got busy real fast.”
“We had upwards of 200 suppliers that closed their doors in 2008. We had exorbitant transfer and support costs -- in the tens of millions of dollars,” as Magna had to move tooling from a failed supplier to a new supplier, he said. The company also pulled some work back in-house from failed subsuppliers.
Magna responded by quickly pulling together a database of companies it was buying from and shared the information across the company's decentralized groups.
And top executives started visiting suppliers to assess their status. “I personally went out to about 200 suppliers in 2009,” Stroz said. What he found was a litany of problems.
Many suppliers were not adequately capitalized. They lacked management capability. Many were “overly reliant on one or two customers and the auto industry,” he said.
2 of 50 ‘looked different'
Few had unique technologies that set them above the pack. For example, “Out of the 50 injection molders I saw, two looked different” than the other 48 because of technology leadership, he said.
Magna's overall conclusion: “We had more suppliers than necessary, and they were not located where we needed them.”
Magna's evaluations of 400 suppliers from Ontario, through Michigan and Ohio and down to Mexico, turned up some startling conclusions by location.
Of Magna's suppliers in Ontario, 60 percent were rated “acceptable,” while “40 percent didn't make the grade,” Stroz said. But Ontario did far better than Michigan and Ohio. Just 35 percent of Magna's suppliers in those two states were “acceptable.”
The portion of “acceptable” suppliers was 40 percent elsewhere across the U.S. Midwest, 38 percent in the south, and 56 percent in Mexico.
Preferred supplier program
Today, Magna is setting up a preferred supplier program across all its business units. It will rate all suppliers using common metrics in terms of their financial, operational and commercial strength, and share the results among all divisions.
All new suppliers must receive a financial rating before being approved to sell to Magna. To ensure confidentiality of the data that Magna requests from suppliers, “we have a team that keeps the financials confidential, even from myself,” Stroz said. “The only thing I get is either a pass or fail.”
The operational review checks whether the sub-supplier is lean and well-managed. But Stroz cautioned, “We have hundreds of suppliers who are lean and efficient. We're looking for suppliers who can do something different,” by offering unique technology.
Magna also wants to see that its suppliers have a diverse customer base. “If you say, ‘Magna, you're 80 percent of our business,' that's not what we're looking for," he said.
One thing Magna is looking for is globalization. As Magna supports its customers' shift to global vehicle programs, it looks for that same capability from sub-suppliers.
“Electronics, motors, steel, resin -- these suppliers really need to be global,” Stroz said.
In addition, Magna is switching to a standardized global system of e-procurement which will be used by all suppliers. All Magna plants will be using similar contract-bidding systems and models. This is expected to give existing Magna suppliers greater access to additional Magna work, as well as provide more communications.
“In the past, it was very hard to sell to Magna's 238 divisions. Suppliers had to find and contact each one,” Stroz said. “Now we're making that easier, working from a corporate level.”