OPERATIONS

Broken Promises

The bitter truth about partnerships between large automotive corporations and their suppliers.
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What happens when a large corporation wants to make partners of its smallsuppliers? Just ask the auto suppliers; they've learned the bitter truth

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Partnership is a wonderful word.

It sounds unfailingly upbeat, yet in business practice it can mean almost anything -- or nothing. These days the meaning of partnership is especially unclear because the word is often used to describe relationships between large and small companies. Big U.S. corporations are trying to emulate the success of the Japanese, who work closely with a small number of trusted, long-term suppliers.

If that sounds too good to be true, it's because it is. If it were so simple for U.S. companies to imitate Japanese business practices, we wouldn't still be running such a huge trade deficit with Japan. It's not easy for a traditional American company to implement the cultural changes necessary to treat suppliers as partners.

Nowhere is that clearer than in Detroit. Because the automakers faced severe global competition earlier than most industries did, executives at the Big Three were early converts to the partnership model. As far back as 1979 they were murmuring about switching to long-term contracts, taking advantage of their suppliers' know-how, and forging supplier relationships that valued more than just lowball bids.

By the mid-1980s that murmur had become a chorus. To compete the automakers needed higher quality, lower costs, and more innovation. In all those things, they needed suppliers' help. So the car companies promised a new era of supplier relations. In order to have close partnerships, the Big Three needed to reduce their supplier bases, but the companies they kept would be trusted. In return for improving quality and increasing engineering support, the suppliers would find their ideas about improving product design eagerly sought. In exchange for guaranteeing price cuts each year, they would for the first time get long-term contracts.

That was the theory. Since then the automakers have increased their use of long-term contracts, but those contracts aren't worth much to suppliers. The idea was that they would trade price cuts -- often a hefty 5% a year -- for the ability to plan long-term. But now that times are bad, both GM and Ford have requested additional cuts. Chrysler, in a more cooperative mode, is asking suppliers to come up with cost-saving suggestions.

"As soon as things got tough, they went right back to the old ways. The knee-jerk reaction of the auto companies was, Let's go squeeze our partners some more," says Bob Orsini, a partner at Corporate Futures Group Inc., a Cleveland automotive-consulting firm. "The partnership is nonexistent. It's over."

Not everyone views the situation quite so bleakly. But partnership hasn't been all it was cracked up to be from a supplier's point of view. By and large, it's not because the suppliers haven't lived up to their end of the bargain, either. Not that they had much choice: they could either become successful partners or die.

After all, the underlying reality behind the partnership drive was that the Big Three wanted closer relationships with fewer suppliers. (Ford, for example, has reduced its supplier base by about one-third since 1980 and plans to reduce it by another third in the next three years.) Suppliers who seriously hoped to make the cut had to invest heavily in quality-improvement systems, training, automation, and engineering and research staffs.

As for the Big Three, top management understood that to succeed in the long run, the automakers would need to change their culture to work closely with suppliers. But there's a huge difference between what top management understands on an abstract level and what gets implemented. Without wholesale organizational changes, supplier partnerships can't work. All too often the Big Three haven't made those changes.

The theory behind partnerships was that suppliers had knowledge and ideas automakers could use. The price cuts in the long-term contracts would encourage suppliers to suggest improvements, which would save everybody money. The catch: the suppliers often signed the long-term contracts, invested in developing improvement ideas -- and then discovered they couldn't get the automakers to implement them. "There is no real mechanism inside the company for getting the improvement accepted quickly," says Maryann Keller, an auto-industry expert who is managing director of Furman Selz Inc., a brokerage firm in New York City. Meanwhile, the supplier is still responsible for making the contractually agreed-upon price cuts. (Chrysler is said to be much better at implementing changes than Ford or GM, and has a system for doing so. GM, meanwhile, is promising future reforms -- but suppliers have to agree to price cuts now. Ford, too, is just starting a program to work more closely with suppliers, but only the top 135.)

When suppliers do invest in working with the automakers -- on new-product development, for example -- they complain that the purchasing department doesn't take their extra costs into account, and that it still thinks only in terms of today's low-cost bidder. A recent survey by the Big Six accounting firm of Arthur Andersen included a question that tactfully asked whether the Big Three's purchasing practices were "out of sync" with their product-development practices. An overwhelming 70% of the auto-company executives interviewed agreed that they were, as did an even more overwhelming 83% of suppliers. As one supplier put it, "Many product-design improvements suggested by suppliers find their way into competitors' hands almost instantly."

All this has life-or-death consequences for suppliers, who are asked to do more yet are paid less. A survey of suppliers conducted by Sandy Corp., a training and consulting firm in Troy, Mich., found that even before the recent round of price-cut requests, 95% had seen "profit erosion" in the last two years; two-thirds called the drop "significant" or "very significant."

In the long run, the automakers will suffer, too, if -- unlike the Japanese -- they discourage suppliers from giving them innovative suggestions. According to several industry observers, the Japanese "transplant" automakers in the United States do a better job than the Big Three of working with suppliers. In fact, a recent study by researchers from Pennsylvania State University and the consulting firm of Arthur D. Little Inc. concludes that suppliers who sell to both U.S. and transplant manufacturers give the Japanese better prices on lower volume. Why? The suppliers factor into their prices the high costs of dealing with the hassles of the Big Three's purchasing practices.

"The Japanese do not come forward and ask us to reduce our prices after we've entered into a long-term contract," says the chief executive of one privately held midsize U.S. company that supplies both the Big Three and transplants. "That's the very thing that turns around and destroys that sense of partnership."

Oddly enough, that particular supplier symbolizes all that Detroit has accomplished in the past decade. By placing endless pressure on their supplier base, the automakers have improved dramatically those companies that have survived. One indicator is the increasing number of suppliers who sell to both U.S. and Japanese automakers. While those suppliers have become good enough to meet Japanese quality standards, their U.S. owned customers still have not -- as car ratings continue to show.

What an irony. The Big Three have created what they said they wanted: a small number of world-class suppliers who have the capacity to make continuing improvements in quality, productivity, and design. In short, they've created suppliers that are capable of being true partners. Now all Detroit has to do is learn how to treat them that way.

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Last updated: Jul 1, 1991




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