Sourcing strategies are becoming an increasingly strategic issue for OEMs as they acknowledge the growing pressures on major tier one suppliers to screen customers and contracts. The notion that these tier one suppliers might increasingly select or prioritise customers, rather than the other way round, has been gaining credence for some time. Few suppliers have gone public on the issue so far and fewer OEMs have accepted the practice could become prevalent, but all that could be slowly changing.
Nick Scheele, Ford Motor Co, President COO has also recently warned Ford employees of the dangers of squeezing vendors too hard, noting that unhappy suppliers might, dedicate their best people, invest their best resources and offer the newest technology and innovation to our competitors, putting Ford at a competitive disadvantage.
This underscores a recent analysis by AutoBusiness and DRI-WEFA entitled OEM Sourcing Strategies, which found that suppliers are under increasing pressure to select the right OEM winners and the most promising product programs. Based on an analysis of 32 key criteria, the study concluded that suppliers are increasingly adopting screening techniques, which means they select customers and/or model programs with a view to ensuring acceptable financial returns. The impact of this may be stark some OEMs could find themselves sidelined by key suppliers when new product/process technology is shared.
Much will depend on how individual relationships are conducted. Although on the surface convergence of OEM-supplier relationship choices is underway, the pace and reality is less clear. An increasing focus on a core of tangible supplier selection criteria, including design, development, engineering and R&D capabilities, global presence, quality and delivery is evident, but many OEMs continue to take unique positions reflecting their own philosophies and stances towards competitive advantage. Most of the OEMs interviewed in the AutoBusiness/ DRI-WEFA study remained wary of sacrificing actual and potential competitive advantage on the altar of total harmonisation.
Suppliers will increasingly focus on these differences and evaluate their future impact on revenue and profit streams. More broadly, they will also extend the screening to more intangible areas of the OEM-supplier interface, outside supplier agreements, general terms and conditions and broader sourcing philosophies. Such things as interpretation of, and adherence to agreements/contracts will play an increasingly vital role, areas where trust, integrity and credibility become critical. Goodwill can evaporate quickly if an OEM is perceived to be acting outside the spirit, if not the letter of supplier agreements. In such cases, Scheele’s fears can quickly become reality.
More specifically, the study provides a framework for decision-making in an increasingly vital area of every supplier’s business, program screening, by:
- identifying the major trends in purchasing, manufacturing and product development at all major light vehicle OEMs;
- assessing levels of corporate and market risk associated with current and expected strategic sourcing policies; and
- quantifying the likely volumes for major platforms and individual model programs under development at the same OEMs.
A number of conclusions can be highlighted.
- OEMs will increasingly focus on strategic sourcing strategies as a means of securing competitive advantage.
- Platform rationalisation is well underway but the speed of this varies significantly among OEMs.
- Convergence in OEM/supplier relations across the auto industry is apparent in some areas, but key differences in approach will persist in others.
- Suppliers are increasingly adopting screening techniques, which mean they select customers and/or model programmes with a view to ensuring acceptable returns.
- Some OEMs could find themselves sidelined by key suppliers when new product/process technology is shared.
- OEMs are increasingly scrutinising the real abilities of the module and system integrators and questioning the true returns.
- Individual OEM sourcing strategies are continuing to evolve, often driven by senior management changes.
- Supplier associations are gradually intervening at the OEM/supplier interface in order to mediate over key supplier agreement issues.
The analysis of the major OEM groups, embracing most of the key players in North America, Europe and Asia, illustrates the wide diversity of approaches taken to sourcing strategies, sometimes within OEMs themselves and/or different global regions.
Specific conclusions by OEM are as follows.
GM is widely regarded among the supplier community as taking the most uncompromising stance with its suppliers, especially in Europe. Nevertheless, it has also been at the leading edge of transferring complete system responsibilities to tier one suppliers, particularly in the interiors area. GM-Fiat Worldwide Purchasing is becoming increasingly influential.
Recent management changes may herald a new approach to sourcing strategies, particularly in Europe. Integration of platform/component sharing and sourcing strategies across the PAG and other group companies is a priority. Working increasingly closely with Covisint in relevant areas.
Global structure preserves differentiation between the Mercedes-Benz and Chrysler brands. Attitude towards suppliers has hardened in recent years as emphasis has shifted to performance and accountability. Mitsubishi Motors sourcing is moving closer to the DaimlerChrysler model.
The Renault-Nissan Purchasing Organisation is becoming a dominant influence on sourcing although separate company structures continue to exist. Short-term emphasis has been on cutting Nissan’s purchasing budget but longer-term strategy will mirror Renault’s traditional approach to suppliers, with the Optima programme prominent.
PSA has led the platform rationalisation trend in Europe, driving components commonality and purchasing economies of scale. Supplier rationalisation has resulted, with a core 20 suppliers now accounting for 40% of total procurement. Joint venture with Toyota in the Czech Republic has broadened procurement responsibilities.
Fairly conservative stance towards outsourcing and supplier responsibilities but has a high reputation amongst its supply base for engineering depth and genuine desire for development partnerships. Demands very high quality and product development standards and is prepared to be first to market with technical innovations developed by, or with, major tier one suppliers.
Continues to pursue many independent strategies and is reluctant to follow new industry trends, especially in the e-commerce area. Early into the platform rationalisation move but now prefers to talk about modular components that can be used across a wide range of models. High volumes are available for key suppliers. A move towards the BMW supplier relationship model is apparent as the previous emphasis on secrecy dissipates.
Demanding of suppliers, especially in the quality field, but widely respected by its supply base and still leads the industry with regard to development/improvement programmes for suppliers. Increasing global manufacturing footprint has placed significant demands on vendors. Conservative stance with regard to module development and supplier responsibility remains.
Highly respected by suppliers for its product engineering and manufacturing integrity. Retains a fairly conservative but very loyal stance towards its supply base because of traditional emphasis on leaning of internal processes. Strong commitments made to local sourcing in North America and elsewhere.
Traditional very close ties with supply base in South Korea are likely to loosen as manufacturing operations are extended into the US and Europe. Technical capabilities of existing suppliers, including the Mobis in-house operations, are suspect and joint ventures with global tier ones are being encouraged. Expanding volumes and more global approach to sourcing are attractive features for suppliers.