As VW Group wrestles with the cost and other implications of ‘dieselgate’, attention this week was drawn to a dispute between the company and two of its suppliers. If it is looking at its supplier base for cost savings, it will need to act carefully. Richard Gane considers the strategic implications for OEM-supplier relationships.  

A dispute between VW and two suppliers halted production at several plants in Germany earlier this week and even though the situation has since been resolved, the car maker would be well advised to learn lessons from what has happened.

Still suffering from the fallout of the emissions scandal, which has led to reduced demand for some of its vehicles in some parts of the world, VW now seems increasingly willing to tread roughshod over its suppliers in a bid to cut costs.

The dispute involved a pair of single-source suppliers of commodity components; CarTrim, which supplies car seats and ES Automobilguss, which supplies gearbox parts. Both suppliers severed their relationships with VW after the company made a unilateral decision to cancel one of their contracts, reducing their revenue potential significantly and invalidating recent capital expenditure commitment.

Bearing in mind these were single-source suppliers, VW’s decision to cancel the contracts was a particularly high-risk course of action. While the decision to single source was probably cost-driven, sourcing low-value stock in this way is short sighted and brings unnecessary risk. The car maker’s procurement managers should have foreseen that they might react by cutting off supply and causing a break in production. Failing to predict this response is symptomatic of the autocratic mentality still held by some large manufacturers and the belief that they can dictate their own terms of business.

It is also unusual that VW had not chosen to set up dual-supply contracts for what are essentially high-volume components, which are unlikely to contain any significant intellectual property value. Such contracts are commonly used to protect against breaks in supply and when split, say 80/20, they can still be achieved cost-efficiently.

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If advanced manufacturers take one lesson from this week’s events, it should be the importance of forming strong strategic relationships with key suppliers. Gone are the days when buyers held all the power in their supply relationships, nowadays such relationships require much closer management and power is balanced more evenly. OEMs need to be realistic about the fact that their suppliers will have invested significant sums in R&D activity in order to develop components to meet their technical brief. Sharing their IP-protected technologies with the customer automatically gives them the right to greater say over the terms of their business relationship.

To minimise the risk of supply chain disputes, OEMs should take care to establish their supplier relationships in the right way from the start. They should start by defining their ‘strategic’ and ‘non-strategic’ suppliers and selecting the right sourcing strategy for each. In the case of non-strategic suppliers, a dual-sourcing approach is usually preferable and it will be necessary to negotiate terms of business that address the supplier’s concerns openly and fully.

For VW, it must be hoped that this week’s costly lessons are learned and the car maker has realised that it can no longer afford not to change its buyer behaviour.

Richard Gane is director and automotive sector specialist at supply chain firm, Vendigital.