Suppliers complain of worsening relations at Mercedes-Benz Car Group, shocked by the continued prioritization of cost reduction over quality and engineering. While the situation at Mitsubishi has continued to deteriorate over the past year, Chrysler appears to be on the cusp of a breakthrough. But how can suppliers manage their business with such a hugely disparate company? Susan Brown reports
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SUPPLIER relations at DaimlerChrysler have deteriorated and European suppliers fear there is worse to come. While respondents to the SupplierBusiness.com supplier satisfaction survey have rated all the European-based suppliers surveyed so far (VW, Renault-Nissan, PSA, BMW) as broadly increasingly attractive business partners, DaimlerChrysler is rated a less attractive company to do business with, compared to two years ago. It scored the same as GM and Ford, who have been well-known for their aggressive cost-cutting programs over the last year. Overall there is a feeling of shock in Germany that DaimlerChrysler is behaving in the same way as a volume manufacturer. DaimlerChrysler is “no different to GM or VW anymore,” said one respondent.
Cost has been put before engineering and quality, and not just for a period while the group integrates its three businesses – it is something that is now central to purchasing policy. It is a policy that arguably has helped turn Chrysler around, and Mercedes-Benz is now following that lead. “Chrysler is pushing hard on cost cutting, which will affect quality and quality appearance,” said one respondent to our survey.
The lack of integration of the DaimlerChrysler passenger car companies is a continuing theme in this story. There have been some attempts to exploit synergies across the groups, but the brands are less integrated than those of some of its competitors. The main beneficiary so far is Chrysler and the future is starting to look brighter there. Indeed, some European suppliers are benefiting from new business there. Mitsubishi needs a new business plan, and Andreas Renschler, head of DaimlerChrysler’s Smart cars division, who has been working on sharing platforms between Smart and Mitsubishi, has been given the job of preparing that plan. In Europe there are serious concerns about Mercedes-Benz Car Group’s ability to deliver the quality and technology innovation for which the brand is known.
Product offensive
DaimlerChrysler is looking for product-led growth, mainly through revitalization of the Chrysler brand and recapturing lost market share in North America. Mercedes-Benz Car Group will launch more than ten new vehicles between 2004 and 2006 and Chrysler Group will launch 25 new models during the same period. Jürgen Schrempp described this as a “genuine product explosion”.
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By GlobalDataWith six brands (seven including Maybach), DaimlerChrysler has six diverse approaches to marketing. The challenge will be to avoid overlap and maintain synergies while sticking to a truly differentiated brand oriented strategy,” said Stephen Landry, an analyst with PwC AUTOFACTS.
The objective at Chrysler is to increase volume and to add more vehicles while spending less on capital investment. Tom La Sorda explained that basic architecture of vehicles should be used for longer cycles – two major cycles and frequent freshening. More equipment should be re-used and the car should be designed into existing manufacturing processes rather than build a new plant for every new product. More components should be shared between platforms and with partners.
Certainly a product-led revival at Chrysler does seem to be on the cards. The new Chrysler LXbased vehicles (Chrysler 300/Dodge Magnum) have a chance to make real progress in recapturing large numbers of American consumers that had decided they never want a car from the Big Three again. The Chrysler 300 is a contemporary take on a classic American sedan shape. But the fit and finish, especially the interior, speaks strongly of the Mercedes-Benz influence. One reason for this is that DaimlerChrysler has recruited many of its Mercedes-Benz suppliers to come to North America to build components for the new car. Furthermore, the DaimlerChrysler team has exploited Mercedes-Benz expertise in areas such as the rear axle to develop a vehicle with internationally competitive handling.
Organization of purchasing
DaimlerChrysler still has separate purchasing departments for each of its groups. Peter Rosenfeld is EVP procurement & supply at Chrysler, Harald Bölstler is his counterpart at Mercedes-Benz Car Group (including Smart), and Stefan Buchner is responsible for Mitsubishi Motors. They report to Tom Sidlik who became DaimlerChrysler AG’s global head of procurement & supply on 16 December 2003, following the retirement of Gary Valade. An umbrella organization, called Global Procurement and Supply (GP&S) aims to exploit synergies between the groups and “facilitate continuous improvement of all procurement and supply related activities”.
Parts reduction and commonization
Clearly one of the key challenges in a group that is trying to integrate is to look for opportunities to reduce costs by reducing the number of different parts and sharing components.
“DaimlerChrysler vehicles are full of potential commonalities,” said La Sorda, speaking at a presentation last year. Then he was EVP, manufacturing at Chrysler Group, but was recently named COO as from May 2004. He cited examples of starter, alternator, AC compressor, airbag ECU, sunroof, fuel pump, oxygen sensor, hinges, window regulator, exhaust substrates and seat structure.
So far DaimlerChrysler has examined 50 ‘commodity’ parts and is currently examining more. Concrete progress has been made in the 14 different pumps previously used for power steering actuation. From 2006 only three variants will be needed. Mercedes-Benz automatic transmissions are built into Chrysler Group vehicles in modified form. The company is also aiming to use a common electrics/electronics architecture in the Group.
While Mercedes-Benz cars were initially not meant to share components with other brands, the Chrysler Crossfire does borrow around 40% of its parts from Mercedes-Benz. The 3.2-litre engine comes from the SLK, while the gearbox comes from Mercedes-Benz and the rear suspension comes from the C-Class. Some E-Class electronics appear in the LX platform.
Overall, though, shared use of components and platforms has been slow to materialize and is more likely to happen when Mitsubishi is brought more closely into the group.
Price reductions
According to the SupplierBusiness.com supplier satisfaction survey, pressure to reduce supplier prices has increased markedly at DaimlerChrysler over the least two years. But this is much in line with the rest of the industry. Of concern is that suppliers recognize that they are not valued as they were in the past and that long-term relationships are being wasted. “Partnership regarding cost saving ideas is just a phrase,” said one respondent. “Customer focus is price driven – no consideration for past contributions,” said another. “Their expectations are becoming more and more unrealistic,” said another long-term major supplier. “Recent pressure for price reduction was unfair regarding claimed reduction level, as well as contradictory [to] agreements in the past.”
One supplier spoke of “total disorganization” and an “I don’t care” attitude towards suppliers.
Several suppliers commented on the unfair application of supplier performance measures and pricing comparisons. Another supplier said that the group is using cost data that no one at DaimlerChrysler understands.
But the situation is more complex. One respondent praised a system where there is reward for good performance and punishment for poor performance. “Negotiations are fair and reach settlements,” he said.
Lack of realism is another criticism, “obviously the price targets set by DaimlerChrysler in Europe refer to the level of eastern European suppliers, but do not reflect costs of DaimlerChrysler quality demands (which probably will not be fulfilled by eastern European suppliers),” said one supplier. “LPP charts are not a good indication of real market conditions.” LPP (Linear Performance Pricing) is a tool DaimlerChrysler uses to evaluate cost competitiveness. All current purchase prices for the same commodity are plotted on a chart. Based on these prices, and the use of a regression analysis including multiple variables, an average of the lowest 20% of the prices creates a Best Practice price line for all parts in that commodity. The Best Practice prices become the new target prices for all parts in the analysis. “LPP charts do not fully consider the technology built into the product, including advanced production processes,” said the respondent. Another complained that suppliers called in for LPP review “are not allowed to even analyze the data … since they are deemed confidential. [DaimlerChrysler] does not give you enough information to defend yourself in detail”.
Quality
Of particular concern is that the criticisms on price reductions are mainly against Mercedes-Benz Car Group, and are set against a background of falling quality. Suppliers say that the problem goes back as far as 1996, when Schrempp took over at Daimler-Benz. Customers forgave Mercedes-Benz for engineering problems such as the A-Class that rolled over too easily, but the problem is now much more deep rooted. Rusting doors in the E-Class, poor corrosion resistance on the M-Class, defective airbags on the C-, E- and S-Class and poor reliability of the electronic content of the cars – particularly of the current E-Class. “Mercedes has an astonishingly large number of problems,” said German consumer magazine AutoBild.
Meanwhile, quality at Chrysler has improved and suppliers are contributing to the improved quality. In 2002, the Chrysler Group reported a 10% gain in the annual J.D. Power and Associates’ Initial Quality Study, and a 21% decline in 2002 model year warranty costs.
Steve Walukas, vice president, Worldwide Supplier Quality, credited the quality improvements in part to better discipline in the timing of new model launches, more Chrysler Group presence on suppliers’ shop floors, and the Black Belt Program which uses mathematical and statistical problem-solving techniques to uncover the root cause of production and design issues. The group also operates a Quality Gate Process, in which there are more than ten quality gates along the company’s development process-handoff points between core processes. Only when a project has got a green light at the gate can it proceed to the next phase.
Walukas also noted that the company is now holding suppliers more accountable for the quality of their parts, and rewarding only good suppliers with new orders.
Walukas said quality concerns have caused the Chrysler Group to find new sources for more than $3.3bn in components in the past three years. “In the past, we rarely re-sourced business,” he said. “Suppliers must meet our cost, quality, technology and supply requirements.”
DaimlerChrysler is working on implementing a centralized global supplier quality management system by 2007.
E-business
“DaimlerChrysler is focused on new web-based systems that have helped improve quality as well,” Walukas said.
A software tool called Powerway.com, for example, allows engineers, quality specialists, procurement and supply personnel and tier 1 suppliers to maintain, share and leverage massive volumes of information related to specifications for thousands of components. Powerway.com enables data to be updated in all legacy systems, so information is always consistent, timely and accurate. A new internet-based system was launched last year to better communicate changes in component specifications within the company and with suppliers.
The Chrysler Group also began using a new program, called the Authority Definition Plan, which more clearly defines the expectations of part development between the supplier and the company. “We have better discipline in our product development process, so better quality is designed into parts at the beginning,” Walukas said. “Then, when we get ready to launch, we have a very rigid approval process to make sure the supplier has the capability to make the part to specification and make the volumes required.”
Innovation
As well as traditionally offering very robust quality, through the 1990s Mercedes-Benz was the technology leader in Europe. Mercedes-Benz cars were the first to be fitted with ESP (Bosch), first to get common rail diesel (Bosch), first to get adaptive cruise control (ADC GmbH, part of Continental), and second only to BMW with navigation systems.
All these innovations came from the supply base, and where they were first, Mercedes-Benz would get 6-12 months exclusive access. Arrangements like this require trust and long-term partnership, and genuine reward for the supplier who is technology partner.
When “customer focus is price driven and there is no consideration for past contributions”, suppliers will take their business to customers who will reward innovation and R&D investment. The new BMW 5 Series is packed with supplier innovations (from Bosch, ZF & ZF Lenksysteme, Siemens VDO among others) while the E-Class is a much more conservative offering.
In surveys of GM, Volkswagen and now DaimlerChrysler, suppliers voiced concerns that they could not trust their customers to reward good ideas. Volkswagen stood accused of taking costsaving ideas from outside suppliers and passing them on to in-house operations.
Both GM and DaimlerChrysler are viewed cautiously for another reason. One North American powertrain supplier said that DaimlerChrysler took its “[cost reduction] idea and provided it to the current supplier to quote the same idea and keep the business”. Not only is this corrosive to successful collaboration, it slows technological progress, as no one wants to risk suffering for having a good idea.
Globalization
DaimlerChrysler has a huge global reach – both in cars and trucks. Investment in Mitsubishi is mainly for access to the Japanese market but it also supplies opportunities to enter Thailand and China. If Mitsubishi’s business improves, DaimlerChrysler executives say it is open to new suppliers. “A greater amount of our development work will be handled by outside companies,” said Stefan Buchner. “This outsourcing is going to require availability of appropriately qualified system suppliers.”
Outside of the triad regions DaimlerChrysler also has operations in Brazil and South Africa. DaimlerChrysler was badly burnt by the turn of the economy in Brazil. Having planned to produce their A-Class there it has had to switch capacity to a lower-priced vehicle and now plans to produce the Smart Formore in Brazil (60,000 units a year) for global markets.
Landry suggests that DaimlerChrysler has an “institutional trepidation about these volatile markets” as a result of its experience in Brazil, and it is relatively absent in eastern Europe and Asia. “DaimlerChrysler faces an uphill struggle against the flood of local and global competitors in all segments. It is simply not a participant in the high volume Chinese segments: still a toe in the water approach,” said Landry.
Like the planned Brazil plant, DaimlerChrysler’s East London plant in South Africa is also integrated into the global manufacturing network producing right-hand drive C-Class cars for export to right-hand drive markets such as UK, Japan and Australia.
Hyundai may also be brought more closely into the group, but at the moment this is confined largely to the global engine alliance and truck production in South Korea. DaimlerChrysler owns 10.5% of Hyundai and is seeking to increase this to 15.5%. Hyundai is keeping its “overseers” at arms length, minimizing its impact/effectiveness.
Global purchasing is an opportunity for cost reduction. “Today we do [$118bn] in purchasing … the company spends $23.1bn on commodity parts where DaimlerChrysler could reduce costs if it bundled its purchasing for all its brands,” Rudiger Grube, DaimlerChrysler director of corporate strategy, is quoted as saying in a PwC AUTOFACTS presentation.
Conclusion
Mercedes-Benz’s status as the cash cow of the DaimlerChrysler Group is clearly becoming detrimental, as it does not have enough left over to plough back into its R&D and quality improvement. Suppliers worry that erosion in the traditional Mercedes-Benz approach will be damaging, in turn putting more pressure on suppliers as volumes sag.
