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April 21, 2005

UK: Conflict versus collaboration in OEM-supplier relations

Thomas Stallkamp's new book SCORE! (subtitled “A better way to do business: Moving from Conflict to Collaboration”) is an important contribution to the debate about how General Motors and Ford can halt and eventually reverse their steady long-term decline.

Thomas Stallkamp’s new book SCORE! (subtitled “A better way to do business: Moving from Conflict to Collaboration”) is an important contribution to the debate about how General Motors and Ford can halt and eventually reverse their steady long-term decline.

Stallkamp, the former vice-chairman of DaimlerChrysler and pioneer of Chrysler’s extended enterprise concept, says that he started out writing the book to describe how companies can improve their financial performance by changing the way they approach their supply chain.  But “I now realise that we have to change a whole approach to management with both our employees and our suppliers” he writes.

Stallkamp tells the history of Chrysler’s SCORE program, an acronym for supplier cost reduction effort, as part of its extended enterprise concept designed to tap the expertise of suppliers and create the kind of co-operation seen in the Japanese keiretsu.

The approach asked for cost, product, and system suggestions from suppliers, tracked their implementation, and rewarded suppliers for their contribution.

Between 1991 to 1998 the approach took more than $US5 billion from Chrysler’s material cost structure, says Stallkamp, and Chrysler “was able to gain additional millions in access to advanced technology research and development through its suppliers”.

Stallkamp describes how the SCORE approach was defended by the former Chrysler management in the face of GM’s “arbitrary and dictatorial” purchasing strategy under Lopez in the early 1990s, and Ford’s mandatory price reduction action in 1990 before being eventually dropped after Stallkamp’s departure from DaimlerChrysler when “Daimler management made a conscious decision to revert to more adversarial tactics in use by GM and Ford”.

Stallkamp says that by most measures US automotive companies tend to favour the adversarial approach more than most other industries, although he says that adversarial approaches dominate many other industries in America.

He suggests that it is typical of highly concentrated consolidated industries with well-established cultures and highly integrated manufacturing systems.

In more fragmented industries he says, buyers “cannot exhibit the same degree of leverage over their extended enterprise and are less adversarial because they rely more on the standard practices of commerce”.

But he warns that the adversarial approach is as unsuccessful in other industries as in automotive.

He cites the example of Kmart, where he served on the board, as a company whose negative practices and inability to co-operate with its suppliers in the way practised by its rival Wal-Mart contributed to its eventual bankruptcy in January 2002.

Stallkamp writes that resistance to adopting collaboration is usually centred on the commonly held misconception that using collaborative techniques are somehow a softer and less demanding approach.

“It is not a soft, philosophical approach, but it does utilise aspects of human behaviour that we have often overlooked in a blunt use of power and leverage.”

“It took some time for Chrysler management to realise that its own engineers might not always be correct or the most practical” says Stallkamp. He cites the time Chrysler was approached by Motorola and told that the Chrysler specification for waterproofing grease in the automotive electric engine controller was the same spec as used on the space shuttle cargo bay doors – adding four dollars per car compared with the common silicon grease that Motorola thought would be sufficient.

“The engineers who specified the NASA grease were not bad people intentionally increasing the costs; they were just too closed in their thinking and were overkilling the specifications that they could be sure of the result,” says Stallkamp.

The problem was not with the employees on either side – it was with the way business was conducted.

Stallkamp says that the Big Three’s actions such as “the demand for arbitrary cost reductions and threats of cancelling contracts with no warning” create suspicions in the minds of their suppliers about whether they should trust them – undermining their inclination to help reduce OEM’s capital requirements by working on joint development and jointly sharing cost savings.

“By the time the US automakers wake up, the industry likely will have been permanently harmed by the use of adversarial methods” says Stallkamp.

Stallkamp says the change of Chrysler was helped by the fact that the company had been to the brink of bankruptcy (twice).

“A crisis or a galvanising event is often necessary to get the culture to see the light” he says – and even then it is not easy to change ingrained habits.

He cites comments by Chrysler group CEO Dieter Zetsche in late 2004 identifying the common interests of OEMs and suppliers as showing that senior levels of some US automobile manufacturers have recognised the need to change their approach — but suggests that comments by Tony Brown, Ford vice president of global purchasing, show how little has changed at other companies.

He also sees encouraging developments at some North American suppliers.

They are not waiting for the domestic OEMs to heal themselves, he says, but are implementing managed collaboration themselves and “rapidly moving to embrace the expanded or newly arrived foreign manufacturers that do not operate in the same way that the dying big three do.”

“We are entering unconventional time to require more efficient use of capital, introduction of conflicting technologies to protect the future, and answers to relocate and training of the entire workforce in many industrial businesses” he says.

“There seems to be some risk [with adopting collaborative management], but there’s much more to gain if we can just break the mould of tradition.”

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