Peter Rosenfeld, Chrysler Group’s head of procurement and supply, has announced two long-term suppliers as part of his company’s efforts to develop a new industry model for supplier relations.
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He named Johnson Controls International and Magna International as so-called ‘highly integrated partnership organisations’ (HI-PO). Based on their performance against Chrysler ‘s measurements, both companies were awarded with early involvement in the product development for a future model scheduled for late 2008.
In this particular project, Johnson Controls will supply seats and Magna will provide the rest of the vehicle cockpit.
“I submit that naming interior suppliers for a 2008 product is strong evidence of DaimlerChrysler’s development of a deeper relationship with suppliers,” said Rosenfeld.
DaimlerChrysler’s model for a competitive business model with suppliers that works for the environment in which it operates is critical because purchased materials make up 60% of the total cost of every new group vehicle. The company needs to ensure that its supplier relationships contribute to competitiveness by helping to find new, flexible solutions to get to market faster with better products.
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By GlobalData“DaimlerChrysler is forging strong new bonds with our HI-PO suppliers as part of our commitment to proactively shape our future,” said Rosenfeld. “Our vision includes an improved model of cooperation with suppliers – a model that enables us to continually transform our companies so we can mutually thrive in the global marketplace.”
In this new model, the “best-of-the-best” will receive several benefits, including the ability to not have its business challenged as long as it performs well. It will also have the right of first refusal on business re-sourced from under performing suppliers, and an ‘inside track’ on future business, according to Rosenfeld.
To explain the DaimlerChrysler approach to improving the quality and effectiveness of his company’s supplier relationships, Rosenfeld used an analogy of three types of stock portfolio management.
One approach to investing — and to supplier selection — is the “flavour- of-the-month” tactic that Chrysler thinks some OEMs seemed to have followed in recent years. This strategy is comparable to an investor who continually buys the so-called “hot stocks” that appear to be today’s bargain. This kind of investor is always seeking to buy low, sell high.
“For me, this approach to supplier relationships will not provide DaimlerChrysler a competitive advantage,” said Rosenfeld. “The constant churn fails to leverage long-term opportunities. The strategy’s upheaval is in part, I contend, generating headlines about the steady long-term decline of OEM market share.”
Another traditional method of equity oversight is a focus on income. In this approach, sometimes known as a “blue chip strategy,” the objective is to invest heavily in a select number of tried and true companies and stick with them for the long-term. The preservation of a consistent yield flow is fundamental. This “steady as she goes” approach, for some, allows peace of mind.
“In essence, this methodology is a bit like riding a merry-go-round — the ride is pleasant and constant — the path is known and certain,” explained Rosenfeld. “For significantly sized investors with an income strategy, board membership adds to the control achieved by garnering influence on the investment’s operations.
“Similarly, in the automotive industry, some OEMs operate with such a philosophy – steady as she goes with a selected group of suppliers, some which are partially owned. I certainly understand the underlying approach here – one supported by a relatively calm economic environment.”
The third traditional investment method pursues growth. In this case, significant value appreciation is the focus. Unlike the income strategy, here, Rosenfeld said, the “roller coaster” is more appropriate. The highs are higher and the lows are lower with the objective of a higher return on investment than the income strategy. Neither the income nor the growth strategy is right or wrong he said; each is suitable given the investor’s circumstances at hand.
“For DaimlerChrysler, given the storm that we face, our approach is more of the latter,” said Rosenfeld. “The business model we are building is similar to the growth strategy defined by the economist Harry Markowitz, known as the Efficient Frontier.”
Markowitz, a Nobel Prize winner, demonstrated a viable alternative to the income targeting approach to portfolio management. His work showed that quantifiable processes can enable the development of an efficient, diversified portfolio.
“I believe the same theory is applicable to a supplier portfolio,” said Rosenfeld. “In short, we are constantly assessing suppliers, seeking those that offer the greatest return for comparable risk.
“DaimlerChrysler’s method involves identifying suppliers which have also learned how to manage the elements. We want to work our way through the storm together with suppliers which aren’t going to get capsised along the way.
“Our goal is to establish positive associations with a select group of suppliers based on performance measures that are transparent and objective. We refer to our relationships with these suppliers as ‘HI-PO’ – highly integrated partnership organisations. These HI-PO suppliers are winning new business with [us].”
Similar to the portfolio manager’s methodology, DaimlerChrysler has set out to create a diverse portfolio of suppliers with minimised risk for maximized return. Rosenfeld explained that his company is looking for genuine high performers, as opposed to those that are boom-and-bust.
To manage its relationships, DaimlerChrysler has created approximately 240 competitive sets of products – for example, seats, steering gears, or lighting. For each such grouping, the company has established a board of directors that makes decisions on sourcing — similar to individual portfolio management teams.
Each board is composed of representatives from engineering, procurement, supplier quality and supply, with specialists from design or manufacturing joining where appropriate.
To ensure that the assessment process is fair and transparent, the automaker openly shares with its suppliers the metrics used to judge quality, systems cost, technology and supply performance. Every production supplier’s performance on these measures is posted online, so it always knows how the automaker views them — in absolute terms, as well as relative to each competitive peer group.
