A new study involving more than 250 of the motor industry’s leading suppliers
claims that quality suffers when vehicle manufacturers place undue cost reduction
demands on suppliers.

The study also shows that suppliers are withholding technology from the OEMs
who they believe are the worst to deal with.

The 2001 North American Automotive Supplier Survey involved 261 Tier 1 suppliers
and was conducted by Birmingham, Michigan-based Planning Perspectives, an automotive
industry research firm that for the past decade has been studying the industry’s
buyer-supplier relationships on behalf of the Big Three and several Tier 1 suppliers.

The study found that suppliers are responding to ‘hard’ price reduction
demands of the manufacturers differently, depending on how much they give back
to the OEM and the opportunity they have to make an acceptable return on the
manufacturer’s business.

Many suppliers who gave higher price reductions or felt that they had a lower
opportunity for making an acceptable return on the manufacturer’s business said
that they were maintaining, if not lowering, the quality of their products in
order to achieve mandated cost reductions.

In those areas where overall quality is improving, such as electronics, these
suppliers are improving quality, but at a slower rate for those manufacturers
to whom they gave the largest price reductions.

In addition, the study showed that suppliers are reducing the services they
provide the OEMs and are becoming more selective in sharing new technology with

Such actions suggest that these suppliers are taking very definite actions
to reduce costs as they meet the price-reduction demands of the automakers.

For instance, when asked "to what extent are you sharing new technology?"
with each OEM, the study showed that suppliers indicated they share less as
the price reduction increases.

This lack of sharing by suppliers occurs at all of the major OEMs but to varying
degrees. According to the report, the willingness of suppliers to share technology
with Toyota is much greater than their willingness to share technology with
General Motors, which was in last place.

The study also showed that DaimlerChrysler, Ford, and General Motors place
two to three times greater emphasis on price than quality when selecting suppliers,
while Toyota and Honda, the quality leaders, virtually balance price with quality.

These findings have significant strategic implications for manufacturers and
suppliers alike.

“The automobile manufacturers must recognise that suppliers, especially
publicly-traded suppliers, are facing the same Wall Street pressures to improve
profits as they are,” says Planning Perspectives president John Henke.

“It’s no coincidence that the quality of domestic vehicles is suffering
while Toyota’s quality continues to rise.

“Toyota knows how to work with its suppliers – including its US suppliers
– better that the domestic OEMs. These findings suggest that while the
domestic OEMs should continue to undertake internal and supplier-related quality
improvement programmes, these will have limited success in improving vehicle
quality until the OEMs more closely balance quality with price when selecting

The study found a large disparity in price reductions being requested by OEMs.
According to the report, there is considerable variation in price reductions
being demanded by each of the OEMs as well as significant variation

across commodity areas within each OEM. Suppliers reported that every OEM,
domestic and transplant, has demanded price reductions that vary by 50% and
more across commodity areas.

One OEM, for example, was demanding an average price reduction in one commodity
area of only 3.0 percent, while in another area was asking for 7.8%.

“This suggests that either there is a complete lack of cohesive pricing
strategy within the OEM, or that each OEM has implemented a rather sophisticated
commodity pricing strategy. However, further investigation found the latter
is not the case,” Henke said.

As a result, the report concludes that suppliers must develop and implement
business strategies on a commodity basis for each OEM. No longer will a single
overall strategy targeted to a specific OEM result in optimum results.

To view related research reports, please follow the links

regional report: North America

world’s car manufacturers: A financial and operating review