DaimlerChrysler Is Not Alone

In the span of a few short but intense weeks, the Chrysler Group of DaimlerChrysler AG went from model citizen to town traitor.

At least, that's the perspective of automotive suppliers who make their living shipping parts for Chrysler products and had to swallow hard when the beleaguered automaker demanded a 5% price cut early last December.

Is this, they asked, the death of the “extended enterprise,” the prototype for long-term supplier relations created by former Chrysler purchasing chief Thomas Stallkamp? DC maintains that the extended enterprise is not dead, but that tough times call for tough action.

And WAW's 23^rd Annual Supplier Survey confirms that DC hardly is alone in its aggressive cost-down strategies.

Sixty percent of automaker participants in this year's survey, conducted between April 5 and May 10, say their companies have asked suppliers for price cuts of between 3% and 6%. And nearly 10% of OEM respondents say their companies have requested price cuts of more than 8%.

The OEM sample was a cross-section of all automakers currently producing vehicles in North America.

Nearly half of the supplier respondents say that other automakers — as well as Tier 1 suppliers — have placed similar demands on parts producers in the wake of DC's 5% price cut.

And both groups of respondents say that, overwhelmingly, pressure to cut prices has intensified since last year.

In retrospect, the size of the DC cut probably is not that significant. But the timing was bad, as suppliers were given only a few weeks to prepare for the change, when they already were expecting lower volumes in 2001 after a record-setting 2000.

Thomas Sidlik, the Chrysler Group's executive vice president of procurement and supply and a DC Board of Management member, says the pain was not all passed off to the supply community, as DC eliminated 20% of its own labor force.

“We went after 5% in the supply base because it's pretty serious,” Mr. Sidlik tells WAW. “This is no fun and games here. We can't lose $5 billion and still be around, so it's serious. We have a recovery plan to get us back on track to be very profitable, and there's no alternative.”

Fully 90% of DC's suppliers have complied with the 5% cut. “Only 10% didn't and chose not to be our suppliers,” Mr. Sidlik says. He says between $2 billion and $3 billion in contracts were re-sourced to new suppliers, without saying how many suppliers were affected.

Mr. Sidlik says those who met the 5% cut are on DC's “favored list” and will be rewarded with future contracts.

In February, DCC began working with the supply base to cut a further 10% in costs over the next two years.

Every Friday is “report card day” when about 100 employees, mostly engineers who are working with the suppliers, meet to gauge progress and applaud breakthroughs such as a sunroof switch that was used in a number of vehicles at a cost ranging as high as $6. A standard switch will be used in the future at a cost of $1.30 per unit.

Although our survey found that other automakers are seeking aggressive price cuts, an overwhelming majority of both OEM and supplier respondents described DC's 5% cut as unreasonable.

Supplier respondents had plenty of written comments to add to our survey with regard to the DC price cut.

Some say they are picking up new business opportunities with DC because the automaker is shopping for new suppliers. Others say these demands are a threat to the industry.

“We won't work for no margin,” writes one supplier respondent. “Why should we when there are other profitable niches?

In the wake of DC's 5% price cut, have other automakers and Tier 1 suppliers placed similar demands on their suppliers?

On average, how deep are the price cuts your company has demanded of suppliers for year 2001?

This is just a preview of our 23^rd Annual Supplier Survey. Watch for full results in the August issue of WAW