Supplier tiering creates purchasing pickle: shifting buying patterns raise autonomy and control issues

Ford Motor Co. Vice President-Purchasing Carlos E. Mazzorin emphasizes that price resistance isn't confined to the automotive market: Even cereal makers are finding consumers won't accept a steady diet of price hikes. Indeed, during June the major cereal producers rolled back prices sharply to shore up sinking sales.

But even the breakfast food makers don't have to worry about Toyota Motor Corp. dropping its prices and eating their lunch.

With Toyota and other Japanese automakers threatening to introduce new models such as the Camry at prices dramatically lower than current versions, the U.S. Big Three purchasing chiefs are concerned their current cost reduction demands for suppliers may not be enough to keep them globally competitive.

They insist, however, this doesn't mean a new assault on supplier profit margins. Instead, they're looking farther down the production supply chain -- past the Tier 1 biggies to the Tier 2 and Tier 3 suppliers -- seeking new ways to eliminate waste and cut costs. They also are rationalizing their non-production suppliers with gusto. Vendors of everything from computer accessories to toilet paper are being winnowed down to a handful.

But in an era of globalization, systems integration, program management and increased supplier warranty responsibility, whipping your supplier's suppliers into shape can be as confusing as it is daunting. Who evaluates and picks sub-suppliers promises to become one of the key issues of the '90s. And large suppliers are becoming increasingly vocal about wanting more control of their own destinies.

"I'm saying if you want me to manage the system, then allow me to choose the suppliers that we think can provide that we need to make this happen," under-scores Timothy D. Leuliette, president of ITT Automotive, Inc., a major Tier 1 supplier.

A new study by the University of Michigan's Office for the Study of Automotive Transportation (OSAT) and A.T. Kearney hints at the turmoil, suggesting the industry is in an interim period of overlapping responsibility in key areas. "It's very likely that many suppliers have accepted and established mechanisms for assuming greater responsibility, but that assemblers haven't fully relinquished control in those same areas," says A.T. Kearney Principal John Waraniak.

Most suppliers agree the auto industry is in a transitional phase now and that levels of autonomy remain largely unresolved.

Some automakers are allowing their Tier 1 suppliers to select those down the chain while others are not. And even those who do have their limits.

For example, Mercedes-Benz U.S. International Inc. based in Vance, AL, is giving unprecedented autonomy to those supplying components and systems for Mercedes' new sport utility vehicle. Johnson Controls Inc. was allowed to pick its sub-suppliers for the headliner modules it supplies, and General Motors Corp.'s Delphi Automotive Systems designates many sub-suppliers for interior modules it is supplying. But when it comes to choosing suppliers of key components such as stereo systems, Mercedes keeps control.

Everyone from robot makers to sellers of nuts and bolts is noticing subtle and not-so-subtle changes in relationships and reporting structures. But so far it seems more like a realignment than a shakeout.

Neil Dueweke, Fanuc Robotics North America, Inc.'s general manager of the worldwide Ford Motor Co. paint business, says he now deals with major Tier 1 suppliers such as paint shop system integrators and transfer press suppliers almost as often as he deals directly with Ford -- even though Fanuc is a globalized systems supplier in its own right.

"We are more involved with the Tier 1s and 2s than we ever have been," adds Jeff Moss, president of DCT Inc., a major production tooling supplier.

Besides working much more closely with automakers on future product programs, Mr. Moss says DCT is now assuming responsibility for numerous peripheral operations while at the same time interfacing with many direct and indirect suppliers.

For example, on one '98 model year program, DCT is responsible for fabricating all the racks and providing the dunnage in which its subassemblies are shipped, and dealing directly with major metal stampers.

DCT even is taking responsibility for testing the racks. For this purpose, DCT affiliate Control Power-Reliance has developed an elaborate transportation simulator that duplicates all the complex motions that too often result in product damage during shipping (see diagram above).

The simulator allows DCT to improve the design of racks and containers used to transport various body and underbody panels, which often are damaged during transport in trucks or railcars.

"It is a logical extension of what we do as a body-shop systems supplier," Mr. Moss says. "We have to interface with the racks and dunnage with our system anyway. We know all the pitfalls."

Although many suppliers are happy to take on added responsibility, they still remain concerned about lacking sufficient authority.

"The one concern I have so far in the systems arena is that our customers have the expectation that issues won't surface to them. We are expected to manage everything, yet they still have their oar in the water as far as customer-directed sourcing," says Dennis M. Racine, vice president - purchasing at ITT Automotive.

"If there are sources they're familiar with that maybe we haven't worked with, it presents a concern whether we should source with that particular supplier when we don't have the history. We need full history. We need full understanding of the people we work with if we're going to cover warranty, if we're going to cover expectations, design, and so on," Mr. Racine adds. "It's minimal right now but it has reared its head a couple times."

Arguments are compelling on both sides.

While insisting they don't want to meddle too much with suppliers bestowed with systems integration or program management responsibility, Big Three officials often argue that their global exposure makes them better than Tier 1 suppliers at ferreting out the highest-quality, lowest-cost sub-suppliers all over the globe.

"We are finding tremendous electronics companies in Israel at the Tier 2 and Tier 3 levels," says GM Vice President-Worldwide Purchasing Harold Kutner. "In Brazil, we're finding casters that are better, and in Russia we're finding aluminum components that we can buy -- formerly made for the defense industry and now moving into commercial. And because we are global and because we have people in various parts of the world, we have the ability to help Tier 1s find Tier 2s and Tier 3s," he adds.

In the area of raw materials purchases, all the Big Three insist they can drive costs out of the supply chain by purchasing everything from steel to seating fabric in huge quantities, getting a volume discount, and then reselling to suppliers at cost. But once again, this is becoming a bone of contention with some suppliers.

As a part of Ford 2000, the automaker's ambitious plan to streamline its business, Mr. Mazzorin says most raw materials, from precious metals to foundry sand and including plastics and steel, are being purchased in bulk and resold to suppliers. "We are leveraging raw material. The mechanics of the deal are almost invisible, but it gets you the lowest possible cost that you can get," Mr. Mazzorin insists.

For most generic materials, that arrangement works fine, says ITT's Mr. Racine. However, when it comes to many specialized materials, "we buy as well as the OEMs in most cases," he says. "It's primarily because we cover fewer, smaller ranges of materials that we buy in larger quantity for a specific item, where they have to cover everything. We just discussed this with a GM sourcing team on steel and they agreed we should veer off."

But raw materials pricing and sourcing promise to be touchy issues for a long time to come. ITT's Mr. Leuliette still is fuming over hikes automakers agreed to 18 months ago.

"I think if there's any scar tissue still very fresh, it was the OEMs' agreement to give increases to the steel industry and other raw materials. Then those raw material suppliers came to us and said `I got it from the OEM, now you're going to pay it or I'm not going to deliver,"' Mr. Leuliette says. "And the OEMs looked at the Tier 1s and said: `I told you, no price increases.' At that time we were obliged to say (to the OEMs) `Okay you buy the material and deliver it to us."'

That was a big setback to harmonious OEM/supplier relations, Mr. Leuliette says. But he adds the experience also has taught the industry some important lessons in cost control.

"I think the OEMs learned a very critical lesson. If you go out and give a primary materials supplier a major increase, every dollar you've given you've probably underestimated your exposure by a factor of three, because we have the same materials.

"Once they legitimize that increase, it will ripple through the industry and we can't tolerate that. Either we get the increase passed through, or they have to stand tough with us, because they gave price increases to the steel industry we would never have imagined to give to any of our suppliers," he says.

From the sound of it, both OEMs and suppliers will need to eat their Wheaties every morning -- no matter what the cost.