Change of Control - Purchasing wields the power

Management of auto companies has gradually changed over the last decade or so and has become more supplier-oriented. It wasn't that long ago that purchasing had basically one function: Take a package that typically consisted of a design, a set of specifications, shipping requirements, and volumes, then select a supplier. The supplier submitting the lowest bid usually won the job. Special tooling belonged to the company and was furnished to the supplier. This tooling also was purchased using the same process in selecting suppliers. The toolmaker with the lowest bid got the business.

The delivery of other parts, if they were required by the supplier, was mainly coordinated by purchasing.

So you can see it got pretty complicated when you think about thousands of parts and hundreds of suppliers.

The system just became too unwieldly, especially when it came to controlling costs and improving quality. Gradually, more responsibility was shifted to suppliers. What finally evolved were Tier 1 suppliers.

The idea of the Tier 1 suppliers is that they would furnish all major components and subassemblies. They also would be responsible for the total design, the process, the required tooling, sub-suppliers, storage, financing, etc. This, of course, reduced the number of suppliers that an automaker had to deal with from thousands to a few hundred.

>From a concept standpoint, it looked like a good idea. You're dealing with fewer suppliers, so it's easier to pinpoint responsibility. You can better take advantage of worldwide engineering and manufacturing knowledge, and it's easier to control costs and quality.

This all sounds really good until a guy like Jose Ignacio Lopez de Arriortua, first at General Motors Corp. and then Volkswagen AG, comes along as a purchasing czar. And he wants to be a local hero by becoming the cost-cutting king.

He recognizes that squeezing costs out of suppliers has become a lot easier. Now all he has to do is focus on a few Tier 1 companies instead of thousands of small suppliers. Tier 1 suppliers are over a barrel because the corporation is one big customer to which they have committed a large portion of their capacity and financing.

The Lopez approach was pretty simple. He would tell the supplier that he liked his product, but he would like it a lot more if it were 20% less. The supplier, who probably was pretty competitive to begin with, would have to consider drastic measures in order to comply with the price-cutting edict.

Subsequent edicts could force him to cut back on long-term investments like research, or equipment that could result in eventual cost savings. He would no longer think long-term. His biggest worry was getting by for the next year. When you have cut back in all the areas you can think of, you start taking fliers. The danger is that sooner or later production and quality problems start to crop up.

Sacrificing long-term commitments has resulted in bigger immediate profits. This has supported the concept of outsourcing, and has justified even more outsourcing.

As more and more responsibility has shifted to outside suppliers, however, so has product development. So you really have to wonder if there is still anyone in engineering who is responsible for determining the future of product development for the corporation.

As more and more responsibility has shifted to outside suppliers, the power within the corporation has shifted from engineering and manufacturing to purchasing.

The function of purchasing is no longer to take a given design and find the lowest bidder. It now must be concerned with finding suppliers that have the capability to research new technology, design and develop products, to produce parts using cost-effective processes.

They also must find suppliers that can be responsible for their sub-suppliers, arrange their own financing, warranty their parts, and have deep enough pockets to absorb unforeseen events, like costly recalls.

The shift to a more supplier-oriented corporate structure places the viability of the company squarely in the hands of purchasing. Things that could drastically affect a company's profitability - such as product changeover, delays in new model startups or quality problems - become less of an engineering and manufacturing responsibility and more of a purchasing responsibility.

Take, for example, Chrysler Corp.: A primary objective at Chrysler is to achieve a higher level of quality in all products. Because 65% of its parts are supplied by outside contractors, purchasing must have a large responsibility in achieving this objective.

So it's really no surprise that Chairman Robert J. Eaton and the board of directors gave the president's title to Thomas T. Stallkamp, former executive vice president of procurement and supply.

Mr. Sharf is a former executive vice president of manufacturing at Chrysler Corp.