Commentary: Pipe Dream or Reality?

Over the past year, a few new chapters, each with a different plot, have unfolded in the continuing saga of buyer-supplier relations.

First, Tier 1 suppliers, the bitterly complaining targets of OEM price-reductions, began to demand the same from their suppliers. Both Lear Corp. and Visteon Automotive Systems, for example, reportedly were demanding rebates from their suppliers. Second, while most OEMs were continuing to look to suppliers for price reductions, Volks-wagen AG ended the year by renouncing its Inaki Lopez era for a kinder more gentle relationship with its suppliers. VW believes price pressure isn't worthwhile anymore; it wants motivated suppliers in working relationships built on trust.

Actions of Lear and Visteon certainly run counter to the constant and shrill chorus from Tier 1s that price-reduction pressures destroy any hope for true partnership. VW's change of heart appears to back up this belief.

So, is there a correlation between pricing pressures and good supplier relations?

Almost 100 manufacturer-supplier studies we have conducted since 1990 in automotive and other industries throughout the globe clearly indicate that, contrary to popular belief, there is no connection between price-reduction pressures from manufacturers and good working relations between these same manufacturers and suppliers. We found, as most everyone believes is typical, poor manufacturer-supplier relations occur when a manufacturer, whether an OEM or Tier 1, puts considerable price-reduction pressure on its suppliers.

But we also found that a manufacturer can place considerable price-reduction pressure on its suppliers and still have good relations with them.

For example, in the computer industry, Dell has such a relationship; the same can be said for Black & Decker in the small tool industry and selected OEMs and Tier 1s in the auto industry. This indicates that price-reduction pressure, in and of itself, is not necessarily the cause of poor buyer-supplier working relations.

What then should an OEM or Tier 1 be doing?

Global competition in the auto industry requires every manufacturer, whether OEM or Tier 1, to be price-competitive by lowering its prices on current products and/or providing improved products while maintaining or even cutting prices. Suppliers help achieve these ends. For every manufacturer, price-reduction pressures are part of doing business and can be most beneficial.

In our studies, we found that manufacturers set high expectations for supplier price reductions in an environment in which the supplier is motivated to achieve those goals. The motivation comes when the manufacturer and supplier share the savings from supplier-initiated cost reduction ideas; having timely and meaningful two-way communication; through nurturing and maintaining close working relationships between the manu-facturer's purchasing and engineering departments and the appropriate supplier personnel; and when a manufacturer actively works with suppliers to evaluate their operations and implement cost-reduction programs, particularly with smaller less-capable suppliers.

There is one more critical condition for good relations to prevail. A manufacturer's actions must occur in an environment of mutual trust.

Manufacturers setting aggressive price-reduction targets must treat suppliers fairly and as valued business partners, while honoring contractual agreements and living up to the spirit of their commitment to suppliers. The quid pro quo is that suppliers must actively work with the manufacturer, meet all deadlines and not be complacent. If they are, the manufacturer has every right to become more demanding, particularly when other suppliers meet their price-reduction expectations.

What does this say for VW, Lear and Visteon? VW has it half right. But if they give up pressuring suppliers for price reductions, they could also lose important supplier contributions to their competitive advantage.

Lear and Visteon, if they are interested in having good supplier relations, better make certain that the pressure they are placing on suppliers is being done under the conditions necessary to maintain good relationships. These observations apply to any OEM and Tier 1 interested in maintaining good supplier relations while ensuring it has the lowest possible prices!