You Get What You Pay For

Since 1990 we have been conducting surveys of production suppliers in North America to determine how they interact with their OEM customers. During that time two things have remained constant: First, the quality of the domestic manufacturers' vehicles has continued to lag the quality of the vehicles built by the transplant Japanese manufacturers. Second, suppliers have consistently told us that the Chrysler Group, Ford Motor Co. and General Motors Corp. place far more emphasis on price than on quality when selecting suppliers, while Toyota Motor Corp., the quality leader, places an equal emphasis on price and quality.

Today the situation is the same. Ford is being hammered in the press because of poor quality. Chrysler is struggling to improve its quality, and General Motors is being challenged by less than sterling quality reports on its vehicles. In a just-completed survey we conducted, more than 250 Tier 1 suppliers, 60 of which rank among the top 100 North American suppliers, told us that Chrysler, Ford, and GM are focusing more than ever on price when making sourcing decisions, while Toyota continues to balance price with quality.

In the past 10 years domestic OEMs have benchmarked Toyota in the hopes of finding the holy grail to help them meet Toyota's quality standard. Domestics also have implemented many quality improvement programs, hired more quality personnel and brought in quality “gurus” from other industries, all with the fanfare that things are going to change. Nothing has changed. They haven't caught Toyota. They still source with more concern for price than quality.

Focusing on price and demanding “unreasonable” price reductions during a contract will not improve quality. Maybe it's time for the domestics to reconsider how they balance price and quality when interacting with suppliers.

Domestic OEMs do not seem to recognize that suppliers face the same business challenges. They also need to remain profitable. When asked in the survey how they offset the price-reduction pressures the domestics are placing on them, suppliers told us they are meeting quality demands, but not giving one bit more than necessary. Second, they are beginning to reduce the services they have “freely” given to domestics in past years. Third, they are considering when and with whom they share new technology. The domestic OEMs are getting what they are paying for.

If the domestics are only giving lip service to higher quality, why should suppliers incur the cost to provide it, particularly when they won't be paid for it, and it isn't going to help them win the business if it results in higher prices?

Higher quality parts are not free. The Tier 1s have a responsibility to their shareholders. Can you imagine any Delphi Automotive Systems or ArvinMeritor Inc. shareholder who would be pleased to hear that profits fell because management felt they should help Chrysler, Ford, or GM improve its quality and not get paid for it?

And how many employees of these suppliers would be willing to give up profit sharing or bonuses for the same reason? Surely the domestics realize that if they continue to source on low price and continue to demand “unreasonable” price reductions from current suppliers, the suppliers must cut costs somewhere to ensure that they make the profits expected of them. Suppliers know they can keep costs down by not going beyond the quality levels expected of them and by being increasingly stingy when it comes to giving away free service or new technology. That won't help the domestics increase quality.

Smaller margins for suppliers also have long-term implications. Less monies may be available for research and devlopment, which could contribute to higher-quality vehicles. Second, the inability to make acceptable margins will continue the merger-and-acquisition movement among suppliers. The result will be an increased concentration of suppliers who, by virtue of their smaller numbers, will have a greater say in how OEMs work with them, particularly when confronted with what the suppliers consider to be unreasonable and capricious behavior.

Chrysler found this out when it tried to unilaterally extract a 5% price cut from its suppliers. It had to back off. Destroying supplier relationships, we have found, does not contribute to higher-quality vehicles.

Toyota continues to win more J.D. Power quality awards than any other OEM, continues to increase its market share in North America while the domestics' share declines and continues to source its suppliers by balancing price and quality, and doesn't demand “unreasonable” price reductions of its supply base. Maybe it's time for Chrysler, Ford, and GM to do the same.

John W. Henke Jr., PhD, is president of Planning Perspectives Inc., a Birmingham, MI-based consultancy specializing in buyer-supplier relationships, and a marketing professor in the School of Business Administration at Oakland University. He can be reached at [email protected].