OEMs and “Tier Ones” Need a New Way to Do Business

Normally, this space is reserved for an old-time plant mechanic/machinist/set-up man/lab technician/materials man, yours truly, and my thinking about the “nuts and bolts” of processing and materials.

This month, however, I’ll beg your indulgence and relate a true story of two OEM automotive companies and a Tier One supplier caught in a difficult squeeze. No, I won’t name the Tier One, or the manufacturers, but suffice it to say that you’ve heard of the supplier and both auto makers.

The Tier One inked a typical volume deal with a “domestic” manufacturer. To meet the requirements of the job, the Tier One both adapted existing equipment and purchased new machinery. Lines were configured, tooling installed, and they were on their way.

Then, the inevitable happened. Performance problems with the part meant a material change. With resin prices rising, the already slim margins got thinner.

The OEM customer responded by promising engineering support and relaxing the quality requirements on some non-critical dimensions. The customer also offered to single source the part with the processor to get unit volumes high enough to allow bigger resin purchases, with theoretically more buying power. Naturally, all at the original pricing.

The result? Now the processor had to second source the scarce resin, still paid a high price and margins got thinner. Cash flow, however, got bigger, as more equipment cranked out more parts on more shifts, burying the reality of minimal profitability in big turnover numbers.

And the kicker? The OEM reorganized their buying practices and paid a visit to the supplier. There they did an inventory of all presses and their serial numbers. A capability study? No, the customer used accountants to determine the theoretical depreciation available on the new equipment and determined which machines were already written down to zero. Why? To extract further price concessions. And the CBA negotiated between the supplier and the union meant that shutting the whole operation down (if they could avoid a lawsuit) would be more expensive than running the job. They were buried alive, face down.

At a much smaller line, however, the supplier was molding parts for a “Japanese” OEM. They also called the supplier, but with a different question: When was the processor going to ask for a price increase? That OEM was tracking raw materials pricing and knew that margins were trending toward zero, and had already factored in a price increase to compensate.

Why? Japanese OEMs cycle models faster, and don’t need to be shopping jobs all over North America to chase pennies, because they’re already getting a premium in the new car market based on consumer perceptions of quality. And what’s a good way to get quality parts? Establish a good relationship with suppliers and let them make the same part for years. Give me a decade molding door handles and I’ll give you damn close to zero defects.

Irrational customers (and admittedly incompetent suppliers) are a little like drugs…you have to just say ‘No’.