Suppliers attack DaimlerChrysler's strategy
Kevin R. Fitzgerald
Editor-in-Chief
Supply Strategy July, 2001
The merged DaimlerChrysler says it will use the Web to rescue itself from recent financial problems, but
supplier sources and analysts say there's a lot more to the story
DaimlerChrysler put out the word in February: It's time to stop the fiscal bleeding and turn he company
around. The announcement came on the heels of a series of press releases last fall and winter touting the
corporation's moves to Internet-based commerce and supply management centered around its FastCar and
eExtended Enterprise initiatives.
Based in Stuttgart, Germany, and Auburn Hills, Mich., the world's third-largest automaker boasted a 17%
savings on commodity parts bought via online auctions on the online exchange Covisint, which was
launched last year by a consortium of automakers. The February turnaround plan requires 15% overall
savings on expenditures, with Internet-based procurement and supply chain initiatives slated to contribute a
significant portion of that savings.
But serious questions about DaimlerChrysler's strategy have been raised by sources in the automotive
supply base and some automotive industry analysts. Supplier sources, who have asked to remain
anonymous due to the fact that DaimlerChrysler is a significant customer, question whether the merged
auto giant is capable of achieving its aggressive cost reduction targets and other goals through Internetbased procurement and supply chain management. And an automotive analyst agrees, pointing out that
DaimlerChrysler is behind its main rivals, General Motors and Ford Motor.
Perhaps more ominously, supplier sources say that recent actions by DaimlerChrysler and other evidence
show that the highly successful approach used by the "old" Chrysler to reduce costs through ongoing
mutual efforts with suppliers is being replaced by a more confrontational approach that will damage
suppliers' profit margins and make them weaker suppliers. They fear that when the Internet fails to deliver
anticipated cost savings, DaimlerChrysler will look to the supply base for additional price reductions. They
also believe this strategy will backfire in the long run.
'Merger of equals'
From the very beginning, the much-publicized "merger of equals" of Daimler-Benz and Chrysler Corp. was
a clash of company cultures and management personalities. Many top Chrysler executives left the
company, including Tom Stallkamp, a career supply management executive who had advanced to the
position of president of Chrysler. Back in the 1990s, Chrysler's SCORE program (supplier cost reduction
effort) received a lot of publicity and acclaim (see sidebar). SCORE was the exact opposite of the
confrontational approach to supplier relations previously used by the Big Three automakers. Chrysler
worked closely with suppliers to find and implement SCORE savings, and profitability improved for both
Chrysler and its key suppliers. Many Chrysler executives, including Stallkamp, believe that SCORE and
the relationships it fostered with strategic suppliers were instrumental in first saving Chrysler from
bankruptcy and then making Chrysler the most profitable automobile manufacturer in the world.
Supplier sources say that DaimlerChrysler has reverted to a much more confrontational approach with
suppliers that threatens to cut into their profit margins and, long-term, make them less able to deliver
products of high quality. This approach is closer to that used by both General Motors and Ford in recent
years, though some industry observers say GM is collaborating more closely with suppliers than is either of
its two main rivals.
A dramatic change in how the most "supplier friendly" automaker deals with suppliers could have farreaching effects. Supply executives in other manufacturing industries keep an eye on how the Big Three
conduct business with suppliers; to a degree, some follow suit with their own suppliers. And certain types
of automotive suppliers who serve many other industries-raw material suppliers of chemicals, plastics, and
metals; and electronic component suppliers, for example-can be broadly affected by poor profitability in
their automotive businesses. Poor profitability can affect the performance of other businesses that supply
other industries.
Also, many innovative supply management practices and processes were created and developed in the
automotive sector; automotive is seen as something of a "leading indicator" in supply management
strategies and execution. Some automotive observers are speculating whether the industry will see a strong
shift back toward the approach of former General Motors purchasing czar Jose Ignacio Lopez de Arriortua,
notorious for ripping up existing contracts with suppliers and demanding annual, non-negotiable price cuts.
Lopez also used other heavy-handed tactics-and questionable business ethics, to say the least-when dealing
with suppliers.
The 5% supplier challenge
When management at DaimlerChrysler targeted a 15% decrease in expenditures over the next two years,
the company immediately turned to its suppliers for a 5% reduction in billing. Not all suppliers accepted
the mandate.
"They're using the traditional technique of beating up on suppliers," says Daniel Garretson, senior analyst at
Cambridge, Mass.-based Forrester Research. "The 5% is odd because they've had a reputation of being
supplier-friendly, unlike Ford and GM. With the collaboration involved, it helps to be supplier-friendly, so
beating up on suppliers could backfire."
A Tier 1 source stresses that Chrysler did not ask for a 5% decrease, or even discuss it with suppliers
beforehand. "They simply reduced purchase orders by 5% without negotiation," according to this source,
who says that some suppliers accepted it, some did not, while others are trying to negotiate with
DaimlerChrysler.
Behind on the Web?
At least some of DaimlerChrysler's recent actions raise legitimate questions about the company's pinning
such high hopes on savings from Internet-based supply initiatives, and not all of these questions come from
the automotive supply base. Some industry watchers say the company lags behind its rivals.
"DaimlerChrysler is not doing as much as Ford and GM, and now they're distracted by the current fiscal
condition," says Forrester's Garretson. "They've been slower on e-business and build-to-order progress.
Both Ford and GM have aggressive build-to-order programs. DaimlerChrysler isn't as focused on it."
DaimlerChrysler says it hopes to achieve the additional 10% of savings needed to reach its 15% goal
through collaborative work with suppliers. While the company seeks a straight 5% savings through price
reductions from suppliers, it is also hoping to get help from suppliers to achieve additional savings through
technology and redesign across all vehicle divisions, from Jeeps to Minivans. Most of this savings is
expected to come via Internet-based initiatives, including online auctions, supply chain management and
design collaboration. But in the design area, at least one supplier source believes suppliers are unlikely to
bring their best ideas to DaimlerChrysler. "The turnaround in the '80s and growth in the '90s were due to
suppliers taking over design responsibility for major systems," says the source. "Chrysler went from a
manufacturer to an assembler. Daimler is believed to fail to understand the magnitude of suppliers'
leadership in component design, and probably won't have the infrastructure to take it over. DaimlerChrysler
is expected to learn the hard way that this is the case."
Are they justified?
Some automotive analysts believe automakers are justified in asking for lower prices from suppliers if
they're paying for online systems that deliver savings to all trading partners. "OEMs are footing the bill for
new Internet technology that they claim everyone will benefit from, so there is a justification for their
demands to lower cost, besides brute strength," says Jenna Pelaez, associate analyst of Automotive Industry
Essentials at New York-based Jupiter Media Metrix.
In the implementation of supply chain systems, Chrysler says it is investing for its suppliers. Pelaez says
suppliers are eager to sign up on e-business initiatives launched by automakers. But sources in Tier 1 say
some major suppliers are very hesitant about participating. "This is why you see such slow participation in
Covisint," says the Tier 1 source. "The OEMs need to learn how to build cars correctly first and not take on
software development. It's like the government saying they have a new program that is going to be good for
you-no one believes it."
Stable forecasts
The need for an improved automotive supply chain is well-known. Key to improved efficiencies is the fast
movement of accurate forecasts through all links of the supply chain. Suppliers working on tight margins
see plenty of room to capture savings through the visibility that comes from openly sharing forecasts and
inventory levels.
Chrysler began a supply chain pilot as part of its eExtended Enterprise. The pilot included supply chains
supporting interior trim and body stamping.
In many links of the chain, it can take up to six weeks for forecasts to work their way through all supplier
tiers. The supply chains used in the Chrysler pilot averaged two weeks, according to Chrysler. That's a 92%
improvement over the two weeks it has traditionally taken for Tier 4 suppliers to receive Chrysler's
forecasts.
But a high-placed Tier 1 source says that DaimlerChrysler is missing the mark: "While this improvement
may have taken place, the problem isn't and hasn't been in schedule visibility-it has been in schedule
stability. Seeing a new schedule the same day is meaningless when each day the schedule can fluctuate
wildly. That is why supplier delivery performance is far better for the trans-nationals like Honda and
Toyota. They keep far more stable schedules, and stable schedules are a cornerstone of lean production and
supply chain management."
The problems in the present supply chain became even more evident as Chrysler moved to automate
communication. In order to drill down to the roots of the problem, the automakers need to drill past their
connections to Tier 1 suppliers and get all suppliers to connect more effectively.
But once again sources in the supply base believe that DaimlerChrysler will have a very difficult time
managing a fully connected supply chain. "The OEMs are of the opinion that they know what's best.
However, they are so far removed from the supply chain, both in size and understanding, that others are
better suited to manage it," according to the Tier 1 source.
To Covisint or not?
Another big question underlying automotive e-business transformations is whether the connections will live
in private trading networks or whether they will migrate to Covisint. Automakers are loath to move
sensitive trading communication to a public host. The private networks run by automakers currently bring
together a few hundred suppliers. Yet the ultimate connectivity will include 15,000-plus trading partners.
Try doing that over a private network.
For the moment, private networks have won the day. "All three OEMs are doing more through private
trading networks than through Covisint," says Jupiter's Pelaez. "They aren't waiting for Covisint to
coordinate its offerings." Pelaez adds that the automakers and their suppliers don't see Covisint as the be-all
and end-all of their Internet strategies. "Covisint's real value is providing infrastructure cheaper, facilitating
supply chain integration and communication, and standards building," says Pelaez.
Forrester's Garretson believes Covisint will be more useful to DaimlerChrysler than it is to Ford and GM.
"Ford and GM are keeping their private initiatives going while Chrysler is planning on using Covisint.
That's another data point on Ford and GM's aggressiveness. They're hedging their bets against Covisint. To
the extent that DaimlerChrysler is not being as aggressive, they may need Covisint."
To many industry players, Covisint is still an unanswered question. "For most Tier 1 and Tier 2 suppliers,
the financial equation for Covisint and other e-business applications does not provide the ROI," says our
source in Tier 1.
Opposite approaches
It's somewhat ironic that when the "old" Chrysler was faced with extinction, it used a mutually beneficial
approach with suppliers that resulted in major gains. Now, in troubled financial times, the merged
DaimlerChrysler is taking the opposite approach: forcing price cuts from suppliers that may seriously
damage the company's ability to compete long-term in an industry that becomes more fiercely competitive
as time passes.
Whether or not DaimlerChrysler's Internet initiatives will deliver expected gains remains to be seen, as
does the long-term effect of aggressive relations with suppliers. But one thing is certain: Supply
management executives in many industries will be watching, and whatever happens at DaimlerChrysler
could have long-term ramifications for supply management.
What happened to SCORE?
DaimlerChrysler's focus on Internet-based tools and processes dominates its current strategies. But just a
few years ago the "old" Chrysler was being lauded by analysts and suppliers alike for its innovative
approach to cost reduction, a program called SCORE, for "supplier cost reduction effort."
The basic premise for SCORE was simple: Cost savings that were implemented or suggested by suppliers
were shared with the suppliers, usually in a 50:50 split. Supply management at Chrysler effectively, over
time, institutionalized SCORE throughout all functions and business units of Chrysler. The result was
better quality, product performance and profitability, and a trusting supply base.
A source at a supplier of automotive electronic components believes that the new, heavy-handed approach
by Chrysler will "damage relationships, absolutely. What we see now is DaimlerChrysler eroding
relationships. What made Chrysler unique was the way they managed the SCORE system. There was
overwhelming willingness in the old Chrysler to work very hard with suppliers, to quantify and achieve
reductions in any ways possible. That's no longer the case."
Look out for FastCar?
Chrysler's eExtended Enterprise has a sister e-business program, FastCar. The initiative, announced last
year, is meant to leverage Internet technology to help the company develop new products more rapidly.
Typically it takes up to four years to design and develop a new model. "The FastCar project is as ambitious
as any we've ever done," said James Holden, the corporation's president and CEO at a recent industry event.
"It will provide real-time transparency to the product development process, but more importantly, it will
dramatically increase the speed and precision of development, reduce waste and increase the quality of our
products."
FastCar comes with strong support from top management, but a question persists: Can this be accomplished
during hard times? "My sense is they haven't been moving as fast as Ford and GM," says Daniel Garretson,
senior analyst at Forrester Research. "They did make some fanfare about the whole FastCar initiative. It is
apparently intended to accelerate the product design cycle from 40 to 48 months down to 20 months. But
now I think they're focused on fixing their other financial woes."
Editor's Note: DaimlerChrysler declined to comment on the issues addressed in this article.
Author(s) : Kevin Fitzgerald