Automakers Demanding Lower Component Prices

[Michael T]

Hi all -- I didn't know exactly where this topic might belong so I stuck it here...

In the September 2001 issue of Quality magazine, there is a small article titled, Where Has Quality Gone?. In this article, it relates that automakers are demanding lower prices from their vendors. For example, Chrysler demanded a 5% across the board price cut and wants an additional 10% by 2003. I have heard smatterings of this on this site as well as others, but have not really gotten involved in it since I'm not in the auto industry. The article goes on to allude that auto parts makers may be sacrificing quality in order to meet these cost reductions.

Here's my boggle... Ultimately, the fruits of a good quality program are lower rework costs, enhanced customer satisfaction, more orders, etc., which lead to more profitability for the company. As we all know, a good quality program isn't cheap to initiate and it isn't cheap to maintain. In the long run, it pays off in higher profits (see above), but now - the customer is wanting that TOO. While I think everyone will agree that quality is essential, no one ever said it was free. Sure, if the supplier is feeling a pinch in the market due to competition they can lower prices to be more competitive, but why must they give away the farm? On the other side of the coin -- has anyone seen the price of automobiles decrease 5%?

I may be way off base on this -- and if I am - I apologize. Any thoughts - especially from those people who are feeling this bite, would be enlightening and appreciated.

Cheers!!!

[Jim Biz]

Michael:

We too feel the impact from the Auto industry price reduction movement - although are not an automotive supplier...

Some of our customers "follow the Big 3 leaders" and
A) Demand - reductions
B) Automatically TAKE small percentage reductions across the board, Yearly "because we are registered".

I have heard of places in our area where customers have requested access to all raw materials costs - labor costs and process cycle-time information... "So they can help in improvement efforts"??

MY PERSONAL OPINION --- sadly -- this outlook and these type of requests provide a cause for mis-trust.. --- customer satisfactin can now be taken to the extreame of "if you don't do it for free - I'm not satisfied."

Regards
Jim

[Kevin Mader]

Hello Gentlemen,

General information: By the late Philip Crosby’s definition, quality is free and always will be. Dr. Deming said that “Quality costs less” in reference to the same process producing a quality product and defective ones. Variation contributes to increased costs, so I think this is what he meant by that. Nuff said.

On your topic: As I have said, I worked for a Medical Device organization, at that time drawing $1.3 billion in sales. In the mid ‘90s, we went flat on sales, cutbacks on spending and a hiring freeze imposed. As a tactic (or perhaps strategic initiative), we elected to hold our suppliers to a 20% reduction in price for all purchased components. Seems unbelievable, but at that time, most of our Suppliers were so heavily dependent on us that we could leverage our position. But what does this say about our view of the Supplier? What kind of relationship did we have? What was left when the plan was carried out?

From my perspective, we took advantage of our situation, and suppliers had to respond or risk extinction. I wonder how many of the automotive suppliers are currently in the same position. What is clear to me is that such initiatives, tactical or strategic, are devoid of Customer considerations and Quality Systems understanding. It merely is based on financial objectives of the organization. Profit above everything else. It is a short-term focus.

In addition, it is the same skipping record: competition over market-share rather than increasing the market and raising the standard of living and the quality of life for their customers. Do they think the market is saturated already? I wonder if those making TVs ever thought that way?

Regards,

Kevin

[Marc]

I have seen contracts and RFQs over the years many times. Folks, this is nothing new. I'll go back to about 1996 with an example. The Request for Quote was for a 5 year production run at about 1.2 million 'parts' per year. The requirement was for yearly reductions in prices. I think it was something like 5%, 4%, 4%, 5%, 4% - expectations of cost reductions per year.

> I have heard of places in our area where customers have
> requested access to all raw materials costs - labor costs
> and process cycle-time information... "So they can help in
> improvement efforts"??

Material costs were addressed in the RFQ. The customer (GM as I remember) required that costs be stated. They required cost reductions based upon material costs, but there was a cost 'baseline' going in. Material cost increases would not be passed on. (That's only 'fair', right?)

Think Contract Review

This was at another customer: The proposed contract did not address address the issue of reduced parts requirements. That is to say, for example, if the customer was having a bad year or two and instead of 1.2m the quote was based upon only bought 750,000 for a couple of years. I note this because I saw this happen to a client that, for a while, was actually paying the customer about 5 cents a part because the reduced volume.

Anyone who wants automotive business is going to put themselves thru the mill as has been the case for years. A lot for the 'new' required reductions are based upon the theoretical savings derived from QS-9000 and/or Six Sigma and/or ISO 9000 and/or Manageing by Data and/or Continuous Improvement and/or etc., etc. And in part it is based upon the correct idea that every year thee process should, in fact, run better. People gain experience as time goes on. Production and design issues / problems are identified.

> MY PERSONAL OPINION --- sadly -- this outlook and these
> type of requests provide a cause for mis-trust.. ---
> customer satisfactin can now be taken to the extreame of
> "if you don't do it for free - I'm not satisfied.

Yup - business is a lot like life. There's no Utopia, but we're always trying to reach Utopia. The balance of trust is a delicate issue. The guy I bought my firewood from this year was cheap - but there was a mutual distrust dispite the smiles. I distrusted him because of some preconceived notions (his truck, his clothes, his mohawk haircut, etc.), but more so because all he could talk about as he stacked (I helped) was about being screwed by customers in one way or another. Most of his rants related to what we would label customer satisfaction. This guy really had a serious attitude 'problem'. The last cord he dumped - he asked to be paid and said he'd be back in a day or two to stack the cord. I knew he wouldn't come back (well, it fit my picture of him from what I learned about him as we stacked wood together), but I don't mind stacking wood so I paid him. Nope - he didn't come back. On my end, however, he was selling 18" to 24" cords (not face cords) for what my 'regular' guy charges (charged) for 12" to 16". And, my 'regular' always brought mixed wood. A fair amount of soft wood - maybe 30%. This weird (for lack of a better work) guy brought nothing but ash, oak and other hard wood - no 'trash'. I bought about 2 years worth of wood. (Yes - I'm a pyro. I love the fire in the winter. I pretty much heat the whole house with it.)

But back to automotive - the trust issue is always a tightrope wlk.

I was with a client where I saw what I considered thrilling. It was a material costs issue. This was several years back. The contract included a raw material cost clause which did allow for price to customer increases - and of course materials cost decreases had to be passed on to the customer. For 2 years the costs of raw materials did decrease and the decreases were passed on to the customer. However, in year 3 materials prices rose to what the baseline was going into the contract. The customer would not accept the increase for some sorry a** reason. It was funny as heck... My client was fuming mad. They dashed off a registered letter (not to mention FAXes and such) and said they would fulfill another month of production per the contract but that since the customer would not, per the contract, accept the materials cost increase, they considered their contract broken. They also stated that they would no longer respond to RFQs from the customer in the future. It took 3 days for everyone to kiss and make up (the customer decided to accept the material cost increase). But for those 3 days it was FAX city. Phones gone nuts. People bitching and moaning. I was laughing so hard inside that I was almost busting. While I obviously can't name my client, their customer was Chrysler. Of course, they could do what they did because Chrysler was only about 20% of their business. They thus had the upper hand and played their cards right.

Ah, automotive! Don't ya just LOVE it?

[Marc]

Three Years Later - What Paybacks, Price Reductions and other Contract Requirements (demands?) are YOU seeing?