Exceed or Else

Company: DaimlerChrysler AG
Business Units: Mercedes Benz & smart Passenger Car Group, Chrysler Group, Commercial Vehicles
Size: Third-largest automotive buyer (components and metal) in the world; 104 plants, 14,000 suppliers, 13,000 sales outlets in 200 countries
Annual Purchases: More than $100 billion
Perfect Service Center Supplier: Large, technologically sophisticated; able to provide flexible shipments based on consumer demand; willing to commit to long-term contracts, constant performance improvement (quality, efficiency and delivery) and scrutiny by direct competitors

If you're an automotive supplier, Chrysler Group wants you to know precisely where you stand compared with your competition. Wondering how other metals suppliers competing for a long-term contract with one of the world's major manufacturers compare with you? This is your chance.

Just like every major automotive manufacturer, Chrysler Group wants quality parts made using the appropriate technology, delivered on time at a fair price. However, the auto maker insists on complete transparency where suppliers are concerned—not necessarily comfortable for those who would like to make delivery and send the bill. The company's disclosure of all suppliers' performance sets up an internal competitive environment that prevents complacency among long-term contract holders and puts the auto maker in a strong negotiating position when contracts come up for renewal. Sharing supplier information does, however, give service centers access to one of the most extensive catalogs of best practices in the auto industry.

The question is whether in a strong-demand, short-supply, price-driven market that transparency gives the upper hand to the manufacturer or the metals supplier. Or whether, fueled by information technology, gaining the upper hand is no longer the issue and true collaboration really is the new business reality.

“We provide what we believe to be the most transparent data exchange in the industry,” says Peter Rosenfeld, executive vice president—Procurement & Supply, based at Chrysler Group, Auburn Hills, Michigan. “We do so via an Internet portal, which our suppliers can access 24 hours a day, seven days a week. In turn, we expect suppliers to take advantage of that transparency to honestly evaluate their performance and continually improve the quality of their products and processes.”

With its preference for long-term, 3- to 4-year contracts, Chrysler Group has been insulated largely from the price increases of the last 18 months. Its most visible line in the sand was in 2001 when the company demanded an across-the-board 5% price reduction from suppliers, and other vehicle manufacturers followed suit. As contracts negotiated in that pricing environment come up for renewal, the company, which resulted from a $36 billion merger between the American Chrysler Corp. and the German Daimler Benz in 1998, believes that its philosophy of transparency will ensure that it can negotiate terms based on more than cost alone.

The stakes for both the auto maker and its suppliers are high. On one hand, warranty claims in North America based on poor quality cost automotive manufacturers $10 billion per year, according to AMR Research in Boston. Due to its focus on quality, Chrysler has reported a warranty cost reduction of 31% over the past two years. On the other hand, a contract with Chrysler ensures sustainable volume and potential profitability—regardless of where the market goes—to suppliers willing to subject themselves to the very visible scrutiny of their peers.

The Chrysler Group (Chrysler, Jeep, and Dodge), which sold more than 2.6 million vehicles in 2003, consumes steel in excess of 2 million tons annually delivered by integrated mills and up to 12 domestic service centers. To play in this league, suppliers must respond to the demands of a “board of directors” (a buyer, supply specialist, quality specialist, engineer and representatives from design or manufacturing) for each of 240 component sets—seats, steering gears, lighting, etc. Each board weights Chrysler's value drivers (quality, cost, technology and delivery) for a particular component set. Board members are assigned responsibility for each individual supplier relationship, and each supplier must be equipped internally to provide the information Chrysler's supplier portal requires.

In other words, it's not enough to have state-of-the-art processes. Suppliers for Chrysler also must have the willingness to share performance information with their competitive set.

TALK THE TALK

Over the past six years, Chrysler has changed suppliers for better quality more often than for any other reason. Since 1998, 60% of suppliers have been changed due to quality. Given the length of contracts and product cycles, poor performers have time to fix problems. “Individual suppliers can see how they are doing and decide if they want to make the changes necessary to place themselves in the ‘reward' or new business category,” says Matt Baldwin, senior manager of raw materials procurement for Chrysler Group.

Each supplier is measured on targets set for that commodity group. “If you're selling hot roll,” Baldwin says, “you'll be judged by the other companies selling hot roll. If you're selling bolts, you probably don't need much technology—we'll want it on time, inexpensive and strong.”

Hosted by Covisint, a Global Supplier Portal allows suppliers access to a competitive assessment matrix built with the weighted value drivers and calculated to include annual performance numbers for that component set. With a perfect score of 100 in the top right corner and 0 at the bottom left, the closer suppliers are to the top right, the better.

COMPETITIVE ENVIRONMENT

The pressure is always on to provide the lowest price, but an important new standard has become technological sophistication. Chrysler considers itself an early-adopter of new technology, such as laser welding, and prefers suppliers that offer new technology to improve the chain or the product.

“Supply continues to be a challenge for many service centers,” Baldwin says. “In a broader sense, smaller service centers appear to be finding it hard to be competitive due to their inability to offer advanced supply or process solutions.” Hampered by size and an inability to invest in more advanced value-added capabilities, smaller service centers find it hard to compete for Chrysler contracts.

Almost all metal sourced from minimills comes through metals service centers. However, service centers also provide material to support Chrysler's low-tonnage parts that are not economical for integrated mills to supply. Service centers slit the material to meet size requirements, store the material and deliver it on time to meet production needs.

A reputation for innovation goes a long way to cement supply chain relationships with Chrysler. For example, Dana Corp. received the DaimlerChrysler Brazil “Best in Class” Award for Technological Innovation for its Commercial Vehicle Systems Group axle-housing manufacturing facility in Sorocaba, Brazil. The award recognizes the facility's compliance with DaimlerChrysler's high technical requirements, including robotized cells, CNC equipment, and state-of-the-art manufacturing technology.

YOU MUST UNDERSTAND

Chrysler's fundamental criterion for suppliers is that they understand how it does business. While the company is willing to help an entry-level supplier, metals service centers shouldn't enter the relationship cold. Chrysler is not in business to help suppliers iron out their kinks. “They should be prepared to closely monitor their own performance and deliver at a benchmark level,” Baldwin says. “They can talk to us directly or participate in our supplier training sessions. Other than that, suppliers should take long-term approaches to our relationship and be flexible in the way that they do business.” In this case, flexibility means innovation and collaboration.

To encourage this long-term approach, Chrysler Group has begun co-location of suppliers on-site in new facilities next to its Toledo, Ohio, North Assembly Plant. These suppliers will build and manage major body, chassis and paint operations, bringing their own best technology, expertise and ideas on site. They'll be able to perfect what they do, allowing Chrysler to move capital from building and operating shops into product development.

“We've found service centers to be successful when they offer multiple solutions and take work off our plate,” Baldwin says. “The ability to offer a wide variety of solutions is a priority for us. There are certain steel service centers that are willing to step outside the box and offer solutions—it makes them a more valued supplier.” For example, in the past, steel service centers have anticipated Chrysler's and its Tier 1 suppliers' metal needs and purchased enough metal to get a price more competitive than what other service centers could have gotten, Baldwin says.

Suppliers that exceed Chrysler's expectations can anticipate opportunities to expand worldwide. “The best-in-class supplier distinction is opening doors for us to discuss important new business with other DaimlerChrysler plants in the world, something that was not expected when Dana decided to establish the new plant in Sorocaba,” says Paulo Lisboa, Dana's commercial manager for on-highway products.

Again, it makes business sense. Rather than bringing a new supplier up to speed, Chrysler introduces a supplier that already understands its high expectations to the rest of the system.

“Since working together as a global procurement organization during the last six years, American sources that previously supplied only the Chrysler Group have won significant business with our Mercedes-Benz passenger car and Commercial Vehicle divisions,” Rosenfeld says. Mitsubishi Electric Corp., an electronics supplier, and TRW, a manufacturer of airbag technology, had the opportunity to launch significant business with Mercedes, and Gentex, which provides self-dimming mirrors, grew its business with the unit as a result of past successes.

WHAT'S NEXT

Within the grand automotive sourcing scheme, unless you're at the top of your game, you may never get your chance with the Chrysler Group. The company encourages new suppliers to introduce themselves and demonstrate their capabilities. But to get a shot at Chrysler's supply chain, metals service centers either must develop such a reputation for excellence that the expertise makes it to the right people's ears or wait for a current supplier to perform poorly.

As to the future of the automotive steel industry, Baldwin expects more consolidation, be it horizontal or vertical. Increasingly, he expects to work with Chrysler's Logistics organization to determine total landed cost before making a sourcing decision. This is being done already with most suppliers, but it will become more pronounced in steel, which is largely a regional concern. To this end, DaimlerChrysler AG has a Global Supply Council that meets regularly to decide how the company can improve to benefit all units.

“Our goal is to build a spectrum of globally competitive relationships,

one supplier at time,” Rosenfeld says. What will happen as contracts come up for renegotiation and suppliers locked into 2002 pricing must, given their own income statement demands, ask for higher prices? DaimlerChrysler feels fairly confident that its transparent terms still will make a compelling case. “We don't have a shortage of people looking for a long-term contract,” Baldwin says. “So when a contract runs out, current suppliers don't have an advantage. The sheer size of the contracts and opportunity for more business is incentive enough.”