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How Detroit Drives Off Suppliers

Mercenaries don't do heroics. If your company is thinking about outsourcing some part of your operation, keep that fact in mind. When the chips are down and you really need someone's support, your supplier's commitment to you better be based on more than short-term gain.

Last month, I talked about the Battle of Agincourt, in which Henry V defeated a French army that was better equipped and nearly five times larger (see BW Online, 6/15/05, "Front-Line Leadership").

OFF TO SLAUGHTER. What you may not know is that the French army (like most armies of Continental Europe at that time) had "outsourced" its archery to Genoese, considered the best builders and operators of crossbows in the world. Good with their weapons they may have been, but when the battle broke out, the Genoese reportedly headed for the hills.

Who could blame them? I mean, it wasn't their country they were fighting for. Besides, just 69 years earlier, the French (with a contingent of Genoese crossbowmen) ran into a huge English army at Crécy.

Rather than engaging the English with his French men-at-arms, Philip VI forced 15,000 exhausted Genoese crossbowmen to the front of the line -- where they were promptly slaughtered. No doubt, the stories of the French's largesse were still circulating in small Italian towns 50 years later.

INNOVATIONS LOST. It's a peculiar thing -- as companies get more and more aggressive with outsourcing (now bidding out things closely linked to mission-critical factors), they're also increasingly treating their suppliers like mercenaries. They always talk a good game in their rhetoric about "partnering" with suppliers, but that usually is a euphemism for getting the suppliers to take all the risks for rapidly diminishing rewards.

Nowhere does this theme resound more strongly than in the U.S. automotive industry, where I happen to do a lot of work. Purchase decisions at U.S. auto makers and tier-1 suppliers increasingly come from purchasing personnel, some with little or no knowledge of design, engineering, or manufacturing. They have one objective: to drive for the lowest possible cost of a given component.

Now, nothing is wrong with trying to get a low price, and certainly the automobile supplier chain has huge inefficiencies in need of correction. But today, the purchasing-office-driven bid process is forcing out the very innovations that could make the U.S. auto industry more competitive.

OVERSEAS EDGE. A few years ago, a part failure on a car made by a Big Three auto maker threatened to cost millions of dollars in warranty claims. The company explained the crisis to a supplier, who -- in just a few weeks -- designed an innovative solution via a breakthrough in material science it had been working on for years.

Keep in mind that the supplier invested its own money to create the solution -- and that the solution allowed the car company to avoid millions of dollars in costs. But when it came time to sign the contract for the replacement part, the auto company made the innovation available to its competitors for bidding. How's that for encouraging innovation from your suppliers?

So what if U.S. auto companies are grinding their suppliers for lower costs? They have to do it to compete with the Japanese, right? Wrong. Ask any suppliers who do business with car companies, and they'll tell you they would much rather sell to Japanese or European manufacturers. Foreign carmakers are tough, but in the words of one supplier, "They appreciate what you do for them and don't forget it."

HISTORY REPEATS ITSELF. Where is all this headed? Crain's Automotive News recently cited a survey of 259 automotive suppliers on where they are investing their R&D dollars. Parts makers say they are raising R&D budgets and capital spending for Toyota (TM), Nissan (NSANY), and Honda (HMC), and they are reducing expenditures for the Big Three.

Perhaps even more important, 63% of respondents reported having a good or very good relationship with Toyota, compared to only 3% for GM (GM) and 5% for Ford (F). The auto parts "archers" are heading for the hills. Look for U.S. auto makers to fall further and further behind their foreign rivals.

The benefits that accompany the integration with supply-chain partners bring with them an imperative for collaborative relationships. Companies of all sizes that fail to realize this may have short-term success but could ultimately find themselves like GM and Ford -- alone on the battlefield at an inopportune time. Some recent indicators suggest the Big Three are waking up to this reality. They can only hope it's not too late.

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