Cut Costs Or Else

When more than 300 General Electric Co. appliance division suppliers assembled in a cavernous ballroom at the Hurstbourne Hotel outside Louisville, Ky., last November, most were apprehensive. But they were hardly expecting the jolt that GE had prepared for them. Executives at the meeting announced "Target 10," a draconian initiative aimed at slashing the appliance unit's supplier costs by 10% annually, starting in 1993. Suppliers would get help from GE in finding savings, but those that didn't go along would probably lose GE's business. And with appliance margins slim and price-cutting fierce, declared appliance unit President J. Richard Stonesifer somberly: "We see no relief in sight."

Today, GE's new cost-saving intiative is in full swing, and many of its contractors are struggling to find ways to cope. A few have resisted. But they're bucking a trend that's quickly gaining momentum. Across America, in industries big and small, companies are giving their suppliers a blunt message: Cut, cut, and cut some more.

General Motors Corp.'s cost-slashing messiah, J. Ignacio Lopez de Arriortua, brought the issue to the fore when he very publicly demanded double-digit price cuts from GM suppliers last year. Now, a legion of big-name U.S. concerns, including AlliedSignal, IBM, Dow Chemical, and DuPont are playing variations on the cost-slashing theme. While the companies all say they are seeking "cooperation" with suppliers, a few are clearly taking the get-tough, Lopez approach. United Airlines Inc. has demanded that suppliers come up with cost cuts of 10% or more. And at GE, Chairman John F. Welch Jr. is leading a companywide drive to slash supplier costs. The Hurstbourne meeting, as recorded in a videotape made by GE and obtained from a supplier by BUSINESS WEEK, shows that GE's demands are hardly mild.

BOOMERANG. For Corporate America's suppliers, there's often no alternative but to go along. The cost of purchased materials accounts for more than 50% of most manufacturers' expenses (chart), so suppliers know it's the main place big companies must cut. Despite the steady recovery in the U.S. economy, vicious price competition and customer demands are forcing the companies to browbeat, cajole, and beg contractors to cut costs. And they're never satisfied. The message, says Alexander A.C. Wilson, director of U.S. manufacturing at IBM's personal-computer company: "20%, 20%, 20%--continual price reductions."

The trend, moreover, is already going global. In Germany, auto maker Mercedes Benz recently announced an overhaul of its supplier relations. And rival Volkswagen in early March asked some suppliers for price cuts of at least 5%. Now, ailing VW also may be courting Lopez for a top spot. Lopez has said that he's happy at GM, though he hasn't shut the door on a move. VW won't comment, though it says it will consider personnel changes at a Mar. 16 board meeting.In any case, Volkswagen is already showing just why Lopez would feel at home there. At one recent meeting with suppliers, new Chairman Ferdinand Pi ech was confronted by a supplier who insisted he couldn't afford a 5% price cut. Attendees at the meeting say Pi ech, an engineer by training, turned to one of his engineers and asked if the supplier improved VW's mileage. Told no, Pi ech replied: "O.K., let's do without them."

Few companies, however, are so closely following the GM formula. Though GM denies it, suppliers say Lopez alienated many of them by rebidding long-term contracts, offering greater volumes but sometimes ditching old partners for low-ball bidders. While acknowledging that GM needs big changes, Robert Cizik, chief executive of Cooper Industries Inc., a big Houston parts supplier, calls that a "caveman" approach.

The cutting at GM may be having a punishing boomerang effect. Several suppliers claim, for instance, that they're now pulling back on research for future GM parts. They also claim they will turn over new ideas to Chrysler Corp. or Ford Motor Co., which take the more cordial approach of forging tight cooperative relationships with their suppliers. GM says it isn't aware of a problem. But a spokeswoman adds that suppliers who cut needed research and development, "won't be doing business with GM much longer."

That could be a big advantage for rivals. Thomas T. Stallkamp, Chrysler's vice-president for procurement and supply, says his company is mainly interested in attacking "system costs" by working with suppliers so vehicles can be made more cheaply. And the approach is working: One castings supplier went so far as to recommend that the intake manifolds he made could be replaced by plastic, saving Chrysler $3 a car. That cost him the business, since he didn't make plastic parts. But he was rewarded with new orders for suspension components.

Such "partnering" has been a buzzword for some time. Companies such as Xerox, Motorola, Ford, and DuPont in the 1980s built ties that involved suppliers in product design and troubleshooting. But, says James P. Kuhn, a vice-president at A.T. Kearney Inc., there was a "relaxation, almost imperceptible, of demands by customers for price competitiveness."

Now, companies such as DuPont Co., which forged close ties with many of its contractors, are asking vendors for more. In January, DuPont told suppliers it needed 5% in cost cuts this year, through lower prices or savings through process changes. DuPont isn't scrapping its partnerships, but Philip J. Keller, a company procurement-process manager, wants to keep the pressure on. "We don't want to get fat, dumb, and happy," he says. The goal, he adds: "to keep us both from getting flabby."

NO BEATING. Other large corporations are also trying to build on the relationships they forged during the 1980s. Crown Equipment Corp., a maker of forklift trucks, sent out a letter in late February, asking its top suppliers to ferret out savings and offer price cuts, though it specified no exact percentage. Crown isn't trying to "beat suppliers over the head," says its purchasing manager, Mark Gagle.

And the partnering trend isn't going to let up any time soon. AlliedSignal Inc. says it plans to drop 80% or more of its 10,000 suppliers over the next three years as a prelude to building closer ties with those that remain.

Of course, all these painful changes do have a bright side. Consumers benefit, for one thing. Georgia State University economist Donald Ratajczak says reduced supplier costs are one big reason inflation will remain low, because the cuts are usually passed along to consumers in lower prices.

But the penchant of some companies for hammering very hard on suppliers worries some pioneers of partnership. "I think it's a little early to judge," says former Motorola Inc. purchasing chief Ken Stork. "But I'd share a concern that things are headed in a negative direction." Many suppliers also have that worry. As one auto-supplier executive moans: "I'm preparing for the worst year of my life." And it's only March.

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