Q&A: A Veteran Of The Auto Parts Wars Comes Riding To The Rescue
If you think prospects for Detroit's auto makers are grim, consider their parts suppliers. Nearly every one of the nation's 100 or so listed auto suppliers has posted flat or declining earnings in recent quarters. And analysts believe that the 12,000 or so smaller, privately held suppliers are in even worse shape. A decade into a cost-cutting push by carmakers, the industry is now sliding into its first downturn since the early 1990s, and pressure on parts suppliers to further slash prices is more intense than ever. Frustrated to the breaking point, many say they have nothing left to give.
Their defender--and possibly their savior--comes with a unique pedigree. Over the past three years, Dennis K. Pawley has made a soul-wrenching transition from auto-industry big shot, who saved DaimlerChrysler's (DCX) manufacturing operations in the 1990s, to harried chief of a troubled parts maker. He finally resigned as CEO of auto-lighting supplier Guide Corp. late last year in a public protest over what he says were unrealistic cost demands from General Motors (GM).
Now the self-styled poster child for the pressures plaguing the parts industry says he wants to help other suppliers find a way out of the gloom. Come mid-April, Pawley and several partners will start offering their expertise via his new venture, The Lean Learning Center, in Farmington Hills, Mich. The plan is to disseminate the manufacturing techniques he mastered in turning around Chrysler along with the lessons he learned as a parts supplier.
Pawley intends to teach smaller suppliers about lean manufacturing, a technique invented by Toyota Motor Corp. (TM) for streamlining plant operations by constantly looking for ways to wring waste out of the manufacturing system. Most of these smaller players have not tackled lean manufacturing yet because it has been too expensive or too complex. Pawley believes they can't afford to wait any longer. His credo: If suppliers are going to meet the auto makers' cost-cutting demands, they have to change the way they operate--period.
Pawley recently talked with BusinessWeek correspondent Jeff Green at his suburban Detroit office about his plans and the challenges facing the industry. An edited transcript of that conversation follows.
Q: Suppliers have gotten a lot more sophisticated in recent years. Is that reflected in their manufacturing operations?
A: From some of the things I've gone through in the last year with Guide Corp., and just looking around the industry, especially at the Tier 2 and Tier 3 levels [table, page 28D], I'm convinced that three out of four companies have absolutely no idea what lean is. I don't believe that 10% of top executives at supplier companies even know how to take a waste walk [a way to assess factory management] on a factory floor. Now they are faced with even worse pressure from the Big Three.
Believe me, I have a lot of sympathy for them, because some of the demands are simply impossible to meet. But [not all the demands] are impossible, as many suppliers think--there is that much waste hanging out there.
Q: With the industry taking such a dramatic downturn, do you expect suppliers to respond to your message?
A: We're launching our efforts right into the teeth of a horrible time in the industry. On one hand, I can ask: Do I really want to put money into starting the Lean Institute? Will anyone do it? On the other hand, I think you're going to have a high percentage of all suppliers in trouble. My guess is 60% to 70% will try to simply cut costs to save themselves, rather than reorganize more intelligently. This will be a disaster for many. But we can work with the rest.
Q: When you were at Chrysler, suppliers were already complaining about this situation. Did you understand their plight then? Do Big Three auto makers understand it now?
A: I don't think they care. I really don't. I think the Big Three, including my old alma mater, just feel that suppliers ought to consider it a privilege that the auto makers allow suppliers to do business with them. They figure the suppliers can solve their own problems.
The trouble is, the Big Three can pass on a 5% cut to their Tier 1 suppliers. But the Tier 1 guy, in most cases, can't just pass that off to their Tier 2 and 3 suppliers. They're just not big enough--they'd go under. So the Tier 1 guys are bearing 75% of the cost cuts.
Q: Are larger suppliers better able to cope?
A: No. Look at what's happening with Delphi Automotive Systems (DPH) [a GM spin-off that is now the largest U.S. auto supplier] right now. They're laying off people all over the damn world because of what's happening at GM. Visteon Corp. (VC) [Ford's parts spin-off] is in the same situation. The Big Three right now are just blind to this. They are going to try and solve their own problems by passing them off to suppliers.
Q: Suppliers are gaining more clout. Does consolidation mean the auto makers will eventually create suppliers they can't control?
A: The top guys can afford to say "O.K., we'll make your cuts," and can probably do it. But when you get down into the tiers, it's really difficult. That means suppliers will keep getting bigger. The auto makers will force more and more mergers. The suppliers are going to reach a point when they are as big as the Big Three, and they aren't going to be pushed.
Q: How much waste is there in most operations?
A: I don't believe you can show me a supplier organization today that couldn't rip 10% out of the organization. I'm not just talking labor but all costs. For the last four years I was at Chrysler, I got 10% cuts every year. Had we not done a lot of this stuff, I would have had to close down plants. We were able to free up about 10,000 square feet of floor space a year. You can cut capital costs and change your whole approach to business with those types of cuts.
Q: Why aren't the Toyotas of the world asking for these same cuts every year?
A: Toyota doesn't have to. This is their system. It just comes. It's automatic. It's the way they think. They get that continuous improvement every year--out of the same suppliers serving the Big Three.
Q: The concept of lean manufacturing is more than a decade old. Don't suppliers have to take some of the blame for not taking steps earlier?
A: It was only during the last five years I was at Chrysler that I really took it to heart and started working on it. I think the same was true at Ford (F) and GM. In crisis, you start working on things--you need to survive. But the industry has been so healthy, so profitable, over the last 10 years, only the smartest of the suppliers started working on it when times were good. Now they're looking at it because the lifeboats are out and the ship is starting to sink.
Q: Why is this your problem?
A: I knew I was going to leave Guide by the end of the year. I thought I was going to do some fishing. But in going through that experience, I decided that if there's any way to make suppliers smarter about this, someone has to help them. I'm not doing this to throw daggers at the Big Three. Somebody had to play the middle ground and start helping them build bridges back. That's worth spending my time on.