Q&A: Should Suppliers Be Partners?

Tom Stallkamp has grand plans for parts makers

Thomas T. Stallkamp shook up the auto industry once before. In the early 1990s, while an executive vice-president for procurement and supply at Chrysler Corp. (DCX ), Stallkamp came up with the idea of lowering costs through smart outsourcing--a plan he called the "extended enterprise." Now, as head of MSX International Inc., a design and engineering services provider to the auto industry, he aims to take outsourcing to a new level.

The key to Stallkamp's first revolution was the emphasis on cooperation among carmakers and their suppliers. Rather than dictate lower parts prices to suppliers, he offered incentives. If suppliers found a way to save a dollar, Stallkamp let them keep 50 cents. And instead of playing competitors off against one another, he pledged loyalty to Chrysler's incumbent suppliers, as long as they could meet contract terms. The change made Chrysler the darling of Detroit for most of the 1990s, even as cost pressures mounted.

Now, those warm and fuzzy days are gone. Chrysler has been absorbed into Daimler. Stallkamp got the boot in a post-merger restructuring. And suppliers are again being pushed hard to slash prices. So hard, in fact, that pricing is overwhelming all other considerations--in some cases, even quality. The Big Three are outsourcing more than ever, heaping new responsibilities on their suppliers, often without any extra incentive. And the auto makers are demanding that suppliers be more open with their finances. Whenever a supplier finds a way to trim costs, the auto maker is there looking for its share. Stallkamp calls this the "treadmill effect": Suppliers are working harder to get ahead but not getting anywhere.

It is in this bleak context that Stallkamp is trying to spark a second supply-chain revolution. The idea is to create alliances of suppliers who have agreed to centralize the control of their supply-chain operations. Suppose that a dozen companies are involved in the manufacturing and assembly of a car seat. Today, the small fry make and deliver parts to a larger integrator, who assembles the seat and delivers it to a General Motors Corp. (GM ) or a Ford Motor Co. (F ) The staff at each of these companies watches over the flow of goods, manages delivery dates, and tends to their clients.

But if Stallkamp has his way, this set of affiliated manufacturers will form a temporary web and cede control of their supply chains to MSXI. This would allow the suppliers to concentrate on what they do best--making parts--while MSXI makes sure that all the parts and finished subsystems show up when and where they are needed. Where necessary, MSXI helps out with engineering and design support. Suppliers save money because they don't need dedicated staff to maintain the supply chain. And the alliance structure allows them to create and dissolve groupings as projects change, without the legal burdens and financial risks associated with formal joint-venture arrangements. Here's how Stallkamp described his ambitious plans to BusinessWeek Special Correspondent Jeff Green:

Q: Why do we need to change the way we deal with the supply chain?

A: In a nutshell, I still believe that supply chains need to be actively managed by someone. When I was at [Chrysler], we had a concerted policy to help our suppliers and cooperatively manage the supply chain. Now, the OEMs [original equipment manufacturers--i.e., the auto makers] seem to be moving away from active management to more passive management. When that happens, I believe it's up to the supply base itself to try to find another alternative.

Q: You've suggested that the MSXI model would help suppliers to preserve some of their own cost savings--without immediately having to surrender them to auto makers. How would that work?

A: The issue is that since the industry has moved to open-book costing, it's very, very difficult for suppliers to get off the treadmill of cost-cutting, because the OEM has his hand on the control knob. The whole game here is making suppliers' margins more attractive to investors in the outside world. That is not on the OEMs' agenda right now. It should be. Companies in an alliance would decide ahead of time how to split off the savings from coordinating their supply chains and the OEM wouldn't be involved in those discussions. If MSXI saves $1 on a part, suppliers would split those saving according to a predetermined formula--perhaps the biggest supplier gets 60%.

Q: What are the specific improvements you gain from your system?

A: First of all, you would have better production planning. Instead of just dumping the stuff off onto the other guy, you would smooth your production to phase in with his. Second, there is elimination of transactions. Because you're an alliance, you don't have to go through the paperwork or electronic invoices for each part. There is an accounting once a month. Then it's also [a savings of] sales and administrative costs. Because you have an alliance, you don't have to go out and sell to the next guy up the chain--or romance him. Your business is already pre-sourced. The supplier already knows how much business he is going to get as part of the alliance. He might not even need his sales staff anymore. To me, that's where a lot of the costs come out. Think of it as eliminating the need for all of the companies in the tier to entertain each other. I guess you eliminate a lot of lunches.

Q: Why alliances instead of mergers?

A: These alliances are temporary and they can be project-specific. In a merger or acquisition, you are dedicated to buying a company and using it for everything. Under an alliance you have more flexibility. Alliances allow you to have multiple relationships.

Q: What's happening where companies "touch" that doesn't happen within their four walls?

A: Those are the gray areas of cost. Senior management normally doesn't look at what its company is doing to the other guy. A company's costs structure and accounting system usually only count stuff that's within its four walls. When you work on an alliance, you're allowed to share those savings. If you're not allied with a company, you really don't care how much costs you're throwing onto his side. A seat company must realize that its schedule for parts impacts the production schedule of companies down the supply chain. By better coordinating the schedule, you are reducing inventories between suppliers. It also reduces freight costs and other premiums.

Q: What are the savings?

A: There's an initial 10% just on the logistic controls and production-smoothing that you get out of it. And the more companies you add to the chain, the more the savings grow. On a given project, it's a way of saving 10% to 20%.

Q: What is driving changes in the management of the supply chain?

A: I think the OEMs have abdicated their responsibility, partly because they don't understand the nature of supply-chain management and partly because of their quest to reduce overheads and costs.

They're trying to push costs down the chain. They're saying, "You do it," without thinking what the impact will be on the supply base. GM is now outsourcing an entire interior. Ford and Chrysler are outsourcing telematics [advanced communications] and safety systems that have to be developed and managed by the megasuppliers. This is adding complexity. The suppliers need to create sales and procurement duties at each level. It's not efficient.

Q: Why can't the larger auto suppliers take on this role themselves?

A: Originally, there were only three OEMs in the U.S. that were managing the supply chain. Now, if you move to the megasupplier level, you're probably talking at least 15 to 20 companies, all of which have to replicate the logistics, the production control, the supply-chain management.

That's inefficient. So they should outsource some of the more transactional and noncore supply-chain functions to a company like ours that could spread the costs over several companies. One independent company can do it more efficiently than 15 or 20. In my mind, it's apparent there is no other way to increase suppliers' margins.

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