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Articles - Publication Date 4.1.2002
The Big Squeeze
Small and midsize manufacturers say price-cut mandates and online reverse auctions compromise quality and endanger their businesses. Supporters of the practices say the strongest suppliers will survive, making supply chains more efficient.
By Doug Bartholomew
Where will it all end?
That's the question many executives at small and midsize manufacturers are asking as they struggle to comply with mandatory price cuts. These suppliers are feeling especially pressured to cut costs as OEMs and large Tier I companies, equipped with a powerful new technology-the online reverse auction-are driving prices down to subterranean levels on everything from tires to pumps to assembled components.
Critics of the forced price reductions say they arbitrarily require producers to reduce the quality of materials and parts and trim necessary labor. What's more, they complain that the painful vice-grip on suppliers not only hurts quality, but ultimately leads to plant closings as manufacturers can't afford to stay in business.
"Many companies have gone out of business as a result, but that's just a bump in the road for a Ford or a GE or a Daimler-Chrysler," says Paul Wood, purchasing manager at Betts Industries Inc., Warren, Pa., a maker of valves, lighting systems, and other parts for over-the-road tank trucks. "They'll use you up like a dishrag and then throw you away."
Proponents of mandatory price cuts and online reverse auctions as a means to reduce costs say they merely hasten the natural business process of weeding out the weaker, less efficient producers.
The topic is controversial. Despite an outpouring of letters to IndustryWeek from suppliers after a recent column on this topic (Starving Suppliers Not The Answer), few suppliers wanted to be identified in the letters or for this report for fear of losing their large customers. And some representatives of Tier 1 and OEM companies either didn't want to be interviewed or didn't want to be identified in this report.
"There's a lot of resistance, but the OEMs are in a position to drive a lot of business to those suppliers that are willing to change and embrace new business practices," says Bill Davidson, former professor of management at the University of Southern California Marshall School of Business Administration and chairman of Mesa Research, Redondo Beach, Calif. "The market power is with the Tier I and OEM companies, and if you want to do business with them, expect to get squeezed."
Mandatory price reductions are fairly common in industry today. Toyota Motor Corp., the standard-setter for many management practices followed by U.S. manufacturing over the last decade, requires its suppliers to cut prices annually. More than half (56%) of manufacturers participating in a recent IndustryWeek value-chain survey reported that they had required their suppliers to cut prices as a contractual obligation.
Daimler-Chrysler AG last year told suppliers they would have to reduce their costs by 15% over the next three years. "Chrysler felt that their suppliers were overcharging them compared to what their competitors were paying for the same parts," explains Martin Piszczalski, president of Sextant Research, an IT consulting firm in Ann Arbor, Mich. "They told their suppliers, if they didn't do it, they wouldn't consider them for future contracts." Even so, Piszczalski warns, the long-term effect on the supplier community is bound to be constrictive. "Sooner or later," he warns, "This will drive some suppliers out of business."
General Motors Corp., which spends $130 billion annually worldwide, takes a different tack. "We are working individually with each supplier, and each has an individual target," says spokeswoman Renee Rashid-Merem. "Some have been aggressive in reducing costs already, but others have not been as aggressive." GM works with its suppliers, she says, in an effort to develop savings that the OEM and the supplier can share.
The online reverse auction, in which suppliers are pitted against each other in a downward bidding spiral, is by far the most popular technology enabling manufacturers to slash thei
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"They'll use you up like a dishrag and then throw you away."
Paul Wood, purchasing manager, Betts Industries Inc.
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