[Editor's note, the U.S. Bureau of Labor Statistics released the Producer Price Index, a monthly read on what suppliers are charging their customers, after this story was posted. With a 1% gain in January, the PPI continues to rise, putting inflationary pressure on manufacturers.]
The world economy’s supply chain snarls continue having far-reaching effects. Some corporations are investing in new manufacturing and/or logistics capacity closer to home to lower their risk profiles. For others, investments in automation are gathering steam as recruiting and retention challenges force the hands of hiring managers.
In a great number of cases, though, the relationships between original equipment manufacturers and their suppliers are being tweaked, renegotiated and maybe even redefined.
The pain points laid bare by the shortages of semiconductors, freight containers and workers to build and ship those products are helping suppliers secure contracts with higher minimums and more guarantees, said John Mark McDougal with business advisory company LBMC where he is the lead shareholder for services provided to the manufacturing and distribution sectors. Contract negotiations also bringing OEMs and suppliers closer together and improving the points of connection between the two parties.
“There’s never been a better time for doing great work and being treated well,” McDougal said. “But it’s also more important than ever to manage your risk by knowing the landscape and knowing your customers. Just feeling your way through this won’t work.”
Given those workforce and supply chain headaches, suppliers who have proven they can deliver are standing on very solid ground in negotiations. They will find that some OEMs want to—and in many cases, just plain need to—play the game by rules that aren’t as rough on the little guys as in the past.
As Paul Ericksen, IndustryWeek’s supply chain advisor, wrote here recently: “Isn’t it reasonable to expect a supplier who has been leveraged in their relationship with an OEM to apply leverage to them when the leverage balance changes?”
Looking ahead to 2022, Dave Opsahl, CEO of automotive program management and collaboration software company Actify, said in December that one area to watch is suppliers’ growing relative strength when it comes price and delivery commitments.
“In most cases, the suppliers tended to be working just in time,” Opsahl said. “The notion of buffer stock or the notion of having flexible prices based on the price of the raw material are not part of the typical conversation or negotiation between a supplier and OEM, but I think those kinds of conversations will be happening more in 2022 and beyond for sure.”
The bigger bat no longer works
For now at least, the dynamic of suppliers bending over backwards to win or retain business at margins that get squeezed a little more each year seems to no longer apply. Demand remains strong in many end markets and OEMs don’t have the option of spreading out, delaying or relocating production. So, they need to come to the table with an attitude that doesn’t, as Ericksen wrote, drive suppliers beyond “lean-ness” and toward anorexia.
“It’s a different conversation if you don’t have something to give in return,” said Tim Reeser, CEO of Lightning eMotors Inc., which designs, makes and customizes zero-emission commercial vehicles and has been adding to its supplier base—and in some cases, switching parts makers—as it has landed more contracts. “’Bring a bigger bat’ doesn’t work this time.”
An important component of connecting better with suppliers new and old, Reeser said, is working together on designing better systems, be that through greater automation or more tightly integrating logistics and software functions. The Lightning eMotors team, he added, has itself been walking that walk as “part of growing up” and scaling its business from $5.4 million in sales in 2020 to more than $20 million last year and with more growth to come in 2022, including from a recently announced contract with General Motors Corp. Reeser said Lightning is offering higher minimums or supplying engineering and logistics or transportation help to more quickly scale up the work it needs done.
“We’re not taking no for an answer by innovating,” he said.
At the much larger end of the auto manufacturing spectrum, Ford Motor Co. executives also are rethinking parts of how they work with suppliers. Speaking at a Credit Suisse investor conference in December, Chief Product Platform and Operations Officer Hau Thai-Tang discussed Ford’s collaboration with GlobalFoundries on semiconductors and pointed to that partnership as an example of the company being more proactive deeper into its supply chain.
Ford, he said, is laying out for GlobalFoundries more elements of its future technology plans and thinking more strategically about building the necessary capacity.
“Then [we’re] going to more of a directed-sourcing approach, where we would go to a Tier 1 supplier and say, ‘Ford is now going to take the lead on designing this driver-assisted technology system. And we’re okay with sourcing new elements of that but we want you to use this technology node coming from this wafer manufacturer that we already have an agreement with,’” Thai-Tang said. “GlobalFoundries is just one example. We’re doing the same with power electronics, driver-assisted technology, infotainment areas that are going to be very key in terms of being brand differentiating and more bespoke to the needs of Ford.”
Being more bespoke might mean being more flexible, too, but maybe not in the way much of the manufacturing sector has worked for decades. Tom Mitchell, president and COO of manufacturing sequencing software provider Insequence Corp., said just-in-time models appear to be damaged at best—in automotive work but also in sectors such as furniture and appliances—and that improving OEM-supplier relationships and creating better visibility for both will be key to finding a better way forward.
“I get the sense that all stakeholders are focused on making things better,” Mitchell said about concepts such as surge capacity and backup scenarios. “They’re thinking more about this than in the past. […] The crux is better collaboration across the board—from OEMs to suppliers to vendors like us.”
With a growing range of global risks drawn sharply into focus, today’s environment is by no means easy for manufacturing suppliers or most of their customers. But getting it right can be quite lucrative: McDougal said the leaders of one of his clients are “very confident in their abilities” to keep available some spare capacity for times of stress. When those times come around for peers and competitors, he said, they’re ready to benefit.
“They can either buy the business relatively cheap or get 30% of the customers—their best customers,” he said. “The strong get stronger and the weak get weaker or don’t make it.”