OEMs Aren't as Powerful as they Think

Sept. 9, 2016
VW and other large OEMs are learning that they don't have all of the leverage in their relationships with suppliers.

In addition to the responses my articles receive through IndustryWeek I also get e-mail and telephone feedback. Consequently, the responses you see on IW sometimes represent only the tip of the iceberg. That was the case with my previous entry, both in spectrum and volume. Because of this I will follow-up here on the Extending Payment Terms topic rather than the announced one on selecting managers.

Prior to doing so I want to cite a couple of articles that recently appeared in IW.  The first involved a Volkswagen supply chain issue. Read this article and you’ll be amazed at the parallel between it and the episode I related in the Extending Payment Terms article to back up my point that suppliers may have more leverage in dealings with their OEM customers than they appreciate. In fact, I suspect Volkswagen has either severely reprimanded or even axed the supply management personnel who were managing (and I use that term loosely) the supplier who shut down their factories. Hopefully Volkswagen now understands that it doesn’t have all of the leverage in its relationships with suppliers and will adjust their approach relative to how they work with them.

The second relates to General Electric breaking ground on its new Ontario, Canada engine plant. You may recall my column from last fall (“The Hastert Rule Makes Congressional Collaboration Almost Impossible”) which focused on the U.S. House of Representatives Republican majority leadership refusing to hold a vote on renewing the Export-Import Bank, which had elapsed. I received negative feedback from readers who felt I was both: a) picking on Republicans, and b) that the Bank practiced cronyism, which really wasn’t appropriate for a capitalist economic system. You may also recall that GE decided to close a Waukesha, Wis.-based engine plant (which employed about 600 workers) and move its work and jobs to Canada because of ongoing issues about whether Export-Import Bank financing would be consistently available going forward. So now we have the “rest of the story.”

Please refer to both these articles for more detail on GE’s decision, but the bottom line on this whole matter may have best been expressed by Republican Congressman Reid Ribble of Wisconsin who—when the House was finally allowed to vote on the issue—supported the Bank’s renewal and later explained his vote this way: “We can’t just unilaterally withdraw in a global economy. It would be a withdrawal for ideological reasons. Conservatives have this ideology that government should leave it to the private sector, but there are types of exports where the private sector won’t pick up the financing of that business. (U.S.) Companies will be forced to leave the country and take jobs to countries where there is export-import bank financing if we don't offer it.”

By the way, when the vote was taken it turned out 75% in favor of renewal, 25% against, which by anyone’s accounting (especially in today’s partisan political environment) should be considered overwhelming consensus. Which makes you wonder why the vote was even held up in the first place.

Included in the feedback I received on the Extending Payment Terms article was an e-mail from an OEM supply management executive who took me to task—over the course of many of my columns—for criticizing what most OEMs feel are generally accepted supply management practices including, I assume, actions like unilaterally Extending Payment Terms. This person went on to question how I, myself, could have been effective as an OEM supply management executive since I always seem to take the supplier side on issues. Hmmm.

Next Generation Supply Management—the theme of what I write on—focuses on what is needed to develop a Lean Performing Supply Chain, the measure of which is individual supplier build-to-demand capability. In other words, the closer a supplier is to being able to support short-fuse changes in order quantity and/or mix without relying on pre-built inventory (in the case of higher-than-anticipated demand) or ending up with excess inventory (in the event of marketing forecasts that were too optimistic), the closer that supplier is to being a Lean performer.

A Lean Performing Supply Chain would provide an OEM with almost unlimited order fulfillment flexibility, an asset that has long been considered one of the Holy Grails of business. It goes without saying that this would present to just about any OEM a significant competitive advantage. Unfortunately, I’m aware of only one supply chain that even approached such capability, i.e., the one I was involved with in the late 1990s and early 2000s (see the article “Lean’s Trinity” from the October and November 2013 issues of Industrial Engineer for background on it).

Consequently, I have taken on what has become a kind of personal crusade to publicize the benefits of the practices applied that developed that supply chain performance. Why? Because there is no doubt in my mind that a Lean performing network of manufacturers (i.e., supply chain) would address many of the competitive weaknesses that currently exist in U.S. manufacturing—both on the supplier and OEM sides.

I understand that on a day-to-day basis purchasing personnel sometimes must just “do what needs to be done” and that this can lead to difficult choices. But under Next Generation Supply Management the question that always needs to be asked before launching a major strategy and/or initiative is: Will that strategy/initiative facilitate increased strategic supplier build-to-demand capability?

Obviously, unilateral extension of payment terms doesn’t pass the muster here. My experience is that most company decisions to take financial advantage of suppliers in this way come from financial people, not purchasing leadership. In effect, purchasing is only following orders in implementing such initiatives. Yet, ironically, purchasing is then called upon to manage the negative fall-out they cause. The point here is that when actions are proposed within an OEM that will be counter-productive to increasing supplier build-to-demand capability, the purchasing function should speak out against them. An inability to effectively forestall such suggestions within an OEM organization implies that the purchasing function is considered tactical at that company, i.e., doesn’t have a-seat-at-the-table.

In the last column I referenced an article in IW about an OEM that had extended payment terms from 30 up to 120 days. I don’t know this company’s motivation for doing so but I have heard that this strategy has recently recycled itself into the bag-of-tricks for many supply management consultancies. Word-on-the-street is that the OEM from the article has been engaged over the last year with one of the Big Three supply management consultancies so perhaps that’s who suppliers to this OEM have to thank for their customer’s new late payment strategy. I continue to believe that OEMs who apply dictates like the one cited in that article lose out in the longer run, at least relative to what Next Generation Supply Management delivers.

Getting around to answering the critique from my supply management colleague—and applying the test cited above—I will confirm that I do believe that many OEM purchasing practices are counter-productive to facilitating Lean Supply Chain Performance and that’s why I speak out against them in my columns. This fall I will be writing two or three columns on Lean and how I believe it should be applied to supply chain management. In the meantime, however, keep in the mind the following question: Do today’s generally accepted OEM supply management practices really deliver a measurable competitive advantage?

These practices almost exclusively focus on piece-price reduction, which delivers—at best—financial singles or doubles to a businesses’ bottom line, to use a baseball analogy. I understand that singles and doubles are important in the game of business, but the list of OEMs for whom singles and doubles have delivered a true competitive advantage is very slim. Continuing the baseball analogy, I think the 1959 White Sox were the last major league team to win a championship without power-hitting potential. Next Generation Supply Management not only is better at facilitating the supplier capability needed to deliver singles and doubles, it also established the potential for hitting home runs when business opportunities arise. As I said above, I’ll write more on this topic over the coming months.

I’d like to now respond to three of the comments on the last column that were submitted through IW. “Toppers” explained how his company will consider OEM requests for payment term extensions based on their rationale and whether middle ground can be found regarding the terms of their implementation. From my perspective, he outlined the perfect response and I would recommend this approach to all suppliers. Unfortunately, most payment term extensions I’ve seen don’t come in the form of request. They come in the form of edict, i.e., do this or else. And unfortunately, most suppliers—I would estimate well into the 90% range—just go right along with the edict. What do you think would happen if 90+% of an OEM’s suppliers responded to such an edict akin to how Topper’s company does? I’d lay down good money that the OEM would get the message and restore their former payment plan.

“Redmartin” laid out a case where one of his OEM customers had dual-sourced some of the product it purchased from his company, and was leveraging that situation for a piece-price reduction. Believe it or not—under certain situations and with the right implementation approach—I can support such a strategy ) so much for me always taking the side of the supplier!). In fact, if the item being purchased is a flat-out commodity this is a supply management practice I generally support. From the description that Redmartin gives of how his company responded to the OEM’s attempt at leverage, however, it is clear that their product should have been considered anything but a commodity. Why? Because, as he pointed out, their product had both a lower warranty failure rate than that of their competitor, with the cost of each required warranty repair also being significantly lower. This indicates an overall Total Cost advantage such that the parts should NOT have been considered mix-and-match, i.e., a commodity. So, although I think that under the proper conditions I would have no problem with a buyer working for me applying a strategy of dual sourcing (called focused competition, in supply management lingo), I would expect my people to source based on Total Cost and—if it had been my purchasing organization in the example Redmartin lays out—I would have been extremely disappointed that my buyer hadn’t been aware of all significant Total Cost factors impacting the use of this specific dual-sourced part.

Finally, “CaRealist” points out that suppliers who don’t toe-the-line to coercive OEM leverage often see their level of business with them plummet. This, unfortunately, is true. An old rule of thumb in the purchasing game is there is always some supplier who will be willing to buy-the-business by artificially undercutting competitor pricing. I have actually seen a few cases of supply management managers (and heard of many more) taking advantage of this truism through a practice called source churning. Under it, business is moved on a relatively frequent basis from supplier-to-supplier to cash in on this buy-the-business mentality. And if your primary performance metric is piece-price variance, such a strategy can make an OEM purchasing person look good. This approach is exactly the wrong thing to do if you are trying to build a Lean Performing Supply Chain. However, purchasing personnel can get away with it if supply management is considered tactical-—not strategic—at their company. My recommendation to suppliers is they should categorize OEMs by how they work with them and look to increase their amount of business with customers willing to collaborate and reduce it with those who rely only on applying leverage.

I hope this clarifies my motivation for writing the column as I do. I don’t expect all OEM supply management personnel who read my column to always like what I write, but I do hope that at least some of them think about possible changes that will increase the impact of the profession beyond just Material Variance, i.e., piece-price. By the way, it is only through such change that purchasing will earn a seat at their company’s executive table.

My next column will be on tips for selecting managers.

Note: One of the purchasing truisms I like to cite is that in supply chain relationships the goal should be increase the size of the pie to eliminate the need for winners and losers. Well, the following is slightly off topic but my wife does bake a pretty good pie. Her pie baking sensei—Kate McDermott—has just published a cookbook exclusively focused on pie-making, The Art of the Pie. The book apparently is a winner as the initial printing of 50,000 copies is already spoken for. If you or your spouse like to cook and are looking to increase your pie-making skills, I highly recommend Kate’s book.

About the Author

Paul Ericksen | Executive Level Consultant; IndustryWeek Supply Chain Advisor

Paul D. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers. At the second he was chief procurement officer. He then went on to head up a large multi-year supply chain flexibility initiative funded by the U.S. Department of Defense. He presently is an executive level consultant in both manufacturing and supply chain, counting Fortune 100 companies among his clientele. His articles on supply management issues have been published in Industrial Engineering, APICS, Purchasing Today, Target and other periodicals. 

Read Paul's articles

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