TIER 2 FIRMS FEEL SQUEEZE FROM ABOVE

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DETROIT — Tier 1 automotive suppliers have started doing unto others — namely, their Tier 2 suppliers — the way automakers have done unto them.

For several years, carmakers have demanded more of their top suppliers while putting them into a cost-cutting vise. Now, several large Tier 1 companies have started chopping the ranks of their own parts and materials providers and asking those remaining to provide more services at a reduced price.

``It's pushing the limits of some Tier 2 companies,'' said Chief Operating Officer Kevin Alder of Cambridge Industries Inc., a Madison Heights, Mich., company that has rapidly ascended to Tier 1 status since 1992. ``You have to have the element of size to keep up with the expectations.''

Meanwhile, evidence of a Tier 2 supplier squeeze is mounting:

Donnelly Corp. in Holland, Mich., held a daylong conference April 29 with its top Tier 2 suppliers.

Among the topics discussed was the thinning of the company's supply ranks by two-thirds within five years. Donnelly also is asking for a 3-5 percent annual price reduction from each supplier during each year of a production contract.

ITT Automotive Inc. of Auburn Hills, Mich., which will hold its annual supplier conference June 23, has given its vendors strict guidelines, including mandates to slash prices and provide virtually zero parts defects.

The large supplier also plans to reduce its supply roster from about 843 companies today to about 300 by the year 2000.

Cambridge has begun to evaluate the operations of each supplier, including taking a close look at management, product development and cost structure, to come up with a short list of top vendors.

In addition, industry sources said that both United Technologies Automotive in Dearborn, Mich., and Lear Corp. in Southfield, Mich., are gathering quotes on a bevy of parts from many Tier 2 suppliers to winnow their supply bases. Lear officials declined comment on a possible supplier consolidation, and UTA officials were unavailable.

While the environment might be stressful, the demands are necessary to do business with automakers, said Dennis Racine, vice president of purchasing for ITT Automotive's electrical systems business unit.

``We're not asking our suppliers to do anything that automakers aren't asking us to do already,'' Racine said. ``I'd say that for the most part, our suppliers understand that's the price of entry into this market. It's expected practice.''

At ITT, those practices now include greater supplier involvement. Among its requirements are for suppliers to provide full-scale design and engineering expertise. The firm also expects its suppliers to work with other vendors to integrate several parts into a workable whole and prepare prototypes and validation samples early in the design process.

ITT's suppliers also must meet some tougher demands. That includes providing virtually zero part-per-million defects — a goal that Racine said 70 percent of his suppliers now achieve — and cutting costs by 3-4 percent during each platform year through continuous improvements.

In addition, each supplier is expected to go online with ITT by dispatching production and shipping schedules electronically and sending blueprints and computer-aided designs via computer.

The company's goal is for at least half its key suppliers to meet that criteria by the end of 1998 and the rest to follow the next year, Racine said. Currently, less than 20 percent of ITT's suppliers — or about 160 firms — achieve those standards, he said.

``It's good for supplier relationships with us,'' said Racine of ITT, which recorded about $2.5 billion in North American automotive sales during 1996. ``For instance, in a product's design phase, a supplier won't be throwing a product over the fence anymore for us to look at it. We'll be collaborators.''

Donnelly, which recorded $380 million in North American automotive sales during 1996, just started a similar program. As a follow-up to its April meeting, teams from the company's corporate purchasing group are visiting individual suppliers during the next several months.

``We're looking for suppliers to bring technology, design expertise and a long-term commitment to reduce costs,'' said Donnelly spokesman Randy Boileau. ``If they don't step up, we can't work with our customers. They must understand that this is the way we do business now.''

At the meeting, Boileau said suppliers greeted the news of price reductions and added services with a mixed reaction. They also might have been alarmed by the news that Donnelly wants to cut its supply base from about 300 companies today to about 100 vendors by 2002.

Those actions have caused some Tier 2 suppliers to re-evaluate their operations. Plastomer Corp., a Livonia, Mich., maker of polyurethane acoustical foam products, started an 18-month, $4 million plant expansion in February and entered into a strategic alliance with Stanton Industries of London. Both actions were needed so the company could work better with its Tier 1 customers, said Executive Vice President David Baughman. However, Baughman questioned how many smaller suppliers could afford to make that kind of financial commitment.

``The main conflict I see is that [Tier 1] suppliers still want the lowest price bid while pushing us to give them so many other services,'' Baughman said. ``While price is still king, I don't think the playing field will be level.''

Cost pressures also factored into a decision by Foamex International Inc. of Linwood, Pa., to restructure its operations in late 1995 to gain more efficiency by eliminating capacity, said Norm Willis, Foamex vice president for automotive sales. The restructuring included closing 12 plants, some not automotive-related.

Today, the Tier 2 urethane-foam product supplier believes it is in a good position to capture opportunities both in North America and globally. In exchange for reducing costs and price, Foamex has forged longer-term contracts with Tier 1 companies, Willis said.

``The difference is that in the past, they might say `tell us your ideas,''' Willis said. ``Now, we work closer with them to actually implement those ideas, both at our facilities and at theirs.''

Even companies the size of DuPont Automotive have changed the way they work with Tier 1 companies. That DuPont unit, based in Troy, Mich., realigned operations to focus on specific automotive components, such as powertrains and fuel tanks. Now the firm works much more closely with suppliers in those areas.

``Five or 10 years ago, we might have applied the same concepts on different parts of a vehicle,'' said Erik Fyrwald, DuPont director of engineering materials.

``Now we have a greater technical sophistication in automotive applications. In general we have a lot more freedom.''

However, that environment also is causing some concerns. Braboy & Associates, a Franklin, Mich., firm specializing in plastics industry mergers and acquisitions, has seen a recent rash of inquiries from Tier 2 firms, said President Jay Braboy. Many of them are looking to acquire another company or form a joint venture, he said.

As Tier 1 companies are signing long-term agreements with fewer suppliers, they also expect more capacity than those companies always can provide, he said.

Baughman at Plastomer said it was an either-or decision. ``Either you make the investment or you find another area besides automotive,'' he said. ``That's the choice for most of us.''

Yet, ultimately, that investment decision could be a healthy one, said Alder at Cambridge.

``A big part of our success will be our partnership with key suppliers who realize we're in this together,'' Alder said. ``We're asking nothing more than that they walk the walk with us.''