JCI wants to grow with smaller supply base

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DETROIT (Feb. 21, 11:30 a.m. ET) — After four years of consolidation, Johnson Controls Inc. emerged at the end of 2011 with a dramatically smaller supply base.

The company's seating and interiors operation has slashed its supply base by more than half to 3,200 vendors — even after the acquisition of Keiper Recaro, C. Rob Hammerstein Group and Michel Thierry Group.

Terry Nadeau, group vice president of global purchasing at Johnson Controls Automotive Experience — JCI's business unit that produces seats and interior components — says the company's supply base is much stronger financially than it was before the consolidation.

Among his concerns, however, are the company’s injection molded parts suppliers in Europe.

Nadeau spoke with Automotive News special correspondent David Sedgwick.

Q: Has Johnson Controls integrated Keiper Recaro, Michel Thierry and C. Rob Hammerstein into its purchasing operation?

Nadeau: Absolutely.

Michel Thierry was our first acquisition. They're a fabric company, and they make leather products. They are fully integrated and are part of our global manufacturing and purchasing organization. C. Rob Hammerstein and Keiper Recaro also have been fully integrated.

Q: How many suppliers does JCI's interiors operation have globally?

Nadeau: Our automotive [interiors business] has approximately 3,200 direct material suppliers.

Q: How does that compare with the number of suppliers you had before those acquisitions?

Nadeau: Michel Thierry is in a line of business that we weren't in. They had 140 suppliers. We had a little bit of overlap on meshes and some foams, but it was [mostly] a new supply base. C. Rob Hammerstein and Keiper Recaro had 500 suppliers combined. We had some similar products, and there was much more overlap.

Q: Does JCI have any plans to consolidate its suppliers?

Nadeau: From 2007 to 2011, we reduced our supply base by 54 percent. [Consolidation] has been a big focus. We are doing a lot more partnering with our suppliers. It's such a cost-driven environment; we are trying to give our suppliers the scale they need to survive in a tough industry.

Q: Does a core group of suppliers get much of your business?

Nadeau: We've broken our purchasing into four major commodities: metals and mechanisms; trim, fabric and foam; plastics; and electronics. As you can imagine, we buy a gazillion subcomponents. Each group has a core supply base.

Q: How many core suppliers do you have?

Nadeau: A couple of hundred if you look at it globally.

Q: What percentage of your annual purchasing budget goes to those core suppliers?

Nadeau: I'd say more than 65 percent.

Q: Do you expect those key suppliers to get a bigger portion of your purchasing budget?

Nadeau: I think it will be pretty stable. Obviously we've reduced our supply base quite a bit. When you think about natural disasters, we want to make sure we can cover a lot of the risks that are out there today — both financial and natural.

Q: Do you expect your suppliers to be global?

Nadeau: More and more, we like global players. But in cases where there is an industry that isn't as global, then we use regional solutions.

Q: It looks like we might have U.S. light-vehicle sales of 14 million units this year. Are you confident that JCI's suppliers can meet your production targets?

Nadeau: We make sure that our suppliers have available capacity in excess of [production forecasts]. So far, we haven't had any issues, especially in North America. During the downturn, our suppliers demonstrated that they had the ability to flex their capacity and infrastructure down and up. So we felt pretty good about that.

Q: After the March 11 earthquake in Japan, did you take steps to make your supplier network more robust?

Nadeau: We've been pretty active on the risk-management side. We look at every one of our suppliers according to their location and type of product.

Q: After the earthquake, were you able to identify all your second- and third-tier suppliers?

Nadeau: In general, we felt pretty good because of our [production] standards, and what our suppliers disclosed in terms of their own key suppliers. It's never perfect, but we got through it in a pretty good way.

Q; In the wake of the recession of 2009, are you monitoring the financial health of your suppliers?

Nadeau: Yes, we have a watch list. We've got a pretty good handle on the health of our suppliers. It's substantially better than it was two or three years ago.

Q: Now that the European market is stagnating, are more European suppliers getting into financial trouble?

Nadeau: We shrank our supply base by 54 percent, and we think we've picked the winners. There are individual industries that concern us, like injection molding. But in general, our suppliers are in much better shape in Europe than they were five years ago.