Even though Visteon Corp. expects its suppliers to prepay a portion of savings from lower-priced, long-term contracts as part of a process to winnow its supplier ranks, the upfront payment won't determine who wins the business, said Visteon's purchasing chief.
``If you look at how we share the value that we'll generate, it can range from a check upfront to increased reduction rates over the term of the agreement to absorption of tooling investments,'' said Jonathan Maples, Visteon's vice president of quality and materials management. ``Once we figure out the process, then we can play around with how we move cash. We weren't hung up on cash.''
That is more flexibility than Visteon spelled out to plastic injection molders in documents asking for bids on large groupings of parts for five-year contracts. Visteon told those suppliers the proposals must include a minimum 6 percent annual price reduction, with an upfront check for the first year's savings plus a part of future years' savings to equal at least 10 percent of the value of the contract's first year.
North America's second-largest auto supplier wants to reduce the number of its suppliers from 2,500 to 500. To do so, it is grouping parts into large commodity segments and looking to concentrate a large volume of business among just a few suppliers. The large volumes benefit suppliers by enabling them to run factories at high capacity rates, according to Visteon.
For example, the 180 injection molding companies that supply Visteon could be cut to a core group of about 15 via the program.
The Tier 1 supplier has been criticized for its ``pay to play'' strategy, although such conditions have been a part of contracts between automakers and suppliers before. But Maples defended the plan.
``All we're saying is we think there are big savings for all of us,'' Maples said. ``Because we are giving [our suppliers] the opportunity to do this, do we ask for 8 percent per year of this recognized improvement, of which hopefully they're keeping 8 percent themselves?''
Visteon rival Delphi Corp. of Troy, Mich., does not plan to follow suit.
``Our focus is going to change drastically from a price focus to a cost focus because that's where the power of eliminating waste is at,'' said Dave Nelson, Delphi's vice president of global purchasing, when asked if it would impose ``pay to play'' on its suppliers.
Visteon will review the proposals of the injection molding suppliers by the end of this month, pushing back the original timetable of signing new contracts by mid-March, with detailed discussions following through April.
The supplier met with some of its plastic suppliers on March 12, to get their feedback.
``We'll have further discussions with our suppliers and see how long it will take to come up with something beneficial to the entire supply chain,'' Maples said. Those discussions are to determine which suppliers are thinking creatively enough for Visteon to best work with, he says.
``None of these people can make money today, because none of their presses are full,'' Maples said of the injection molders. ``There will be some who have to shut down, but that's the nature of an industry where you have overcapacity.
``What we're doing here is just accelerating that consolidation, and it is very painful for some people,'' he said. ``I don't think it's our fault that they are not a low-cost producer, that they don't have the highest quality.''
Visteon contracts will not be awarded solely on price, Maples said. ``What I always try to look at is the quality, the value, the speed and the people elements of any way that we do business.''
Many suppliers who talked to Plastics News and sister publication Automotive News are concerned that they will not be able to afford to continue doing business with Visteon.
Maples said: ``The strong will prevail and survive. We're going to help them succeed.''