Chrysler Group LLC is speeding up payments for some engineering, design and development work and taking other actions to improve its badly frayed relations with suppliers.
The new policies - to be fully rolled out by the end of January will apply mainly to parts Chrysler will buy for compact and midsized cars based on a Fiat platform. Chrysler projects volumes to reach about 700,000 by 2014.
The Auburn Hills, Mich.-based automaker also will use the approach on other new programs.
Under new, Fiat-led management, Chrysler is taking a series of steps to reverse its reputation as the worst of the major North American automakers in dealing with suppliers.
It's no fun to work in a business where you're fighting your supply base, Dan Knott, Chrysler head of purchasing, told Automotive News. We need a healthy supply base.
The changes, which Chrysler has discussed with its advisory council, include:
* Paying some suppliers upfront for costly advance engineering, design and development work on certain new Chrysler programs.
Interiors will be a particular focus because they contain a high amount of brand-specific content and are costly for suppliers to develop, Knott said. Chrysler won't pay for engineering of commodity parts - brackets, for instance that would benefit other carmakers.
* Resolving outstanding payment claims faster.
Knott said it took Chrysler an average of 287 days from the time a supplier submitted a claim to the time Chrysler did its analysis and agreed to pay. With a claim resolution process launched at the end of last year, we've reduced that to 105 days, he said and he wants it to get faster.
Unresolved claims can be costly to suppliers and affect other programs. A supplier still waiting for payment for one Chrysler program might be reluctant to take on future work.
* Paying suppliers in chunks at predetermined milestones in the life of the program.
Suppliers must invest heavily for tooling at the start of a new-vehicle program but then typically are paid as little as pennies per part delivered for the life of the program. It can take years to recover that initial investment. And if the volumes fall short of projections, the supplier can end up taking a loss on the program.
Knott's plan is to pay suppliers at certain milestones a percentage of what they are owed, a sharp departure from the piece-payments approach of the past.
No 'legacy issues'
Knott, 49, admits the new policies won't be a panacea for Chrysler's suppliers but said, I've got a lot of business to source, and I don't want it to be held up by legacy issues.
Jeffrey Klei, president for North America in Continental AG's Automotive Group, praised the moves and Knott. He really wants to be fair to suppliers, Klei said.
He said Knott wants Chrysler to be the place where suppliers bring their new technology first.
Klei said he couldn't speak to the issue of paying sooner, but he already has seen evidence of Knott's determination to resolve Chrysler's disputes with suppliers.
Hannover, Germany-based Continental had numerous claims and disputes outstanding with Chrysler which is not surprising, given the volume of business the supplier does with Chrysler, Klei said.
Knott said, Let's start the year clean, and he and his team worked to resolve a lot of those disputes in the closing weeks of 2009, Klei said.
Knott said he's developing a new business model with suppliers.
Speeding payments is a delicate issue because both sides have cash-management issues.
Amortizing a program over three to five years can threaten suppliers if volumes fail to meet goals and the supplier does not recover its investment.
On the other hand, if suppliers know that they can get paid earlier and more predictable payments, they can iron out their cash flow peaks and valleys. That change could improve relations with lenders, which have been reluctant to lend to suppliers.
Speeding up the payment makes the system function better, said auto analyst Melissa Anderson of IRN Inc. in Grand Rapids, Mich. This is a case of the automaker lubricating the system.
Chrysler's effort to hasten payments and resolve disputes is likely to be welcomed by a grateful supply base, which has endured tribulations during the auto downturn. Chrysler's volumes have been volatile, and the company has had two ownership changes in three years.
Daimler AG scrapped a popular Chrysler program known as SCORE (Supplier Cost Reduction Effort), instituted by one-time purchasing boss Tom Stallkamp, that shared cost savings with suppliers.
Under Cerberus Capital Management, industry newcomer John Campi ran Chrysler purchasing for a year. He promised Chrysler would treat suppliers as partners but ended up suing a number of them.
Chrysler's trip into bankruptcy made many suppliers leery of taking on Chrysler projects.
Last year Chrysler dropped dramatically from its previous ranking and finished just ahead of dead-last General Motors Corp. in a survey of which automakers are viewed by suppliers as the best at adopting innovations into vehicles.
The study, compiled by Plastics News sister publication Automotive News with J.D. Power and Associates, ranked BMW AG best. Ford Motor Co. vaulted in the ranking from last place in the prior survey, in 2007, to fifth among major automakers.
Chrysler also has scored near the bottom among the six major North American automakers in an annual ranking of supplier relations every year since Planning Perspectives Inc. began the survey in 2002.
Improving that score is one of my objectives, Knott said.
We know we're not the easiest customer to work with, he said. If we can be a better customer, we can get more value.
Automotive News staff reporter James B. Treece contributed to this report.
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