DETROIT (Nov. 28, 1 p.m. ET) — Delphi Automotive plans to earmark as much as 70 percent of its $8 billion annual purchasing budget for 100 key suppliers, up from about 40 percent today.
Sidney Johnson, Delphi's purchasing chief, says the company's top leadership is spending time with these key suppliers to build relationships and share expansion plans.
In an interview, Johnson also discussed disaster planning after Japan's earthquake, volatile raw material prices and the need for dual suppliers of key products.
Here are highlights of Johnson's interview with Special Correspondent David Sedgwick.
Q: A year ago you said 500 or 600 vendors account for most of Delphi's purchasing budget. Do you plan to give them a bigger share of Delphi's purchasing budget?
Johnson: Yes, that's the idea. The 600 suppliers are what we call our “castle.” They account for 80 to 85 percent of our current expenditures. We'll try to get that up to 90 percent.
Q: How many of them would be considered key suppliers?
Johnson: Within that group [of 600 vendors], there is a core group of 100 key suppliers. Right now that core group gets 40 to 45 percent of Delphi's annual expenditure. We'll target them for 60 to 70 percent of our expenditures.
Q: That is obviously a lure. Do you offer them anything else?
Johnson: Access. We offer them access to our decision makers. When one of our presidents is traveling in a particular region, he'll have dinner with their top leadership. They'll talk about where they are headed in the future, and where they want that supplier to be.
Q: How large is Delphi's annual purchasing budget?
Johnson: Direct purchases [of components] will be $8 billion. Indirect purchases [of services] will be $1.5 billion. Logistics will cost about $500 million.
Q: In the wake of the March 11 earthquake in Japan — and the recent flooding in Thailand — is Delphi reviewing its disaster plan?
Johnson: We have a staff that manages events that take place around the world. This team exists year-round; it's not something we put together [after the earthquake]. When crises come up, the team manages logistics, inventory, production, working with our customers, understanding our constraints.
Q: Toyota has said it will rely on dual suppliers to buy key components. Is Delphi doing likewise?
Johnson: We call that dual manufacturing; that's not new. As you move up to more valuable components, you want to understand the likelihood that something can go wrong.
Q: Do you do that with all your suppliers?
Johnson: No, just with the key ones. You do some type of risk management depending on the difficulty of recovery. There are some things that I would never dual source, because the parts are not specialized.
Q: So if your supplier's fastener factory gets flooded, you would just run down to Ace Hardware and buy more fasteners.
Q: Can you give me an example of a key product that requires you to line up dual suppliers?
Johnson: We'd do it for raw materials like plastic resin. It's a critical piece of our business. Resin goes into a lot of our products, and there is a lot of volatility in that market.
Q: So raw materials are actually the key potential bottleneck for Delphi?
Johnson: Yeah, maybe your supplier has a fire or a flood. When you lose a critical raw material with a long lead time, you've got a problem.
Q: How is Delphi coping with the price of raw materials like copper, aluminum and plastic resin?
Johnson: It was nice to see copper go down from $4.75 a pound to $3.25. Now it's going back up a bit. Copper is extremely volatile. But like any publicly traded metal, you can escalate and de-escalate the price throughout the value chain.
Q: So you index the price of copper — that is, accept price changes from suppliers when the cost of the material rises and falls?
Johnson: Copper and aluminum.
Q: How about plastic resins? The price of oil has flattened a bit, so that has moderated resin prices, right?
Johnson: Oil prices have been pretty stable of late. But there's no price index for plastic resins. Everybody knows what a barrel of oil costs. But oil is just one factor of resin production. There are a ton of other factors that impact resin. For example, natural gas is a huge component of resin manufacturing.
Q: What do you do about it?
Johnson: That's a good question. You look at alternate raw materials. Maybe there's a lower-cost resin that will meet your performance specs.
Q: How do you handle suppliers that come to you and complain that the price of resin has doubled?
Johnson: If it's truly a hardship for a supplier, and they are a strategic supplier and you have the right relationship, you help them out and hope that they return the favor. These [price adjustments] are one-offs.
Q: So it's a matter of “come in and we'll talk.”
Johnson: Absolutely. Resins are difficult to manage.