DETROIT (Oct. 29, 1:30 p.m. ET) — Chrysler Group plans to bring key suppliers in early on product-development projects and de-emphasize competitive bidding, said Scott Kunselman, the automaker's new purchasing chief.
With the new approach, which is common at Honda Motor Co. and Toyota Motor Corp., the automaker will award more no-bid contracts to favored suppliers. Chrysler and the suppliers will collaborate early to cut engineering costs, build trust and improve long-term planning.
The approach is another step in Chrysler's efforts to improve supplier relations under Fiat management. Moreover, Chrysler wants to be a favored partner of newly empowered suppliers straining to produce more parts in a rebounding industry.
Boosting loyalty among its 3,000 suppliers is vital for Chrysler as it pushes its factories and suppliers to keep up with growing demand. The automaker has had 30 consecutive months of year-over-year sales increases. It is on track to increase vehicle shipments 20 percent in 2012, to 2.4 million units, and plans to boost production another 8 percent in 2013, to 2.6 million units.
“For the most part, the business we place today is through a quoting process. We will, moving forward, look to migrate to a presource arrangement,” said Kunselman, 49, who became Chrysler's purchasing chief in April, succeeding the late Dan Knott.
But such no-bid arrangements are difficult to maintain, say supplier experts. They require substantial trust, transparency and discipline from the supplier and the automaker — requirements that grow harder to maintain as each side jockeys to improve its profits as the contract matures.
The long-term, no-bid agreements give suppliers more predictable revenue, allowing them to invest with reduced risk. They also allow suppliers to join automakers' engineering programs early, which typically enables them to cut costs. And suppliers say they provide their best technology to automakers that are loyal to them and offer the best profit opportunities.
For automakers, the no-bid agreements help ensure an uninterrupted flow of parts. This is a significant issue now for suppliers straining to keep abreast of rising production in North America.
Chrysler had a similar no-bid supplier program, called SCORE, in the 1990s under purchasing chief Tom Stallkamp, but it was abandoned about a decade ago while Chrysler was owned by DaimlerChrysler AG.
Under DaimlerChrysler and later Cerberus Capital Management, Chrysler returned to Detroit's adversarial habits, using the bidding process to play suppliers against each other to get lower prices. One downside was that a supplier's loyalty could drift easily to another customer.
Chrysler does a “very limited” amount of no-bid contracts now within the $40 billion it spends annually on goods and services. But Kunselman wants to expand the use of no-bid contracts specifically to improve the company's relationships with suppliers.
“It's a low number, and I want to take it to a higher number, because that will inherently advance me in the line, because I can let them predict better and have more stability in their plan through the presource process,” Kunselman said.
The no-bid contracts aren't carte blanche contracts. Chrysler won't award them for parts that have only one supplier, and suppliers that seek such a contract will have to open up their businesses to Chrysler cost engineers, Kunselman said.
“I need to have knowledge within the walls,” of the supplier, said Kunselman, who was Chrysler's head of engineering before assuming the purchasing role. Cost engineers will have a specific task of doing cost analyses of presourced parts — looking at a supplier's raw materials costs, labor costs, profit margin and what the specific part should cost to build.
“We'll look to work together to reduce the costs, but at the end we have transparency,” Kunselman said. “That will give us the confidence to source ahead of time and not to seek a quoting process as the primary source of leverage.”
The Chrysler purchasing boss said he intends to roll out the no-bid contracts as the automaker ramps up for its “next big projects.” That could include several major launches scheduled for late 2013 and 2014, such as Chrysler's coming lineup of commercial vans and planned replacements for its large sedans and minivans.
Neil De Koker, president of the Original Equipment Suppliers Association, said Chrysler's new policy to negotiate no-bid contracts with suppliers is good news.
“It's great,” De Koker said. “For years, suppliers have been asking for earlier involvement in programs, so that they can share their best ideas. It's a win-win situation and we're excited about it.”
De Koker noted that the new program encourages suppliers to invest in R&D and expand production capacity for Chrysler.
“Suppliers were very hesitant to do business with Chrysler because they were afraid Chrysler wouldn't survive,” De Koker said. “Chrysler is stronger today, and there is more collaboration and trust.”
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