Price Pressures Affecting Product Quality, Study Finds

In what is effectively a caution for the aftermarket, a new study involving more than 250 of the automotive industry’s leading OEM suppliers claims that quality suffers when vehicle manufacturers place undue cost reduction demands on suppliers.
The study also shows that suppliers are withholding technology from the OEMs who they believe are the worst to deal with.
The 2001 North American Automotive Supplier Survey involved 261 Tier 1 suppliers and was conducted by Birmingham, Michigan-based Planning Perspectives, an automotive industry research firm that for the past decade has been studying the industry’s buyer-supplier relationships on behalf of the Big Three and several Tier 1 suppliers.
The study found that suppliers are responding to ‘hard’ price reduction demands of the manufacturers differently, depending on how much they give back to the OEM and the opportunity they have to make an acceptable return on the manufacturer’s business.
Many suppliers who gave higher price reductions or felt that they had a lower opportunity for making an acceptable return on the manufacturer’s business said that they were maintaining, if not lowering, the quality of their products in order to achieve mandated cost reductions.
In those areas where overall quality is improving, such as electronics, these suppliers are improving quality, but at a slower rate for those manufacturers to whom they gave the largest price reductions.
In addition, the study showed that suppliers are reducing the services they provide the OEMs and are becoming more selective in sharing new technology with them.
Such actions suggest that these suppliers are taking very definite actions to reduce costs as they meet the price-reduction demands of the automakers.
For instance, when asked "to what extent are you sharing new technology?" with each OEM, the study showed that suppliers indicated they share less as the price reduction increases.
This lack of sharing by suppliers occurs at all of the major OEMs but to varying degrees. According to the report, the willingness of suppliers to share technology with Toyota is much greater than their willingness to share technology with General Motors, which was in last place.
The study also showed that DaimlerChrysler, Ford, and General Motors place two to three times greater emphasis on price than quality when selecting suppliers, while Toyota and Honda, the quality leaders, virtually balance price with quality.
These findings have significant strategic implications for manufacturers and suppliers alike.
"The automobile manufacturers must recognize that suppliers, especially publicly-traded suppliers, are facing the same Wall Street pressures to improve profits as they are," says Planning Perspectives president John Henke.
"It’s no coincidence that the quality of domestic vehicles is suffering while Toyota’s quality continues to rise.
"Toyota knows how to work with its suppliers – including its US suppliers – better that the domestic OEMs. These findings suggest that while the domestic OEMs should continue to undertake internal and supplier-related quality improvement programs, these will have limited success in improving vehicle quality until the OEMs more closely balance quality with price when selecting suppliers."
The study found a large disparity in price reductions being requested by OEMs. According to the report, there is considerable variation in price reductions being demanded by each of the OEMs as well as significant variation across commodity areas within each OEM. Suppliers reported that every OEM, domestic and transplant, has demanded price reductions that vary by 50% and more across commodity areas.
One OEM, for example, was demanding an average price reduction in one commodity area of only 3.0 percent, while in another area was asking for 7.8%.
"This suggests that either there is a complete lack of cohesive pricing strategy within the OEM, or that each OEM has implemented a rather sophisticated commodity pricing strategy. However, further investigation found the latter is not the case," Henke said.
As a result, the report concludes that suppliers must develop and implement business strategies on a commodity basis for each OEM. No longer will a single overall strategy targeted to a specific OEM result in optimum results.