The Detroit Free Press confirms what we've been reporting: Chrysler is forcing a five percent price cut and change from Net 45 to Net 60 on their indirect suppliers. A "company document obtained by the Free Press" states Chrysler predicts they'll save $100m over the next 12 months by doing this. Chrysler wouldn't comment on the document, saying somewhat redundantly "The type of information described would be considered confidential. … We do not discuss confidential information on a public basis." The document acknowledges they'll piss off their suppliers: "It seems that this action is in direct conflict with Chrysler's desire to rebuild relations with suppliers… [but] Chrysler is committed to improving its relationships with suppliers through open, honest communication — no matter how difficult the subject." I don't know which school of management teaches this kind of logic, but common sense says the way to improve your relationship with someone you're buying stuff from is to pay them on time and at the agreed price, not name your own price and pay when you're jolly well ready. Just sayin'.
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Any company that will just screw their suppliers over like that while preaching the opposite simply cannot be trusted. If one tends to do bad things to one group simply because it is to their advantage then logic says they will tend to do it to me if it is to their advantage and if I give them the opportunity.
No thank you Chrysler.
Healthy suppliers will abandon ship and search for business elsewhere. Stricken suppliers will go under. The remaining suppliers will be marginal operations AND be pissed off. Yup, I’d buy a car assembled out of those bits.
Since Chrysler doesn’t release financials anymore, we can only speculate, BUT…
$100m is peanuts for a company this size. In order to be willing to go through all of negative goodwill this will cause, for the sake of a measly $100m, the cash must be REALLY hard to come by.
At this rate, Chrysler will only be able to afford (or willing to pay for) parts made from paper. Think of the greenwashing – “Our cars are made from trees! We’re part of nature!”
If Chrysler were an ebay buyer they would be getting serious negative feedback on this, but lucky for them ebay did away with negative feedback for buyers.
Someone should remind them they are not as big as they used to be and other car companies are eager to do business with domestic suppliers to cut shipping times. Maybe this is the beginning of the end game. stack up huge obligations to justify a C11 filing of some type, coupled with gov’ment buyout.
They only save $100M/Year doing this. Considering their annual cash burn is in the billions and the backlash that this will create, this is a dumb cost-saving move.
How is this legal?
This reminds me strongly of today’s Dilbert.
I don’t think that this necessarily means anything.
They may be doing it just because they can. Given their position, Chrysler has enormous leverage to renegotiate the terms and stick it to them.
When Sears was a highly profitable company, they would stiff suppliers routinely. They were famous for securing a manufacturer, ordering enough product to become the supplier’s largest customer, only to change terms once production was in full swing. At that point, the vendor was in so deep that they had no choice but to accept it.
This also might be a convenient way to deal with the UAW. I’d be interested to know what obligations they have to the workers if there are supplier interruptions.
Chrysler has so much excess inventory that there is really no reason for them to focus on pumping out cash to build more of it, particularly if their goal in the medium term is to offshore most of their parts production.
You have to look at this from the mentality of a typical private equity firm. PE firms like to outsource functions that they consider to be non-essential, and they like to cut costs. That means more production in cheap markets, and less in the US. No reason to worry about the vendors if they don’t have much of a future with the company.
I don't know which school of management teaches this kind of logic This is basically what WalMart does – they tell the suppliers how much and when they are going to pay for inventory. At least WalMart is up front about it.
Yep, this is how Walmart and Home Depot deal with vendors. If they can’t make any on the deal manufacturing the items in the US, then the folks in Bentonville, Arkansas will suggest them to switch to overseas production.
Chrysler is already able to produce vehicles with the some of the fewest number of labor hours in the industry. I look for quality issues to show up soon and not just tacky interior issues.
I believe that most of our business schools must be teaching this behavior to both accountants and MBA’s. I also believe that it appears to work on paper, but that since you can’t easily measure the damage it really loses you money. In the meantime, someone will put on their resume that they saved the company $100 million and work their way up in management while dozens of other folks will have to work to clean up all the mess it causes.
BTW, gratz on the prediction. Well done. Treat yourself to a hearty “I told you so”.
Have to love them, what a company, guess they will understand when I deduct 5% from my minivan payment and send it a month late. I think I will tryr this with utilities, gas and phone to. I’llk have a few extra pay cheques in the bank, and with a good balance I guess I can go and borrow some more money; maybe get a cheap Dodge Ram, and all thanks to Chrysler.
Presumably these relationships are contractually bound. How Chrysler believe it can unilaterally rewrite terms and conditions in its own favor with impunity is beyond me.
Presumably many of these suppliers are captive, and are beholden to Chrysler as a 900 pound customer. Otherwise (and even if) once suppliers are unable to make payroll, watch the contract violation lawsuits roll in.
Home Depot and Walmart pay pennies on the dollars to suppliers up front. There’s no haggling for extra profit with them – take it or leave it mentality. You also do not get any benefit as a season supplier if someone sells it cheaper to them – they’ll drop you like that.
What is the problem with Chrysler is that they are under contract for deliveries and built into those contracts are “hardship clauses” – usually only one way from the supplier b/c of lack of control over raw materials costs (usually the supplier can negotiate up costs while still under the contract). What Chrysler is doing is violating that spirit as they are buying parts cheaper though suppliers costs have risen and paying them later. It is a sucker punch in the face and knee to the groin. I’m waiting for what happens when suppliers either sue Chrysler for breach of contract or withhold shipments of parts til they pay on time and for the contracted amount.
I don’t think anyone here has actually read what the contracts say. Niether have I. But there may be a hardship clause, and a surcharge clause for material, and other uncontrollable cost changes. These contracts are very complex and we just don’t know the “truth”. Are there any buyers out there that can shed some light on it?
burn in hell chrysler.
I don’t think anyone here has actually read what the contracts say. Niether have I. But there may be a hardship clause, and a surcharge clause for material, and other uncontrollable cost changes.
I doubt that it matters. In business litigation, the winner is determined by whether the offended party can afford to pay for a protracted legal battle, not on the language in the contract.
The problem for the plaintiff is that the burden is on them. If you can’t do it on contingency, then you’re paying by the hour, and it can take years to end up in court.
Ultimately, for the defendant, it becomes a stall tactic. Cutting a compromise deal is cheaper and less time consuming than suing, so compromise is the result. In every instance, that means that the vendor gets stiffed by some amount, the only question is one of how much.
Pch101
If it goes to litigation everyone is already screwed. (except the F-ing lawyers of course)
“The Detroit Free Press confirms what we’ve been reporting: Chrysler is forcing a five percent price cut and change from Net 45 to Net 60 on their indirect suppliers.”
Actually TTAC’s original report just said that Chrysler was stiffing their suppliers, no mention of indirect, direct or any such qualifications.
I found this on da ‘net:
“Our recent decision to enact a 5 percent cost reduction on certain nonproduction materials and services is a part of Chrysler’s ongoing efforts to reduce its cost footprint in a highly competitive marketplace.”
So unless eviedence can be found to the contrary, it sounds like they are paying full contract price on those airbags and brakes and glass and tires and seats and belts and hoses and mufflers and…
Well, I’ve found that products from famous brands sold in Wal-Mart are of inferior quality and durability especially if the phrase “Exclusively at Wal-Mart” is used.
It means a different model number from the manufacturer for a product that they sell widely elsewhere, but they had to cheapen some aspect of it (internal component quality) to meet WM’s rock-bottom offer.
So, does that mean that the last Chryslers produced will use brake pads made of laminated horse-hide? Stay tuned.
If it goes to litigation everyone is already screwed.
All things being equal, Chrysler is most likely in a superior position. While they litigate or threaten to litigate, the money stays in Chrysler’s pocket. It’s the Golden Rule: He who has the gold, makes the rules.
More to the point, it won’t go to court. They use the time drain and expense burden on the supplier to achieve a compromise. The compromise automatically saves money for Chrysler by default; the only place that the price is going is down.
Why is this an issue? Isn’t the mantra on this site to drive cost down? The Japanses/Koreans/Germans open in lower pay areas and that is a good thing, the Americans re-locate to lower wage areas, thats a good thing…. So now Chrysler is sending the message that suppliers must get on the same page and squeeze profits, or reduce labor. De-flation is a good thing, right?
Pch,
I am not so sure it’s the gold that is ruling this one. If Chrysler weren’t up to their eyeballs in their own cars, they would have much less leverage. It seems their own incompetence is giving them power here.
LAloser,
I would say many of us on this sight are about value, not price. If you push the price of the car down by making it cheap and unreliable, we are not for that.
If Chrysler weren’t up to their eyeballs in their own cars, they would have much less leverage.
Of course, you’re right. I alluded to this earlier — Chrysler doesn’t really need the inventory, so they are not eager to make a concerted effort to pay for parts to build stuff that they can’t sell.
I suspect that they want to curtail production, and figure that they may as well disrupt the supplies. They have really nothing to lose, and a fair bit to gain, given their position. Toyota and Honda couldn’t afford to do this, but Chrysler is in a different place.
Landie;
I agree. My problem is the glee some get when the average Joe/Joan Autoworker is dis-placed or forced to take a reduction in pay or benefits. In New Zealand they call this jealousy “Tall Poppy” syndrome. If you do better than anyone else, you are cut down to size. I personally have read posts here and other places that state” They make too much to build cars, what education, tec. does that take?” I choose to think the income they make is spend and truly “trickles down” into the community…grocery to lumberyard. To de-flate that income will cause a knock-on effect.
LALoser
Why is this an issue? Isn’t the mantra on this site to drive cost down? The Japanses/Koreans/Germans open in lower pay areas and that is a good thing, the Americans re-locate to lower wage areas, thats a good thing…. So now Chrysler is sending the message that suppliers must get on the same page and squeeze profits, or reduce labor.
The issue isn’t that they’re trying to reduce costs. We’re all for that. The issue is that a company signed a contract with another in good faith to supply goods and services at a specific price and to be paid by a specific date, then the other company has unilaterally decided to ignore the terms of the contract, regardless what impact it may have on the supplier.
If I financed a car with Chrysler Finance and said I’d make a specific payment by a specific day each month, then decided I wanted to pay it 15 days later each month and only pay as much as I wanted to pay, I don’t have any doubt that Chrysler would want to take legal action against me. Why don’t the same rules apply to them?
When Sears was a highly profitable company
Keyword: was
Look at the profits and health of car companies who go above and beyond ChryCo in their relationships with suppliers. Just sayin’.
During WW2, government auditors were shocked to discover that contractor Ford had no accounting controls. Ford’s Accounts Payable Dept. paid suppliers’ invoices by weighing them. And yet, the Allies won that conflict without the benefit of modern electronic “information management.” Kinda makes ya wonder…
I haven’t read that Ford paid suppliers invoices by weighing them, but have read that Ford estimated their total payables by measuring the stack. I’ve also read that Henry II was released early from his Navy tour so he could take over Ford and keep it afloat given the critical role it was playing in war production.
Long way from today as Ford seems way ahead of GM in acting in response to the recent collapse of the truck market.
Maybe the good folks in charge are not trying to save money but increase their speed towards Ch11.
Would there be any benefit in doing this?
Litigation has nothing to do with this. Chrysler obviously believes that its suppliers are too dependent on it to do anything but submit. Its a matter of power in the relationship, not legalities.
As an attorney and the former owner of a company that had Wal-Mart as its biggest customer, I know that litigation won’t be an issue. Each supplier will simply have to decide how badly it wants to continue supplying Chysler. Those that can afford the onerous terms and the 5% hit will; those that can’t, won’t.
“Why is this an issue? Isn’t the mantra on this site to drive cost down?”
I have yet to see a TTAC editorial which advocates getting costs down by any means possible.
There are good ways to reduce costs, bad ways to do it and debatable ways.
Good way – Figuring out a smarter way of engineering the product which gives an equal or better result to the prior method whilst costing less to manufacture.
Bad way – Being a thug and simply paying your suppliers less than you originally agreed to.
Debatable way – Moving production to Mexico.
Check out this excerpt from one of many published articles on how Toyota & Honda deal with suppliers as compared to the 2.8:
http://findarticles.com/p/articles/mi_m0UDO/is_20_15/ai_89273708
“Other important findings included: Suppliers rank Honda and Toyota as the best OEMs with whom to conduct business; Honda and Toyota balance quality with price when working with their suppliers while the domestic OEMs stress price significantly more than quality; Detroit’s Big Three have practices that hinder the suppliers from doing their best job in meeting the OEMs’ price reduction and quality improvement expectations; Domestic OEMs go about demanding price concessions from their suppliers in a manner that shows little concern for the suppliers’ economic viability or supplier working relationships, while Honda and Toyota price reduction demands are conducted in a manner that demonstrates concern for both.”
If I financed a car with Chrysler Finance and said I’d make a specific payment by a specific day each month, then decided I wanted to pay it 15 days later each month and only pay as much as I wanted to pay, I don’t have any doubt that Chrysler would want to take legal action against me. Why don’t the same rules apply to them?
Because Cerberus is a big guy, and we’re little people. Everyone is equal, but some of us are more equal than others.
Comments get cut off after 10-11th line?
What do we always hear from the investment gurus?
Diversification!
Manufacturers’ suppliers would do well to be diversified, too.
That way, breach of contract could be dealt with in a severance sort of way. And other suppliers would know that they should avoid that manufacturer, too.
If suddenly, nobody sells MAP sensors to Chrysler, then they will have to begin making their own. Or stop making cars.