The "run on the bank" supplier scenario we predicted for Chrysler is coming to pass. We've already reported that Chrysler's been playing silly buggers with their payment (stretching terms to keep the cash flowing flowing). And now ChryCo is beginning to face the predicted backlash. At the Traverse City management ho' down, Chrysler's executive vice president for procurement did his best Joe Pesci imitation for insolent suppliers, The Detroit Free Press and TTAC's Best and Brightest. "If a supplier wants to push us because of their fear [that we're going bankrupt], then they're violating the contract that's in place and I will take the necessary actions," John Campi intoned. "I have had suppliers come to me with a gun to my head and I say, 'I am not going to let you shut down production, but if you are serious then you have to live with the legal consequences.' And the legal consequences are not the end of it because if somebody does that, I can tell you they will not be walking around very long a supplier of choice."
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“And the legal consequences are not the end of it because if somebody does that, I can tell you they will not be a supplier of choice.”
At this stage in the cash-burn game, I would think that anyone who would be willing to produce Pentastar parts, on any terms, would be a “supplier of choice” (or, more accurately, “supplier of last resort”) to ChryCo….
Deming’s point #4
4. End lowest tender contracts
End the practice of awarding business solely on the basis of price tag. Instead require meaningful measures of quality along with price. Reduce the number of suppliers for the same item by eliminating those that do not qualify with statistical and other evidence of quality. The aim is to minimize total cost, not merely initial cost, by minimizing variation. This may be achieved by moving toward a single supplier for any one item, on a long term relationship of loyalty and trust. Purchasing managers have a new job, and must learn it.
This doesn’t sound like loyalty and trust to me. Sounds more like how Walmart deals with suppliers.
It has occurred to me that Chrysler is looking for excuses to stall and stop production, not only to avoid building excess inventories but also to find justifications for trimming the workforce.
As it becomes clearer that Cerberus is focused on implementing an outsourcing strategy, you have to wonder why it would bother building more trucks until it has a partner to buy a lot of them.
Cerberus’ priority is on managing its cash flow, which means cutting out unnecessary expenses and delaying initiatives that do not yet have a home. Their money would be better spent on putting the Nissan deal together than on building vehicles that only a rental car company could love.
Isn’t it fascinating how the some folks and some companies think that everybody ELSE owes them a living, benefit of the doubt, whatever – but then when the shoe is on the other foot, they are amazed and angry, insufferable and arrogant?
The comment by Chrysler in this context is essentially saying to their suppliers; “we consider the contract we signed (including what we’d pay) to be “flexible” and we’ve unilaterally decided to pay 25% less than agreed ahead of time for parts – and oh yeah, we’re paying later, too – but if you balk, we’ll sue you for breach of contract”.
Well, good thing I’m not the guy in charge of any Tier 1 suppliers to Cry-slur because there’d be a two-worded response that they’d be getting and it starts with F and ends with Uck You.
Then I’d get the best legal team together and sue CHRYSLER for breach of contract, pull their tools and dies out of my plants and hand them over to Cry-slur post haste. Nope, would not hold them hostage.
Can’t get blood out of a stone. Let some other sap get the work while the legal beagles work on suing for breach of contract.
The supplier would WIN, but what the supplier might get would be pennies for their trouble since if one Tier 1 supplier “did the deed” and simply gave the two-word response, it might embolden others to do so, too.
That’d prove to be “game over” for Cry-slur.
@Dynamic88
Are you sure that point says what you think it says?
It seems that point is saying that a company should not buy parts solely on the lowest cost to manufacture, and subsequently switch suppliers if a rival offers a saving of 1 cent less per unit. This is indicative of Walmart.
It seems that the point is, it’s better to pay a bit more for parts of higher quality and minimal variance, and to try to nurture a long term partnership with a supplier by giving assurances that the company won’t drop the supplier at the first sign of a cheaper producer.
This is a crappy evil way to run a business. Although Chrysler’s finances are undoubtedly crappy, Cerberus has tons of cash. For them to screw suppliers, who really have no recourse in this situation, proves what blood suckers they are (ok everybody already knew that). Unfortunately for them, these suppliers are in such bad shape, several of them likely will just call it quits. When they go down, they undoubtedly will take a nice chunk out of Chrysler to return the favor
I see this ending very badly for Chrysler. There is no reason why what menno said could really happen in the short term. I’m sure there are a few suppliers who have diversified and aren’t solely reliant on Chrysler for their survival. If they start a joint lawsuit with other suppliers that don’t plan to just take the breech of contract up the a$$ it could seriously stop production while eating more of their cash in court.
I am also in a business where getting paid for our goods and services can be a serious problem. We have learned to be ruthless about getting paid- our motto is “No business is better than bad business”. If we are the slightest bit concerned about being paid, it is cash up front before goods are shipped.
Why would Chrysler’s suppliers put up with this nonsense? It is time to start ending these contracts and let Chrysler find some other sucker willing to work under these conditions, preferably one of your competitors. Let Chrysler such the life out of your competitor instead of you.
I’m on the fence with this one. Having worked in Purchasing for 10+ years, I have seen some suppliers play some crazy games with their quotes. I have also seen supplier reps pull up to our building in brand new BMW/Mercedes Benz. That doesn’t show well. I have also had suppliers say they are losing money, yet their Financial Reports state they are making record profits.
On the other had if you beat a supplier down too much their is not money left for capital improvements and R&D. That’s what happened to Oxford Automotive if anyone if familar with them. They gave until it hurt.
If only Chrysler could concentrate on building good vehicles that people want they wouldn’t have to screw around threatening their suppliers…
Chrysler is going down; the only questions in my mind is how long it takes, how many other companies it takes down with it and how much tax payers cash it suckers from the government in the meantime.
straight8 :
August 16th, 2008 at 10:34 pm
@Dynamic88
Are you sure that point says what you think it says?
It seems that point is saying that a company should not buy parts solely on the lowest cost to manufacture, and subsequently switch suppliers if a rival offers a saving of 1 cent less per unit. This is indicative of Walmart. It seems that the point is, it’s better to pay a bit more for parts of higher quality and minimal variance, and to try to nurture a long term partnership with a supplier by giving assurances that the company won’t drop the supplier at the first sign of a cheaper producer.
It says what you just described, but it also says to foster a relationship based on trust and loyalty. It’s hard for a supplier to trust a company that says we’re going to pay later, and if you balk at that we’ll sue, and you won’t be our “supplier of choice”.
Dynamic88 says “This doesn’t sound like loyalty and trust to me. Sounds more like how Walmart deals with suppliers.”
At least Wal-Mart pays its suppliers on time when they do perform. It is a contracted requirement. Failure to pay within a contract defined period is a breach of contract – therefore the suppliers have the right to slow down or even cease deliveries. Chrysler is playing with fire…again.
Cerberus has lots of stuff going on below our radar other than Chrysler. The WSJ had a blurb a few days ago about Cerberus selling Talecris Biotherapeutics Holdings for $3.1B. They and a partner bought it in 2005 for $350M and debt. So their profit as a percent of investment was enormous. They and one or more partners bought Mervyns awhile back; Mervyns filed bankruptcy recently. But real estate was also part of the deal, and Cerberus sold off some of that at a large profit, and had sold off their Mervyns stake before the BR filing. No doubt they’re not happy with the way GMAC has gone and would like a near-term profit at Chrysler. But it’s just a piece of their very large pie. We’ve read that Nardelli was hired because he was pessimistic, and all the Cerberus people had to know GM was headed for a cliff, and surely factored this into their plans. We don’t like to see them get away with screwing relatively small suppliers, and would like to see some pay back, but the Cerberus people are about bottom line period, and they don’t even see the blood flowing as long as it someone elses.
There was also an interesting little article in the WSJ a few days ago about Feinberg’s redo of a townhouse in Manhattan for himself and family. He’s $15M (3 times the orignal estimate) and 5 years into it. He’s refused to pay for work, written rubber checks, there are contractor leins, etc. Feinberg paid $20M for the place in 2003. Apparently he pays when contractors force the issue. These guys are just bullies who have so far been successful.
At least Wal-Mart pays its suppliers on time when they do perform.
Actually, several years ago Wal-Mart was the company who was famous (infamous?) for “renegotiating” contracts when product was already on the water. They’ve probably had to slow their roll a bit on that business strategy, but it’s still a company built on deceit and manipulation. Anyway, back to Chrysler…
Ye reap what ye sew…saw the Crisis-ler co add on TV today offering 40% off the sticker for 08 Rams to make room for the 09’s….32% off jeep grand cherokees…..
they are in a box….what this will do to the residual values of vehicles they have on lease, plus the resale or trade-in values of any potential customers they had….I cringe.
this is what they have to do to “move the metal”, but Jiminy, they are saying to the people who paid closer to retail earlier in the year, plus to the banks who financed their earlier leases, Uck-Fay Ou-yay.
MM,
Great point. If you buy a Chrysler at 20% off, did you get a good deal? You just don’t know. That has to make selling cars a little tough on the dealer…
“This car lists at $31,000, but we will sell it to you today for $25,000. What do you say?”
“Hmm, how about $15,000?”
“Are you nuts?”
“That was established when I walked in your door. Now, we are just arguing about imaginary numbers.”
Dynamic88: Deming’s point #4. End lowest tender contracts
Thank you for saying this, it is lost on the buyers who go on lowest price. For years I saw sales people lie outright about our products abilities in order to get the business, then it was thrown to the technical staff to deliver to the performance specification.
When the product under performed or was late, engineering was blamed. Sales was never made accountable because their metric was to bring in business.
Any engineering manager who protested was sent to “Special Projects” then disappeared “to persue other opportunities” and was never seen again.
Pig_Iron,
Sales wasn’t held accountable because they were doing what management wanted. Otherwise, things would have changed. The bottom line is, the people you worked for were scum. It was a bad company.
Shii, only 15%?
A Dodge/Chryseler/Jeep in Kansas City dealer was offering 50%, 0% for 72 months, AND they would pay the sales tax on the vehicle for a lot of their models.
Talk about desperation!
All these discounts being offered yet the manufacturer is still making a profit – makes you wonder what the profit margin was when the market was bouyant