The New Chrysler Approach to Suppliers: The New DOD Acquisition Model?
In a recent Wall Street Journal piece on the new Chrysler and its struggle to build new cars, the authors underscored a core challenge facing the new Chrysler management. They have designs for new cars; they have assembly lines in mind for the new cars; they just don’t have the suppliers lined up.
As Neal Boudette and Jeff Bennett noted in “Suppliers Balk at Working on Chrysler’s New Models” (Wall Street Journal, September 25, 2009), “One of the biggest hurdles is persuading suppliers to spend money up front to develop and make parts for the new models, these people said. Some smaller suppliers that are under financial strain themselves are hesitating because they are unsure whether the vehicles will sell in high enough volumes for them to make money, they said. In most cases, these people said, Chrysler is declining to guarantee certain production volumes, a change from what it and other car makers have typically done.”
The journalists go on to add: “ Auto companies usually give suppliers a volume estimate, and allow them to raise parts prices if actual sales fall short of the target. Suppliers also use the information to plan their own expenses for tooling their factories. “Why would we want to tie ourselves to Chrysler when GM and Ford are a known factor,” said an executive with an interior-parts supplier who didn’t want to be identified. “We’re already financially strapped so we have to be more choosey in where we will spend our money.”
DOD will face similar problems if its approach to acquisition reform ignores the essential realities of the global aerospace and defense supply chain. The financial crisis has put significant stress on the supply chain; and key supplier will go to where the predictable money lies. And given the globalization of many of the commodities and supplies required in aerospace and defense this will mean a global competition to providing stable and predictable flows of cash to the suppliers. DOD will have to be careful how it addresses the realities of today’s global supply chain.
On this website we will pay a good deal of attention to the supply chain issues. Richard McCormack in his Manufacturing News has covered on a regular basis the challenges facing the supply chain and recently discussed the challenge of Chinese ownership of a key element of the supply chain. Bill Anderson will provide a regular contribution on the supply chain dynamics and challenges.
For now, we can note that contract approaches such as the littoral combat ship may well ignore the impact of supply chain issues on pricing and supplies. The USN says it wants to downselect a single design for the LCS; and that it will buy a number of ships over four years. If this was generating a multi-year contract with a fixed number of ships over a fixed number of years, the winning prime contractor could then go to the supply chain, guarantee numbers and negotiate prices and availability. But the current proposal is to buy two ships at a time for a proposed four year period.
This seems like the Chrysler management hoping to have good supply chain prices and availability without a realistic commitment to numbers. This is simply not a realistic approach to business, let alone the defense business.
***Posted October 26th, 2009