Avoiding big pricedowns

Managing relationships in the automotive industry has become more difficult in the three decades since research group IRN began providing consulting services to component suppliers. Globalization has intensified competition, and as we have learned, automaker stress is bad news for suppliers.

IRN began surveying suppliers in 1997 to learn how companies were responding to a disturbing development: customer requests for price reductions on existing as well as potential business. Many clients were seeking strategic advice to address price-cutting efforts by OEMs and Tier 1 suppliers. Little did we know that the situation would get worse before it got better. According to survey results, the average annual price-reduction request grew from 3.8% in 1997 to a high of 6.3% in 2003. By 2013, that figure had eased to 3.1%.

Suppliers asked, “What is the smallest concession I can make without getting into trouble?” Survey respondents said 2.1% on average in 1997, rising to 3.6% in 2003, and, 10 years later, falling back to 1.3%. The last three years have been stable, suggesting the industry agrees that good suppliers should be able to achieve annual cost improvements of 1% to 3% and share savings with customers. However, in the 2013 survey, respondents were asked for up to 10% in pricedowns, and concessions were as high as 8%. As the disclaimer goes: individual results may vary.
 

So, we were not surprised by a recent call from an account manager at a plastics molding house who said, “Every year you get me in trouble with my CEO. He shows me your study and says, ‘Everybody else is giving back way less than we are.’” The relatively small maker of commodity parts is dependent on General Motors for 50% of sales. The executive says he did not have much leverage and was not in a position to gamble by taking a hard line. His theory is larger companies give back less, and the smaller you are, the more you pay.

Yes and no. According to the 2013 survey, suppliers with less than $50 million in sales were less likely to be asked for a reduction on existing business. That suggests they may enjoy being under the radar. Of the smallest respondents, 36% were not asked, compared to only 5.6% of companies with more than $1 billion in sales. However, reduction requests to larger suppliers were typically within 1% of the average. Smaller suppliers were more likely to be at the higher end of the range.

That said, size is not destiny. Navigating relationships hinges on different factors:

• An efficient cost structure allows flexibil­ity in handling price reduction requests.
• Understanding the competitive landscape lets you assess how easily customers can switch to another supplier.
• A healthy mix of customers reduces the impact of policies of any one company.
• Proprietary products or unique capabilities give you opportunities to talk about things other than price.

Negotiating prowess is important, but the broader question is how to improve your competitive position before the customer even asks for price reductions.

Customers will most likely continue to pressure the supply chain for savings. IRN’s survey indicates that some suppliers are doing very well – limiting concessions to what makes sense for their financial objectives, regardless of the customer’s expectations. Doing so is not a matter of size so much as strategy and execution – a job for the entire company, not just sales.

IRN Inc.
www.think-irn.com

About the author: Melissa Anderson is vice president of automotive research group IRN Inc. Anderson has consulted with automakers and suppliers extensively since 1986. She can be reached at melissa@think-irn.com.