Will Spend Management Reshape the US Automotive Industry?

Shhhh ... I'll let you in on a little secret. The US automotive industry is going through a massive transformation. And it's not just a question of getting rid of bloated management layers and cumbersome union contracts (which can make the total cost of a union line worker exceed that of a software developer in Silicon Valley). No, this transformation is much bigger and more relevant for our discussion. This transformation I speak of is a move to embrace Spend Management at all levels of the organization, not just procurement. And it's about time.

Anyone in the automotive supply chain knows how famous the Big 3 traditionally have been for taking out the hammer and beating down the supply base, demanding price concessions at every corner (and even on the straight-aways). Collaboration and joint cost take out were simply not in the vernacular of the typical Detroit-based OEM or Tier One procurement manager in the past decade. But while the sourcing slug-fest was transpiring in Detroit, Toyota and Honda were forming tighter relationships with their suppliers -- while also relying on competitive negotiations, though this is not a well-known fact -- to collaboratively take cost out of their entire operations and encourage innovation. As a result, the Japanese providers (despite a handful of recent recalls) are on top of the global automotive market from a profitability and growth perspective.

But what about Detroit? The Financial Times recently ran an interesting little number that hit on some of the major elements about the transformation of procurement in automotive. I would agree that past practices (including strategic sourcing alone) doomed the US automotive industry. Consider that a procurement superstar like Dave Nelson at Delphi could not save his organization from bankruptcy, despite saving over a billion dollars over the years through competitive negotiations and other efforts (this statistic is anecdotal, but I've heard it from multiple sources close to the company).

Additional good material on this subject can be found in a Supply Chain Review article that quotes extensively from AMR Research's analysis of the sector. One of the highlights is how Ford is now moving to change its procurement approach: "Amidst the financial news of debt ratings, bankruptcies, and financial distress of the Automotive industry, Ford is looking to reduce its production supply base and build a "sustainable supplier structure" that would prove to be more viable than today's current business models." Finally, the domestic OEMs are moving beyond cost management and are starting to talk about a more holistic Spend Management approach focused on the total cost of supply and manufacture (including labor, material, etc.). Let's hope they follow up on the rhetoric with action.

-Jason Busch

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