Volkswagen Supplier Dispute – Supply Chain “Good Practice” May Have Contributed To Problems

We wrote yesterday about the dispute between Volkswagen and two of its key suppliers which has led to production of Golf cars being suspended for several days.  On Friday, the state court of Lower Saxony ordered the suppliers involved, Car Trim and ES Automobilguss, which are sister companies, to deliver the parts to Volkswagen – or else VW can seize the components themselves.

This is clearly a fascinating case, and we suspect it might be a future case study for many a CIPS exam, conference presentation or even MBA course. On reading the details, one immediate thought came to mind – what would Professor Cox make of this? Andrew Cox has written extensively about power in the supply chain, and is one of the most influential thinkers of the past 30 years in our procurement and supply world. His work around control of critical assets in supply chains and strategies to capture or counter power should be familiar to every procurement professional. They’re not, unfortunately, but that’s a different story.

What the VW problem demonstrates is that power is not simply about size and apparent leverage. VW is over 100 times larger than the suppliers involved, and as the brand name manufacturer would seem to have some intrinsic brand power and of course leverage over providers of gearbox components and car seats.

But the events of recent weeks demonstrate that the suppliers, mid-sized firms Car Trim and ES Automobilguss, both part of the Prevent Group, do have some real power themselves. They clearly have some sort of almost monopoly power, at least in the short-term, in their areas of expertise. So by refusing to supply, they have stopped production and lost VW tens of millions of euros already.

We don’t know the whole story, but it appears that the suppliers are annoyed (to say the least) because VW cancelled some of their contracts “without explaining or offering compensation”. In retaliation, they stopped supplying.

Looking at this in wider terms, we know that auto manufacturers in their drive for efficiency have drastically reduced the number of suppliers in recent years. That helps with standardisation, and at one level gives them more buying power. But of course, the suppliers left standing after the rationalisation paradoxically find themselves in a stronger position, with fewer competitors for buyers to consider. And it is almost immaterial how large the contract is in terms of real power. If you are the only supplier of car seats, windscreen wipers or almost any component for the Golf, you have that power whether the contract is worth €1M a year or €100M.

There is also little chance of Volkswagen (or any other customer) finding alternative suppliers quickly. Another factor that comes into play here  is the way that modern manufacturing is designed around precision; you can’t just find another car seat that is vaguely similar to that made by Car Trim and start sticking it into every Golf on the production line.

Finally, the trend towards lean manufacturing, Kanban and “just in time” approaches that has come back to bite here. Many manufacturing firms now hold only a few days’ stock on-site, or in some cases a few hours, with the supplier taking responsibility for very regular deliveries to keep production going. That’s all great, until you have a supply interruption – for any reason. At that point, you really wish there was a dirty great warehouse somewhere holding a month’s worth of components.

We will come back to this when we know more, but just one other thought. What do you think the KPIs or performance targets for the VW procurement / supply chain board-level director might be? If it does come out that the dispute was triggered by VW’s insensitive behaviour towards what is clearly a critical supplier, one might assume that he or she won’t be getting much of a bonus for 2016.

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