VW Dispute Highlights Issue of Power in the Supply Chain

We wrote here and here about the Volkswagen problems with two suppliers (both part of the same larger group) who were withholding critical components and had brought production to a halt in VW factories. The dispute has now been resolved, and everything is running again. However, the story does raise many issues for the firms involved and for procurement more generally.  The cause of the dispute is explained like this by Reuters:

VW's relationship with Prevent soured after it commissioned Car Trim to develop new seat covers for high-end models including Porsches and then cancelled the 500 million euro ($558 million) deal in the aftermath of the diesel scandal, refusing to cover the 58 million euros its supplier had already invested.

VW are going to review their strategy, unsurprisingly.

Chief Executive Matthias Mueller has vowed to review the German car giant's procurement strategy to avoid any repetition of the crippling supplier dispute that hit production at six plants this month … VW will re-examine contracts that leave the group dependent on a single supplier after the dangers were highlighted by its damaging wrangle with Bosnian parts maker Prevent, Mueller said.

"We will of course look into questions such as multi-sourcing, single-sourcing," he told reporters late on Monday. "We will look at our procurement contracts and try to optimize matters with all suppliers."

As we said previously, much of this comes down to power in the supply chain. The automotive end-manufacturers may have apparent power, as they own the brands that we all know and that play a big role in car-buying decisions. Who cares which sub-contractor makes the seats or the cast iron gearbox casing? Well, the consumers don’t care, as long as the final product delivers, but that does not mean the suppliers are without power – quite the contrary.

Because of successive economic downturns, the latest in 2008/9, and continuous pressure from the auto manufacturers, only the fittest and best component suppliers have survived. That means there is limited choice in many of the supply markets in which VW needs to operate. Barriers to entry are pretty high too – setting up a new business to make car seats is not something you do without a lot of financial backing. So choice is limited, which increases supplier power.

The move towards a smaller and reduced supplier base is something that procurement over the last 30 years has driven as much as anyone, and has proved to be the proverbial double-edged sword. There are many good reasons for supplier reduction, but it also cuts the number of options in case of problems, it drives the market tightening we talked about in the previous point, and it leads to a situation as here where there is a sole supplier for some key components within the process. If something goes wrong, and it might not be a dispute of course, it could be a natural disaster at the supplier’s plant for instance, then there is no alternative provider who can quickly step in.

The move towards “lean”, Kanban and other techniques has also left manufacturers in many sectors without much in the way of buffer or safety stock. It is not a new problem; Mars were ahead of their time, and 30 years ago as a young buyer I was being woken up in the middle of the night because the delivery of flour hadn’t turned up, and we ran with just a few hours’ worth of stock on site.  Again, this is seen as a positive but it has some potentially negative consequences.

There have also been reports that VW has been pushing its suppliers for savings given the problems the company is facing since the emissions scandal hit their sales. In a June letter seen by Reuters, VW procurement chief Francisco Javier Garcia Sanz warned suppliers that he would seek new savings as the company faced "epochal change driven by new technologies and customer requirements".

There is a large bill for fines or damages to come for VW, as various groups take action against the firm for the scandal. So you can understand how and why pressure is likely to be applied to the supply chain to try and recover some margin. But that will be resisted of course. The issue of power is key, and is something every procurement professional needs to consider in their own critical categories and supply chains.

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Voices (2)

  1. bitter and twisted:

    Are VW going to review the strategy of single-sourcing or review the strategy of trying to **** their suppliers?

    1. Ian Heptinstall:

      Precisely B&T. Super power is only a problem if your main procurement tactic is bullying.

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