DaimlerChrysler Creating New Model for Long-Term Supplier Relationships

Peter Rosenfeld, Chrysler Group Executive Vice President - Procurement & Supply, speech to 2005 Management Briefing Seminars

* Johnson Controls and Magna named to 2008 supplier contracts * DaimlerChrysler will extend collaboration with HI-PO suppliers * "Best-of-the-best" receive additional benefits

TRAVERSE CITY, Mich., Aug. 3 -- Peter Rosenfeld, Chrysler Group Executive Vice President - Procurement & Supply today announced two long-term suppliers as part of his company's efforts to develop a new industry model for supplier relations. He identified Johnson Controls International and Magna International as Highly Integrated Partnership Organizations (HI-PO). Based on their performance against Chrysler Group's objective measurements, both companies were awarded with early involvement in the product development for a future model of the Chrysler Group, scheduled for late 2008.

In this particular project, Johnson Controls will supply seats and Magna will provide the rest of the vehicle cockpit. Both suppliers will bring their expertise in market research, design, engineering and technology to the new product.

"I submit that naming interior suppliers for a 2008 product is strong evidence of DaimlerChrysler's development of a deeper relationship with suppliers," said Rosenfeld. "This early supplier involvement is in keeping with our quest for new products, new technology, new delivery systems and new processes that will help us gain mutual competitive advantage."

DaimlerChrysler's model for a competitive business model with suppliers that works for the environment in which it operates is critical because purchased materials make up 60 percent of the total cost of every new Chrysler Group vehicle. The company needs to ensure that its supplier relationships contribute to competitiveness by helping to find new, flexible solutions to get to market faster with better products.

"DaimlerChrysler is forging strong new bonds with our HI-PO suppliers as part of our commitment to proactively shape our future," said Rosenfeld. "Our vision includes an improved model of cooperation with suppliers -- a model that enables us to continually transform our companies so we can mutually thrive in the global marketplace."

In this new model, the "best-of-the-best" will receive several benefits, including the ability to not have its business challenged as long as it stays on that high performing plane. It will also have the right of first refusal on business re-sourced from under performing suppliers, and an inside track on future business, said Rosenfeld.

The portfolio analogies

To explain the DaimlerChrysler approach to improving the quality and effectiveness of his company's supplier relationships, Rosenfeld used an analogy of three types of stock portfolio management.

One approach to investing -- and to supplier selection -- is the "flavor- of-the-month" tactic that some OEMs seemed to have followed in recent years. This strategy is comparable to an investor who continually buys the so-called "hot stocks" that appear to be today's bargain. This kind of investor is always seeking to buy low, sell high.

"For me, this approach to supplier relationships will not provide DaimlerChrysler a competitive advantage," said Rosenfeld. "The constant churn fails to leverage long-term opportunities. The strategy's upheaval is in part, I contend, generating headlines about the steady long-term decline of OEM market share."

Another traditional method of equity oversight is a focus on income. In this approach, sometimes known as a "blue chip strategy," the objective is to invest heavily in a select number of tried and true companies and stick with them for the long-term. The preservation of a consistent yield flow is fundamental. This "steady as she goes" approach, for some, allows peace of mind.

"In essence, this methodology is a bit like riding a merry-go-round -- the ride is pleasant and constant -- the path is known and certain," explained Rosenfeld. "For significantly sized investors with an income strategy, board membership adds to the control achieved by garnering influence on the investment's operations.

"Similarly, in the automotive industry, some OEMs operate with such a philosophy -- steady as she goes with a selected group of suppliers, some which are partially owned. I certainly understand the underlying approach here -- one supported by a relatively calm economic environment."

The third traditional investment method pursues growth. In this case, significant value appreciation is the focus. Unlike the income strategy, here, Rosenfeld said, the "roller coaster" is more apropos. The highs are higher and the lows are lower -- all a bit more exciting -- with the objective of a higher return on investment than the income strategy. Neither the income nor the growth strategy is right or wrong he said, each is suitable given the investor's circumstances at hand.

"For DaimlerChrysler, given the storm that we face, our approach is more of the latter," said Rosenfeld. "The business model we are building is similar to the growth strategy defined by the economist Harry Markowitz, known as the Efficient Frontier."

Markowitz, a Nobel Prize winner, demonstrated a viable alternative to the income targeting approach to portfolio management. His work showed that quantifiable processes can enable the development of an efficient, diversified portfolio.

In his analyses, Markowitz explained that, when comparing choices with a similar potential return, pursuit of the lowest risk is prudent. When those choices are optimized and plotted on a risk-and-return graph, the line connecting these selections is described as the "Efficient Frontier;" essentially, a group of equities constantly vying for investor dollars.

"I believe the same theory is applicable to a supplier portfolio," said Rosenfeld. "In short, we are constantly assessing suppliers, seeking those that offer the greatest return for comparable risk.

"DaimlerChrysler's method involves identifying suppliers which have also learned how to manage the elements. We want to work our way through the storm together with suppliers which aren't going to get capsized along the way.

"Our goal is to establish positive associations with a select group of suppliers based on performance measures that are transparent and objective. We refer to our relationships with these suppliers as 'HI-PO' -- Highly Integrated Partnership Organizations. These HI-PO suppliers are winning new business with DaimlerChrysler."

Similar to the portfolio manager's methodology, DaimlerChrysler has set out to create a diverse portfolio of suppliers with minimized risk for maximized return. Rosenfeld explained that his company is looking for genuine high performers, as opposed to those that are boom-and-bust.

Transparent process

To manage its relationships, DaimlerChrysler has created approximately 240 competitive sets of products -- a set being, for example, seats, steering gears, or lighting. For each such grouping, the Company has established a board of directors that makes decisions on sourcing -- similar to individual portfolio management teams. Each board is composed of representatives from Engineering, Procurement, Supplier Quality and Supply, with specialists from Design or Manufacturing joining where appropriate.

To ensure that the assessment process is fair and transparent, DaimlerChrysler openly shares with its suppliers the metrics used to judge quality, systems cost, technology and supply performance. Every production supplier's performance on these measures is posted online, so it always knows how DaimlerChrysler views them -- in absolute terms, as well as relative to each competitive peer group.

Supplier evaluation and HI-PO relationships

DaimlerChrysler uses its data to compare and contrast suppliers, and map them on a matrix with System Cost & Technology plotted on the horizontal axis, and Quality & Supply measured on the vertical axis. Based on a mathematical formula, the highest performers -- the HI-PO suppliers -- incline toward the upper right of the chart. DaimlerChrysler invests in the relationship with a HI-PO supplier because it is offering the highest return for the given risks. Or, as Rosenfeld explained, HI-PO suppliers are riding the DaimlerChrysler efficiency frontier.

"Our goal is not to own them, but to grow our business with them," he said.

Within this set of HI-PO relationships, a sub-set of elite suppliers exists which, by their performance level, has attained a status that DaimlerChrysler terms the "Reward Zone." For these "best-of-the-best" companies, tangible benefits result for attaining and remaining in the Reward Zone.

"First, in general, a Reward Zone supplier will keep its business with DaimlerChrysler as long as a high performance level is maintained," said Rosenfeld. "We will not challenge it and, not only will the supplier retain current business, but it also will receive the right of refusal on additional business that is re-sourced from underperforming suppliers." Furthermore, Reward Zone suppliers will have the first opportunity to get future business by pre-sourcing to a target price, and will also receive "Last Call" opportunity when new business is competitively bid.

Conversely, the poorest-performing companies are at risk of their business being re-sourced.

"Although sounding harsh, I remind you that the market applies the same terse evaluation on each OEM, as it supplies vehicles to the market," said Rosenfeld. "If, for example, we underperform in quality, the customer simply re-sources his or her business and we lose!

"Of course, some suppliers will rank in between the HI-PO territory and the Resource Zone. Many of these companies are solid performers in most areas, but may have experienced an isolated problem that prevents them from being at the top. DaimlerChrysler's intent is to work together with these sources to identify jointly areas for improvement and plans to upgrade performance.

"Although not all HI-PO suppliers qualify for the Reward Zone, DaimlerChrysler is working to strengthen its relationships with all HI-PO suppliers. And building a closer relationship includes involving them in the early development stages of future product. And I do mean early."

Suppliers benefit from relationship

According to Rosenfeld, deeper, longer-term relationships will help HI-PO suppliers with the business planning needed to weather their own storms. For high performing suppliers, the opportunities are increasingly worldwide. DaimlerChrysler's business model is that of an integrated global organization. This harmonization presents opportunities for Hi-PO suppliers with all of DaimlerChrysler's business groups.

For example, Delphi, traditionally a supplier to the Chrysler Group, has substantially grown its business with the Mercedes Car Group to the point that Delphi now has more business with Mercedes than with the Chrysler Group.

Harmon Automotive has grown its business by expanding within the DaimlerChrysler family, as well, and today actually has several times more business with Mercedes than it does with Chrysler.

Another supplier leveraging these expanded global opportunities is Gentex, based in Holland, Michigan. Gentex supplies the Chrysler Group with self- dimming mirrors, and continually has developed new and innovative products. Because of its strong performance, Gentex has also become a Tier One supplier to Mercedes.

"Of course, the global trend goes both ways," said Rosenfeld. "A year ago in Traverse City, DaimlerChrysler announced plans to co-locate three HI-PO suppliers on site next to the Toledo North Assembly Plant. The suppliers include one based in Korea, one in Germany, and one in the U.S. These suppliers will build and manage major body, paint and chassis operations, all within the footprint of our plant. This venture represents the first time suppliers will operate as an integral part of an American auto assembly plant. With this kind of arrangement our fates are definitely intertwined -- we win or lose together.

"So, for those suppliers which perform well in our system, the opportunities for growth are real and substantial."

Advantages to DaimlerChrysler

DaimlerChrysler sees a number of advantages to building long-term supplier relationships that are based on the sustained performance requisite for mutual trust.

One benefit is that DaimlerChrysler can leverage its suppliers' in-depth market research and knowledge of consumer tastes. To cite just one example: a strategic relationship with Magna led DaimlerChrysler to pursue Stow 'n Go seating in its minivans.

"Stow 'n Go is arguably, the most significant innovation in that segment in recent years and reasserted our leadership in minivans," said Rosenfeld. "We hope to receive more innovative ideas like this as a result of the relationships we are building. A supplier with a deep understanding of the market can advise us on any number of issues. For instance, an interior supplier might provide customer research on color and materials, the number and placement of cupholders, digital or analog instrumentation, chrome versus satin-brushed aluminum, or the placement of a navigation system."

This sharing of strategic insight is much more likely to occur when an OEM and supplier reach a level of long-term trust.

"We look at these HI-PO relationships as long term, with the caveat that the suppliers need to continue to perform (just as DaimlerChrysler, by the way, needs to perform as a company). If a supplier remains on the Efficient Frontier, DaimlerChrysler will keep investing -- just as an investor will stay with a stock for a long time, as long as its risk-return measure continues to be robust.

HI-PO suppliers which embrace innovation, as well as continuous improvement in systems cost, technology and quality are the companies that will continue to gain trust and business.

NOTE TO EDITORS: Additional information and news from DaimlerChrysler is available on the Internet at: http://www.media.daimlerchrysler.com .