Chrysler Group CEO-elect Tom LaSorda Says His Company is Forging a Unique Model for Supplier Relations

Tom LaSorda speech to Auto Industry Action Group (AIAG) AutoTech Conference

- Names four "Hot Buttons" suppliers need to understand - Announces TRW and Iroquois Industries as HI-PO suppliers with long-term partnerships - Supplier quality initiative reduces 'yard holds' for participants from 35 to one in 2005

DETROIT, Aug. 29 -- Chrysler Group's Tom LaSorda today told an automotive industry audience that in order to overcome negative economic issues, his company is redefining the OEM-supplier relationship model. LaSorda, who is currently Chief Operating Officer and becomes President and CEO on September 1, explained that an essential pillar of Chrysler Group's unique approach is to build long-term relationships with key suppliers.

He identified TRW and Iroquois Industries as Highly Integrated Partnership Organizations (HI-PO) and as two examples for companies which benefit from the new model. Based on their performance against Chrysler Group's objective measurements, TRW and Iroquois were awarded with early involvement in the product development for future vehicles of the Chrysler Group, scheduled for 2006 and 2007. Both suppliers will bring their expertise in market research, design, engineering and technology to the new products.

"Early supplier integration will help reduce the need for wasteful late engineering changes, which hamper our efforts to meet quality and system cost targets," said LaSorda. "Upstream supplier involvement also provides additional lead time to develop more innovative features and technology. This earlier sourcing reflects our efforts to form stronger partnerships with suppliers."

LaSorda pointed out that suppliers and OEMs are facing the same economic environment and respective tough challenges: rising petroleum and resins costs, high steel prices, cost of health care, cost pressure, negative net pricing and high competition.

"The truth is ... it can be tough to stay upbeat given the challenges and hurdles in our path. Many of the headlines this year suggest the U.S. auto industry is in the midst of an irreversible meltdown, one that is claiming OEMs and suppliers alike," said LaSorda.

He described the Chrysler Group's approach as to rather focus on how to turn pain into partnership and how to turn "pain into power" -- specifically, the power to deliver high quality, innovative, cost competitive products to the customers. "Bottom line, I'd prefer to put my attention on how we can turn pain into mutual profitability, which is where we all want to end up," LaSorda added.

Chrysler Group's future CEO admitted that he won't deny that pain has been part of the past history with the supplier community. A few years ago, Chrysler Group was in desperate need for a turnaround, just to survive. According to LaSorda, the company needed to take drastic action even with its suppliers to secure the future. But in reality, he continued, relationships and communication are indispensable to survival. "This is why -- when I became COO of the Chrysler Group -- I made it a priority to meet with top supplier executives to solicit their viewpoints on how to make our working relationship more dynamic and productive," said LaSorda.

For LaSorda especially the past level of improvable product quality showed that Chrysler Group hadn't done a good enough job of working with suppliers to meet the company's expectations and be successful in Chrysler Group's system. "It became clear that, no matter what metrics we used to select and oversee suppliers, we needed to strengthen the underlying relationships in order to make them effective," he said.

The company's answer to the challenge was to develop new ways to work more closely with suppliers. One example is that Chrysler Group has organized technology reviews under its Material Cost Management program. These sessions allow individual suppliers the opportunity to come in and show some of Chrysler Group's top management the breakthrough ideas in their pipelines.

Chrysler Group has met with many companies so far, and each has brought in five to 10 initiatives. These technology reviews expedite consideration of ideas that can put the manufacturer and its suppliers ahead of the competition. This program will be continued going forward.

Suppliers also tell Chrysler Group that if the company integrates their experts much more closely and earlier in the development process, they can really make a difference in helping the OEM deliver more value to its customers. "This is why we announced earlier this month that Johnson Controls will supply seats and Magna will provide the rest of the interior for a Chrysler Group crossover vehicle that will be launched in late 2008," said LaSorda. These two companies became involved 12-to-15 months sooner than suppliers normally come on board for a vehicle program.

But LaSorda also stated that if Chrysler Group and its suppliers are going to work closer with each other, then suppliers also need to understand how an OEM thinks. "Some suppliers could greatly improve their OEM sales approach by understanding how we think -- what our engineers, our Procurement and Supply organization, and our Sales & Marketing operations need to hear," Chrysler Group's COO added.

LaSorda named four major "hot buttons" for OEMs that suppliers need to understand. He explained that he thinks of them like electrodes, because once someone really connects with them, "it's as if they emit an electric charge that really gets the OEM's attention."

The first one is system cost. In a global competitive environment, the commitment to minimize cost needs to be intense and relentless. A second electrode LaSorda described is quality.

The third hot button LaSorda sees for the automotive industry is the need to improve fuel economy. As the appetite for oil increases in China, India and the rest of the developing world, the pressure for more fuel-efficient answers will become increasingly intense.

The fourth electrode outlined in LaSorda's speech is priceable content. Suppliers will get Chrysler Group's attention if they bring a feature that a consumer understands provides value and will pay more to acquire. Examples can be found in the customer-pleasing content on the new Jeep Commander: the U-Connect hands-free communications system using Bluetooth technology; a navigation system that uses voice and on-screen directions and is integrated with an MP3 player; and new tinted glass CommandView skylights, which help to open up the vehicle and provide a more spacious feeling.

LaSorda reinforced that the four "hot buttons" he described are key issues on the minds of most automotive executives. "Understanding this mindset is something that suppliers can do to help us work together more effectively."

Earlier this month in Traverse City, Peter Rosenfeld, the executive vice president for Chrysler Group Procurement and Supply, outlined what Chrysler Group is doing to strengthen the working relationship with proven suppliers. The main strategic direction is that the company is providing more opportunities to suppliers that are proven performers -- and is focused on growing and deepening its relationships with those companies.

Chrysler Group coined a term for these proven performers, and its relationships with them: HI-PO -- which stands for Highly Integrated Partnership Organizations.

LaSorda named a couple of additional HI-PO suppliers -- besides Johnson Controls and Magna International -- that have gained new business as a result of Chrysler Group's new approach. After being given the direct opportunity to meet cost, investment and timing targets, TRW will provide ergonomic switches for small and mid-size cars debuting in 2006 and 2007, respectively.

The second announcement shows that a supplier doesn't need to be one of the largest suppliers to achieve HI-PO status. Iroquois Industries -- a supplier of welded structural components in the chassis area -- has been awarded business for a 2007 SUV program of the Chrysler Group.

"So you can see, the opportunities for growth are substantial for those suppliers that perform well in our system," LaSorda summarized. He further explained: "However, the fact is, we are all accountable to our ultimate customers. If we don't meet our customers' high expectations for quality, features, innovation and cost, they will simply re-source us and buy another brand."

Chrysler Group's soon-to-be CEO pointed out that rather than writing off poor performing companies, his company's intent is to work with them to identify jointly areas for improvement and to implement plans that upgrade results. One way Chrysler Group is doing that is through its Quality Assessment and Audit Team -- QAAT. This program is focused on working with suppliers to achieve broad-based improvement, the kind that gets to the root of the problem.

The process involves sending in three or four QAAT specialists, who form an integrated group with leaders from the participating supplier. This joint team conducts a detailed operational assessment and then develops a plan that addresses systemic issues. The troubles might eventually be traced to any number of areas, including product development, operations, procurement, material handling, or supply chain management.

The entire focus of QAAT is to improve quality and delivery. Chrysler Group invests its own resources and skills, and in turn asks the suppliers to provide support, from the assessment process right on through implementation of improvements. "Frankly, some suppliers have entered the program suspicious about our motives," said LaSorda. "But their view usually turns around after they realize that our intent is constructive."

To date, Chrysler Group has 25 active QAAT projects across North America -- and is seeing measurable improvements in performance. For example, the suppliers who have been actively involved with QAAT have had only one quality yard hold to date -- compared to a total of more than 35 incidences in 2004.

LaSorda reminded the audience that large, international enterprises like DaimlerChrysler tend to deal with global companies in order to efficiently match its needs with a supplier's services. "As a supplier, an ability to operate in multiple geographic locations simultaneously is a competitive edge," said the Chrysler Group COO. "Above all, however, never forget that each of us needs to execute at a higher level in order to survive the challenges ahead. The global competitive threats are very real and will affect each of us personally."

LaSorda asked the suppliers that they should be awakened by the prospect that Chinese automakers will enter the North American market within a few years, if not sooner. "It's the cold reality of today's marketplace. As a supplier, you must reinvent your business, before your competitors -- or we OEMs -- do so."