By Robert Sherefkin and Bradford Wernle

DETROIT ¡ª Chrysler LLC purchasing czar John Campi told hundreds of supplier executives last week that the automaker wants to cut component costs by 25 percent over three years.

 

Spokesman Kevin Frazier says Chrysler will make some significant changes in its manufacturing and purchasing operations to help suppliers hit the 25 percent target. Chrysler says it will:

-- Give suppliers 30 days' notice of its production schedule, rather than the one-week notice typical today. If Chrysler eliminates unpredictable production spikes, suppliers can reduce overtime and eliminate excess purchases of raw materials.

-- Share more parts among nameplates. For example, a handful of wiring harnesses could replace dozens.

-- Reduce late engineering changes, which drive up costs.

 

Suppliers will split the resulting savings with Chrysler, Frazier says. But if those changes fail to deliver the 25 percent cost-cutting target, suppliers will have to cut prices to hit the target.

 

Executives at two major suppliers, who asked not to be identified, confirmed they were told that Chrysler wants to cut costs by 25 percent over the next three years.

 

Cost savings could allow suppliers to lower prices without cutting profits, Campi told a closed-door gathering of 380 supplier executives in suburban Detroit last week, according to people who attended.

 

His comments to the Original Equipment Suppliers Association last week show that Chrysler is seeking to cut costs aggressively despite an increasingly bleak picture for auto suppliers.

 

Looking abroad

 

Part of Chrysler's 25% cost reduction would come from sourcing in low-cost countries. Chrysler has

• Told suppliers to match low-cost-country prices

• Opened engineering offices in Shanghai and Chennai, India

• Expanded Mexico-based Latin American engineering operations

 

Echoes of SCORE

 

Chrysler's program is reminiscent of the SCORE program the company employed in the 1990s. Frazier says Campi isn't a student of SCORE ¡ª but Frazier notes that Campi plans to meet this month with former Chrysler purchasing director Tom Stallkamp, who launched SCORE.

Neil De Koker, managing director of OESA, says Campi called for a partnership with suppliers that have a global footprint and access to capital and new technology. De Koker says Campi asked the executives to "work in fierce collaboration" with Chrysler.

Any cost cuts likely would be in addition to those already written into new and existing supplier contracts, sources say.

 

Chrysler wants the 25 percent saving on "our entire book of business," according to a supplier executive who met earlier with Campi. So, for instance, a carryover part on which the supplier may have already cut prices over the past three years still would be subject to a 25 percent price cut over the next three years. But it's unclear whether Chrysler is pushing equally hard with all suppliers.

 

Go abroad

 

Chrysler also is pressuring suppliers to meet the prices available from low-cost countries such as China and India, co-President Tom LaSorda acknowledged in a recent interview.

 

"What we're saying to them is, 'Here's where we're moving,' which is primarily a bigger presence in China," LaSorda said. "But we're putting a lot of engineers and a lot of procurement people not only in China but also in India and eastern countries ... even Mexico."

 

The vast majority of the $40 billion in parts that Chrysler buys annually comes from North America. In an interview in January, Campi said Chrysler does not buy enough parts from low-cost countries.

 

Supplier doubts

 

The difficulties facing Chrysler were on the mind of at least one supplier executive at the OESA meeting who asked about Chrysler's future.

 

Campi assured the audience that Chrysler will survive. The company is hitting the financial goals set at the time of the purchase by Cerberus Capital Management in 2007, he told suppliers.

 

Asked whether Chrysler would provide the kind of financial transparency the automaker demands of its suppliers, Campi said he would try to bring Cerberus executives face to face with certain large suppliers, but not all.

 

Chrysler has expanded overseas engineering and procurement activities since Cerberus took ownership in August. Chrysler has opened engineering offices in Shanghai and in Chennai, India, and has expanded its engineering presence in Mexico.

 

CHRYSLER STATEMENT: Campi aims to reduce supplier cost, not profits!

 

Chrysler posted the following statement on its media blog at 2:42 p.m. EDT on Monday, May 19:

Editors note: Last week, Chrysler's Executive Vice President and Chief Procurement Officer, John Campi, unveiled a plan to reduce Chrysler's production component costs by 25% over the next three years.However, Campi is not solely focused on the supplier's price, instead he has set his sites on taking cost out of the entire supply chain, which includes costs Chrysler has within its operations and are part of the supply chain. To that end, the collaborative cost-savings initiative, which he outlined at an Original Equipment Suppliers Association Town Hall on May 15 in Troy, Mich., calls for Chrysler to stabilize its production schedule; reduce engineering change notices and reduce component proliferation. Campi explained that these initiatives would help improve the cost structure of both Chrysler and its suppliers; generate cost-savings that would be shared equally (reducing the price Chrysler pays for components) -- and perhaps most importantly, without impacting the supplier's profits.

 

However, despite this welcomed news, Campi says that on more than one occasion since he began discussing this plan, his message has been misinterpreted. So in response, we asked John for clarification about the assumption that suppliers would be forced to reduce their price if they failed to achieve the 25% cost reduction.

 

Here's John Campi's clarification:

 

"It is disappointing to find that the media can't seem to get the message straight. So, let me set the record straight.

 

Not once in any public or private discussion have I ever suggested that suppliers would have to reduce pricing to meet the 25% cost out challenge without our mutual objective of protecting their profitability in dollars and percent. Our drive for cost reduction will only be accomplished with collaboration between Chrysler and our supply base. That simply cannot happen if it is not mutually beneficial.

 

This is really simple. First, I want to take cost out of what is incurred by us and our supplier (25 percent target). Secondly, I want to share equally with the supplier on each stepalong the way. Schedule stability should drive significant savings for the supplier ¨C potential estimate of eight percent. So, after stable orders can be demonstrated, our supplier would save approximately 8 percent -- giving us 4 percent and increasing their profits by approximately4 percent.

 

In summary, a program that suggests that we will take the savings without having driven the cost out is doomed to failure before launch. That would be just another typical cost reduction effort that puts the burden on the suppliers without regard to the obligation we have as OEMs to find mutually beneficial solutions. I personally refuse to play that game. It simply will not help the survival of this once great American industry."

From: Automotive News Europe