Chrysler woos wounded suppliers

ERJ staff report (AN)

Detroit, Michigan -- Dan Knott, the boyish, hard-charging new head of Chrysler Group purchasing, is trying to lift the company from the bottom of the heap in terms of supplier relations.

It won't be easy, but the 49-year-old former product engineer is off to a fast start.

On April 28, Knott surprised a packed supplier meeting at Chrysler's Auburn Hills, Mich., headquarters by unveiling a cost-savings system reminiscent of -- although more modest than -- the company's much-admired SCORE program of the 1990s.

SCORE rewarded suppliers for cost reduction suggestions. Several years after the Daimler AG regime abandoned the program in favor of a more confrontational approach, SCORE remains a yardstick for enlightened supplier relations.

At another supplier meeting May 25, Knott told parts makers that they would share in cost savings if they help Chrysler cut warranty recalls next year.

Chrysler also is paying suppliers more quickly -- a sure way to win friends.

The monthly meetings -- which Knott has made a fixture since taking over purchasing in December -- are part of his effort to restore Chrysler to the preferred-customer status it enjoyed in the 1990s. That's when purchasing chief Tom Stallkamp made SCORE an industry model for collaborative relations.

"We must have a partnership relationship so they [suppliers] will give me their A team," Knott said in an interview in Auburn Hills last week. "So many times in the past, we were pointing fingers at each other."

Knott and his boss, CEO Sergio Marchionne, badly need suppliers' cooperation if they are to reverse Chrysler's reputation for mediocre quality. The company, which spends $28 billion annually on parts and services, is now in the midst of sourcing components for a fleet of new small and mid-sized vehicles based on Fiat platforms. Production of those vehicles, scheduled to start arriving in late 2011, is expected to grow from 800,000 to 1.2 million by 2014.

Chrysler is flexing its purchasing muscle. Since November, Knott has hired 46 purchasing staffers and 86 quality engineers, expanding his team from 431 employees to 563.

"This is the biggest leverage, from a sourcing perspective, we've had in many years," said Knott.

A tall order

Knott said he invited suppliers to attend the meetings in person rather than just tune in on the Web because he prefers meeting them face-to-face rather than having his message filtered through a webcam. Since taking over as head of purchasing, Knott said, he has met more than 100 top supplier executives.

"I've given my e-mail address to a thousand suppliers," he said. "I'll answer you within 24 hours."

Knott, who started his automotive career as a fuel systems engineer at American Motors in 1983, has held a number of positions at Chrysler, including vice president of the Jeep product team and of Chrysler's car, minivan and SRT programs. Vehicles bearing his stamp include the Dodge Viper, Chrysler 300C and Jeep Grand Cherokee SRT8.

Compact and wiry, Knott is an avid golfer and runner who also loves riding his BMW 1150 RT touring motorcycle and is licensed to race sports cars.

Stopping the slide

John Henke, president of Planning Perspectives Inc., a Detroit consulting firm that publishes an annual survey of suppler-automaker relations, said Knott faces a challenge restoring Chrysler's badly dented credibility with suppliers.

"Unfortunately, they're at the bottom, and everybody else improved more than they did," Henke said.

Chrysler's supplier relations have been going downhill since Daimler dismantled the SCORE program soon after taking over in 1998, in favor of a more confrontational approach. The slide worsened when suppliers lost confidence in the company's ability to pay bills as Chrysler edged toward bankruptcy in 2008 and 2009.

John Campi, a compatriot of ex-Chrysler CEO Bob Nardelli, proclaimed a new era of collaboration when Nardelli brought him to Chrysler in early 2008, during the Cerberus regime. But the happy talk did not translate into action, and Campi ended up suing a number of suppliers before leaving a year later.

"Campi clearly destroyed any vestiges of decent relations that existed at that point," Henke said. "They seem to be moving back, but he [Knott] has a hard row to hoe."

In the most recent Planning Perspectives survey, Chrysler finished last among the six biggest carmakers with a score of 187. Honda was the industry leader with a score of 340. The industry average was 266.

Although Chrysler's score was low, it was a 16 percent improvement over the 2009 score.

"I feel pretty good about that," said Knott. "However, I don't feel good that we're still last in the industry."

Henke praised Knott's efforts to pay suppliers more quickly. With a new claims resolution process put in place at the end of last year, Chrysler has slashed the length of time suppliers must wait for payment of disputed claims to 95 days from 287.

Knott "has gone after the low-hanging fruit in the last year, and he's done it very well," Henke said. "He's clearing up messes with suppliers when they haven't been paid."

Guarded response

The two new initiatives are a first step toward moving out of the basement, although suppliers are taking a wait-and-see attitude.

The first program -- called SUPER, which stands for Supplier Product Enhancement Reward -- rewards suppliers that propose cost-cutting innovations in addition to the annual price cuts outlined in their contracts. In the first year, Chrysler splits the savings 50-50 with the supplier. After that, Chrysler keeps all the savings.

SUPER is a more modest version of the SCORE program, which was widely emulated during its glory days in the 1990s. SCORE generated hundreds of millions of dollars in savings on projects both large and small by soliciting supplier cooperation.

SUPER will allow suppliers to share in the savings for technical cost reductions they suggest. To vet supplier proposals, Knott has appointed a team of technical cost reduction specialists.

For example, if a supplier comes up with an idea for reducing complexity in a door panel that saves Chrysler $200,000 annually, the supplier would get to keep $100,000 for the first year only. After the first year, all savings go to Chrysler.

The program has generated hundreds of supplier suggestions since Knott announced it in April. The suggestions must be vetted and tested, a process that could take 200 days.

Knott conceded that Chrysler's new incentives are not as generous as those of SCORE. The company may sweeten its incentives as its financial health improves.

"After we get more stable, we'll look for more," he said.

The CFO of a major Chrysler supplier said he was unhappy with the prospect of getting just 50 percent of a cost-saving innovation -- and only during the first year of the contract with the automaker.

"I may have to spend capital and tooling to make a change to save them money," he said. "Why should I make the investment?"

Knott's second initiative rewards suppliers if they help Chrysler achieve a 12 percent reduction in warranty recalls in 2011. First, Knott's staff calculates each supplier's defects per thousand parts. Then they ask the supplier to reduce that figure by 12 percent in 2011.

The program measures the supplier's best performance in parts per thousand over the past two years. If warranty claims meet or exceed the target, Chrysler pays all the bills, no questions asked. If warranty claims are worse than expected, the supplier must share the cost.

Knott hopes the warranty process will eliminate corrosive disputes over who is responsible for a problem and give suppliers a financial incentive to make fewer defective parts.

"I want their skin in the game up front," he said.

Knott declined to say how much Chrysler spends on warranty claims every year, but he did say claims were down 46 percent since 2007.

"We give the Chrysler supply chain organisation credit," said Tim Manganello, CEO of BorgWarner Inc. "Chrysler is on a path to reduce warranty expenses and share some of the savings with suppliers.

"However, these programs can cut both ways in terms of sharing expenses," Manganello said. "We'll have to wait until we see the actual operating results before we can form an opinion."

Knott wants to make collaborative relations a part of Chrysler's culture that lasts beyond his tenure as purchasing chief.

"I want to be here until I retire," he said. "But we've had five purchasing heads in the last three years. It's important to change the culture in a positive way."

Robert Sherefkin and David Sedgwick contributed to this report

From Automotive News (A Crain publication)