Antitrust Violations: “Inside the Shark’s Mouth”

This week I had the privilege of participating on a panel sponsored by Finance Executives International on the topic of the antitrust violations that have occurred in the automotive supply chain. For those of you who are not familiar with the issue let me bring you up to date.

In February 2010, the FBI raided the offices of three wiring harness manufacturers in the Detroit area carting away papers and computers. Soon, it became known that they were investigating price fixing and other antitrust violations in the industry. Howard B. Iwrey, the Chair of the Antitrust and Trade Regulation Group at the Detroit-based Dykema Gossett law firm, participated in the panel and presented that what started simply with three raids has expanded to the following:

• The investigation was global with Japan raiding 3 wire harness manufacturers and the EU 2.
• More commodities became involved. To date the Department of Justice (DOJ) has obtained guilty pleas covering 37 parts from 38 companies.
• The DOJ has collected $2.6 billion in fines from the guilty pleas. Canada, the EU, Japan, South Korea, Australia and China have also levied fines.
• 58 individuals have been charged with crimes and 30 individuals have pleaded guilty, receiving fines up to $25,000 and prison terms of up to 2 years. It should be noted that the vast majority of these individuals were not salespeople but high and medium level executives.

Not only is the investigation ongoing but civil litigation by allegedly harmed parties from purchasers to dealers to consumers has started and is likely to go on for years.

I was asked to participate on the panel to bring some supply chain perspective. I chose not to focus on the controls and processes that need to be put in on the sales side of the equation. I can guarantee that with the fines and jail time that has been doled out, executives across the industry are making sure their houses are in order on the sales side of the equation. I chose instead to focus on the buying side of the equation. And while I am not one to blame the victims – and the customers/buyers were definitely the victims here:

So, how do I think that the customers/buyers put their heads in the shark’s mouth? I talked about two areas:

• Culture
• Processes – or lack thereof

Culture. Our moms’ condition us from an early age that the customer is always right. While they may not always be right, they do more often than not, set the tone for negotiations. They do this by defining how business gets done and whether that approach will be collaborative where both parties work together for the benefit of both or being competitive where both parties fight, dividing what is assumed to be a fixed amount. The majority of Japanese auto manufacturers have a well-deserved reputation for working collaboratively with their supply base.

My experience has been that the US European manufacturers have alternated between competition and collaboration based upon economics and business conditions.

I started in the industry in 1984 after the Reagan/Carter recession (whoever you want to blame it on). At that time, Chrysler had borrowed from the US Government to stay afloat while Ford and GM survived based upon sheer momentum and both cash and non-cash assets. While fighting to survive they were also being challenged by Japanese automakers that were succeeding in the market and establishing US manufacturing locations. The Japanese success was in part based on their ability to work closely with their supply bases to build higher quality vehicles. Their supply bases tended to be smaller and their approach with them almost parental in nature.

Faced with the challenges, US manufacturers changed from using competitive practices, with many suppliers, to collaborative practices trying to emulate the Japanese approach. In large part, they were successful, supply bases became smaller and the quality of the vehicles improved.

However, while that was happening they continued to lose market share and signed labor agreements that raised the cost of production and made labor essentially a fixed cost.

A minor recession in the 90’s highlighted the cost issues and the US manufacturers were again faced with poor financial performance. In response, the GM purchasing executive, Ignacio Lopez, changed GM’s culture back to competitive. As a part of the effort, GM brought suppliers into their supply base who had been taken out in the 80’s and new, global suppliers. GM started promoting savings they were achieving utilizing a price-focused, competitive approach.

Faced with GM reports, Ford and Chrysler too eagerly also moved in a more competitive direction.

So, back to our story, what does all of this have to do with antitrust and price fixing?

Well, first it created an atmosphere that the suppliers had to protect their bottom line. When I was a young buyer at Ford a manager told me: “Jeoff, you will get fired just as fast buying at too low a price as you would too high a price.” During competitive times this gets replaced by managers saying: “I don’t care how you get there, but this (price) is what we need, so just do it.”

When the mutual trust broke, so did some of the processes. Here are some of the control and process issues we see every day in the supply chain:

• Too often, the buyer’s commercial focus is on pricing instead of cost transparency through detailed cost breakdowns and open costing. Achieving cost transparency enables the buyer and seller to work together collaboratively to develop more cost efficient designs and process.

• The request for quote process in many companies is handled via email and excel spreadsheets:
  • Which suppliers are being quoted?
  • How many quotes are being received?
  • Are buyers trying to “guide” business to particular suppliers?

• Are T&C’s being communicated? Buyers are given the freedom to design their own, unique RFQ formats:
  • Inconsistent requirements
  • Key statements of work missing

• Most Tier 1’s lack consistent evaluation methods and guidelines to evaluate competitive quotations from the suppliers:
  • Inconsistent financial evaluation methods
  • Lack of oversight

• Many Tier 1’s have multiple ERP systems making it difficult to compare supplier pricing across plants and regions.

While I do not want to blame the victims, I do believe that they should fix their culture and processes to fix their side of the equation.

Doing so will have a benefit:

• 57% of automotive CEO’s/Presidents do not believe that their purchasing teams are adding bottom line value. *
• Collaboration within the supply chain, processes, controls and data transparency are some of the elements to achieving competitive advantage through the supply chain.
• Companies who have achieved competitive advantage in procurement have 22% higher margins. **

At APD, we help clients build stronger relationships with their most strategic supplier partners and achieve these higher margins. If you are interested in learning how you can switch from confrontational to collaborative supplier relationships, drop me a line at jburris@apurchasingd.com

Source:
* Advanced Purchasing Dynamics Survey January 2016
** 2013 Chief Procurement Officer Study, IBM Institute for Business Value