Caught in the Middle

In this tale of tiers, pricing pressure affects some more than others.

American BOA Inc. is feeling squeezed. As a second-tier supplier in the auto industry, the Cumming, Georgia-based maker of exhaust interface products must satisfy first-tier suppliers–its customers– that are demanding price reductions, while buying its raw materials from third-tier suppliers that refuse to cut prices. “We’re stuck in the middle, with no place to go,” says Bruce Hirabayashi, vice president and CFO of the privately held company, which has nearly $100million in annual revenues.

Although major automobile manufacturers like Ford Motor Co., DaimlerChrysler, and General Motors Corp. like to call the industry’s reconfigured supply chain a “value chain,” that value is elusive for many suppliers like American BOA. When automakers impose a 5 percent price cut on their suppliers, as Chrysler did in January, a first-tier supplier such as ArvinMeritor Inc. must find ways to make and sell its components for less. If you’re ArvinMeritor, a $7 billion company with power over a galaxy of second-tier suppliers like American BOA, you simply pass the cost-cutting mandate on to them.

Unfortunately, American BOA can’t do the same. “Our suppliers are the big steel companies,” notes Hirabayashi. “If ArvinMeritor comes to us and says, ‘You will reduce costs by 5 percent or you won’t ever do business with us again,’ and we go to one of these giant companies and say the same, we’d hear them chortling at the other end of the phone. If we tried to make them kneel and whimper, they’d say, ‘What’s your name again?’”

American BOA is not the only supplier for which the value chain is becoming a noose. Compelled to cut costs, invest in expensive Web-based technology, and produce more modular components that require expensive process changes and new machinery costs, suppliers are being squeezed to death–literally. In an industry that once numbered some 50,000 suppliers, today there are fewer than 30,000; that figure, says Dick Gabrys, Detroit-based vice chairman of Deloitte & Touche, will “shrink dramatically” in the next 10 years.

Many industries are evolving along the lines of the fast-track computer sector, where such companies as Dell Computer Co. set new standards for delivering customized products. Shorter product cycles driven by mercurial consumer tastes are becoming the norm. Ford, for example, is in the midst of a reengineering effort that will enable it to manufacture cars on a “reasonable” build-to-order basis. That will amount to a fundamentally different buying experience for consumers: enter a dealership today and spec out the car of your dreams, and you’re usually told it will take months to deliver. “You end up skipping the black interior or the red stripe,” explains James Gouin, CFO at Ford Consumer Connect, the Dearborn, Michigan-based division of Ford that is in charge of its customer build-to-order strategy. “Our vision,” he explains, “is to provide the consumer [with] the product they want, when they want it, and deliver on that promise. A car is a lot more problematical in terms of actual components and suppliers than a computer. To achieve the Dell model, we have to completely reimagine a century-old supply chain.”

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