In light of the cost increases due to the tariffs implemented by the Trump administration on imports, is this a time to get tough with your suppliers and demand they cut their prices or collaborate with them to see how you can weather this storm successfully together?
An article by Mike Colias and Ryan Felton in this weekend’s Wall Street Journal (“The Peril of Trump’s Tariffs for America’s Auto Titans”) provides some insights into which path General Motors (GM) is taking. Here’s the excerpt that caught my attention:
Car-company and supplier executives have been strategizing how to react to the new tariffs. Their lawyers have been hammering out who will get stuck with the bill. Sharply worded letters [emphasis mine] have been flying across Detroit and beyond, from mom-and-pop companies to the behemoth carmakers, quarreling over how costs will be absorbed.
In a letter last week to a supplier, GM said that worsening market conditions as a result of higher costs doesn’t change a supplier’s responsibility to uphold a contract. GM has “no obligation” to pay a supplier increased prices on a contract as a result of tariffs, said the letter, seen by the Journal.
Once again, GM is being penny-wise but pound-foolish.
Back in July 2016, for example, Stephanie Gleason at the Wall Street Journal reported that “General Motors Co. is fighting to get equipment and inventory from a family-owned auto parts supplier that filed for chapter 11 bankruptcy protection last week, saying a contract dispute threatens to shut down 19 GM assembly plants in North American and lead to ‘tens of millions of dollars in losses.’” The article goes on to say:
Clark-Cutler-McDermott Co., (CCM) a 115-year-old interiors supplier based in Massachusetts, filed bankruptcy Thursday and blamed the move on an unprofitable contract with GM that has drained it of $30,000 a day since 2013 [emphasis mine]. In responses filed Friday, GM accused the supplier of using the bankruptcy process and its position as a critical parts supplier to protect personal interests rather than honor contracts.
Some lessons are just never learned in this industry.
(For more on that 2016 GM case and my commentary at the time, please read “When You Focus On Getting The Best Deal Instead Of Developing The Best Relationship”).
The sad truth is that GM is not alone in always taking the “get tough on suppliers” approach when it comes to addressing economic challenges. Walmart, Target, Amazon, Apple, and other 800-lb Gorillas do the same (see my recent post on LinkedIn, “800-lb Gorilla Meets 800-lb Panda Bear: China vs. Walmart”).
What is the cost of poor supplier relationships? A 2015 study of 435 automotive suppliers conducted by Planning Perspectives Inc. (PPI), an independent automaker-supplier consultancy, answers that question for the OEMs in the U.S. automotive industry: “Ford, General Motors, FCA US and Nissan collectively would have earned $2 billion more in operating profit [in 2014] had their supplier relations improved as much as Toyota’s and Honda’s did during the year.”
(Check out the press release linked above for more details, as well as my post at the time, “The High Cost Of Poor Supplier Relationships”).
I’ll end with what I’ve said many times before: Whether it’s extending payment terms, or taking a strong “What’s In It for Me?” approach to negotiations, the end result is often the same for companies that bully their suppliers: short term gains that are ultimately negated by increased costs, quality problems, supplier bankruptcies, and other issues further down the road.
Will you follow down that same failed road too or choose to collaborate with your suppliers to see how you can weather this tariff-created storm successfully together?
