As I was preparing yesterday’s post on the short-lived talks of a GM-Ford alliance, news reports emerged that Chrysler was reporting production cut backs and new supply management measures in response to its profitability problems.

DaimlerChrysler CEO Dieter Zetsche blamed the North American group’s poor performance on several factors, including a gross misjudgement on the impact higher fuel prices would have on demand for pick-up trucks and sport utility vehicles, which make up the large majority of Chrysler’s sales. Zetsche also fingered another culprit: “Chrysler has failed to meet material cost reduction targets.”

For those in supply management circles the news is a morality tale about the sustainability of supply management performance. In the 1980s and 1990s Chrysler was the darling of the auto industry, thanks in part new stylings and a competitive cost structure, primarily through improved supplier relationships.

On the brink of financial ruin, Chrysler used bankruptcy protection to wrangle free of tough union contracts and to redefine supplier relationships. Under the leadership of then supply management chief Tom Stallkamp, Chrysler was among the first Detroit automakers to involve suppliers in new vehicle development and to outsource development and production major vehicle sub-systems. At the time, Chrysler relied on outside suppliers for 70% of its production assemblies, parts, and materials.

Such tight-knit relationships made Chrysler the favored customer among automotive suppliers. As an editor at Purchasing Magazine, I had several opportunities to interview Stallkamp and his team on their supplier development and collaboration approaches. It was clear in these discussions how Chrysler’s approach to supplier relationships was at the time far more advanced than the other Detroit automakers.

In one interview, the executive director of Chrysler’s supply management group told me: “”In order to fully reap the benefits of a world-class supplier, we must become a world-class customer.” Chrysler used several different methods to encourage suppliers to develop new technologies, including hosting “technology forums” where suppliers were encouraged to show off new and future products. In addition, Chrysler’s systems and commodity managers aligned the automaker’s product roadmap with the future technologies and innovations of its supply base.

Chrysler reinforced its commitment through its much-heralded score (Supplier Cost Reduction Effort) program, which challenged suppliers to reduce cost or enhance product or process performance at the same cost. The program tracked supplier performance to a 5% year-over-year savings goal. Chrysler did not expect such savings to come from lower pricing. Instead, Chrysler encouraged suppliers to find ways to improve quality, reduce inventory, streamline material handling and distribution, and develop more efficient ways to design and produce parts or assemblies.

Chrysler also trained suppliers to be more competitive in such key areas as continuous improvement, kaizen, and flow manufacturing. Chrysler sent cross-functional teams into supplier plants to perform quality reviews and assist in improvements.

That’s not to say Chrysler was soft. In fact, Stallkamp, who later became Chrylser’s president, once told me: “Suppliers often confuse that being in a partnership means the relationship is not measured. On the contrary, we must constantly measure progress toward expressed and defined goals. Even good performance toward goals can be superseded by competition doing even better.”

In short, a large part of Chrysler’s revival was due to the close and fair relationships it established with suppliers. However, since being acquired by Daimler, Chrysler has begun muscling suppliers and its relationships (and performance) have suffered. The latest evidence of Chrysler’s tough stance came yesterday with Zetsche’s public commitment that squeezing better terms from suppliers would be “a signficiant area of focus for the remainder of the year.”

Such statements mark the end of an era for innovative supply management practices in Detroit. The impact of the return to archaic supply management approaches will put GM, Ford, and Chrysler at competitive disadvantages in terms of securing new innovations and supply from the automotive supply chain. Stallkamp himself sums it up best in a must-read new Purchasing Magazine article on how suppliers are abandoning Detroit in favor of Japanese automakers — such as Toyota and Honda — that offer more collaborative and fair supply management practices: “The U.S. supply base is responding by moving to balance their business more evenly away from the domestic U.S. manufacturers.”

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