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Chrysler: What Went Wrong?

February 23rd, 2007 · by Tim Minahan · 3 Comments · automotive sector, supply management

Once the darling of the U.S. automotive industry, Chrysler is now getting more bad press than Britney Spears. After years of decreasing sales and disappearing profits, Chrysler last week announced a massive restructuring plan. At the same time, rumors arose that parent Daimler-Benz is actively shilling the North American unit.

The Details

Chrysler Group last week announced that it will cut 13,000 jobs and close a slew of manufacturing plants over the next three years in an attempt to restore profitability by next year. But Daimler-Benz’s aggressive moves to sell off Chrysler suggest that claims of profitability in 2007 are wishful thinking, at best.

(Rumors abound that ailing General Motors is considering acquiring Chrysler. But such a union is complicated by GM’s own problems coupled with labor and regulatory hurdles. A more likely scenario would have Chrysler bought by another foreign automaker, possibly even a Chinese manufacturer.)

What went wrong?

Lackluster product innovation and cultural challenges were largely to blame for Chrysler’s downturn. However, part of the automaker’s ails can be attributed to a wholesale abandonment of the core supply management principles that had once differentiated the brand.

While emerging from bankruptcy under showman Lee Iacocca in the 1980s, Chrysler adopted highly collaborative supply management approaches, including co-development, joint waste-removal/productivity improvement initiatives, risk-reward sharing, and outsourced production of complete vehicle assemblies.

These approaches, borrowed in part from the Japanese and ascribed to largely out of necessity, fueled Chrysler’s now legendary revival. As an editor at Purchasing Magazine, I was lucky enough to delve into these then-novel supply management approaches with the Chrysler supply management team, including CPO Tom Stallkamp, who was later named company president. Stallkamp brought a new level of supplier collaboration to U.S. shores with his now famous SCORE (Supplier Cost Reduction Effort) program, which solicited business-improvement concepts from suppliers, and the “extended enterprise,” which increased supplier responsibility for design and supply decisions and assembly manufacturing.

However, SCORE and much of Chrysler’s supplier collaboration spirit was scrapped after Daimler-Benz acquired the company. Since, the new-co, Daimler-Chrysler has made supply management blunders once reserved for other automakers from Detroit:

  • Cost myopia: Soon after acquiring Chrysler, Daimler abandoned the collaborative SCORE program in favor of a more simplistic and combative approach of demanding price- and cost-concessions from its suppliers. (Can you say, “Pull a Lopez?”) The move alienated many of long-time suppliers and failed to give Chrysler a cost advantage against most of the world’s automakers. In fact, recent auto-industry reports indicate that Chrysler has joined GM and Ford in being among the least profitable automakers. Together the Detroit squad make $2,400 less profit per vehicle than Japanese automakers.
  • Inferior stepchild complex: Daimler also quickly abandoned one of the early selling points for the Chrysler acquisition – the promise of sharing pats and vehicle architectures between Chrysler and Mercedes-Benz models. Company officials were concerned that Mercedes buyers would abandon the high-scale brand if it shared attributes of the more pedestrian Chrysler. Hmmm. Sharing of parts between mass-market Toyota models – such as Camry and 4Runner — hasn’t tarnished the image of Lexus, which is now the largest selling luxury brand in the U.S. It also hasn’t hurt profitability for Toyota.

The fate of Chrysler is still in the balance. However, Chrysler should serve as a morality tale for supply managers. The automaker had achieved supply management excellence and used it for competitive advantage. However, in an effort to be a global powerhouse, Daimler-Chrysler got greedy (and lazy), falling back on old-school, hard-hitting supplier management tactics. And it is now paying the price.

Chrysler’s experience (and, quite frankly the experience of all Detroit-based automakers) proves there’s truth in the old adage: “Hell hath no fury like a supply base scorned.”

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3 responses so far ↓

  • 1 Supply Excellence » Who’s the Boss? Chrysler May be Bought by its Supplier // Mar 1, 2007 at 9:12 am

    [...] Last week, in a post on where Chrysler went wrong, I joked that the automaker may need to face the fury of supplier backlash after reneging on its supply management commitments. I never expected how true that statement might become. Or how soon. [...]

  • 2 Jason // Mar 1, 2007 at 12:49 pm

    I know I’m late to post a comment…

    Being a prior employee of an automotive supplier and Detroit native (no, I’m not looking for a pat on the back), I must say that you are right on in many points you made.

    The Once-Big 3 all fall into the same “Pull a Lopez” trap. Beat the supplier down and demand yearly savings. I wonder if they realize that the suppliers just build those “savings” into their piece price anyhow? Tell me that you demand a 3-5% price reduction each year and I’ll give it to you. Of course, I’m gonna raise my price accordingly from the outset. So, although I’m offering a 3-year guaranteed cost savings, I’ll charge you 9-15% more than my actual cost in the first year, 6-10% more than actual in the second, and 3-5% more in the third.

    While supply costs contribute to the Once-Big 3’s profit woes, I wonder what that percentage actually is. As you mentioned in your earlier article (http://www.supplyexcellence.com/blog/2006/10/06/will-anyone-buy-detroit/), I believe that lack of standardization, as well as, very high labor, health care and pension costs are more to blame for their lack of profitability than anything else.

    In a global marketplace, Detroit-based automakers are obviously not what they once were. The question is, “What will they become?”

  • 3 Tim Minahan // Mar 3, 2007 at 4:01 pm

    Jason:

    Thank you for the inside insight. Unfortunately you’re experienced comments are both right on the money and frigthening. And your question is indeed the $64 billion question: What will become of Detroit automakers? Increased reliance on Tier One suppliers for module assembly and even design and growing JV investments in emerging markets — particularly China beg the question:

    What can Detroit do both effectively and profitably?

    One possible answer: sales and marketing. I wouldn’t be surprised to see the Tier Ones and China JVs become the design and body shops, Detroit can become Madison Ave in the Mid-West.

    This would have tremendously positive ramifications for Detroit’s cost structure and profit potential — relinquishing GM, Ford, and Chrysler of large depreciating manufacturing assets as well as the wage and healthcare burdens of unionized labor. (I’m not aware of an advertising or marketing union.)

    Obviously, these moves would have a devasting effect on U.S. labor. I can see the work lines forming outside one of the dozens of Toyota and Honda’s U.S.-based auto-assembly plants already.

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