DaimlerChrysler’s U.S. Keiretsu

For most of its history, Chrysler (now DaimlerChrysler) managed suppliers through a competitive bidding process: suppliers were selected on the basis of their ability to supply components at the lowest possible cost to Chrysler. A supplier’s track record on performance and quality was relatively unimportant in this process. Contracts were renegotiated every two years, with little or no commitment from Chrysler to continuing to do business with a particular supplier. As a result, the typical relationship between Chrysler and its suppliers was characterized by mutual distrust, suspicion, and reluctance on the part of suppliers to invest too much in their relationship with Chrysler. Since the early 1990s, Chrysler has systematically reorganized its dealings with suppliers in an attempt to build stable long-term relationships. The aim of this new approach has been to try to get suppliers to help Chrysler develop new products and improve its production processes. To encourage suppliers to cooperate and make investments specific to Chrysler’s needs, the company has moved away from its old adversarial approach. The average contract with suppliers has been lengthened from two years to over four and a half years. Furthermore, Chrysler has given 90% of its suppliers commitments that business will be extended for at least the life of a model, if not beyond. The company has also committed itself to sharing with suppliers the benefits of any process improvements they might suggest. The basic thinking behind offering suppliers such credible commitments is to align incentives between Chrysler and its suppliers to create a sense of shared destiny and to encourage mutual cooperation to increase the size of the financial pie that they will share in the future. By 1996, the fruits of this new approach were beginning to appear. By involving suppliers early in product development and giving them greater responsibility for design and manufacturing, DaimlerChrysler was able to compress its product development cycle and substantially reduce the costs of the product development effort. DaimlerChrysler’s U.S. division reduced the time it took to develop a new vehicle from 234 weeks during the mid-1980s to about 160 weeks by 1996. The total cost of developing a new vehicle also dropped by 20 to 40%, depending on the model. With development costs in the automobile industry running at between $1 and $2 billion, that translates into a huge financial savings. Many of these savings were the direct result of engineering improvements suggested by suppliers or improved coordination between the company and suppliers in the design process. To facilitate this process, the number of resident engineers from suppliers who work side by side with DaimlerChrysler engineers in cross-company design teams increased from thirty in 1989 to more than 300 by 1996. In 1990, Chrysler began implementing a program known internally as the supplier cost reduction effort (SCORE), which focuses on cooperation between Daimler- Chrysler and suppliers to identify opportunities for process improvements. In its first two years of operation, SCORE generated 875 ideas from suppliers that were worth $170.8 million in annual savings to suppliers. In 1994, suppliers submitted 3,786 ideas that produced $504 million in annual savings. By December 1995, Chrysler had implemented 5,300 ideas that have generated more than $1.7 billion in annual savings. One supplier alone, Magna International, submitted 214 proposals; Chrysler adopted 129 of them for a total cost savings of $75.5 million. Many of the ideas themselves have a relatively small financial impact; for example, a Magna suggestion to change the type of decorative wood grain used on minivans saved $0.5 million per year. But the cumulative impact of thousands of such ideas has had a significant impact on Daimler- Chrysler’s bottom line. DaimlerChrysler has continued to pursue this approach aggressively, so much so that in 2004, it announced that its long-term goal was for its suppliers to take over a much higher percentage of actual car production— which includes making the car body and assembling most of its major components. Chrysler believes that this will give suppliers greater motivation than its own car divisions to control quality and reduce costs. Thus, it has a radical long-term business model: it wants to be a car designer and not a carmaker. The cars that come off the assembly line may have Chrysler’s name on them, but it will have only designed them, not built them.