Automaker Seeks 25% Cost Down From Suppliers in This Steel Market?

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A cost down from the American automotive industry? Surely you jest. As you read in MetalMiner’s last post, US automakers are in trouble financially – and Chrysler’s recent announcement that it is seeking a 25% cut in parts prices doesn’t change this writer’s point of view. Although Chrysler’s CPO, John Campi, intends to meet with legendary purchasing czar Tom Stallkamp for cost down ideas, 25% seems like a pretty big long-shot in this market.

Campi’s ideas so far include: providing suppliers with 30 days visibility of its production schedule (instead of the current 7), standardize and share parts across platforms and reduce late engineering changes. The other idea involves splitting savings with suppliers. These are all noble strategies and with an organization the size of Chrysler, if it were able to implement the ideas across all plants, they could probably get somewhere within striking distance. But Mr. Campi is going to have to look closely at one variable and one variable only and that is steel.

Consider this: The US consumes about 125 million tons of steel annually, according to this article in Investor’s Business Daily. According to that same article, 20% of that goes into cars or about 25 million tons. Chrysler’s market share is 9.8%, according to Automotive News so its approximate share of the total automotive tonnage is 2.45m tons. Steel has increased between $500-600/ton for hot rolled and cold rolled products. So if we take $500 as the average increase and multiply it by Chrysler’s tonnage, we’re talking about a $1.225b price increase! Okay, I realize this is the automotive industry here and of course Chrysler has not born the burden of those costs (probably only a tiny fraction of those costs actually) but where does Chrysler think its supply base is going to come up with a 25% cost reduction?

As a giant fan and advocate of lean manufacturing and sourcing processes, I’m dying to see what rabbit Mr. Campi is going to pull out of this hat!

–Lisa Reisman

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