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Automotive World Online GM's New Purchasing Contract Makes Suppliers More Accountable

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  • 1. COMMENT: GM’s new purchasing contract makes suppliers more accountable By Mark Morley High profile recalls have been prevalent in the automotive industry in recent months, with notable incidents such that which occurred in Japan a few months ago: 3.4 million vehicles were recalled due to an airbag fault, impacting four domestic OEMs. Each manufacturer used airbags from the same supplier, Takata. Until now, OEMs have borne the cost of recalls, even where the likely cause was a part provided by a supplier. However, it is the manufacturer’s brand image which is impacted following a recall, which can lead to a drop in sales, ultimately reducing operational profits. The aftermarket parts or downstream business of a manufacturer is lucrative, but key to its success is choosing the best suppliers. Likewise the upstream business or direct materials supply to production lines is lucrative for suppliers as contracts are typically multi-year and there is a high chance of repeat business, as well as expansion, if, for example, the OEM opens a new plant in an emerging market. GM is taking the matter into its own hands by issuing new supplier contracts which aim to move the cost of a failed or recalled part back to the supplier. Under the new contract there are open ended provisions which state that the supplier’s products “will not, at any time (including after expiration or termination of this contract), pose an unreasonable risk to consumer or vehicle safety”. The end result of this is that the supplier will need to The supplier’s products “will not, at any time (including after expiration or termination of this contract), pose an unreasonable risk to consumer or vehicle safety” invest in more stringent testing procedures to try to further increase the mean time between failures. The new contract will also mean that suppliers will need to consider improving design processes, perhaps using alternative materials and potentially modifying production processes to design parts which are even more reliable. Should a major recall occur under this new contract, it will not only damage a suppliers’ business but also, if it does not work towards improving product quality and investing in processes, see it run the risk of losing contracts. The automotive industry as whole is now closely watching GM’s situation to see what happens. There is always a fine balance in terms of how much an increase in supplier-related costs can be passed on to the consumer. Some may view this contract provision as GM being proactive in dealing with the recall challenge, but it is likely that the new contracts will potentially impact both up and down stream business. This new policy will also help boost GM’s global Corporate Social Responsibility (CSR) charter. To enforce this charter, GM and other OEMs need to optimise how they work with suppliers, both contractually and in terms of adhering to quality standards, leading to even more stringent and frequent supplier assessment processes. One such process already in use is the Materials Management Operations Guideline Logistics Evaluation, (MMOG/LE) an extensive supplier assessment process developed by the Automotive Industry Action Group (AIAG) in North America and the Odette organisation in Europe. Many manufacturers run this assessment process once a year but GM’s initiative may lead to more regular MMOG/LE assessments being carried out across itssupply base. All in all, it is fair to say that GM’s new policy comes with the best of intentions, aiming to further improve quality processes across the supply base, which can only help increase consumer confidence in the brand. The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd. Mark Morley is EMEA Industry Marketing Director at GXS. The AutomotiveWorld.com Comment column is open to automotive industry decision makers and influencers. If you would like to contribute a Comment article, please contact editorial@automotiveworld.com. 1 www.automotiveworld.com