With the world still reeling from supply chain shortages and disruption, many organizations are rethinking their supply chain strategies and in particular, how they work with their suppliers.
One example is Stellantis — an automotive conglomerate comprised of several major auto brands, including Chrysler, Dodge, Fiat and others. Stellantis recently dramatically altered its purchase order contract terms and conditions.
The Detroit-based Butzel law firm recently did an analysis that warned suppliers of the impact of Stellantis’ changes. The findings? The new terms, almost without exception, are less favorable to suppliers. For example, the new terms go so far as requiring suppliers to warrant the design, even if they are not design-responsible.
Jennifer Dukarski (a shareholder and leader of Butzel’s Connected and Autonomous Vehicle Specialty Team) shares her perspective: “What Stellantis is trying to do is strong-arm suppliers with staggeringly one-sided language. The new terms provide ample protection for Stellantis but few, if any, (protections) for its suppliers — something that will be immediately obvious to suppliers. This hardline approach will certainly create adversarial negotiations with current and future partners.”
How bad are these terms? Stellantis’ recent move caught the attention of Jan Griffiths – an automotive industry advocate for authentic leadership. Griffiths dedicated a podcast episode to dissecting the Stellantis power-based approach in her Finding Gravitas podcast. She agrees that what Stellantis is doing is one-sided, stating, “I can’t imagine anybody in their right mind who would sign up for this.”
Andrew Downard – a former procurement executive in the automotive industry, turned academic –calls Stellantis’ approach is “myopic and short-sighted,” adding, “Stellantis is using its power to create a short-term win that will most almost certainly come back and haunt them in the longer term.” Downard’s advice comes from both practical experience, having worked for both GM and Nissan, and an academic perspective, having earned his Ph.D. in supply chain management with a focus on supplier relationships.
During a time when the automotive industry is already dealing with massive disruption and supply chain shortages, this type of supplier contract is a massive step in the wrong direction.
But what lessons can we learn and how can you prevent them?
1. Seek Ways to Build Trust with Suppliers
Downard suggests one of the biggest lessons learned is that when organizations choose to use their power over suppliers, it erodes supplier trust and creates an adversarial (versus a cooperative) relationship. “The research around the importance of trust in supplier relationships is very deep and compelling.”
John Henke – a former Professor at Michigan State University and President of Planning Perspectives Inc, an industry research business that helps companies understand their supplier relationships – is one of the pioneers making the connection between supplier trust and supply chain success. Henke is known for his empirical research on the benefits of supplier trust, which proves the most trusting supplier working relations are the least adversarial and reap the most significant benefits from their suppliers. For instance, he and his co-author Chun Zhang, discuss their research in a 2010 Sloan Management Review article, “Increasing Supplier-Driven Innovation,” that shows supplier price concessions and supplier-related non-price benefits, such as suppliers’ willingness to share new processes and product innovation ideas, increase as trusting working relations with the customer increase.
Henke’s research is far from fluffy. He bases his conclusions on over 20 years of ongoing studies on the working relations between the six major US automotive manufacturers and their hundreds of Tier 1 suppliers. These studies enabled the comparison of the automakers’ supplier relations with regard to one another and across commodity areas and other groups within each automaker.
Also, Henke’s research is not unique. Over the past two decades, many studies have tied trusting supplier relations to a plethora of customer-related benefits. The University of Tennessee’s work in creating highly collaborative trusting supplier relationships has led to seven books on the topic, including Contracting in the New Economy: Using Relational Contracts to Boost Trust and Collaboration in Strategic Business Relationships.
One company that made the shift to create trust-based supplier relationships is Chrysler. In the 1980s and early 1990s, Chrysler executives made a conscious shift to foster trust with their suppliers. Chrysler was so successful that their endeavor was profiled in Harvard Business Review “How Chrysler Created an American Keiretsu.”
2. Look For Cooperative Solutions That Maximize Value
A second lesson: organizations should seek to develop cooperative solutions to maximize value for their suppliers — not just themselves. In essence, creating proverbial ‘win-win’ solutions with suppliers will turn adversarial win-lose relationships into solutions that benefit both parties.
Downard speaks from experience when he encourages organizations to turn to collaborative approaches with a lens to seek ways to create value:
“You can either manage your supplier with strict contract terms and supplier management tactics the way Stellantis is doing or you can inspire your suppliers to help you create value. Having made the shift from GM who used a power-based approach to working with Nissan, I saw firsthand the power of making the shift to a collaborative value creation approach. Rather than bicker over price, at Nissan we created collaborative working relationships where we worked together with suppliers to help them reduce costs and improve quality. The result? At Nissan, I could buy the same part from the same supplier at a far lower cost than I was able to get using GM’s power-based tactics, despite GM purchasing larger quantities.”
3. Don’t Use Handshake Deals
Let’s revisit Chrysler for the last lesson. As mentioned above, in the late 1980s and early 1990s Chrysler executives made chose to create more collaborative and trusting relationships with their suppliers and the results were cited in the HBR article. However, the lesson comes from the fact that Chrysler’s approach is known as informal relational contracting practices. why? While these relationships were well-intentioned, they were based on little more than oral guarantees that existed without formal documentation. When Chrysler merged with Daimler in 1998, the leadership regime shifted with the Daimler executives taking the company’s helm. Chrysler’s trust-based mantra soon went back to a more adversarial approach with their suppliers — and since the actual contract had no formal documentation, suppliers were out of luck.
John Henke’s research profiled the impact in a 2014 Supply Chain Management Review article “Lost supplier trust…how Chrysler missed out on $24 billion in profits over the past 12 years.” The results were staggering. The return of adversarial relationships ultimately led to $24 billion in lost profits between 2002 and 2014.
The lesson is clear. In any relationship, both parties have a set of rights, roles and responsibilities. These should be clearly defined to set clear expectations. A fair-minded approach to each parties’ rights builds trust and can help organizations reach crucial commitments that help everyone achieve their goals.
This stands in stark contrast to Stellantis’ new contract terms and conditions.
The Bottom Line: Collaborative and Trusting Relationships Benefit Your Bottom Line
The new Stellantis terms are a head-scratching example of what not to do when developing a lasting relationship with suppliers—or engaging new partners.
The automotive industry profiled here is only one example. Regardless of the business sector in which you operate, leaders should be trying to establish trust, foster collaboration and create more fair and balanced formal relational contracts with their most strategic suppliers if they want a fighting chance to cope with supply chain challenges.