Steel Buyers Basics: What Goes Around, Comes Around

See the 2015 survey results here.

Normally large OEM’s control so much spend that suppliers are extremely reluctant to discuss these issues openly so this survey has some unique information in it and is worth reading.  I’ve got some pre-bankruptcy automotive stories that illustrate shortsighted customer practices that I will share below.

Example 1.  WCI Steel Inc. had a disagreement with one of the Big 3 over a large deduction the auto company had unilaterally taken on an invoice.  The mill tried for over a year to resolve the issue but the auto company’s payable people, based outside the USA were impossible to reach.  No one else at the auto company would respond to their issue — WCI basically got the run around.  WCI got so frustrated with the auto company’s behavior that they halted shipments and committed the ultimate automotive sin of shutting down an assembly line.  Within two days after the shutdown the issue was resolved but it’s no surprise that both companies went into bankruptcy.

Example 2.  A steel mill sent its engineers into an automotive fabrication plant to help them find savings as part of a contractual effort to find cost downs.  They found a stamped part using a coil whose width that was significantly wider than it needed to be.  The part was high volume and taking the width down out meant saving millions of dollars.  The auto company’s response is that it was too difficult to get approval for this relatively simple change or to get their unionized people to make the necessary adjustments to their tooling.  The mill’s engineers never worked hard to make savings happen for that auto company after that.

Example 3.  A salesperson once told me that half his business was with one of the Big 3 domestic auto company and the other half with Honda.  However he spent 95% of his time working on Honda issues.  His reason was that Honda would listen and react when they could improve a process or fix a problem.  At the other auto company it was impossible to get anything done and, every time he spoke with them the conversation was like having a stick stuck in his eye.  He naturally decided to spend his time where he could make a difference and provide value.

Buyers must understand that Suppliers are a crucial part of a company’s efforts to improve business processes and create innovation.  Toyota and Honda have a strategy (and not just a slogan) that says their suppliers are their partners.  The typical US auto company has a culture (despite what their strategy might be) that says their suppliers should be taken advantage of.  

Which strategy works best?  The historical results speak for themselves.

Finally, it is not just the automotive firms that mistreat their suppliers in shortsighted ways.  One of the largest retailors of building supplies has a policy of ignoring any invoice that doesn’t match, in every detail, what their computer says it should be.  The error could be in an address or a description and might be due to a customer problem and not the supplier’s mistake.  No matter what the mismatch is, the invoice is simply ignored and no indication or report is given on the error back to the supplier.  Furthermore, after six months an unpaid invoice goes into the trash and will not be paid.  

This system creates enormous work for billing departments since there is no information on which invoices were being paid, which were rejected and why.   I suspect this retailer’s accounts payable department sees this system as a way to make money and so they have no interest in helping suppliers find invoice errors and they are big enough to get away underpaying invoices.  But guess what, in my experience, this big company, who should have receive the best prices, actually pays nearly the highest prices – they have to because suppliers have to find a way to recover the cost of doing business with them.

Here is another quote from the report: “OEM buyers and management have to remember that cost reductions, contract changes, and other similar programs do not of themselves result in poor supplier relations; it’s the manner in which these programs are administered that causes poor relations with suppliers.”  

The bottom line is that what goes around comes around.  Suppliers with great ideas and innovative products are going to share them first with customers they respect and trust and over the long term let badly behaving customers wither and die.

Written by: Mario Briccetti of Briccetti & Associates and an instructor for Steel Market Update (Steel 101 & Sales Training workshops). He can be reached at: Mario@mbriccetti.com.