Ten years ago, the acquisition of America’s third biggest car maker by Daimler-Benz was heralded as the solution to its overdependence on domestic sales, its inability to invest sufficiently in the latest technologies and its urgent need for global partners. Today, following last year’s demerger and purchase of a majority stake by private equity firm Cerberus Capital Management, Chrysler appears to be right back where it started.
Except that the rest of the world has moved on. Raw material and oil prices have gone through the roof, global competition has further intensified and hybrid, fuel cell and other key innovations have continued apace. And to make matters worse, the advantage that Chrysler once enjoyed over its Detroit rivals General Motors and Ford when it came to the quality of supplier relations has been all but wiped out, according to the company’s new CPO, John Campi.
In an hour-long conversation recently with CPO Agenda – his first major interview since taking the job in January – Campi was candid about the damage he feels has been done to Chrysler’s relationships with key suppliers over the past decade, and adamant that rebuilding trust and forging greater collaboration will be one of his top priorities.
Campi has a strong track record to draw upon, having run sourcing operations at General Electric’s power systems division and been the CPO of DuPont and retail giant Home Depot, as well as running his own consultancy business. But he’ll need all of his 35 years’ experience if he’s to slash component costs by a whopping 25 per cent over the next three years without simply squeezing suppliers’ margins and, ultimately, threatening their very survival.
How would you describe your procurement strategy for Chrysler?
It seems to me that the first thing Chrysler needs to do is regain trust and engagement with the supply base. I think, over a number of years, we have lost the kind of relationship with key suppliers, the kind of partnership activity that is absolutely necessary to enable real growth for both organisations.
Why do you think that’s been lost?
Well, I think cost pressure has allowed the OEs [original equipment manufacturers] in North America to almost kneejerk react in putting pressure on suppliers to reduce price without systemically changing the cost structure of the supply chain. As long as we do that, both parties fail. And I think there is clear evidence of that failure in the OEs and across the supply base today. I’m talking with suppliers all the time and advising them that, in my opinion, the only way for the two of us to work together is to drive the non-value-added or waste out. There are a lot of things driving cost within the supply chain that are generated by the very conduct of Chrysler and other OEs like us. To the degree that we can stabilise our production schedule, drive complexity out of our product offering, design right upfront the best possible vehicle and not have change notices going out throughout its entire history – three areas that encompass a tremendous amount of cost – we can make the entire supply chain healthier. But I don’t believe the OEs have worked hard enough. We have chased every last vehicle sale without regard to the cost structure that may be necessary to support that.
So supplier relations is at the heart of your strategy?
Yes. Any company that abuses a supplier is destined for failure, because it’s only with those key suppliers that you’re able to really make progress. It is an extremely expensive process to change out a supplier; there’s a tremendous amount of risk involved. I would much rather work with suppliers that we have a history with, and have a very positive relationship with, than anyone else. It not only makes my job easier, but I think it makes our products better because our supply base understands what it is we are trying to do. If you destroy the trust in the supply base, which I believe has been done, then you have a contentious relationship and you can get to the point where each party is trying desperately to take advantage of their opponent, rather than looking at them as their partner.
It sounds like what you are advocating is not dissimilar to Chrysler’s famous ‘Score’ cost-reduction programme from the 1990s. Is that how you see it?
It’s not only not dissimilar, I’m in fact going back to the very author, in [former Chrysler CPO and president Tom] Stallkamp, of the Score programme and I intend to spend some time with him in the next few weeks if he’s available to understand more about what the intent was, what the programme was all about, because I suspect it’s exactly in line with what I’m attempting to do. As an example, one of things we are adamant about is changing the methodology of how we share savings with our supply base. We have been, in my opinion, incorrect in demanding savings that would be either accrued to Chrysler 100 per cent, or some higher level of percentage. My philosophy is a pretty simple one: if I need my partners to participate with me, then I need to share equally with them on those savings opportunities. So it’s very clear to me that 50:50 savings will motivate both of us to try to figure out how to fix these areas of opportunity. That’s certainly a more appropriate demonstration of our desire to be collaborative.
Have you started doing that already?
We’ve already done it with some suppliers; we have not made it as public as I think we need to. But absolutely we are going down that path.
How are you communicating this to your supply base?
We have a series of meetings that we expect to hold during the course of this year. It is something you have to engage on a very personalised basis with the key suppliers. I’m meeting with those as frequently as I can… I fully expect both good and bad from those communications, because we are not going to make everybody happy. I can’t do that. Nor is that my objective. But the truth of the matter is that we have to get on a different footing. A lot of it falls on our shoulders and not on theirs. I’ve expanded the supplier partnership council that we have, from what has been 10 or 12 companies up to 25, and I’m also changing the construct of those meetings because they were very nice social events but I’m not sure a lot of good dialogue or corrective actions to our mutual challenges took place. This supply council will act as a voice of the supplier, helping us understand what we are doing well and what we are not doing well. My intent is to present actions that we intend to take in the future to get their advice and counsel, to engage them in a more open dialogue. If we’re going to make a systemic change in how we negotiate, or in the terms of our negotiations, I want to get some feedback before we do that. And I want their support at the end of the day.
You’ve had to contend with several supplier bankruptcies and disputes in recent months. How concerned are you about this?
We find ourselves in a situation where we’re very concerned about the survivability of some of our supply base. My concern wouldn’t be as high if I weren’t as dependent upon those particular suppliers. Our Plastech deal certainly got a lot of visibility, but at the end of the day I’m pleased with how we managed through that process and where we are today; it’s substantially better than what was being suggested before their declaration of bankruptcy.
I think we’re in an economic condition where all of us have to be concerned about not only our key suppliers but our own health in terms of being able to sustain the cash flow necessary to run our businesses. This is a very tough marketplace. We have an escalating demand worldwide for raw materials and prices all moving at a highly accelerated pace. That has to find its way through the supply chain.
At the same time, we have customers unwilling to pay the additional cost. So you have a squeeze going on that will have to be absorbed by the OEs and the suppliers until such time that we either have a better product in the market that can garner a higher price or the public is willing to accept what arguably is an inflationary cost increase. This puts extreme pressure on us.
How do we help those suppliers that are caught in this vice in a manner that we can manage ourselves? Because having lost $1.6 billion last year, and now being a private equity-owned firm, our challenges are earnings and cash flow. So it’s balancing how much I can afford to support a supply base that’s in trouble. Even when I may want to support them, I may not have the wherewithal to do that.
But one of the things that I’m absolutely adamant about is that we operate with a high degree of integrity with our supply base. That means, especially during these difficult times, that we have to have a degree of openness that we probably haven’t had in the past. There is a need to have some candour about what we can and cannot do. And when we say that we are willing to do something, we must execute it – as painful as that might be at times. There have been some situations where I believe we have committed to certain courses of actions and then backed away from them. I don’t believe you can do that.
I think you have to be cautious about what you commit to but you have to live up to your commitments.
Ten years ago, Chrysler was considered to have much better supplier relations than Ford or GM. Do you think you still have that advantage?
I don’t believe Chrysler has any unique advantage to Ford or GM in supplier relations, but that’s comparing us to the worst in class not the best. I’m looking forward to having supplier relations that are on the lines of Toyota.
That’s quite a big gap to close, though, isn’t it?
Well, it’s a big gap to close in a short time. If you set a strategy and you live up to that strategy, I think it can be done. If you look at where cost is established on any product, it’s done in the design and concept development, and we do not engage our suppliers appropriately in the development of the design and the conceptual development of our automobiles. In order to do that, I must have a relationship with a supplier that is 100 per cent based on trust and confidence and the ethical standards to which we operate, because when I engage them in the development of the design I am committing to them being the manufacturer and there is no negotiation to take place at that point.
To do that, your own engineering and product development people need to be very open to collaboration with suppliers. Is that currently the case within Chrysler or is there more work to be done there?
There’s a lot of work to be done there. This is not something John Campi or a sourcing group can do on its own; this has to be done in lockstep with the engineering team, because they are the ones that are working on the development of these products and it’s critical for them to be fully engaged and in agreement with the strategic direction. Now, we have suppliers where we believe that’s possible. I’m looking for four or five – maybe at the outside, six – truly critical suppliers that I can partner with on major elements of our product. If it’s a critical supplier of interiors, I’m probably very concerned to have their R&D working with our R&D on the development of the next generation. I certainly don’t want to be switching those suppliers if possible.
How important is it that Chrysler is seen as an attractive customer by your key suppliers? And how much will that determine whether you get the product innovations and technologies you need?
This is a bit of a Catch-22, because the answer is it’s exceptionally important, but you’re not going to get the best suppliers to want to engage with you if you’re not a highly competitive OE in the marketplace. So you need to have innovative design, you need to be upfront driving with them the kind of innovation that meets the aspirations of the market. Today, I would argue that while we have some great products, we’re not quite there. And we’re also not the biggest guy on the block. Both of those things tend to work against us, although I would say that most of the key suppliers we’re talking to are more than willing to approach this area of collaboration.
What are the targets and objectives that have been set for you and the procurement function this year?
We have very clear savings goals that we’re trying to drive to, and I would say those have become increasingly difficult as we’ve seen the reality of the marketplace. But having said that, the primary goal I have for this year is getting this organisation recalibrated on the critical-to-success factors necessary for a global procurement organisation supporting this company and working with our worldwide supply base. We have been, and it’s no secret, a Nafta-based sourcing organisation, which is one of the reasons that globalisation is such an important issue. We have not engaged the supply base outside of North America to any great extent until this past 6-12 months. For us to be in that position, I would argue, has put us at a disadvantage over the past 5-10 years, because we’re the last guy to get there. I would also suggest that we probably missed the sweet spot of cost savings from globalisation. But we need global supply for global operations, and there are places like China and south-east Asia and India where it’s critical that if you’re going to ever consider selling vehicles, then you need to have an engagement from the supply side before you do that.
Our desire is to be a more global company and to sell products all over the world. If we are going to do that, we have to be sourcing all over the world. I’m not looking to go and start from scratch with a supplier, I would much rather engage the domestic suppliers that we have here with their global operations, and if they don’t have them they should have them, in order to support this changing marketplace.
Do you have a specific percentage target of how much of your sourcing you want to move outside North America?
The answer is no. I’m not talking about giving up quality, I’m not talking about jeopardising the content or the look and feel of what’s in our vehicles, or the performance. I’m talking about the highest quality we can possibly find, but at the lowest total cost. I would argue that we do as much low-cost country sourcing as any other car company. We are too dependent today on Nafta-based manufacturing, whether it’s from our supply base or ourselves. If we intend to sell vehicles again, whether it’s in Europe or Asia, we need to have a supply base that we can look to to help support those needs. So it’s much more about getting a better balanced footprint than it is about suddenly finding a new pocket of low cost.
In the four months you’ve been CPO of Chrysler, what are the main changes you’ve implemented?
Well, I think philosophically, the movement to engage suppliers on a very different footing is one of them. That’s an educational and change management issue internal to Chrysler, and not just to the procurement group. It’s something I’m very heavily engaged in with our engineering teams. If you look at the procurement organisation by itself, I would argue that there are some structural changes necessary and I’m making those changes even as we speak.
Last week you moved more than 40 buyers and several procurement directors into different jobs. What were your reasons for doing that now?
It’s pretty clear to me that in almost any company – it doesn’t matter what business you are in – when you have people that have been in their jobs for four, five, six, seven, 10 years (and, by the way, we had some buyers in the same jobs for 12 years), they become comfortable and complacent. It’s not anything malicious on their part, it’s simply human nature. I happen to believe that no one should stay in their job more than three years; they should be moving, even if it’s a lateral move, to get a different view and different thinking. I need people who have a clear head and a clear perspective and are not biased by familiarity, or in the case of the directors something that becomes close to groupthink. When I say that, I’m talking more about their alignment with engineering. Engineering’s a pretty strong organisation within Chrysler, as you might guess, and while I have a high degree of respect for them, I don’t necessarily believe that they are always looking at the opportunities they could look at.
At a time when you are seeking to rebuild supplier relations, rotating so many people could be seen as disruptive. What’s your response?
The supplier relationship initiative that we have is much broader based than 40 or 50 people. It encompasses 800-900 engineers and several hundred people in procurement. So while it may have been disruptive for a week or two, I think long term it’s spot on to where we have to be.
How long do you expect it will take to transform your supplier relations?
It will take as long as it takes me and the Chrysler procurement group to demonstrate to the supply base that we’re serious and that we are living up to our commitments and to a degree of openness, fairness and engagement that’s different to what they’ve seen in the past. There are many small steps you take on that path and it is an extremely difficult time to do that. It’s one thing to make that change when you have an upswing in volume and activity, it’s another when you are cutting production because the marketplace has changed so rapidly.
Many private equity owners have a short timeframe for turning around a business. Is that clear to you in terms of your own objectives?
Well, I don’t think Cerberus is operating with Chrysler quite the way most private equity firms operate with their investments. There is a true dedication by Steve [Feinberg, CEO and co-founder of Cerberus] to save this icon and drive it to a very profitable company. As [Chrysler chairman and CEO] Bob Nardelli would say, we are going to become possibly the smallest but also the best little car company in North America, and for that matter the world. That’s not a one or two-year turnaround, that’s a multi-year, possibly decade, turnaround.
How does being the CPO of a private equity-owned company differ from your previous experiences in publicly quoted companies?
The conduct and actions of our organisation are no different, in my opinion, than any other firm. We are acting as a publicly traded company – the public we have to address is Cerberus and Daimler, because they still own almost 20 per cent of the company. But the bottom line is we operate very much in the same way. The strategies don’t change, the things we have to fix are the same.
Is that the fact that you don’t have to report quarterly to Wall Street helpful, though?
I think it helps the company in the speed of execution of the things we need to do. In procurement, I don’t believe it’s changing anything, because the things I’m doing today, or would want to do, are exactly the same that I dealt with at DuPont or GE. The big driver for what we’re able to do in procurement is the market conditions. Those are totally oblivious to whether you are privately owned or publicly traded.
