Stages of New Supplier Relationship

1. Stages of New Supplier Relationship • Stage I • Reduce number of suppliers • Get suppliers to deliver parts just-in-time • Improve supplier quality • Stage II • Involve suppliers in product development • Involve suppliers in process improvement • Suppliers have business for the life of a model • Share in the rewards as well as risks

2. Accomplishments • Development time reduced from 234 to 160 weeks • Development costs per vehicle declined by 20-40% • Fewer engineering hours needed per vehicle (ER&D) • Can purchase hard tools 40+ weeks later than before – and still allow hard tools to be cut after prototypes are completed • Number of new models developed increased from 4 to 6 with the same total size engineering staff • Profit per vehicle increased from $250 to $2110

3. Development and Launch Costs(percent)

4. Efficient Product Development Processes Typical Project Engineering Changes Product Design Potential Timeline Engineering Changes Product Design

5. Catalysts for New RelationshipWith Suppliers • Benchmarked Honda • Integrated NPD teams • Selected suppliers based on history of good relations, track record for quality, and meeting cost targets • Acquisition of AMC • AMC used these practices too (by necessity) • François Castaing is made chief engineer • Glenn Gardner from Diamond-Star Motors became head of re-launched LH program

6. Global Automotive Value Chain Retail Customers 50 million Vehicle Dealers 50,000+ Vehicle Manufacturers 14 Tier I Suppliers 1,500 Tier II Suppliers 50,000+ Tier III and IV Suppliers 250,000+

7. Implications of Presourcing and Target Costing • Choose suppliers early in vehicle’s concept development stage • Full responsibility given to supplier for designing, prototyping, and manufacturing the component • Pre-qualified suppliers are selected for NPD teams • Design to target cost

8. Target Costing $20,000 Target Market Price Less: Profit Fixed Costs Manufacturing Costs Transportation Warranty $11,750 Target Material Cost $8,250 Individual component cost targets

9. SCORE • Needed to motivate suppliers and build trust • Four senior leaders visited key suppliers • Senior leaders overruled engineers on suppliers’ suggestions • Focused on improving DCX and lower tier suppliers first • Offered to share the savings with suppliers • SCORE incorporated into suppliers’ overall performance rating – suggestions should lead to cost reductions equal to 5% of the supplier’s sales, plus reductions in weight, parts, warranty claims • Suppliers could share cost-savings or raise their performance rating

11. Score On-Line In 1999, 7,900 Electronic submissions resulted in $2.8 billion of suggestions

12. Enhanced Supplier Involvement • Suppliers’ engineers in residence at DCX • Supplier Advisory Board from executives of 14 top suppliers • Annual and quarterly meetings with 150 top strategic suppliers • Suppliers investing in dedicated assets (plant & equipment) • Suppliers offered longer commitments (life of model)

13. Chrysler- An American Keiretsu? • DCX has little or no equity in its supplier base • Career overlaps between Japanese companies and suppliers • But it’s harder for DCX to drop an underperforming supplier and it can benefit from Toyota’s and Honda’s upgrading efforts • DCX still has four times as many suppliers in the U.S. as Toyota does in Japan • Initiatives have not penetrated to lower supplier tiers