In an ideal world, the co-operation between OEMs and suppliers creates a win-win relationship. OEMs get the materials and components that they need to improve their products and take them to market at a competitive price, while suppliers are assured of a stable revenue stream that provides them with a sufficient margin of profit.

In practice, suppliers do not always fare so well. Where competition between suppliers is intense, prices tend to be pushed below the point where sufficient profit can be made. Also, demands placed on suppliers other than price, tend to increase over time, requiring them to commit more resources to serving their customers, and thus further reducing profits.

The relationship between OEMs and their suppliers often appears to be an unequal one. The top OEMs, which comprise the lion’s share of this business, are very large companies, often with a global market presence. As they are individually very important as customers, they have a great deal of bargaining power in negotiating contracts with their suppliers.

OEMs now often formalise a very specific price commitment in their contracts with suppliers

The bargaining power is strongest where there is little differentiation between the products offered by different suppliers. Strong natural bargaining power is coming to be fully leveraged by the OEMs, as they combine the power of company size in central purchasing with local knowledge in regional purchasing departments.

The pressure to perform well in price continues beyond the initial contract signing. Rather than a nebulous commitment to continue to offer competitively priced products for the duration of the contract, OEMs now often formalise a very specific price commitment in their contracts with suppliers. As an example, under the heading of »cost management«, Whirlpool states that:

»Each Supplier is expected to deliver N% Total Cost Productivity yearly, which includes a NET X% cash flowed savings year over year, based on annual purchases.«

The values of »N« and »X« are contract-specific. Whirlpool goes on to explain that NET X% is a subset of N% Total Cost Productivity and refers to cost savings that hit its bottom line profitability, the savings originating either in lower prices or rebates. Where such contract clauses exist, the progressive lowering of the amount paid by customers means that a supplier’s cost base must constantly be lowered if profits are not to suffer.

MAJOR OEMS BUSINESS AREA, SALES AND CABLE USE IN 2003