A supplier plans for a customer program requiring 100,000 parts a year. But then the vehicle in question sells only a fraction of its projected volume.
Poor sales forecasting is common in the auto industry, and breeds sour relations between suppliers and automakers.
But Delphi Automotive claims in its newest 10-K annual report that it and other unnamed suppliers have had success obtaining customer agreements for compensation independent of volumes.
"Recently, we and many other suppliers have negotiated for cost recovery payments independent of volumes," Delphi's filing says. "This trend reduces our economic risk."
Delphi declined to provide more information about the contract trend.
Special Correspondent Jim Henry discussed the topic with consultant John Henke, president of Planning Perspectives Inc., who has researched supplier-automaker relationships for years.
Q: What's wrong with a supplier being compensated purely on the volume it delivers?
A: The real issue is when the supplier adds some portion of the engineering and development investment onto the piece price. They give up getting the money sooner, which is to their disadvantage. But it's an advantage to the OEM because they don't end up paying it off until the part is actually used.
The problem comes when the automaker's forecast doesn't come to pass, right?
The OEMs have been notoriously optimistic. "We're going to sell 500,000 over five years." But it doesn't go past 60,000 per year, and they kill it after three years.
The supplier proceeded on the expectation of 500,000 and a five-year period. Where do you get the money for the other 320,000? That's a decided risk for the suppliers.
Does this happen in other manufacturing industries?
Sure. But there are all kinds of accounting games that are played. For instance, at Boeing, according to published reports, they spread their costs out over 10 years.
Is this sort of contract a competitive advantage for Delphi?
I can't say what Delphi is doing. But if you take what they say to potential investors, the desired reaction is, "Oh, my gosh, they recover their money first and immediately when it's been spent.
"That's less risk on their part. Therefore, I'm more willing to buy their stock."