How Boeing, Toyota, Caterpillar, and other OEMs can double their current net profit by using smart contracts to become unmanned “virtual companies”, with or without cryptocurrency: Part 15
What’s in it for the suppliers?
Of course, it doesn’t matter if the OEMs are onboard with this if the suppliers are not. There must be incentive for all involved parties if this is to get widespread adoption.
Here’s the good news: Suppliers actually stand to benefit more than OEMs.
Time for a little background. While being a tier 1 supplier to a major OEM is an exciting opportunity, it’s also a tough life. Suppliers face four major problems.
1. Extremely high OEM expectations when it comes to reactivity.
Perhaps Capgemini best summarized the plight of the modern supplier in their OEM Customer Management for Automotive Suppliers report:
“Most OEMs assume high product quality and low prices as a given, and now also expect considerable flexibility and reactivity”
As described in part 12, smart contracts enable the holy grail of reactivity; instantaneous synchronized coordination of all supplier tiers in a cascading domino effect.
2. Extremely inaccurate sales forecasting on the OEM’s part. Which in turn exacerbates the aforementioned need for reactivity.
In our “virtual company” model, an AI has taken over sales forecasting. Accurately seeing much further down the horizon than a human can.
Since it is in the OEM’s best interest to openly share this forecast, the suppliers benefit too.
3. Excessively aggressive cost reduction campaigns that drive good suppliers into bankruptcy (or at least sour a working relationship and hamstring innovation).
So far, I’ve only discussed these topics from the OEM perspective. Let’s hear some quotes that touch on the supplier perspective:
“The industry as a whole also has an inconsistent history in recent decades, often lurching from collaborative ties to aggressive cost cutting as vehicle sales and profit margins ebbed and flowed with the business tides”- http://www.scmworld.com/general-motors-turbocharged-supplier-relations/
“Heightened friction between OEMs and suppliers on cost reduction matters is the main factor behind the deterioration of relations between automakers and suppliers globally in 2014”- https://news.ihsmarkit.com/press-release/ihs-automotive/2014-global-study-oem-supplier-relations?page=6
“Frankly, this feels like walking down the street and being mugged”-feelings about Boeing PFS from Nigel Stein, ex-CEO of GKN Plc
Within supplier circles, Boeing PFS has even been jokingly referred to as “pilfering from suppliers”.
As discussed in parts 6 and 14, the smart contract will take over management of cost savings efforts. Optimizing every last buying decision and thereby generating more savings than the humans ever could.
But it will also avoid bankrupting suppliers as no parts means unfinished vehicles and interrupted sales, even if the other 99.9% of the supply chain delivers.
It will also free up the human commodity managers’ time and enable them to shift the focus beyond cost reduction. As discussed in part 14, good supplier relationships provide billions in non-price value add.
Overall, suppliers can expect an OEM on smart contracts to be much more discerning and economically astute.
4. OEMs don’t always pay on time. For medium and large suppliers, this is merely an annoyance. But for smaller mom-and-pop suppliers, this can create serious cashflow problems.
Tesla is a good example. They’re only paying contracted suppliers on-time at a 95% rate and non-contract buy suppliers at an 80% on-time rate.
Various excuses have been offered, but the suppliers aren’t buying them. They’re worried that Tesla is being dodgy or that Tesla is potentially under risk of bankruptcy. As a result, they’ve taken legal action by filing liens. Sources: Primary, secondary, and tertiary
No legal action is cheap. Nor fast. Smart contracts, with their inherently automated and self-enforcing nature, are a tremendous improvement.
Also recall the example of a production contract from part 6:
Brake holder part number 43034–0108 will be unit price $40 assuming the OEM buys 10,000/yr and the London Metals Exchange price of aluminum is $2,000/ton. For every 2,000/yr less in orders, the unit price goes up $3 (pro-rated). For every 2,000/yr more in-orders, the unit price goes down $2 (pro-rated). The unit price is 15% dependent on the cost of aluminum. This part requires a lead time of 5 weeks to deliver.
From an invoicing with traditional money perspective, it simply isn’t practical to constantly calculate real-time fluctuations in volume and raw metal prices. Parts are “assumed” to be a flat $40 each for ordering purposes. With differences probably settled on a quarterly basis in the form of rebates.
With smart contracts, real-time price fluctuation calculations are easy. In other words, suppliers are “rebated” on a daily basis as opposed to a quarterly basis. Much better cash flow for suppliers.
Continue to part 16….