IRN Survey Shows Suppliers Holding On to Gains; Careful Choices Needed Going Forward
Melissa Anderson, IRN Inc.

The results of IRN’s 2011 survey on the dynamics of price reduction requests give cause for optimism as well as sounding a few cautionary notes. The survey covers the pricing and financial environment for automotive suppliers giving insight into the health of the industry and a context for the decision making of individual companies.

In each of 152 survey responses, suppliers described a typical experience in which a customer – either an OEM or Tier 1 – articulated an expectation of a price reduction on existing business during the year. The overall average annual request was the lowest it has been since 1997, the first year in which the survey was conducted – a 2.9 percent reduction in component price. The average had been as high as 6.3 percent in 2003, but the results for 2011 indicate a continued (and welcome) moderation on the part of customer demands.

Suppliers were conservative in the concessions that they agreed to make to their customers during the past year. The average annual reduction granted fell to 1.5 percent from 1.8 percent last year. The survey’s highest percentage was 3.6 percent in 2003.

One of the reasons that IRN instituted this survey in 1997 was to gather data to guide clients who wanted to know, “If I say yes, will I get rewarded? If I say no, will my company be punished?” The survey data suggests that, while there are instances of benefits and repercussions, a punitive result is less likely than suppliers fear.

“You get seduced into believing you need to play because you will get hurt if you don’t,” said Kim Korth, president and owner of IRN. “There are examples of that, but the way you say no, and the degree to which you understand your competitive environment, really matter. The customers generally prefer to avoid all the costs associated with moving the business.”

A concern arising out of the 2011 results was that nearly 40 percent of respondents said that the new business won in the past year is significantly less or somewhat less profitable than their current programs. Suppliers need to be careful not to rationalize taking on jobs that put them on a slippery slope toward an unsustainable business model. As vehicle demand and supply continue to increase, there are ample opportunities to enjoy profitable growth.

For more information and to obtain a copy of the report, please visit http://www.think-irn.com.