3 - Jacobs University

Moreover, today OEMs tend to supply entire systems rather than individual components. As a
result suppliers of assembly units gain increasing importance and a lot of the suppliers, which produce
the individual assembly components and used to deliver these directly to the OEMs, operate
now in the 2nd or higher tiers (see Figure 6). Due to such business restructuring, in the past a few
decades the automotive supplier network has evolved into a very complex, highly interconnected,
multi-layer, global structure. Nowadays between 60 and 80 percent of automotive production is
outsourced (Veloso & Kumar, 2002). The number of just the 1st-tier suppliers the biggest automotive
producers have is in the order of several hundred up to a few thousand, while the supplier
base is growing ever bigger as the portion of outsourced production expands. In 2010 Volkswagen
Group ran several pilots on sub-supplier management, which revealed that the average Volkswagen
Group 1st-tier supplier has from 5 to 10 critical sub-suppliers, which are involved in a substantial
part of its production process 6 . The results of this evaluation show that 1st-tier suppliers represent
just the tip of the iceberg (reaching in the best case up to 10 to 20 percent) of the enormous
pool of delegated manufacturing responsibilities and underscore once again how complex the real
automotive supply chain is.
Outsourcing plays a particularly important role in price reduction as well. OEMs strive to reduce
the number of their business partners and at the same time increase the share of business
for individual suppliers. The larger order quantities allow the outsourcing companies to negotiate
better prices. However, there are particular differences between the approaches of individual
automotive players in how far they would go with reduction of the number of their direct suppliers.
Companies such as Renault and Volkswagen pursue a more conservative strategy and use the
”two-plus-one” formula (Veloso & Kumar, 2002). This means that for every component there are
two major suppliers with a third one, closely following behind. The third supplier delivers smaller
quantities but meanwhile receives enough business so that in case one of the two primary suppliers
cannot keep up with the deliveries the third one will step in and take over the orders. Ford on
the other hand pursues a more aggressive strategy and wants to have a single supplier for each
component or system (Veloso & Kumar, 2002). Currently Ford has a comprehensive catalogue of
the prices of individual components and therefore an idea about what a whole system should cost.
This gives Ford advantage in the negotiation process. In the future, however, Ford would know no
more the prices of individual components but only the prices of the whole systems, which would
give its suppliers a lot of power in the negotiations. One further advantage of the ”two-plus-one”
strategy is that working with and accordingly auditing two or three suppliers provides a much more
6 Source: personal communication with Volkswagen AG employees.
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