OEM-Vendor Tensions: Finding Common Ground for Collaboration

The relationship between auto Original Equipment Manufacturers (OEMs) and their Tier-1 vendors is fraught with conflict. Despite being interdependent, the relation suffers from frequent mistrust, and this overshadows collaboration.

To resolve this conflict and arrive at a win-win solution, it is important to understand the root cause of this strained relation.

The Vendor’s Predicament
Tier-1 vendors, typically smaller in size and scale than OEMs, often feel overpowered. Under the current method, OEMs share monthly production plans (based on forecast) with Tier-1s. However, these often change midway because of changes in market dynamics.

As a result, Tier-1s have to change their production schedules resulting in unused raw materials and poor efficiency. It also blocks their working capital.

Those Tier-1s who finish the entire or part of production plan and keep the finished goods (FG) ready as per earlier schedules, face a different challenge. If the OEM refuses to lift the material, Tier-1s are left with dead inventory again blocking their working capital.

Since vendors often serve multiple OEMs, changes from one can disrupt commitments to other OEMs. To cope, the only way out is to resort to overtime, higher costs, or sacrificing aftermarket orders—yet poor On-Time In-Full (OTIF) delivery remains a recurring outcome.

The OEM’s View
OEMs, on the other hand, see unreliability in delayed or incomplete deliveries, which disrupt assembly lines. Even one missing component can disrupt assembly. Consequently, they may need to reschedule production plans.

Senior managers spend valuable time chasing vendors to prevent their lines from going under utilised. To them, the problem appears to be a lack of capacity with their suppliers, prompting demands for dedicated or expanded vendor capacity. But vendors, wary of inconsistent OEM demand, hesitate to invest without long-term commitments. The result: a deadlock.

Seeing lack of action from Tier-1s, OEMs look for new suppliers who offer lower costs or extended payment terms. Ironically, new vendors soon fall into the same cycle of unreliability, perpetuating the mistrust.
 
The Solution: Building a Win-Win Model
The solution to break this cycle requires four key components:

1.  ~100% OTIF performance from vendors for OEMS not to have reliability .
2. Higher productivity  for vendors and OEMS to improve output.
3. Stable costs for both avoiding additional burden.
4. Long-term partnerships to encourage investments in efficiency.

The solution lies in a ‘pull’ based replenishment system - here, vendors replenish raw material stock at OEM sites based on daily consumption data rather than forecasts. A mutually agreed finished goods buffer ensures smooth flow, while simple colour-coded priority signals guide vendors in responding quickly.

This approach shields vendors from sudden plan changes, allows efficient batch scheduling, and lowers inventory risks. For OEMs, it ensures uninterrupted production and reliable supply. With assurances that excess stock will be absorbed or compensated, vendors gain confidence, paving the way for lasting collaboration.

In essence, trust and structured replenishment can turn a historically adversarial relationship into a true partnership—delivering peace of mind for both sides.

Aditi Merchant is Associate partner at Vector Consulting Group. Views expressed are the author's personal.