Supplier relations have been a volatile topic in the auto industry recently. Both sides have been busy pointing fingers, lobbing insults and adding fuel to the fire.

To stay competitive, OEMs are consolidating components and putting extra pressure on suppliers to reduce prices and boost quality. At the same time, many suppliers are struggling to address shrinking profit margins while maintaining customer loyalty.

Unfortunately, few automakers treat suppliers of parts and equipment as strategic partners. However, as all manufacturers strive to create greater value and meet the challenges of global competition, that may soon be a thing of the past. In fact, the oldest assembly plant in the American auto industry will soon be the site of a revolutionary 21st century supply strategy.

DaimlerChrysler (Auburn Hills, MI) recently announced that three key suppliers will set up operations in new, on-site facilities adjacent to the company's Toledo North Assembly plant, which dates back to 1904. As part of a long-term contract, the suppliers will own and operate the new body shop, paint shop and chassis assembly operations within the footprint of the old plant. Although similar concepts have been implemented in other parts of the world, it marks the first time that suppliers will operate as an integral part of an American auto assembly plant.

"We think this is a win-win arrangement and one that can be a prototype for many other collaborative partnerships between OEMs and suppliers," says Dieter Zetsche, president and CEO of Chrysler Group. "We're all fighting the same battles brought about by cutthroat competition and the need to slash costs, improve quality and innovate in every corner of our industry.

"The only way for us to win this war is by working together to find new solutions for the problems that confront this industry," adds Zetsche. "What it comes down to is the need for radical approaches to some nagging problems-old and new-that simply aren't going to be fixed through old solutions."

The suppliers will be partners in the development, construction and daily operations at the Toledo manufacturing complex, which assembles Jeep sport utility vehicles. The three companies involved in the unique experiment are equipment suppliers Durr Industries (Stuttgart, Germany) and Kuka Group (Karlsruhe, Germany), and parts supplier Hyundai Mobis (Seoul, South Korea).

Durr will be responsible for the construction and operation of a 400,000-square-foot paint shop. Kuka will construct and operate a 250,000-square-foot facility on the Toledo site that will weld together vehicle bodies. Mobis will construct a 200,000-square-foot plant that will build rolling chassis modules. A rolling chassis includes major powertrain and drivetrain components, as well as wheels and tires.

The chassis modules and painted bodies will be transported via conveyor directly into Chrysler Group's final assembly building, where all the components will be married together to create a finished vehicle. The automaker will be responsible for installing instrument panels, seats and other final-trim operations. Chrysler will pay the three suppliers for each painted body and rolling chassis they produce

"By partnering in this way with suppliers for body shop, paint and chassis operations, [we are] able to optimize capital dollars for investment in future products," says Tom LaSorda, chief operating officer and former head of Chrysler Group's worldwide manufacturing operations.

Each supplier will invest about a third of the $900 million capital investment for the new facility. Construction of the new facilities will begin this winter, and vehicle production is slated to begin in 2006. The suppliers will be building new versions of the Jeep Liberty and Jeep Wrangler. And, because Chrysler plans to produce up to four new products at its Toledo facility over the next several years, as many as 12 additional suppliers may eventually become involved in the innovative project.

The colocation strategy gives suppliers the opportunity to build and manage key manufacturing facilities totally within an existing plant footprint. In this case, the three suppliers will individually manage the body, paint and chassis operations, thus assuming the capital investment for those areas.

"Traditionally, OEMs own the equipment, so this concept is highly unusual," says David Cole, chairman of the Center for Automotive Research (Ann Arbor, MI). "It's quite innovative and pioneering. The drive to take cost out is so enormous today that it's breaking down traditional barriers in the auto industry. As other automakers and suppliers rethink how they function, we'll probably be hearing more strategies like this."

According to Cole, the Toledo experiment appears to be much more revolutionary for Durr and Kuka. Instead of just supplying paint and welding equipment to a facility, like they've done in the past, the companies will be on the other side of the fence-in the business of running a car plant.

"They received long-term contracts, 14 years I think, that provide a good return on their investment," explains Cole. "Also, this may be an important business model that could be applied to other situations. They obviously would be able to benefit the most if this works. DaimlerChrysler would be there to coach them through the process.

"In a sense, this may be the new way that equipment suppliers have to work in order to make and sell their hardware," adds Cole. "We'll have to wait and see if this catches on."

"This kind of innovation is the road to the future-for OEMs and suppliers alike," claims Zetsche. "No free-market enterprise can survive if its costs exceed its revenues in the long term. While most of the talk today is about ‘outsourcing,' DaimlerChrysler has a very deep-seated interest in ‘insourcing,' much as [we're doing] in Toledo."

LaSorda calls the concept an alternative to the traditional "greenfield site" approach to new manufacturing facilities employed by many automakers. "At the Chrysler Group, we love to defy conventional wisdom," says LaSorda. He claims the automaker will be able to accomplish similar savings to greenfield concepts because supplier investment in the project will equate to an approximate $300 million savings, "enough to pay for one additional derivative product."

But, the uniqueness of the project doesn't stop there. It also represents a collaborative partnership with the United Autoworkers Union (UAW). One year ago, Chrysler Group and the UAW signed an unprecedented, 8-year agreement for Toledo employees that paved the way for the supplier colocation strategy. The UAW recognized that having suppliers based in an OEM's facility could open new opportunities.

Approximately 25 percent of the 4,000 jobs at the facility will shift from the automaker's payroll to the suppliers'. Current Chrysler employees will be able to choose whether to work for one of the suppliers or retrain for another job with the automaker.

"It is only through innovative approaches such as [this] that the Chrysler Group can close the competitive gap with ‘transplant' companies that aren't burdened with legacy costs," LaSorda points out. "We have commitments to the communities in which we operate and to our union partners. Our intention is to honor those commitments."