What are customer-directed parts in the automotive supply chain?

In the automotive industry, a directed part is a component that an Original Equipment Manufacturer (OEM) specifies from a nominated sub-supplier, even though the part is used by a Tier 1 supplier in its final assembly. This shifts part of the sourcing decision away from the Tier 1 and creates a three-party relationship among the OEM, Tier 1, and Tier 2 supplier.

The approach is becoming more common as OEMs pursue platform, common-parts, and risk-control strategies and as components become more complex and quality requirements increase.

One issue that is very specific to the automotive industry and that repeatedly poses challenges for major Tier 1 suppliers is what are known as customer-directed parts, also referred to as the “Setzteilprozess” in the German automotive industry.

In a traditional supplier relationship, the Tier 1 supplier typically has greater control over its sourcing decisions. With customer-directed parts, the OEM specifies the sub-supplier from which the Tier 1 must source a particular component. This creates an interconnected commercial relationship among all three parties and can significantly affect how pricing decisions are managed.

Why automotive OEMs use directed parts

OEMs use directed parts to secure quality, manage strategic components, support standardization, and reduce certain supply risks. Directed parts can also help with scale effects, unique design requirements, and compliance with technical or regulatory requirements. In practice, however, the model only works well if roles, responsibilities, and commercial terms are clearly defined from the start.

The OEM may benefit from greater consistency and control over critical components, but the arrangement can add complexity for the Tier 1 supplier responsible for incorporating them into the finished product.

How customer-directed parts affect automotive supplier pricing

Tier 1 suppliers often occupy a middle position and face a “sandwich” situation: they are accountable for the finished module, but they do not fully control the chosen sub-supplier or the specified component itself. This situation creates several problems that include:

• Less sourcing flexibility
• Weaker negotiation power
• More complex quality management
• Increased coordination effort across OEM and Tier 2 interfaces

Industry risk reporting also shows that suppliers are under pressure from stagnant production volumes, repeated forecast downgrades, weak financial resilience, and rising risk across key component clusters.

From an automotive supplier pricing perspective, three issues are particularly important.

Delayed price adjustments can hurt cost recovery

Even when inflation or other cost drivers are accepted in principle, negotiations and approval cycles can delay actual reimbursement.

For Tier 1 suppliers dealing with customer-directed parts, the issue becomes particularly difficult because the supplier may have limited control over the underlying Tier 2 cost while remaining exposed to its financial consequences.

Weak cost pass-through creates margin leakage

Raw material, energy, freight, and labor increases are often not fully recovered, especially when contracts are fixed price or index formulas lag behind actual market changes.

For a Tier 1 supplier dealing with customer-directed parts, the issue becomes particularly difficult because the supplier may have limited control over the underlying Tier 2 cost while remaining exposed to its financial consequences.

OEM cost-down pressure can squeeze Tier 1 margins

If the OEM pushes cost-down targets while the Tier 1 is already constrained on the sub-supplier side, the result is often a margin squeeze rather than real efficiency gains.

The Tier 1 may not have the same ability to source an alternative component, negotiate with a different supplier, or make other procurement changes it would normally use to reduce costs. Pricing discipline therefore becomes increasingly important for identifying and addressing margin pressure.

How can Tier 1 suppliers improve pricing for customer-directed parts?

There will not be a single pricing measure that solves all the problems associated with this process. However, the focus of these measures can be summarized as follows:

1. Deploy digital pricing and analytics tools – Better data quality, simulation, and KPI tracking help identify margin erosion earlier and make cost recovery more evidence-based. Greater visibility into pricing and cost changes can help pricing teams understand where profitability is being affected before those issues become embedded across a program.
2. Strengthen the negotiation cadence – Replace ad hoc price fights with regular review cycles, benchmark checks, and pre-agreed escalation paths. A more consistent process creates opportunities to address changing costs and pricing conditions earlier rather than waiting until margin pressure becomes significant.
3. Define a clear pricing governance model – Separate what the Tier 1 supplier controls itself from what is passed through from the directed Tier 2 part so the commercial model reflects actual responsibility. Clearly defining these responsibilities can help reduce ambiguity when costs change or commercial issues arise.
4. Establish formal change-order rules – Define in advance who pays for engineering changes, premium freight, rework, and quality failures because these are frequent sources of pricing conflict. Formalizing these rules upfront can help prevent costly negotiations after the expense has already occurred.
5. Segment directed parts by commercial logic – Not every directed part should be treated the same. Critical or volatile items need tighter governance than stable, commodity-like components. This allows automotive suppliers to focus pricing resources and management attention where commercial exposure is greatest.

How Vistex supports automotive supplier pricing

Managing customer-directed parts requires visibility beyond an individual component's price. Automotive suppliers need to understand how changing costs, pricing agreements, customer requirements, and other commercial factors ultimately affect margins and profitability.

Vistex AI-driven enterprise software helps automotive companies gain greater visibility and control over complex pricing decisions by connecting pricing data to the broader commercial factors that influence performance. This can help teams evaluate pricing conditions, identify potential margin leakage, monitor price realization, and make more informed pricing decisions across customers, products, and programs.

Turn customer-directed parts into a source of value

When these challenges are addressed through stronger governance, analytics, negotiation processes, and clearly defined commercial responsibilities, directed-part processes can become a source of value rather than friction.

The result is typically higher process efficiency, better pricing discipline, and stronger cross-tier collaboration. Over time, this can translate into meaningful improvements in margin quality and free cash flow.

For Tier 1 suppliers, the objective is not necessarily to eliminate customer-directed sourcing. Instead, it is to establish the pricing visibility, commercial processes, and governance needed to manage these arrangements more effectively.

Automotive Supplier Pricing and Customer-Directed Parts Frequently Asked Questions (FAQs)

Q: What is a customer-directed part in the automotive industry?

A: A customer-directed part is a component for which an automotive OEM specifies or nominates the supplier, even though a Tier 1 supplier uses the component within a larger assembly or module. This creates a three-party relationship between the OEM, Tier 1 supplier, and directed Tier 2 supplier.

 

Q: What is a directed buy in the automotive industry?

A: A directed buy is a sourcing arrangement in which an OEM directs a Tier 1 supplier to purchase a particular component from a Tier 2 supplier. As a result, the Tier 1 has less control over the sourcing decision than it would under a traditional supplier arrangement.

 

Q: Why do automotive OEMs use directed parts?

A: OEMs may use directed parts to maintain quality, standardize components across programs or platforms, achieve scale advantages, manage strategic components, meet unique design requirements, and address technical or regulatory requirements.

 

Q: How do directed parts affect Tier 1 automotive suppliers?

A: The Tier 1 often remains responsible for the finished module even though it does not fully control the selected Tier 2 supplier. This can create challenges involving sourcing flexibility, negotiations, quality management, cost recovery, and coordination among the parties.

Q: How do customer-directed parts affect automotive supplier pricing?

A: Customer-directed parts can make it more difficult for Tier 1 suppliers to respond to cost increases because they have less control over the underlying supplier relationship. Delayed price adjustments, incomplete cost pass-through, and continued OEM cost-down requirements can contribute to margin pressure.

A: How can Tier 1 suppliers improve cost recovery on directed parts?

Q: Suppliers can establish regular pricing review cycles, strengthen pricing governance, define cost pass-through and change-order rules, segment directed parts according to commercial risk and use analytics to identify margin erosion earlier.

Q: How can pricing technology help automotive suppliers manage directed parts?

A: Digital pricing and analytics tools can improve visibility into costs, price realization, margins, and commercial performance. Better data can help teams identify potential problems earlier, support negotiations with stronger evidence, and prioritize the directed parts creating the greatest financial exposure.