Management

Operating in the automotive industry has always been challenging. Long and complex supply chains, unpredictable demand patterns and changing regulations – not to mention planning-to-production processes that can take up to five years – have caused headaches for car manufacturers and original equipment manufacturers (OEMs) for a number of years.

The recession of 2008 and 2009 and its impact made things even harder. Collapsing demand and other associated factors squeezed the car industry and hit suppliers hard. Prior to 2008, it was important for suppliers to be able to respond to unplanned or short-notice demand from OEMs, as the balance of power usually lay with the manufacturers.

However, economic turmoil has changed the dynamics of the industry. Now, demand is rising and OEMs are increasing their production and part orders to suppliers. But suppliers are still cautious after the recession and have neither the capacity nor the capital expenditure plans necessary to deal with increased demand. According to a recent survey of suppliers to OEMs:

+Automotive suppliers are not taking risks, unwilling to make capital investments unless OEMs assure returns.

+Only nine percent of suppliers have plans to increase capacity by more than 10 percent in the next two years.

+As much as 73 percent of suppliers think they have more power in negotiations with OEMs than pre-2008, largely because there is very little extra capacity among suppliers.

In this environment, constraints on the automotive supply chain are more prominent. OEMs struggle to manage these problems as demand rises. They are challenged to forecast demand and part orders to suppliers with greater accuracy. Given planning and development lead times of four or five years, changes in demand are inevitable. But OEMs are struggling to manage these changes efficiently. The complexity of automotive supply chains, and the lack of spare capacity among suppliers, makes it more difficult.

Driving Improvement

Ultimately, OEMs have to get better at understanding demand, managing changes to capacity and communicating with their suppliers. Making necessary changes is difficult but it is possible. Here are some ways to get there:

1. Improve forecasting, planning

Inaccurate forecasts can lead to cost risks from late capacity changes. Once an OEM is associated with volatility, suppliers start planning for inaccuracy. Suppliers also might underinvest in capacity or give contracted capacity to other OEMs. Manufacturers must be disciplined about combining statistical predictions with a consensus among sales, marketing, supply chain and vehicle dealers if they are to capture real demand. Capturinh unconstrained demand using advanced statistical forecasting tools and perform option-velocity analysis can help OEMs make much more accurate forecasts.

2. Communicating with suppliers

Collaboration and communication with suppliers is as important as managing forecasts and changes. Enterprise-wide collaboration with suppliers is part of making them strategic partners. Sharing accurate and timely demand forecasts with suppliers can help create trust and foster collaborative relationships. Giving suppliers access to OEMs’ demand forecasts can provide them with a clearer view of requirements and makes the extended supply chain more responsive.

3. Reducing complexity

Reducing the free options that are available to buyers and the complexity of trim/model variations can help drive better capacity management. There is a balance to strike between offering enough variety to meet market demands and managing the complexity for supply chain. Reduction in option complexity reduces in the number of parts, and higher usage per part, which improves forecast accuracy and enhances supplier stability. Higher usage per part can also result in better economies of scale, reducing supplier and material costs.

4. Segment and manage parts

Even with reduced option complexity, automobiles are complex products with thousands of parts. It is difficult to track and manage supplier capacity for each and every component. Part segmentation can help in this area. Segmentation criteria might include cost, complexity or development lead times. The idea is to treat parts differently depending on how critical they are, based on the cost impact to the OEM. Capacity for critical parts should be managed and tracked more closely than capacity for non-critical parts.

Value Creation

OEMs can improve capacity management by using these methods to realize huge cost savings and reduced waste. OEMs that tackle these challenges will have a major competitive advantage. Large OEMs might be able to save as much as $1 billion every year via efficiencies through the following steps:

1. Managing material costs

Suppliers know which OEMs are most effective in their capacity planning. Our survey indicated that suppliers adjust their prices accordingly, increasing them by three to five percent for those OEMs that, historically, have been poor at capacity planning and management. Thus, for OEMs, improving capacity management could result in savings of up to three to five percent on material costs — for a large OEM, that’s over $1 billion per annum.

2. Improving capacity utilization

Large OEMs can spend as much as $3 billion to $5 billion every year on part tooling. Getting projections right, so that tooling capacity utilization is as close to 85 percent to 100 percent as possible, can result in cost efficiencies. Improving capacity utilization by 10 to 20 percent could save large OEMs as much as $300 million to $1 billion a year.

3. Reducing logistics costs

Manufacturers and suppliers must account for high logistics costs because car components can be bulky, heavy and fragile. By improving forecasting and managing capacity changes better, OEMs can reduce unexpected volume changes for components, which in turn can reduce expedited logistics costs or air freight for parts.

4. Reducing supply chain risks

Poor forecasts can lead to operational and financial risks when suppliers build plants or establish production facilities for an OEM. This is a concern for suppliers, because they face poor utilization of equipment as a result of cancellations. OEMs will pay for a significant portion of these costs through supplier claims, which can be as high as $500 million per year. Reducing cancellation risks alone could save large OEMs hundreds of millions of dollars. Poor capacity management also can result in inability to produce the vehicles that consumers want most, which results in lost sales, or even worse, production stoppages.

By making these improvements to forecasting and capacity management, manufacturers and suppliers can achieve stability, revenue, margin and sustainable growth. With such huge OEMs, Tier I suppliers should begin to implement these efficiency changes to better position themselves for an uncertain future.