Auto suppliers handle more design tasks, lower costs
By Staff -- Purchasing, 4/9/1998
Automakers are tough customers. At least that's what their suppliers are saying. A two-year study of 150 automotive suppliers in North America and Europe found that automobile manufacturers are demanding that suppliers assume greater design, development, and supply management responsibilities, while simultaneously reducing costs.Such requirements may seem unrealistic on the surface. But the "Global Development Benchmarking Study" shows--and automakers confirm--that top suppliers are complying with such demands. How they're doing this is changing the face of the auto industry.
"The automotive industry's structure has changed dramatically, with suppliers being squeezed from all sides," says Brian Ambrose, national industry director of industrial products and automotive for kpmg Consulting, the research house that conducted the study together with the Automotive Consulting Group (ACG). "The good news is that suppliers are responding with new product development processes that focus on what we are calling integrated supply-base management."
Indeed, increasing cost pressures and stiff customer and regulatory demands have automakers--as well as other OEMs--asking suppliers to handle more design and development responsibilities. In addition, as OEMs begin buying more fully-assembled or "modular" systems, some suppliers are being asked to play the role of straw boss, managing a group of component suppliers and overseeing the integration of these components into a final assembly.
Mike Wild, manager of kpmg's product development practice, says tapping suppliers for system development and integration tasks gives automakers access to the best-practices and technologies used throughout the industry.
"Suppliers can leverage what they've done in the past and modify it for future applications," says Wild. "This will promote commonality between platforms as well as between OEMs."
A supplier's ability to leverage such knowledge to rapidly develop new products will be a key competitive differentiator in the future. According to the kpmg study, the "best-in-class" suppliers can integrate new technology into a vehicle program in less than a year.
"New-product development has become a key competitive differentiator for automotive suppliers," says Wild. "OEMs will be looking for suppliers that can manage their own supply bases [during this process]."
kpmg says such demands have shifted the automotive supplier community from a traditional, tier-based structure to one based on core competencies and supply management strategies. In the future, kpmg expects auto suppliers to fall into one of four categories:
Component manufacturing: kpmg defines these suppliers as low-cost manufacturers that produce parts based entirely on OEM designs.
Subsystem manufacturing: In addition to low-cost production capabilities, these suppliers provide engineered solutions for complex components or assemblies. Examples: air-conditioning ducts, seat rails, and mirror assemblies.
System manufacturing: Technologically savvy suppliers, capable of providing complete system or "black box" design, development, and manufacturing. Examples: Air bags, seats, and anti-lock braking systems.
Systems integration: The top systems suppliers, capable of managing multiple suppliers and integrating groups of systems into a major module. Examples: Instrument panels, front suspension, and rear axle assembly.
The study says best-in-class suppliers in this area exhibit proficiency in five core areas: senior management involvement and focus; integrated development tools; high-performance, cross-functional teams; international leverage; and integrated supply-based management capabilities. (See sidebar.)
kpmg refers to these system integrators as the fulcrum of an "extended enterprise system," in which suppliers become a virtual extension of the automaker or OEM. This might sound familiar. Chrysler Corp. has been using the process, and the term, for nearly a decade.
"Suppliers are moving into having greater and greater engineering responsibility with Chrysler," says Steve Zimmer, director of operations and strategy for the nation's No. 3 automaker. "However, the key thing is suppliers' ability to manage the extended enterprise or their portion of the supply chain."
Such capabilities don't come cheap for suppliers. Many OEMs require systems integrators to finance their own prototypes and tools. For example: Harley-Davidson Motor Co. is pushing its production suppliers to build prototypes themselves or purchase or partner with a supplier who can.
kpmg says suppliers typically recover these costs by rolling them into the piece-rate prices charged to the OEMs. In addition, the study finds that best-in-class suppliers push such costs down further by standardizing design and tooling, when possible, and involving other suppliers to share these risks.
Suppliers aren't the only ones worried about risks. "The associated risks OEMs have with outsourcing are very high," says Wild. "In fact, the OEMs are somewhat concerned about overloading suppliers, worrying that suppliers may not have the capability to deliver what they say they can."
The study identified several areas where even the best-in-class suppliers could still improve performance. These include better management of development-team resources; im-proved metrics; and closer integration of sub-suppliers into product and development activities.
Wild says effectively managing this risk will require purchasing professionals to change the way they source.
"Purchasing managers aren't just buying a build-to-print capability anymore," says Wild. "Instead of buying parts, they're buying capabilities and managing the delivery of those capabilities. Purchasing managers need to work toward predictive metrics that will give them an insight into whether a supplier has the necessary resources to design and develop new products as well as manage its supply base."
As OEMs increase their reliance on suppliers for design and development support, purchasing professionals will need to shift their focus from buying a particular material, part, or assembly to managing a process.
"Purchasing needs to be actively involved in project-management activities," says Wild.
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