Major auto parts makers are under extreme pressure to cut costs. Raw material prices are rising out of control. Profits are being wiped out for many leading suppliers, and smaller firms are being forced to seek bankruptcy protection.
For today’s supplier to be profitable, it must efficiently operate the entire value chain.
Original Equipment Suppliers Association (OESA) recently conducted an eye-opening survey to identify the operational issues facing automotive suppliers. This diagnostic survey was distributed to more than 200 automotive suppliers and focused on various categories of supply chain manufacturers for refinancing, restricting and optimizing the supply chain.
To summarize the findings, it’s important to put supply chain management in perspective. A decade ago, total supply chain inventory was roughly 200 days. As earnings pressure began, original equipment manufacturers tried to improve margins and reduce inventory.
A first wave of supply-base transition led by GM and Ford spun off their in-house supply bases, creating megasuppliers with increasing systems integration responsibility. Concurrently, many smaller Tier 1 suppliers were merging and altering business models in order to compete at the Tier 2 and Tier 3 level, or divesting their automotive supply businesses.
To make the necessary cost reductions in a fierce, price-driven environment, the surviving suppliers turned to lean manufacturing and, to a lesser degree, toward leaning out their own supply chain.
Today, surprisingly, the industry has improved marginally to 180 days of inventory, still far too many. A new, second wave of supplier rationalization, driven by the mega-Tier 1 suppliers created in the first wave, underscores price competition at the Tier 2 and Tier 3 levels, as many have already “leaned out” their organization.
The data collected from the OESA Small and Medium Suppliers Council survey revealed that more than 90 percent of companies believe a large opportunity lies in supply chain management (SCM); however, only 10 percent of small suppliers have formal SCM systems. These same suppliers are committing to more stringent requirements up the value chain to customers.
The survey found that 69 percent provide verbal encouragement to suppliers on performance requirements such as customer service levels and quality. Respondents also indicated priorities are primarily driven by direct cost, quality and delivery requirements. However, the survey reveals that companies are managing only the first level of direct costs and not aggressively addressing indirect costs.
In the imperfect world of the automotive supply industry, one of the few elements in relative control is inventory. The survey found that inventory represents a significant cost reduction opportunity.
On average, 48 days of inventory is carried in the supply base. However, when broken down by size of company, that number changes dramatically. A company with revenue of $100 million, carrying a 35-day inventory, can save more than $200,000 by reducing inventory by just one day.
Likewise, a company with revenue of $25 million, carrying a 60-day inventory, can save more than $55,000 by reducing inventory by just one day. An effort to manage inventory effectively will drive attention to the most appropriate (but not all) SCM issues. There will be a follow-on effect that drives improvements throughout the organization and creates a supply chain that will be very visible and have significant impact on the bottom line.
Suppliers are advised to bring a war-room mentality to the challenge of honing a laser focus on inventory reduction. This will point to the necessary enablers in technology, lean manufacturing and supply chain initiatives. The war-room mindset creates a mechanism to remove inventory, time and cost from systems.
To find profitability through the value chain, suppliers must challenge everything about their organization. They must get the entire organization focused on clearly defined and easily measured objectives.
They must install, manage and communicate through a daily metrics reporting system in a war-room environment. Lastly, they must chart, understand, manage and challenge the entire supply chain to reduce total inventory.
Joseph M. Bione, TMA, CPM, CPIM is the managing member of Doeren Mayhew/Whitehall LLC, providing operational improvement and restructuring services to companies in transition or trouble. Doeren Mayhew/Whitehall, LLC is an affiliate of Doeren Mayhew, located in Troy, Mich., providing a wide range of professional services to middle-market companies. Reach Bione at [email protected] or (248) 244-3159.
