True success in the supply value chain would have the OEMs, Tier 1s, Tier 2s and Tier 3s working in unison.
In all industries, the entire manufacturing base constantly talks about a “global economy” and the idea that those manufacturers that are not working within the global economy today will likely not be around in the future. Although this is an agreed upon theory by many in the business world, there are several other factors that impact whether a company will be around for the long haul. In the automotive world specifically, many suppliers and even large automotive OEMs have failed miserably on foreign soil. While some companies failed because of poor management decisions and poor plan execution, others have failed because of the market itself.
There have been discussions in the automotive industry about collaboration usually directed toward OEMs and Tier 1 suppliers. There is a critical need for suppliers to be aligned with the OEMs earlier in the process, providing their skill and expertise to yield better results. When this alignment is in place, products are engineered more efficiently, quality is better and cost is dramatically reduced. Suppliers gain significant product advantage if they are able to work with their customers further upstream to design more efficiently with total cost in mind.
For years, there has been cost pressure on the Tier 1 automotive supplier. As the domestic OEMs lost market share and profitability, the need to reduce cost was placed directly on the supplier community given that material cost is approximately eighty percent of total vehicle program cost. In a market where automotive suppliers lived for years on high margins, the quick market-share shift caught many suppliers off guard and sent them into financial trouble.
Over the last few years, suppliers have migrated into three primary categories as shown in figure 1. What is interesting about these supplier groups is the way things will shape up in the coming years. As OEMs begin to dramatically standardise platforms, architectures and global components (within and across platforms), suppliers will consolidate like never before. Fewer suppliers will be needed with common global componentry, meaning the best suppliers will rise to the top as the “chosen.” The club suppliers will be the winners and the rest will be merged with other companies for capacity or rationalised out of the business. Even more interesting is the impact on lower-tier suppliers. Massive consolidation is already taking place within the middle market; however, there are many “club” suppliers in this market with many in the “club” of a “club” supplier.
As the industry talks of changes, the issue of collaboration becomes more important. Tier 1 suppliers are notorious for complaining about their customers (OEMs) and their brutal approach to purchasing—and rightfully so. In many cases, suppliers have been treated unfairly, with collaboration as the last tactic used between OEMs and suppliers.But interestingly enough, those same suppliers that complain about their OEM customers have been found to treat their own suppliers even worse in terms of cost reductions, engineering synergies and overall collaboration. No one can argue that the pain just rolls down hill, but in the end everyone suffers from the OEM to the smallest supplier.
In this “global economy” with the stiffness of competition in a market that has a capacity for 80 million vehicles around the globe, yet only produces 65 million, OEMs and suppliers can no longer utilise the culture of beating down suppliers. Companies that are widely successful today are the same ones that are taking over the market share of the domestic OEMs and have the strongest supplier relations. In every survey conducted on supplier relationships, companies like Toyota and Honda have rated substantially higher than their domestic competition.
Why do these companies continue to gain market share, have strong profits and strong suppliers? The key is the culture of collaboration. Many people view the word “culture” as a fuzzy term they cannot quite get their arms around. For years, many companies studied the Toyota Production System but failed to implement it. The reason is they were missing the secret ingredient—culture. It is the DNA of a company. It is the way a company thinks, acts and breathes. The DNA of companies like Toyota or Honda is collaboration. More importantly than just collaborating within their own company, they teach their suppliers the importance of collaboration all the way through the pipeline. Domestic OEMs and suppliers have suffered from the culture disease for years, which is causing many of the challenges we see today.
During a conference at the SAE Show in Detroit in April of 2007, the President of Denso North America spoke about collaboration and used the analogy of the threading on a baseball equating OEMs, Tier 1 and lower Tier suppliers in the quest to achieve ultimate success. Each one is an equal partner in the success of a program, working together at the very beginning of the process. This was a great analogy and one that all companies should live by. When suppliers and OEMs give up on collaboration for the sake of benefiting their own company they lose more money down the line. Supplier development is one of the most important aspects of a good, solid supplier and the key to ensuring its place in the future. There has been a lot of discussion on collaboration in the automotive industry and this idea becomes the basis/foundation for the same.
True success in the supply value chain would have the OEMs, Tier 1s, Tier 2s and Tier 3s working in unison. No participant is larger than the other in terms of control, contribution or the infliction of pain. The key is that they are interwoven together to accomplish long-term success for each other and the programs they support. How do we get companies to work together in this type of environment? It is never an easy task and it really starts with all the players in the game accepting the challenge, working together to become part of the solution, rather than pointing fingers.
