At the risk of ruining your whole day, we submit the following: "The long-term cost reduction agreements that the domestic auto makers have with their suppliers are currently inadequate to allow the OEMs to remain competitive internationally."

So says Brian Chambers, senior associate, Automotive Consulting Group, Inc. (Ann Arbor, MI), an organization that conducts research, particularly among automotive suppliers, and provides strategic assistance and assessment tools so that companies can become better, if not best-in-class. It is worth noting the use of the term "best-in-class" rather than "world class," which is often bandied about in automotive circles. When it comes to product development—the whole routine, from concept through delivery—Chambers says those companies that are truly global benchmarks aren't in auto but are found in consumer electronics. Companies such as Hewlett Packard. These are what he calls the "fast cycle" firms, organizations that are able to do things quickly with high-quality and low-cost results. "Fast cycle competition is moving into the auto industry," Chambers warns, "and the pace is accelerating."

Feel better yet? Probably not. But don't worry, you're not alone.

A bit of explanation about why the aforementioned cost reductions no longer cut it. It is a matter of currency exchange rates. "We've been pretty fortunate during the past five years or so," says Dennis Virag, managing director of the consulting firm. Compared to the German mark and the Japanese yen, the dollar was weak. "But over the past year, the dollar has gained a lot of strength," Virag notes. To understand this in a practical sense, Chambers provides the following example: Toyota, like other Japanese manufacturers, has been working to drive its break-even points lower and lower. The recently introduced Toyota Camry was developed and engineered and is being produced so that the break-even point is based on 90 yen to the dollar. In January, the rate was at 120 yen to the dollar. Which means that Toyota is making a whole lot more money every time it sells a Camry than the domestics are making when they make a sale. The upshot of this? Well, if you are part of the Big Three, you start trying to figure out how to become even more competitive. And: "The cost-reduction pressure is going to get even greater on the supply base in North America," Chambers answers/warns.

Benchmarking Practices

The Automotive Consulting Group has recently completed a study on product development in the supply chain. Some 140 suppliers—from system suppliers to component suppliers—participated. "The auto companies have been off-loading more design responsibilities to suppliers, and many suppliers are going through a learning curve on the product development cycle," Virag explains. "So the purpose of the study is to identify and benchmark the best practices in product development so that companies to compare themselves to others throughout the supplier hierarchy."

So on the one hand, there is an analysis of the various and sundry tools and practices that are being employed by the suppliers for product development. On the other hand—and this one really seems to be the stronger of the two—they looked at how much interaction there is between suppliers at all levels during the product development cycle.

Fundamentally, the Automotive Consulting Group categorizes product development in the following phases:

• Concept development
• Planning, specifications and the quote package
• Engineering design and analysis
• Prototype testing
• Pilot ramp-up and launch
• Reliable volume production.

In addition, they stratify the supply chain starting with the OEMs at the top, then going to:

• Systems integrator: responsible for major modules
• Systems manufacturer: producer of designing, developing, and producing a component such as an ABS system or an airbag
• Subassembly manufacturer: producer of complex components or assemblies that are used in such things as ABS systems or airbags
• Component manufacturer: a build-to-print parts manufacturer
• Materials supplier
• Production tooling and equipment supplier.

And in terms of performance, the three key things they are examining are:

• Quality: This means meeting all of the performance specs throughout volume manufacturing so that warranty costs are low and customer satisfaction is high.
• Cost: This means that the target price is met and the various costs that go into making a product—engineering, purchasing, manufacturing—are being minimized.
• Timing: This includes the entire cycle and stresses that late changes and fire-fighting are minimized.
• "We had speculated going into the study that those companies that involve their customers and suppliers very early in the concept development stage would have better performance characteristics, and we have indeed found that to be the case," says Virag.

Approaches to Development

Virag suggests that there are two basic ways product development occurs in the auto industry. There's a flexible approach, commonly practiced by Japanese companies. And there's the traditional approach, commonly practiced by the domestic OEMs.

• In the flexible approach, Virag explains, the initial approach is fairly loose. First there's a development stage, during which the auto companies have suppliers working on alternative technologies and product designs. Then it is a matter of comparing the alternatives and deciding which will be used. Once that's sorted out, the product definition is created, then it is on to the engineering, integration, and production.
• The traditional approach puts definition first in the program and development second. "The domestics try to define the product very tightly up front. They say, `This is the vehicle, these are the technologies we are going to use, and so forth.' They do a lot of decision-making early in the program," Virag says. "They start the program, then they start running into problems." The solution to these problems, he suggests, usually results in an expansion of the product definition. Engineering changes are made. Timing is thrown off and costs are increased.

"In the Japanese approach," Virag says, "there's flexibility built-in at the beginning. As they run into problems, they have alternatives they can turn to." These alternatives were developed by the suppliers before the product was defined. "In the domestic approach, there aren't any alternatives. They have one approach defined going in. Then, halfway into the project they discover, `Uh-oh, we have a problem.'" Famous last words.

Perception & Reality

But hasn't every domestic OEM seen the wisdom in minimal design specifications up front and the need to operate in a simultaneous engineering mode so that various parties have the opportunity to put forth requirements and alternatives? "If you talk to upper management," Virag answers, "they'll say they're doing that. But there is a disconnect between perception and reality." In other words, the speeches and press releases say one thing; once you get down to the level where things really start happening—and this may be just one level below the executive suites—the reality is traditional.

Unfortunately, this isn't simply a problem that's characteristic of OEMs. Supplier companies tend to operate in the same way. Given that the OEMs are now going to the systems integrators and telling them that they have full-service responsibility—as in design, engineering, prototyping, testing and even managing the lower tiers—many of these companies are finding that they have to achieve new capabilities and skill sets that may be completely foreign to the way that they've worked in the past.

One of the strong recommendations that the Automotive Consulting Group has for companies at all levels: Innovate. This may be innovation in terms of product for the systems integrators, the systems manufacturer, and the subsystem supplier. For the component manufacturer, innovations in manufacturing technology are required at the least, and given that straight commodities can be easy to imitate, the component manufacturer would do well to perform some other functions in order to increase its value-added.

"Innovation really allows a manufacturer to provide a lower-price product," notes Virag.

And to facilitate innovation, he and his colleagues recommend the early interaction—as in at the concept development stage—of all interested parties.

The "Mega" Dealer Phenomenon—and Your Pricing

Although the development of "mega" dealers, such as publicly owned companies that are buying up an assortment of dealerships across the country, might seem to be something of interest primarily to people in sales and marketing, Brian Chambers of the Automotive Consulting Group suggests that the effects of these firms will even be felt by the supplier community.

He explains that these large dealers will have tremendous buying power, "the likes of which the OEMs have never seen before." Which could result in a good deal for the consumer on the lot. But this buying power could force the car companies to reduce the selling price of their vehicles...and this will result in additional cost pressure on suppliers.
 

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