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Competitive Challenges: It's What's Up Front That Counts

It's hard to believe that we're already in the third quarter of 2008.

It's hard to believe that we're already in the third quarter of 2008. While many of us wish we could backpedal to avoid the struggles of this long year in the auto industry, we're also looking forward to 2009 planning and determining what can be done differently. With forecasters predicting increased losses and challenges in the coming year, automotive companies are scrambling to shift their focus. Factories that once produced trucks are being converted to support fuel-efficient vehicles, and unlike the New Domestics, the Detroit Three continue to struggle with flexibility and the cost of achieving this transition.

Take, for example, Honda and Toyota. Both operate with an extreme amount of flexibility in their manufacturing processes, allowing the daily system to seamlessly convert from one vehicle or platform to another. The focus of this flexibility appears to occur primarily in the body shop, but it also relates to product engineering and the idea of commonization. By designing comparable processes for all models, both automakers can easily shift between vehicles when needed.

Commonization is the driving force behind Toyota's Mississippi facility, opening in 2010. It was originally planned to produce the Highlander CUV, but due to the shifts in market demand, it will now produce the Prius hybrid. The automaker's processes are similar regardless of the vehicle. And because all vehicles are engineered with commonality in mind, consumer demand can mandate which vehicle is built when-without throwing a wrench into anyone's plan. In this instance, truck capacity in Texas is simply consolidated, and the Highlander will be built alongside minivans and full-size SUVs in Princeton, IN, a feat that would take domestic OEMs 18-24 months to accomplish.

I wonder, as Ford makes plans to bring the Fiesta from Europe to be built in the Cuautitlan, Mexico facility, whether their fuel-efficient car will arrive too late. The idea is smart; the timing is not. The vehicle is already designed, engineered and being built in Europe, yet it won't hit U.S. showrooms until 2010 as a 2011 model year vehicle. Considering the velocity of change in the first half of 2008, who knows what 2010 might look like? Not to mention that Ford's timing is similar for other facility conversions, as well as new products announced for Michigan Truck and Louisville for Ford.

What is the reasoning behind the domestic delays? It is in part, quite frankly, the old legacy culture within engineering that has placed the focus on unique parts and vehicles for years. Although evolving, this culture is a long way from gaining the economies of scale that come with common design, engineering and processing. The bottom line is a point analysts have been making for years: The Japanese are investing more heavily up front to ensure quality and integrity, thus driving huge savings downstream for the automaker and its suppliers. They are reaping the benefits of long-term savings and at the same time, allowing more money to be poured back into vehicle features that continually lure consumers.

One example lays in research Harbour-Felax Group is collecting in anticipation of a new tooling study to be released this October. Having analyzed more than 18 different seat recliner side shield brackets and covers for the six major OEMs (Chrysler, Ford, GM, Honda, Nissan, and Toyota), we came upon several interesting revelations. While all parts are very similar in design, size and function-with brackets made from heavy gauge steel, created in progressive die presses, and covers made of molded plastic-only one manufacturer spends approximately 75% of their average assembly cost over 18 assemblies. That manufacturer is Toyota, with a total assembly cost of $443,000.00. Even more interesting, Toyota dedicates more initial time to design, ensuring robust products that use strong, high integrity materials to guarantee buildability and quality. Subsequently, this drives down build time and most certainly, tryout time.

 DesignMaterialBuildTryoutOtherTotal
Average of more than 18 assemblies9.3%25.2%52.9%7.1%5.5%100%
Toyota10.6%27.7%43.8%5.8%12.1%100%

By viewing other public studies, we know that Toyota's quality, reliability and efficiency are some of the best in the industry-another positive effect of the upfront work. As if that's not enough, most metal components also are common across vehicle lines, unlike domestic OEMs that typically rely on unique materials across all models, multiplying the cost exponentially.

It should be noted: Every domestic manufacturer in our analysis is spending more than Toyota for their total assembly, with most of their cost involved in build and tryout, skimping on design and material. Oftentimes not discussed but equally important are the immense launch costs, warranty costs, and labor productivity impact involved after the product is in consumer's hands. So what does this information add up to? The fact that there are many poor practices, such as the one described here, leading domestic OEMs down a dangerous path. Until these companies reevaluate their entire system, they will always walk in the shadow of the best in class, coming in as a far second with consumers, Wall Street and the financial records. 

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