Differences that Matter
Profitability has hit record lows for the Detroit Three but interestingly, this past fiscal year reveals the first financial loss for Toyota in North America.
Profitability has hit record lows for the Detroit Three but interestingly, this past fiscal year reveals the first financial loss for Toyota in North America. Based on data from the first 9 months and Toyota's estimate for the fourth quarter, they anticipate losing $1,680 per vehicle in North America for this fiscal year. Nissan also plans to lose money, while Honda is predicting a minor profit. With the losses one thing remains: a major gap in profitability between the companies. Our recent study released in March analyzes tooling investment for the OEMs. Tooling process was a clear window into larger issues that exist at the companies. This analysis highlighted major performance gaps, not just within tooling but all functional areas of the business and the data validated the conclusions. The conclusions highlight what leading companies do differently to drive performance and achieve profit results. The following are the key differences that matter:
1. Common vehicle architecture and global components. Leaders developed an organization and functional area to review all vehicle programs to ensure adherence to common standards in the company and drive lessons learned and continuous improvement. Engineers are trained that reuse of designs and sharing of components benefit total cost, and when done they are rewarded for cost savings. Engineering uses a decoupled development process, engineering platforms corporately and then allowing regional uniqueness by model. This philosophy, combined with manufacturing engineering and flexibility, results in lower investment cost and improved productivity and quality.
2. Program Volume Accuracy. Functional areas work together to develop and communicate accurate vehicle volumes and option take rates to suppliers. Accuracy is the primary objective for the entire value chain rather than manipulation for internal political reasons. Product planning is constantly driving down unnecessary proliferation to improve margins.
3. Supplier Selection. Leaders understand their entire value chain cost structure and work to optimize total system cost. They value suppliers and their engineering input, and because of this they use their own engineering resources to assist in choosing suppliers rather than just piece price through purchasing.
4. Technical Competency. Leaders have a stable organizational structure in critical roles, like purchasing, engineering, and program management, and they leave resources in one job for several years to allow the development of expertise. These people are trained to understand the impact of their decisions on total cost. Additionally, leading OEMs place a high value on their supply base and ensure that an adequate margin exists to allow vendors to reinvest in competency.
5. Early Supplier Involvement. Leaders include suppliers early in the design process, often prior to formal award of business. Suppliers willingly participate because of historic trust. They know they will be compensated for their efforts. This requires a coordinated effort between engineering, program management, and purchasing. Leaders challenge supplier processes and look for optimum ways to solve problems. Leaders submit a more complete product/tool design at kick-off, close to 80 to 85% complete compared to only 50 to 60% at lagging companies.
6. Payment terms for Suppliers. OEMs that facilitate progressive payments to vendors rather than waiting for PPAP are companies with the greatest degree of cost transparency with suppliers. They tend to have financially healthy suppliers, see no finance costs and little to no manipulation of costs by suppliers. Leaders invest heavily in supplier relations and design payment plans and rewards to drive the right behavior.
7. Tool Identification Process. Leaders tie tool identification practices into the PPAP process. This has become systematic to these organizations and ensures that they capture tool lifecycle cost, content and location changes. This is critical to understand where tools are located if they need to move them from a troubled supplier.
8. Low-Cost Country Sourcing. Leaders utilize a total system approach when choosing suppliers and do not force low-cost country sourcing. Their philosophy is to build where they produce, maintaining many suppliers in North America. They allow Tier 1s to decide the best strategy for themselves based on cost, and to choose tool suppliers and Tier 2s. They have a realistic understanding of total cost differences (e.g., progressive payments, cost of quality, etc.). Leaders recognize if the Tier 1 is managing the supplier, then it should make the sourcing decision, whether it is local or a low-cost country. Leaders go through a rigorous validation process of Tier 1s sot that they are confident in their capability to choose the tool vendor or Tier 2.
These core "Differences That Matter" are driving the significant profitability gap between the companies. As the Detroit Three restructure their business, they must consider many of these major cultural changes in order to rebound successfully and improve the health of the entire value chain.