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Insight: What's Your "Engineering Intensity"

As we work with automotive suppliers on improving their operational excellence and on their medium to long-term strategies, we have noticed that a characteristic of the more successful companies is the simple property of what could be called "high self-awareness." Companies usually have multiple viable options in terms of positioning, product line expansion, R&D projects, etc.

As we work with automotive suppliers on improving their operational excellence and on their medium to long-term strategies, we have noticed that a characteristic of the more successful companies is the simple property of what could be called "high self-awareness." Companies usually have multiple viable options in terms of positioning, product line expansion, R&D projects, etc. The difference between top performers and stagnant or declining ones is, in part, a function of their ability to be deliberate in their choices and actions, whatever the strategy. The reason that this matters is that by being deliberate and self-aware, you can achieve greater consistency and alignment, and that is when a company really starts clicking on all cylinders.

As an example of the principle, consider the area of engineering intensity and its implications. Companies that operate at the end of the spectrum with low engineering intensity are typically doing build-to-print work, i.e., manufacturing a product according to the design specifications provided by the customer. At the other end of the engineering spectrum, you find automotive suppliers that take responsibility for the full design of a product or system, including generating innovations. These suppliers can have greater specialization of product knowledge than their customers have, so we call this end of the spectrum the Black Box position. In the middle is the Gray Box position, where a supplier has some involvement in the workings of the product in conjunction with the customer. Their engineering contribution, however, is likely to be more focused on process characteristics, such as measures to increase throughput, reduce cost, or reduce complexity.

The point where your company resides on this spectrum has a number of implications. Staff levels and types, capabilities, product line, investment decisions, pricing-all these and more are tied in with the nature of the engineering intensity of your company. The complexity increases exponentially if we start plotting individual product lines or divisions in addition to an overall company placement.

Getting back to the value of self-awareness, what we have observed in practice is that there can be a conflict between reality and perception. Companies taking a fresh look at this concept often make discoveries: they find that they do not actually reside where they thought or assumed they did; or their situation has changed and they don't reside where they used to; or they did not fully understand the implications and are not getting the desired results out of their positioning.

One company that we work with had been a job shop doing metal stampings for years, when its contracts began being concentrated in a specific system and it began getting similar jobs from multiple customers. The company gradually found itself being asked to test, and eventually to design, elements of the system. Over a period of some years, it was pulled, by virtue of its customer and knowledge base, into being a supplier of a complex assembly instead of basic stampings. Because the company recognized and acknowledged this shift, it was able to make deliberate decisions as the market for that assembly shifted into more lightweight materials and components. Today, that supplier makes relatively few stampings and its investments in personnel and capabilities have been directed toward supporting full design and product expertise in its key system, with corresponding pricing and profitability.

Another IRN client had been positioned as an expert in a particular manufacturing process. Over the years it developed customer solutions and did some design work, in keeping with its position in the Gray Box area. In a recent analysis, however, the company found that over time, key divisions had drifted into a build-to-print role. They were no longer interacting with customer personnel in the same way, and in fact were less customer-service-oriented. Their products, and these divisions, were being treated like commodities and struggling with profitability. We should note that there is nothing inherently wrong with being in a build-to-print role; companies can make money at any point on this spectrum. For this client, the issue was the resulting lack of alignment. Its engineering staff was underutilized, its pricing was out of whack, and it was not getting a look at the component opportunities that would enable it to provide more value-add. In an interesting twist, the company also had one division that had made a play to provide a complex assembly toward the Black Box end of the spectrum, but that division was not performing to expectations, either.

For a client like this one, the highest profit position is likely to be squarely in the middle of the spectrum. There is a certain cachet to being a Black Box supplier, but it can be better still to display some of the sophistication of a Tier One with the resources of a company at the mid-point. In the middle of the spectrum, you can offer the benefits of excellent operations and provide value-added service, and get margins that are almost as good, while avoiding the scale of investment that Black Box requires.

The external environment is getting all the attention these days, but there are other risks to automotive suppliers that are self-inflicted. Circumstances will conspire to create many opportunities to be pulled off your strategic path, so suppliers must be crystal clear about where they lie on the spectrum of "engineering intensity," where they have the best opportunity to make an impact, and what kinds of jobs, investments and commitments meet the criteria of that positioning.
 

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