"Past performance is no guarantee of future results," the investment warning has it. But for people who are making investments, having a sense of what has happened and is happening is likely to result in a superior outcome, as in having the investment pay off. In many ways, suggests Craig Cather, president and CEO of CSM Worldwide (Farmington Hills, MI; www.csmauto.com), an organization that specializes in forecasting and analysis for the auto industry, suppliers are making an investment when they decide to take on business. This is an investment in time, resources, and, of course, money. Given the way that many suppliers are finding themselves in financial straits, Cather says that there is an insufficient amount of assessment occurring before the program is taken on by the suppliers. There are at least a couple of things he thinks suppliers need to do, and they sound like something that would be heard from, say, Charles Schwab. One is to be more disciplined and another is to have a varied portfolio of business.
A major problem he cites is an unwilling-ness or inability of many OEMs to be realistic in their projections for program volumes. He describes them as being "typically overzealous, overly optimistic, and in some cases downright wrong." Consider the simple fact, he notes, that if you add up all of the vehicle numbers projected by OEMs, the total is anywhere from 20 to 25% higher than global demand. Yet in many cases, suppliers are required to have the capacity to meet the rose-colored projections, and when reality sets in, what they see is a lot of red ink on their books. What's more, he continues, "Not only are volume levels often overly optimistic, but there are variations in schedules from month-to-month." This means that sometimes it's overtime; other times it is downtime. Either way, it is an additional cost to the supplier.
While there are some suppliers that try to get every bit of business that they can—after all, one undoubtedly likes to keep things as busy as possible—Cather thinks that doing so can have deleterious effects on the supplier's profitability. "Volume is not profit." This brings in the disciplined part. It's a matter of a supplier making an assessment of two things: (1) what its capabilities and competencies are and (2) what the likelihood is that a program will be successful in the market. The first one is easy. The second part is somewhat trickier. How many program managers in the history of the auto industry are there who have low-balled the projected volume for a vehicle? To be sure, there have been surprise hits (think of the PT Cruiser), but for the most part, the volume numbers tend to be on the, shall we say, "inflated" side. A supplier who goes into negotiations for a program without having done research and analysis of the potential risk is one who is likely going to end up paying for a whole lot of capacity that isn't used and that it can ill afford. Yes, Cather counsels, it is prudent to go into a potential OEM customer with what has historically been happening in a segment and what the ramifications of X, Y or Z happening would be on the volumes, and then pricing accordingly—according to the level of risk involved. "More and more companies going after business without giving it the proper level of scrutiny," he observes. Which could explain the amount of red ink in the supplier community. Warren Buffett, a man who has done pretty well investment wise, once noted, "Risk comes from not knowing what you're doing." Ignoring the risk just to get the business won't make it go away.