A new year gives us a chance to reflect on what occurred in the past year, and what will impact the industry for years to come. Looking ahead, several new paradigms will undoubtedly impact the constructs of our industry. Here are the new norms for 2014 (and beyond):
Capacity Utilization: Long gone are the days when OEMs and suppliers alike are satisfied with their operations running at 100% on a two-shift, five-day-per-week basis. With the focus on controlling fixed costs and maintaining low breakeven points in the face of additional volume, the industry isn’t interested in new brick-and-mortar unless absolutely necessary. The new norm is the integration of three-crew or three-shift formats that produce reductions in overtime costs as well as a hike in utilization rates to more than 130% on a two-shift measurement scale. Instead of building new
facilities, additional volume is driven by incremental labor, a variable cost. Today, more than half of the Detroit Three and scores of suppliers use these advanced shift formats.
One-Hour Logistics: As vehicle production volumes grew after the automotive recession (late 2008 to mid-2010) OEMs and Tier 1 suppliers were more concerned with supplying demand with quality components than the details of where these parts came from. Customers were waiting and logistics costs were of lower priority. As we approach the next vehicle program cycle, these inefficient structures require review. In an ultra-competitive market, all participants are looking for every possible advantage. Shifting supply of bulkier components to within one hour of the final assembly site is the new trend. It will be up to the supplier to prove that scale, quality, or costs will be disadvantaged with a move adjacent to the plant.
Suppliers Wield Increased Influence: Though not music to the ears of OEMs, there is little doubt substantial challenges (most prominently: lightweighting, safety technology, and electronic content) confronting the industry over the next decade make the supply base critical. Meeting the consumer and regulatory requirements will only result from strong OEM-supplier relationships because suppliers are increasingly the purveyors of the processes and components that enable OEMs to build tomorrow’s vehicles. As the competitive field levels and quality is less of a differentiator between offerings, being first to the market with technology the consumer values will be crucial to profitability.
Globalization: The ability to spread development costs of critically important and expensive sectors of a vehicle across more regions and body styles reduces costs and improves scale. For the Detroit Three, this has been a savior to fielding smaller unibody vehicles without reinventing the wheel in every region, only modifying the package to suit local market tastes and regulations. As scale increases, smaller suppliers who opt not to go global with their customers may be at risk, depending upon their component or process.
Tighter Cadence: Essentially, cadence is the length of time a vehicle program is in production. The total cycle time of most programs has slimmed for many reasons. As vehicles emanate from global platforms, it is important that all regions move in lockstep and vehicle timing is closely coordinated. Allowing one vehicle not to shift to a new platform for an extended period of time lowers the scale advantages for all. Suppliers and OEMs alike are working at a faster pace due to the increasing program frequency.
Michael Robinet has been a managing director of IHS Automotive Consulting since 2011. Prior to that, he was the director of Global Production Forecasts for IHS Automotive. His areas of expertise include global vehicle production and capacity forecasting, future product program intelligence, platform consolidation and globalization trends, trade flow/sourcing strategies, and OEM footprint/logistics trends.