By Chris Sweeney, Crain News Service
PLYMOUTH, Mich. (June 29, 2015) — Vehicle makers are only as strong as their weakest supplier, so if one firm in the chain breaks, the results can delay vehicle production and affect the bottom line.
Supplier development is critical in the ongoing relationship between automotive parts manufacturers and their original equipment manufacturer customers. And according to a recent survey by Planning Perspectives, the U.S.-based OEMs have some catching up to do while Japanese firms Toyota Motor Corp. and Honda Motor Co. Ltd. lead the way.
“There are a number of ways supplier development can be done. A lot of that is focused on the longer-term relationship, and it is driven more by taking costs out of the system than trying to drive the price down,” said Dave Andrea, senior vice president of industry analysis and economics for the Original Equipment Suppliers Association (OESA).
“There is no room for error in any of this,” he continued. “You have to treat all of your suppliers with the same kind of attention. Any one of them, the largest of them or the smallest of them, can get you off rail really quick.
“Without a doubt the smaller of the suppliers are going to be brought up with the quality, delivery and productivity, with the rest of the supply base in terms of development.”
It's one of the reasons General Motors Co. established the One Cost Model — a new purchasing program where the OEM will grant suppliers who agree to the procedure contracts for the life of the vehicle. In exchange, GM doesn't seek bids from other suppliers.
Automotive News, a sister publication of Tire Business, reported that GM will update its cost analysis each year to see whether or not suppliers can cut costs through more efficient production. Suppliers gain earlier access into vehicle programs, and GM can develop more realistic cost analysis for those programs.
But the program hinges on one core pillar — trust. Suppliers must let GM engineers and purchasing executives evaluate their factories and cost data.
“It's one of those things that I think will be the first step of a long journey. It has to be institutionalized as part of doing business with General Motors in a long-term manner,” Mr. Andrea said of GM's plan. “It should be about taking costs out, taking friction out and taking redundancies out of the whole process. And that's on GM's side as well as on the supplier's side.”
There is naturally friction in any customer/supplier relationship, but if OEMs and suppliers can work together, Mr. Andrea said the supplier can provide ideas on how to improve designs by changing a process or a specification that could allow it to operate more efficiently.
“If it's done correctly, it's done in a cross-functional way,” he said. “So GM doesn't just send out the purchasing team; they send out purchasing, manufacturing, engineering and the process development side. They walk the plant, they talk to the people, they look at material flows, and you can see a lot of areas where there can be improvement in the supplier.”
Programs such as these are critical in today's environment, where North American light vehicle production is expected to increase by 600,000 to 800,000 vehicles in the next two years, putting total volume close to 18 million units annually, according to the OESA.
Mr. Andrea said the supply chain is running at full capacity, with suppliers investing to expand capacity. Citing an OESA survey, the executive said across the association's 350 members, the median capacity utilization rate is at 82 percent, with the top 25 percent of OESA suppliers already running at 90 percent. A number of those are at 100 percent.
The lower 25 percent is just as tight. According to Mr. Andrea, those suppliers are running at about 70 to 75 percent.
“The biggest thing is looking how compressed the supply chain has been,” he said. “There is no room for error anywhere in that supply chain. If we're full out right now, where are we going to get the parts for the next 700,000 units that are forecast to be made?”
Capital investment is increasing, Mr. Andrea said. A number of suppliers have invested in Mexico along with nearly all of the major OEMs.
While investments are coming, suppliers are doing everything they can to remain flexible and avoid being left out to dry.
“Lead times on some equipment have been stretched, so we know we needed to pull the trigger to meet up with the 2016 and 2017 anticipation,” Mr. Andrea said. “The worst thing that can happen to a supplier is to have some stranded capacity. Suppliers are looking to have a mix of customers to be shipping to a mix of assembly plants. You need to have the flexibility and the capital investment to switch out production to support a number of different customers.”
Mr. Andrea said two-thirds of the OESA's members are working staggered shifts to fill out utilization from the work force side.
And the amount of contract workers has increased from about 5 to 10 percent pre-recession to about 20 to 25 percent today, he said.
Suppliers are shifting talent and capacity into the appropriate region. For instance, with the European market weakening and the North American market projected for growth, companies are moving more of that production into the NAFTA region.