Autoline on Autoblog with John McElroy
by John McElroy on Mar 13th 2009 at 5:29PM 
BIG THREE SITTING ON $10 BILLION GOLDMINE
There's no question that the Detroit-based auto industry needs a lot of help. There's a 100-year history of how it got into the problems it's in, and some of those problems are beyond management's control.
But there is one area where General Motors, Ford and Chrysler have total, complete control, and that's in how they deal with their suppliers. While progress has been made in some areas, most supplier CEOs who I know are still frustrated with how the "Big 3" treat them. They tell me there is at least $10 billion in waste that could be eliminated every year if they worked together as true partners instead of at loggerheads.
Remember, more than 70% of the value of a car today is actually designed, developed and manufactured by suppliers, not the car companies. GM purchases roughly $97 billion of materials, components and services from suppliers. Ford buys $90 billion, Chrysler $40 billion. We're talking about a massive amount of money, which potentially means a massive amounts of savings.
Here's how suppliers say the "Big Three" could slash costs and put some of that money back in their pockets.
John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers.
First off, suppliers want to see stable production schedules. Japanese automakers follow a build-forecast that is set months in advance so that suppliers know exactly what they have to make and when it has to be delivered. It's all part of lean manufacturing. But the Big Three don't maintain that kind of discipline. Not only do they vary the volume of vehicles they make from week-to-week and month-to-month, they often build a different mix of models than their forecast called for. So suppliers are constantly operating in a reactionary mode, rather than optimizing their existing processes and inventory.
Next, they want to see the Big Three do a better job of reducing the part-number complexity that's designed into their vehicles. For example, Ford slashed the number of build combinations on the new F-150, yet there are still 10 million different possible combinations! This forces suppliers to carry extra inventory which incurs carrying costs, increases parts obsolescence and increases rework.
On some product lines the take-rate for certain options is less than 1%. Why even offer them? This means suppliers have to store these parts in inventory, or place special rush jobs to make them when the occasional order trickles in. There's no profit in that.
While the "Big Three" talk about making their plants flexible enough to build several different models, many of their plants don't have this capability. So they can't absorb mix changes in the market place, which means they can't maintain level production in their factories.
Worst of all, the "Big Three" don't do a good job of involving their suppliers early in the product development process. That's when it's cheap and easy to try out different ideas and "what-if"' scenarios. As a result, the "Big Three" often end up making last-minute engineering changes that disrupt the product launch process and create unnecessary quality and warranty risks.
Suppliers especially want to know when the "Big Three" will transform their relationship with them and dealers to one that is more collaborative, inclusive and transparent. Suppliers still perceive the current approach as adversarial, parochial and self-serving.
None of these criticisms are new. I've been hearing the same old horror stories for decades now. And I've seen numerous car company executives come and go who promised that now they were going to treat suppliers as "true partners." Yet it never seems to materialize – or, at least I should say, the supplier community doesn't really believe it's happening.
All of these issues are within the total control of the "Big Three." They don't need any outsiders to help them get this fixed, especially not the President's Task Force. And the pay off could be huge, $10 billion in waste that they could drop to the bottom line.
Autoline Detroit
Airs every Sunday at 10:30AM on Detroit Public Television.
Autoline Detroit Podcast
Click here to subscribe in iTunes
Follow Autoline on Twitter for ongoing updates every day!
Autoline Daily
There's no question that the Detroit-based auto industry needs a lot of help. There's a 100-year history of how it got into the problems it's in, and some of those problems are beyond management's control. But there is one area where General Motors, Ford and Chrysler have total, complete control, and that's in how they deal with their suppliers. While progress has been made in some areas, most supplier CEOs who I know are still frustrated with how the "Big 3" treat them. They tell me there is at least $10 billion in waste that could be eliminated every year if they worked together as true partners instead of at loggerheads.
Remember, more than 70% of the value of a car today is actually designed, developed and manufactured by suppliers, not the car companies. GM purchases roughly $97 billion of materials, components and services from suppliers. Ford buys $90 billion, Chrysler $40 billion. We're talking about a massive amount of money, which potentially means a massive amounts of savings.
Here's how suppliers say the "Big Three" could slash costs and put some of that money back in their pockets.
John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers.
First off, suppliers want to see stable production schedules. Japanese automakers follow a build-forecast that is set months in advance so that suppliers know exactly what they have to make and when it has to be delivered. It's all part of lean manufacturing. But the Big Three don't maintain that kind of discipline. Not only do they vary the volume of vehicles they make from week-to-week and month-to-month, they often build a different mix of models than their forecast called for. So suppliers are constantly operating in a reactionary mode, rather than optimizing their existing processes and inventory.
Ford slashed the number of build combinations on the new F-150, yet there are still 10 million different possible combinations!
Next, they want to see the Big Three do a better job of reducing the part-number complexity that's designed into their vehicles. For example, Ford slashed the number of build combinations on the new F-150, yet there are still 10 million different possible combinations! This forces suppliers to carry extra inventory which incurs carrying costs, increases parts obsolescence and increases rework.
On some product lines the take-rate for certain options is less than 1%. Why even offer them? This means suppliers have to store these parts in inventory, or place special rush jobs to make them when the occasional order trickles in. There's no profit in that.
While the "Big Three" talk about making their plants flexible enough to build several different models, many of their plants don't have this capability. So they can't absorb mix changes in the market place, which means they can't maintain level production in their factories.
Worst of all, the "Big Three" don't do a good job of involving their suppliers early in the product development process. That's when it's cheap and easy to try out different ideas and "what-if"' scenarios. As a result, the "Big Three" often end up making last-minute engineering changes that disrupt the product launch process and create unnecessary quality and warranty risks.
Suppliers especially want to know when the "Big Three" will transform their relationship with them and dealers to one that is more collaborative, inclusive and transparent. Suppliers still perceive the current approach as adversarial, parochial and self-serving.
Suppliers still perceive the current approach as adversarial, parochial and self-serving.
They want to see an "extended enterprise" where everyone in the supply chain feels responsible and accountable for the success of the product, is committed to continuous improvement, and strives to identify and eliminate waste in all aspects of the business. Who wouldn't?None of these criticisms are new. I've been hearing the same old horror stories for decades now. And I've seen numerous car company executives come and go who promised that now they were going to treat suppliers as "true partners." Yet it never seems to materialize – or, at least I should say, the supplier community doesn't really believe it's happening.
All of these issues are within the total control of the "Big Three." They don't need any outsiders to help them get this fixed, especially not the President's Task Force. And the pay off could be huge, $10 billion in waste that they could drop to the bottom line.
###
Autoline Detroit
Airs every Sunday at 10:30AM on Detroit Public Television.
Autoline Detroit Podcast
Click here to subscribe in iTunes
Follow Autoline on Twitter for ongoing updates every day!
Autoline Daily
Get a WordPress.com Blog
Reader Comments (Page 1 of 2)
alexander 5:44PM (3/13/2009)
so, you want that all manufacturers to make boring cars like toyota.. Because, to me personalisation of the car is very important. Here in eastern europe, if you want a vw with ac and esp and no power windows in the back, you can have it. Yes, is more economical to make "standard" cars, but if i want just ac and i don't want to pay for some other thing, why can i doy it at toyota for example?
Reply
reddy 6:51PM (3/13/2009)
Yeah personalization is important, but not to a extent to be insane. Business has to make more sense than being insane.
People like you who want non-standard personalization are definitely far less. If Toyota made boring cars, most of our people buying them should be boring too.
Kitko 8:47PM (3/13/2009)
Alex, a mental note - if you say Toyota is boring, don't use VW as a supposedly not-boring example.
More importantly, Toyota is a Japanese company, and although it makes its cars in Europe too, it's not exactly the same thing as VW having most of their factories for EU models in Europe. It's less than 800 km from Wolfsburg to Bratislava (for those who don't know - it's major VW factory in Slovakia, the only one in the world making Touaregs). Not to mention the fact, that incredible amount of parts is freely interchangeble among Skodas, Audis, VW and Seats - it makes for less expenses, better logistics but, well, not much for making exciting cars.
It's 20,000 km from Japan to Swindon (Honda's UK factory). At the moment, Mazda makes all its EU cars in Japan. That's why Japanese cars are almost always better equipped than their European competition - especially base models. There's only ONE B-segment car in Eastern Europe that has height adjustable driver seat standard in the basic configuration - Mazda 2. An issue if you happen to be 160 cm tall - which many of the female customers, the target group of the B-segment, are. Basic Lexus IS 200 Diesel is much better eqipped than comparable Beemer or Merc. It's cheaper, too. It's necessity, but it's far from boring.
Ian 5:48PM (3/13/2009)
"10 million different possible combinations! "
This is absurd. I'm sure this includes combinations like "The F-150 that has only one wheel."
Not saying there are optimizations to be had, but hyberbole like this makes their remaining points suspect.
Reply
letstakeawalk 5:59PM (3/13/2009)
The number comes from all possible configurations:
Paint color x wheel size x engine x transmission x bed size x wheel base x interior trim X etc. X etc.
10 million possible configurations isn't that hard to believe.
Kenneth Moreland 6:03PM (3/13/2009)
In Shreveport, instead of working with the suppliers, when we have any build or quality issues, we automatically raise the red flag, to jump up and down on the supplier. It's never our fault....nothing to do with the fact, for example that a line employee has 4 inch finger nails, with a cell phone to her ear, and the part doesn't fit right. So instead of disturbing the fantasy football league setups, or text messaging some "squeeze" for later, we tie up our supplier resources to do our job for us, that ultimately we are at fault, and not the supplier. Treating them right, and working hand in hand with them, would sure be huge step up, for building WAY more efficiently and sure would help create a "foreign" word.....QUALITY!
Reply
KT 6:11PM (3/13/2009)
I'm sure they could include them earlier in the design process. This may help a little.
However, I wonder if the suppliers want to take the hit if/when there is a recall on the part(s) they supply? It's the carmakers that catch the heat and negative PR when there's a recall. Would they be willing to pay for the recall repair expenses if they are included in the design process from the start? I doubt it.
Reply
J.Crew 3:50PM (3/15/2009)
Suppliers do pay for recalls to the manufacturer if the part recalled was theirs and proven to be their fault. The OEM takes the reputational hit in the media.
RastaD 6:39PM (3/13/2009)
While the suppliers would surely like more say in the automobile design, I don't think they should have it. It’s difficult to get an exciting design out, as is. There was a lot of resistance from suppliers as the Big Three worked to upgrade their interiors to world standards over the past several years (well, at least GM and Ford). While it may not be the most economic model, allowing a design to come to fruition through a single vision generally yields the best result.
Speaking as an outsider, there seems to be quite a bit of self entitlement and arrogance from some auto suppliers which I really don't understand. They provide a product to their customer and should be happy for the business.
Reply
Sea Urchin 11:35AM (3/14/2009)
Big 3 beat their suppliers into a pulp.
Heck, GM is suing the bankrupt company that was suppose to make Camaro interiors. Kicking the dead, all the while being in Intensive Care Unit and Welfare office all at once.
J.Crew 4:04PM (3/15/2009)
They are not saying suppliers should have a say in the look of the car when they are talking about design. They are referring to the design of the parts being installed in the car. The OEM (GM/Ford) specifies a part, the supplier provides it, and when it hits the factory floor they realize that the specs were not 100% correct which leads to a last minute engineering change that could hold up the entire line while waiting for correct parts. The supplier is charged for the downtime while waiting for new parts. The current parts may be "reworked" to fit what is required if it is not too out of spec. Getting this done is also time consuming, costs the supplier until their updated parts hit the shop floor. The suppliers is also forced to change their entire process back at their factory which is another wack to the suppliers bottom line. This all could be avoided if the manufacturer opened up the design process to the suppliers engineers since they are both working towards the same goal of producing a quality product. This is where Toyota is very strong and why suppliers enjoy working with them. They work side by side and share these savings with the supplier as it is just good business to cooperate when you are always tied at the hip.
Brian P 7:35PM (3/13/2009)
Rasta, the issue at hand is not "design" in the way you probably think it is - the outside shape of the vehicle, the shape of the instrument panel that you see when sitting in the driver's seat. Rather, the issue is, for example, the way the door latch fits into the door mechanism (buried inside), or the way the instrument cluster and heating ducts attach to their supporting structure (buried inside), etc. Who cares if every single vehicle that manufacturer "X" builds uses the same door latch/lock assembly or not, or the same heater core or ventilation fan, as long as it works properly?
Take a look at a 2006 Honda Civic (current swoopy shape), and compare it to the 2005 Civic (previous boxy boring shape). Completely different car, right? Nope. It's built on the same base equipment in the plant, it goes together down the assembly line in the same order, the chassis locating points underneath (that the factory uses to locate the car body precisely as it goes down the line so that the robots align properly) are in exactly the same places. The components are (almost) all supplied from the same sources, too. When production changed over a couple years ago, any guesses how much time and space elapsed between the last 2005 old-style and the first 2006 new-style?
Hint: Not much.
Reply
RastaD 8:45PM (3/13/2009)
McElroy had several great points and the US auto industry should definitely follow the lead of the Japanese on their product scheduling and common design elements. However, allowing the suppliers to have more say in initial auto design (be it structural or not) is not in the car companies' best interest. Basically, they are lobbying for a larger role in the engineering side of the business now that this Washington panel will be "helping" decide how to restructure the industry. Of course the suppliers want a say in external design elements as well as internal. You can't tell me that they wouldn't fight tooth and nail to use a common air vent in an entire range of vehicles if given the chance, whether it grooves with the interior or not.
RockStoneSteel 11:04PM (3/13/2009)
I am so tired of hearing about the millions of possible combinations of options for cars. The fact is, no manufacturer has ever had to make millions of said combinations. They simply make those combinations that are most likely to sell. They are not compelled to randomly throw together unlikely groupings of features, so lay of the whining about the inefficiencies of the optioning.
I think the biggest problem I have is that cars are NOT particularly expensive, relative to what people were paying decades ago as a percentage of their household income. In fact, I would say by far, that most people's disappointments with new cars isn't that they cost too much, but rather they can't get what they want. I have heard people complain, myself included, about the stupid overpriced option packaging that the japanese manufacturers are pushing off on consumers. I don't want leather at any price. I don't want woodgrain at any price. I do want a moonroof and a stereo upgrade. I do want the V6, but I don't want the rock hard "sport" suspension. When a vehicle is the second largest amount of money that a person will spend, it's not asking too much at all for a bit of customization. This would be a great opportunity for the Detroit big 3 to excel over the japanese. Market just like Burger King, "any way you want it". If I'm spending $30K or $40K on a vehicle, I should be entitled to pick and choose features. The problem is the stupid manufacturers that insist on making the options factory installed. Why can't a stereo or wheels or even the interior fabric choice be installed by the dealer? It gives the dealer a chance to make a few extra bucks on the sale and the customer gets what they want.
One of my biggest disappointments with Honda is the poor matching of interior and exterior colors. They don't offer various combinations at all, it's either take it or leave it. Guess what, I bought a Hyundai. And I was able to get the red exterior with a tan interior, just like I wanted. You want that Nissan Altima with satellite radio? Better fork over an extra $5K for a stupid package. Sure, it may "save" Nissan a few bucks in the logistics of parts ordering, but they lost a sale.
The fact is, the rigid packaging by the japanese manufacturers is more of a hindrance than help. They sell cars in spite of stupid packaging. It's penny wise and pound foolish.
To sum it up, the lack of sales on anyone's part isn't necessarily due to high prices, but rather due to not giving buyers what they want. The Mini Cooper is a perfect example of how to get a little more money from a smaller package. The Mini lets buyers option their vehicle to get exactly what they want. At the end of the day, everyone is happy.
Reply
Mark K. 11:08AM (3/15/2009)
For far too long American consumers accepted to buy what manufaturer wanted to sell, instead of insisting on buying what they want. The catch was (and manufacturers know it) that they can get cars little bit cheaper. To understand the point completely (for American readers), go to
http://www.ford.co.uk/SBE/ConfigureVehicle/p=1204903584430
and see how you can buy a Focus, for example, in UK.
March issue of CAR magazine features comparo between Infiniti (new in Europe) and BMW. When comparing 3 series with G37, the first sentence was about 11 engine choices (yes, that's ELEVEN - 6 gasoline and 5 diesels) that BMW offers for 3 series and ... er, ONE engine Infiniti offers. Case rested, Infiniti doesn't stand a chance.
Infiniti can flourish in US with one engine "choice" when BMW 3 series offers 2 1/2 enignes (one IL six in two flavors and one diesel), but you can't sell cars in Europe with same attitude.
Which is really shocking, considering all the hammering with "Customer is The King" we hear daily in U.S. - well, The King he might be (U.S. customer), but that doesn't necessarily mean he's smart.
JC 12:02AM (3/14/2009)
The suppliers' ideas make tremendous sense but, first, you have to fire all the Domestic Auto CEO's and upper management and get a start fresh. As mentioned, it is over 100 years of the same business model, generation after generation, and it all came crashing down now. Domestic Auto makers need new blood from the top down...the same old ideas have not worked nor will work again...and the uppers are completely blind, inflexible, arrogant and LOST but will continue with the old ways with the same old administration in place!!!!
Reply
elprogramer 5:38AM (3/14/2009)
What I find funny is that "planning months in advance" seems contrary to the idea of lean manufacturing (I'm sure it actually does decrease overhead) and more akin to the "just pump 'em out" philosophy of the 20th Century.
In any case, General Motors keeps their fingers on the market's pulse; if their cars aren't doing to well, they slow production instead of eating up parts they don't need. They are still largely operating as if Delphi was still an arm of the company instead of an independent supplier; remember at one time most of the car was built from within the company.
Reply
k48103 9:48AM (3/14/2009)
The root cause resides in OEM purchasing and their tool analysts, not design proliferation or supplier involvement. OEM purchasing practices remain the biggest contributor to new product line financial risk
Now, suppliers' single biggest financial risk arises because, long after we launch production tooling and commit, OEM purchasing gets-around to reviewing quoted tooling. Then, the OEM informs the supplier what they will and won't fund. Insofar as competitively bid programs rarely allow anything but marginally attractive gross margins, this practice often renders financial proformas unattractive. Suppliers are left with little recourse apart from threatening the OEM with stop-ship without a unit price increase - makes for superlative supplier-customer relations
IRS rules may require this analysis, but speeding the tool review process so that its resolved before the project requires production tool launch will dramatically reduce financial risk
Reply
Hakim 2:51PM (3/14/2009)
When you say "we launch production", who are you talking about?
From the "transplant" side, I can tell you that all the tooling cost are fixed and agreed upon prior to cutting steel.
The only times that the supplier may get burned is when there are design changes after the tool is made. Sometimes it isn't clear of who is responsible for the change: Is a supplier issue or a OEM design issue?
Cheech
Mike 11:08AM (3/14/2009)
I'm usually on board with what John says but I'd have to question anyone who thinks that forecasting months in advance is a good thing. We keep seeing parking lots and container ships full of Japanese product piling up at the docks, does that sound like a good business decision?
There's also no info on how anyone came to this 10 Billion dollar magic number, are we just guessing here? Also throwing out the number of possible configurations without telling what those things are (this includes paint choices and other things that really don't cost any more to have) is just the normal journalistic way of trying to make a point without disclosing the full details so as to sensationalize your topic.
Plus the whole story is one sided from the supplier's point of view. Of course the suppliers want to be privey to everything going on in a product's development, but the problem is that these suppliers work for all of the OEMs, disclosing large amounts of info about your product before launch could easily lead to leakage of info to your competitors. Suppliers have no rights to all of that information, it is up to the OEM to disclose what they see fit to protect their assets and get what they need from the people they are paying to produce for them.
Reply