Relationships To Tone Up Automotive Supply Chain

By Louis Rumao

Manufacturers are only as strong as their weakest supplier! Supply chains keep assembly operations running. If one firm in the chain breaks, production can be disrupted and it can affect the bottom line.

This is especially true in today’s automotive industry with suppliers and assembly plants spread all over the world. Supplier development is critical to make the supply chain robust, with a dependable and win-win relationship between automotive parts manufacturers and their customers, the original equipment manufacturers (OEMs). No denying the fact that the US-based OEMs have to do some catching up, while the Japanese firms, especially Toyota Motor Corp. and Honda Motor Co. Ltd., are leading the way.

Automotive OEMs have to comply with an increasing demand for high quality, reliability, innovation and competitive value. They are also subject to regulations on issues like climate change, energy use, passenger safety and mobility. In such circumstances they find it necessary to pass on the market pressures to their suppliers in terms of price and quality.

Supply Chain

It is natural to have friction in any customer/supplier relationship. It can be eliminated if OEMs and suppliers work together, on a long-term basis, with mutual trust.  Supplier development –- a company’s undertaking to improve its supplier’s capabilities – has been taken for granted in Japan for a long time, while in the US only recently. Supplier development refers to an organisation’s efforts to create and maintain a network of competent suppliers, primarily based on the quality management system (QMS) requirements contained in the latest editions of ISO 9001 and ISO Technical Specification (TS) 16949. It should be based on taking costs out of the system rather than forcing the supplier to reduce price. For this every supplier needs to share ideas with the customers on how to improve designs, processes or specifications that could allow it to operate more efficiently. Management should establish relationships with suppliers and partners to provide and facilitate communication to improve the effectiveness and efficiency of processes that create value.

When it comes to price, the old model has also been broken. Formerly, when there were material price increases, the increased cost was passed on to the customer. Today’s competitive climate often leads to costs being pushed down the supply chain as there is pressure on the OEMs to remain competitive in a crowded field.

Survival in today’s economic climate requires companies to develop a strategy to manage cost and increase value to the customer. Towards this goal, General Motors Co. established the One Cost Model—a new purchasing programme 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. GM updates its cost analysis each year to see whether or not suppliers can cut costs through more efficient production. Suppliers gain earlier access into vehicle programmes, and GM tries to develop more realistic cost-analysis for those programmes. In return, suppliers let GM engineers and purchasing executives evaluate their factories and cost data.

However, as cost pressures are passed down the supply chain, cost reduction and the overall enhancement of value cannot be viewed as an isolated initiative. Price reduction is only a tactical short-term solution, and customers need to understand that there is a limit to how much a supplier can reduce price and still remain viable. Instead of focusing on a ‘price down’ strategy, organisations need to employ a ‘cost out’ strategy. This requires a holistic view of the supply chain where an organisation works with its supply base to achieve the removal of waste through joint initiatives for value creation.

Likewise, the introduction of technology and methodologies that can increase productivity has prevented labour costs from impacting product costs, making price differentiation within market segments less likely. But this requires the entire chain to continually adapt and respond to ongoing changes in cost.

The Internet and other electronic forms of communications have enabled the customer to access more information about the types of products and choices that are available. Power has shifted to the customer, who defines what is valuable by what is purchased. This forces companies to be more concerned about and sensitive to the needs of the customer.

As the competitive environment becomes more intense, companies are also noticing that profit margins are in decline. There is little blind commitment by customers to a particular product or service. A product or service must remain the most value-added choice available or it will be neglected for ‘the best deal’. Companies need to be vigilant about value enhancement to sustain a viable position in any industry.

Role of Relationships

The supplier development, as required by the ISO 9001 and ISO TS 16949, will improve the operations of the suppliers and thus improve the product and its ability to satisfy customers. But what does supplier Quality Management System (QMS) development really mean and how is an organization going to achieve a robust supply chain? The answer is in more collaboration across the entire supply chain – with the customer as well as with the suppliers – to improve the processes to reduce cost and create value within the supply base. These days, global supply base means collaborating even with the competition to improve value for the common customer. Improvements in communication, information-sharing and relationships based on trust equate to the hallmark of a new era in competing as a supply chain, rather than as an individual company.

There are many stories of companies that mandated performance improvements, especially cost reductions, from their suppliers without collaboration and participation. The result was lack of value creation, driving many suppliers out of business. Likewise, the success stories are of companies that have discussed with their suppliers how to create value with shared responsibilities, ideas, data and techniques for better performance by all stakeholders.

Quality, cost and delivery have been considered as the key indicators of supply base performance. Another key indicator that has emerged in today’s environment is collaborative connectedness. This is a measure of how well an organisation is connected to and integrated with its supply chain. Collaborative connectedness will become another measure of how well the entire chain is organised and run. It will turn supplier development into supply chain development, and that will improve the performance of the organization itself!

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