Implementing a modularization strategy.

In the automotive industry, modularization strategies are essential for achieving profitable growth and managing the growing complexities associated with product portfolios, costs, time and quality. Since the adoption of the assembly line almost a century ago, auto manufacturers have constantly searched for ways to increase manufacturing efficiencies by maximizing the use of common components, common procedures or common designs, and still offer the widest possible range of products. In many respects, the development of modular systems is a logical extension of that quest.

The critical key is for automakers and suppliers to design and develop modular vehicle sections that offer both optimum efficiencies of scale and manufacturability, along with the widest possible variations to satisfy an ever-increasing variety of vehicle offerings. Global automakers produce more than 600 different vehicle nameplates with a myriad of sizes, shapes and functions.

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Modular development of vehicle systems allows automakers to rely on the collective expertise of their component suppliers. For example, rather than having a supplier provide just seats, it can be called upon to supply the entire interior, including cockpit modules (incorporating the instrument panel, air bags, gauges, console and pedals), seat systems, door inners and the headliner. The idea is that the scale economies inherent in modular component supply will come from an increase in engineering efficiencies and labor productivity, lower material costs, investment costs, and greater speed to market.

Gaining efficiencies

Vehicle manufacturers have been able to gain efficiencies by spreading the development of a component across a larger number of vehicle lines. A systems supplier may gain even greater efficiencies by spreading the development cost of a single component--as part of a modular system--across the vehicle lines of several manufacturers, and still provide the unique brand characteristics that each automaker requires. Modular systems offer several key advantages:

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* Reduce manufacturing complexity at final assembly. Sub-assembly of the module also provides increased manufacturing efficiency when components are designed not only for their function but also for assembly.

* Lower costs for development and purchasing. Fewer engineering hours per vehicle significantly cuts development costs, and the greater degree of standardization allows purchasing to bundle procurement volumes.

* Improve quality. Mature modules that have been tried and tested across numerous design series make vehicles more dependable overall. One of the leaders in the use of modular systems, Toyota, for example, has consistently recorded a strong performance in the J.D. Power CSI ranking.

Brand considerations

Suppliers that develop a profound understanding of their customers' brand strategies and help them become more competitive through their own modular strategies will benefit and become a fixed part of the OEM business system. In order to do this, suppliers must understand the automakers' brand position and the resulting opportunities and risks for their own business in developing related modular systems. Suppliers that don't follow this strategy will be under constant pressure and may fall victim to sustained consolidation.

Being able to create unique brand-shaping modules are vital for automotive manufacturers. They form the core of the brand, and they are what suppliers must focus their innovation efforts on. The primary brand risk and challenge to the strategy is developing unique modules within a vehicle line. If modules are not considered unique by consumers, it raises the risk that automakers could lose brand loyalty due to an inconsistent price/performance ratio for identical technologies. Partnerships that focus on a company's brand positioning are extremely important for OEMs and suppliers. Companies can manage the risks and reap the benefits by thoroughly understanding "What does my brand stand for?"

Suppliers can maximize their market potential by specifically orienting their own products to the lead vehicles of the modular system and/or to customers' platforms. Modules can then be adjusted or varied to give brands different characteristics. This frequently can be done through software and user interfaces, and as a result, creates the greatest value for both OEMs and suppliers.

Exchangeable modules that do not shape brands must be designed with a strict eye on costs, and these more generic systems run the risk of being treated as a commodity rather than a value-added piece of business. Yet a proprietary modular system of largely uniform parts, components and modules across all of a company's customers, also can help suppliers tap significant cost potential and enhance their long-term competitive position.

Some suppliers will be best suited to an expanded role in the modular assembly strategy and others likely will be better off to concentrate on their core competencies, maintaining leadership in the development and manufacturing of individual components. All automotive suppliers must undertake a careful assessment of their core strengths to determine where they fit in this evolving structure.

Toward a modularization strategy

Launching a modular strategy is a complex matter. Expenditures will soar at first, as the responsibility for capital investment is passed from automakers to suppliers. True savings will not be realized until subsequent vehicle generations. When considering a new module strategy, companies should consider the following: Defining requirements of current and future vehicles projects; Identifying commonality across vehicles and defining module clusters and their specs; Specifying a base module and its variants and conducting cost/benefit analysis; Developing module fact sheet and fact book and building module hierarchy.

Only a few OEMs are currently implementing rigorous modularization strategies (e.g.: Toyota and Nissan). They have derived a significant competitive advantage and are hurtling from one sales record to another. As for the rest--OEMs and suppliers, alike--the time to act is now.

By Ralf Kalmbach, partner, Roland Berger Strategy Consultants (Munchen, Germany; [e-mail]) With Mahesh Lunani, partner, Roland Berger Strategy Consultants Troy, MI ([e-mail])