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Supply chain Rx: six sure-fire remedies to improve the health of OEM/supplier relations. (Supplier Business).

The entire automotive supply chain is performing poorly by virtually any financial measure you choose -- return on investment, cash flow, price earnings multiples and operating margin to name just a few. It doesn't matter if we are talking OEMs, systems integrators or lower tier suppliers. Each of these supply chain members are earning substantially lower retums than required to retain risk capital in their business over the long-term.

Supply chain practices need to be comprehensively revised to drive breakthrough performance levels that will once again establish the automotive supply chain as a desirable place to invest capital. Discontinuous change is required, not incremental improvement.

Six specific supply chain management recommendations are documented below based on the recently released survey results documenting financial performance for lower tier automotive suppliers jointly performed by the Original Equipment Suppliers Association (OESA) and Plante & Moran.

These recommendations include the following:

* Team with best suppliers based on demonstrated performance and competence.

* Involve suppliers early in the product/process design stage.

* Develop and use standard collaboration tools.

* Change mental models for purchasing executives by expecting suppliers profit margins to vary with the level of innovation and value provided in their products and services.

* Use real world and reasonable cost models to set price targets.

* Expect suppliers to help their lower tier supply chain become more productive.

Teaming with the best suppliers seems like such a common sense approach, yet so many customers are working with second rate suppliers. Many supply bases are bloated, with little or no focus, and ineffective performance measurements to assist buyers and commodity strategists in making effective sourcing decisions.

The prevailing mental model among sourcing executives emphasizes creating pricing competition between and among undifferentiated and unfocused similar looking suppliers. There is little effort by the customer to develop a coherent commodity buying strategy based on the expectation that quality and delivery will meet world-class performance levels, and the differentiator is the supplier's ability to consistently deliver extraordinary value as defined by specific arrays of customer needs. Customers need to define the critical sourcing characteristics such as equipment size and capacity, the need for process or product specialization, need for value-added services such as engineering and product validation, and geographic scope to name just a few. These criteria are then used to select and develop a compact and high performance supply chain. Big is certainly not necessarily better. If you have any doubt investigate the comparative size of the Toyota or Honda North American-based supply chain compared with other OEMs.

Now that we have a small group of high performance suppliers, the next step is to involve them early in the product/process design stage. This is a time proven method for meeting or exceeding comprehensive and aggressive function, fit, weight, reliability, process capability, warranty, durability, piece cost and investment performance expectations. Estimates are 85 percent of the cost of a final part is established at the design intent stage that occurs by approximately 15 percent of the time into part development process. So if you want to control functional performance, piece cost and investment, it needs to be accomplished during the initial months of the development process and with consultation by the experts with profound design for manufacturability knowledge. This knowledge normally resides within the suppliers four walls.

Since the customers are collaborating with their suppliers on the design and development process, it stands to reason the use of standard collaborative engineering, part development and program management software tools would pay substantial dividends. Envision customer engineers and supplier engineering and manufacturing personnel working simultaneously on the evaluation of alternative design concepts in a real time basis supported by finite element analysis tools and vehicle dynamic modeling capabilities. Supplier personnel are evaluating various design aspects for their impact on capital investment, piece cost, and process capability. Development time is shortened, while math and product data is simultaneously accessible by all authorized stakeholders. Late design changes occur less often as vehicle system coordination is significantly enhanced and manufacturing process changes decline dramatically. Initial and full-cycle quality performance improves, and capital investment declines. The standard provision for engineering changes, frequently 10 percent or more of total investment, is substantially reduced or eliminated.

Back in the customer's purchasing department we also need to see important changes in both purchasing philosophy and decision support systems. Our industry needs to develop reasonable and rationale expectations regarding appropriate profit levels for various types of value. The return on investment and operating margin performance for a MS washer or low tech dome lamp should certainly be different from a high tech stability control system or an interior auto-dimming rear view mirror with integrated data display and microphone. Customers and suppliers must collaboratively develop rational profit models based on the relative degree of value provided by the supplier. System integration, innovative solutions, and break through technologies require substantial investments in R&D and marketing and sales, and suppliers should have an expectation of a value-based return for these innovation streams.

Moving from purchase department pricing philosophy, lets transition into tactical issues related to the development of target prices. Suppliers often wonder where target prices come from. Stories abound of price targets set below the North American material content for the product. While each of the OEMs have purchase cost analysis functions, the costing models used by these groups are typically not sufficiently robust to produce accurate and reliable target cost results. The best source of data to drive these models is from high quality suppliers with whom an OEM has a trusting relationship. Unfortunately, most suppliers are reluctant to share accurate cost information with their customers. A change in philosophy by customer can begin the process of development of a robust, reliable, useful and accurate cost estimating model for use in setting target prices.

A number of large blue-chip customers have worked very hard with their suppliers to help them become more lean and cost effective. Enlightened customers understand the absolute co-dependency between customer and supplier and have invested heavily in supplier development activities to help their supply base improve. Tier one and two suppliers need to strategically invest in supplier development activities, by helping their suppliers implement various quality and productivity improvement practices. After all, a chain is only as strong as its weakest link.

The supply chain management initiatives described above represent a substantial and critical mass start on the journey towards restoring the financial performance and long-term viability of the extended automotive supply chain. Domestic OEMs will only be able to complete in the market place for customers and in the capital markets for money once they overhaul their supply chain management practices.

RELATED ARTICLE: Recommendations for revitalizing the supply chain

* Team with best suppliers based on demonstrated performance and competence

* Involve suppliers early in the product/process design stage

* Develop and use standard collaboration tools

* Change mental models for purchasing executives by expecting suppliers profit margins to vary with the level of innovation and value provided in their products and services

* Use real world and reasonable cost models to set price targets

* Expect suppliers to help their lower tier supply chain become more productive
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Title Annotation:original equipment manufacturer
Comment:Supply chain Rx: six sure-fire remedies to improve the health of OEM/supplier relations. (Supplier Business).(original equipment manufacturer)
Author:Fitzgerald, Craig
Publication:Automotive Industries
Geographic Code:1USA
Date:Nov 1, 2002
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