Strategy # 1. If you make an undifferentiated commodity, you had better be the low-cost producer

The biggest issue facing many automotive suppliers is the lack of differentiation of their product offerings. With the rapid globalization of the industry, the number of potential substitutes for many components has skyrocketed, reinforcing the typical purchasing mentality of focusing the sourcing decision primarily on price. As we tell many stamping and plastic suppliers, they can continue to improve their operational performance (e.g. PPMs, inventory turns, etc.) and they still will not make any money because it is too easy for their customers to replace them because their product offerings are basically commodities. If a supplier’s products can be easily substituted, they have little or no leverage with their customers.

Even with commodities, however, there is at least one winner: the low-cost producer. If a supplier is the low-cost producer, they can price their products to take advantage of the inefficiencies of their competitors and should end up being highly profitable. If you intend to compete with a low-cost strategy, it is important to understand how lean you really are in your operations. Lean is the means to cost reduction. A few years ago, Freudenberg-NOK conducted a study. It set up six levels of lean (1 low, 6 high). It estimated that 60-70% of the U.S. supply base is only at Stage 2, which is described as “pre-one piece flow,” or, in essence, polishing a batch process. On the other hand, it estimated that 80-90% of the Japanese supply base was at Stage 5, which is described as complete process re-design.

Strategy #2. Proactively manage product lifecycles

Suppliers need to pay greater attention to the positioning and characteristics of OEM programs on the front end of the sales cycle. Before submitting a bid, a supplier should factor in whether the program is a large-volume commodity-oriented vehicle, or a lower-volume niche-oriented vehicle. Issues such as the level of front-end engineering support, the amount of dedicated capital, and the degree of value-added design should all be heavily influenced by the overall positioning of the vehicle. Too often, suppliers take a “one-size-fits-all” approach to quotes, and then end up over-engineering a component targeted for a commodity vehicle and are surprised when they lose the bid.

Strategy #3. Take advantage of and/or minimize the risk of technological change

Many segments of the component industry are being significantly impacted by major technological change. Whether it is the replacement of a mechanical assembly by an electronic one (e.g., drive-by-wire) or the trend toward greater use of new materials (e.g., carbon fiber), technological transition is a significant risk and opportunity for most suppliers. The key is to constantly monitor potential changes that may affect your components/systems. In many instances, these technological advancements are initially taking place in Europe. Given the higher gas prices and the need for smaller vehicles, advances in powertrains and the application of lighter weight materials frequently originate there. Even if a supplier is not actively involved in the European market, they should attend all key trade and auto shows. Annual and biennial events such as the Frankfurt Auto Show and the Hannover Fair are invaluable in keeping track of the latest technological trends.

Strategy #4. Minimize the asset-intensity of your business whenever possible

Along with the continuous downward pressure on pricing, a significant trend of the last five years is the steady shift of asset investment from the OEMs to their suppliers.

While the percentages may not look that significant, this shift represents hundreds of millions of dollars in additional cost for suppliers. As referenced in Strategy #2, suppliers must factor in the cost and the flexibility of any new capital expenditures when pursuing new business

Strategy #5. Maintain a healthy program and customer mix

One of the most significant impacts on supplier profitability is their program and customer mix. Too many suppliers are still heavily dependent on one or two OEMs or have a major presence on passenger cars vs. light trucks. For example, as the chart above indicates, in the last five years there has been a significant divergence of performance between General Motors and the foreign-owned brands in North America.

Any supplier with a heavy dependence on GM cars would have seen a significant decline in production simply because of the program mix. Similarly, if the presence had been primarily on GM sport utility vehicles or pick-up trucks, this same supplier would have seen its production increase. As the industry continues to consolidate, suppliers should become more proactive in program and customer selection. While there are many other factors that contribute to supplier profitability, these five strategies appear to offer the potential for above-average financial performance.