Ready to Launch?
An acquaintance from a major Tier 1 supplier surmised the state of OEM-Supplier relationships succinctly in a recent conversation. Today’s focal point is about “Launches, Logistics & Lean”. Some background is in order to add context to this observation. Since 2009, the OEMs and Tier 1s searched high and low for ample component capacity able to feed the North American production market—one which more than doubled since 2009 from 8.6-million units to over 17.5-million this year. No matter where they were located, if a supplier had a beating heart, available capacity, and was able to deliver quality parts on time, they were busy.
Though the North American market is still strong and forecast to continue to rise (albeit at a slower rate of growth), OEMs are taking this opportunity and the on-shoring of a number of suppliers from China, Korea and India to add new competitors to several sectors. This attempt to shift the competitive dynamic is driven by a refocused effort to lower overall landed costs and inherent risk in the face of a number of technology pressures adding cost over the next decade. While most sourcing structures are already very efficient, some bad habits have crept in over the past six years as OEMs scrambled to build vehicles as their first priority and efficiency as a second. An active market quickly hides inefficiencies.
In past columns we have discussed the importance of shortening logistics routes and the subsequent reduction in risk, inventory and improved flexibility. The industry is always seeking to tape fewer dollars to each incoming part. Several high-profile launch issues have focused greater efforts to ensure that launch schedules are supported at all costs.
Vehicle launch readiness has long been an industry issue though more so now. No matter how many safeguards and capacity checks—invariably there was always a fly in the ointment to dog volume or alter mix, like some issue which had never been encountered before—which impacted a launch. Ensuring all suppliers (and the OEM) are on board with an aggressive production launch is more critical than ever for several reasons. Why is this more of an issue today than before? Faster cadence, an influx of new technology and increased competition are altering the industry’s approach to launches. Ensuring optimal vehicle volume and reducing downstream warranty costs supports profitability. Suppliers also want to maintain their forecasting launch plans as revenue is based upon smooth launches.
A combination of a higher number of OEM/facility combinations building in North America, the well-documented talent shortage and condensed product cycles will continue to significantly impact launch readiness. Shorter product cycles dictate that OEMs can no longer afford less-than-optimal launches. If a vehicle cycle is over 25% shorter than before (5 versus 7 years) , shouldn’t launch curves be 25% more aggressive? Therein lies the issue. As arguably the most profitable vehicles are at the cycle’s front end, the industry should not be satisfied with traditional launch curves; a new standard is required. IHS has calculated that a North American-based OEM should have lost only 1.9% of total cycle volume with an aggressive launch curve for their recent high volume launch. Instead, they are likely to lose an estimated 4% of total volume. Lost profitability can reach hundreds of millions of dollars if not controlled.
OEMs no longer wait for mid-cycle actions to launch the highest, most complex trim levels. This immediate heightened build complexity in combination with a number of new technologies to build technologies to lighten overall vehicle mass are adding to the problem. Shifting from an all-steel body and frame to one with mixed materials is going to be a recurring theme within the industry. New suppliers, new manufacturing processes and fastening/assembly techniques will offer new levels of complexity driving the industry to place launch readiness under a microscope going forward.
With an unprecedented number of production launches occurring in North America through 2019 (averaging more than 30 per year), there will be several opportunities to improve launch performance. Add this initiative to an already long list of initiatives to focus future efforts.
Michael Robinet has been a managing director of IHS Auto-motive since 2011. Prior to that, he was the director of Global Production Forecasts for IHS Automotive. His areas of expertise include global vehicle production and capacity forecasting, future product program intelligence, platform consolidation and globalization trends, trade flow/sourcing strategies, and OEM footprint/logistics trends.