The Auto Suppliers' Advantage

One of the advantages of participation in the automotive industry is being in the forefront of manufacturing and management trends.
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One of the advantages of participation in the automotive industry is being in the forefront of manufacturing and management trends. Suppliers are constantly being asked to change, or to meet new requirements. Not all of the changes are good for the industry as a whole, but it is often the case that a company can develop a winning position out of being able to meet those demands. Its improved competitive stance might be useful in winning additional automotive business or in what might be a better plan, particularly for process-oriented suppliers: diversification into other markets.

Some examples of the leading-edge practices that the automotive industry has popularized are lean production, common quality standards, and new environmental standards. The development of lean manufacturing principles began at Toyota in post-war Japan where practices like quick die change enabled the company to meet the necessity of accomplishing more with fewer press lines. Through the 1960s and 1970s, Toyota and other Japanese automakers were at various stages in adoption of lean production, and Toyota was training its supply chain to use the same methods. The U.S. automakers, primarily because of hard times at Ford and Chrysler, began to explore lean production in the 1980s. In another decade, the 1990s, U.S. suppliers were also getting lean. The interesting thing is that, during all this time, the auto industry was largely alone in this undertaking. Although other industries are embracing lean today, they are invariably operating at some point that the automakers have already passed.

Similarly, the auto industry has shown leadership in the development of common quality systems. This was initiated by a task force including the Big Three in 1988, in recognition of the fact that there were efficiencies to be gained in not making suppliers jump through completely different hoops in order to achieve the same purpose. The group effort started on the fringes, standardizing reference manuals and technical terms. By 1994 we had QS 9000, which went further by saying there was a lot of common ground in the quality systems expected by each of the Big Three. For suppliers, this meant they did not need to spend as much time mastering individual programs, like GM’s Targets for Excellence or Chrysler’s Pentastar. Now the trend is toward international harmonization, given the increasing globalization of the industry.

The auto industry has also been quick to take up the ISO 14000 international environmental standards. The automakers have adopted the ISO 14001 process for their own manufacturing operations, and are requiring or inviting suppliers to do the same.

One reason that the auto industry has been able to drive its continuous improvement in this way is that there are many suppliers and relatively fewer customers. The concentration of power in a few customers makes it possible for them to demand that suppliers meet high expectations and follow these practices. We might complain about some of the dynamics, but overall, succeeding as an automotive supplier means operating at a higher level in manufacturing, quality, environmental impact, purchasing, and other areas, as a result of these demands. When automotive suppliers explore other industries for additional business growth, it is often the case that they are ahead of the curve in what those industries expect.

Other Markets Following the Path
Other industries are certainly moving along the same path. For example, Boeing Corp. talks about its Production Initiatives on its web site, and it describes how it began to apply lean principles in 1994 (almost 15 years after the automakers) because of changes at its primary customers, the airlines. Whirlpool, the No. 1 home appliance manufacturer, has a list of supplier quality guidelines that mentions its use of automotive as a basis. And agricultural equipment manufacturers including John Deere are reaching out to auto industry personnel to institute similar practices in their production operations.

Although automotive is at the leading edge of fundamental change in industrial operations, the downside is that those other industries are also adopting the practices that intensify competition between component suppliers. In the appliance industry, for example, all OEMs are turning to supply base reduction (e.g. Electrolux has been reducing its supply base 15% per year), cost reduction (Whirlpool expects annual percentage improvements in Total Cost Productivity), moving production out of the country (Maytag is shifting refrigerator production from Illinois to Mexico), and other means of squeezing out suppliers. The moral of the story is that one cannot assume that the answer to the challenges in auto is to jump to a different industry, even if it were possible to do that instantly.

In the 1980s, when the automakers began talking about reducing their number of direct suppliers, the first impulse for many companies was to try to retain that relationship. Everybody wanted to be a Tier One because that was assumed to be the highest status, and the most lucrative role. As it has turned out, the position of being a supplier in a lower tier has its advantages. Suppliers in the lower tiers have more choices regarding what customers to serve, and are able to move between them more readily to find the best opportunities. This might include moving into new industries, fully recognizing the challenges. Auto suppliers are likely to have the technical and production capabilities to succeed, but they need to build up the sales and marketing side. The potential competitive advantage of leading-edge practices tends to be a decreasing gap, so suppliers should waste no time in deciding whether resources should be applied to complementary business in a new market.

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