Automotive Supplier Excellence: Achieving Continuous Cost Reduction

Automotive suppliers are in a challenging position. Over the last several years, OEMs have issued mandates to their suppliers to reduce costs, and those pressures have only continued to increase. For example, in early October 2002, General Motors accelerated its schedule to negotiate and incorporate its calendar-year 2003 supplier cost reductions. Ultimately, an inability to reduce internal costs year after year to meet the OEM mandates will result in eroding margins that may put the suppliers' future business at risk.

From the supplier community's perspective, most OEM supply-chain improvement initiatives rely on transitioning the operational burden from the OEM to the supplier. According to AMR Research, "...OEMs have done little more than force suppliers to carry a larger burden of inventory …The cost of maintaining inventory has remained the same; it's just shifted to suppliers." Increased inventory burden and additional responsibility to coordinate more of the OEM's supply chain has put additional pressure on the supplier community's margins and increased their operational responsibilities.

To remain competitive, many automotive suppliers have turned to mergers, acquisitions, and/or joint ventures in an effort to grow top-line revenue, maintain market share, more-effectively utilize assets, and increase leverage with the OEMs. Unfortunately, the expected benefits associated with those endeavors often fail to materialize, resulting in additional margin and performance pressure. According to Neil De Koker, managing director of the OESA (Original Equipment Suppliers Association), there has been no evidence of either improved operating margins or return on capital employed due to synergies from merger and acquisition activities.

Automotive suppliers realize that cost control and cost-reduction capabilities must be intrinsic to their structure, processes, culture, and technology foundation if they are to survive and thrive. And the role of technology in the scenario is pivotal, according to AMR Research: "Can companies consistently improve performance by adopting leading business practices independent of whether they have strong or weak technology? The answer is a definite no."

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