Plante & Moran

The recipe for collaboration requires key ingredients that are not yet in place.

Even before Covisint had a name, experts in the automotive industry have been reporting how much cost could be saved by collaborating throughout the supply chain. Yet, with all of that money on the table collaboration has not happened to any real extent. Why not? The recipe of conditions that will make collaboration economic must have not yet come together.

Ingredient 1: Little left in price-downs

I asked several automotive suppliers how much collaboration they are using in working with their customers. The response: “Collaboration? They’re too busy squeezing us for price reductions to collaborate.” And as long as price-down pressure tactics continue to produce billions in cost savings each year, customer management will not change policies and processes to further collaboration. However, as value-add as a percentage of price shrinks and supplier consolidation reduces the number of viable competitors, the savings purchasing will be able to generate in a year will become much less than the savings opportunity through improved collaboration.

Ingredient 2: White-collar revolt

Cost-cutting at the domestic vehicle manufacturers reduced head-count throughout the salaried staff, including engineering. Therefore, do more with less became the marching orders of middle-management. In response to reduced resources, vehicle manufacturers delegated engineering and supplychain responsibilities to “full-service” suppliers. Many of those suppliers have since realized they were not getting a return for those added costs. In the words of one, “They aren’t paying me for full service.” Also, many low-cost producers found by the purchasing department in the global market do not have sufficient local staff to provide full service, such as launch support. Now many of those responsibilities previously delegated to the supplier have since fallen back on engineering, the plant and purchasing. With no ability to increase resources, the remaining white-collar employees are recognizing that collaboration with suppliers throughout the process will be necessary to get the job done right the first time, and the customer will have to make it worth the suppliers’ while.

Ingredient 3: Visible technology gap with other vehicle manufacturers

Obviously, bringing new technology to market in an automobile requires considerable development and testing. The vehicle manufacturer that can use collaboration to accelerate the process can be the first to market with new technology and reap the rewards. Also, if through collaborating a supplier retains the order for their innovations with a reasonable return, that supplier will bring their next new technology to that customer first. Many news articles and studies published in automotive publications over the last three years suggest this is happening now at Toyota and Honda. If Toyota and Honda generate a gap in product technology compared to traditional domestic manufacturers, especially if done through collaborating with traditional domestic suppliers and system integrators, the other vehicle manufacturers will have no choice but to follow suit. The “not invented here” mentality by OEMs and large system integrators so often quoted by frustrated suppliers will be overcome in favor of closing the gap. The attitudes of OEMs and even system integrators that the supply base has nothing to offer will change, first out of necessity and later from experience.

Ingredient 4: Available tools, processes and professionals

The automotive product development process is still a very top-down approach (OEM dictates to supplier) having evolved from vertically integrated manufacturing. Processes for collaboration are not yet well developed, nor are the technologies and tools. Tools and processes for collaboration will become available much like they are for lean manufacturing. Students of the Toyota Production System moved on to become professional lean manufacturing experts and spawned an entire industry of training, textbooks, software and consultants. So, too, will students of collaboration today make available the knowledge and enable collaboration to spread.

Ingredient 5: Culture change driven from the top
When the first four conditions described above are present, executive management will be confident in the promises of supply-chain collaboration. They will have the necessary rationale and economic drivers to force the needed and difficult changes in performance metrics, established product development processes, sourcing practices and attitudes. Only by a forceful and consistent command from the top can collaboration successfully take root and produce value.

Optional Ingredient: Consistency in supply

There are added benefits from the new domestic manufacturers’ desire to maintain a consistent source for component manufacturing. One is that the supplier becomes an expert in manufacturing that component. Secondly, substantial trust is developed between customer and supplier. These benefits make collaboration that much easier and productive.

When the supplier becomes an expert in manufacturing a particular component, it is obvious who to invite to participate in the product development process. This product and process intimacy provides the foundation for adding real value backed by experience. The established trust enables the suppliers to contribute cost-saving innovations with the confidence that they will be around long enough to reap the rewards for the ideas as the incumbent supplier. Consistently sourcing the incumbent supplier will not be absolutely necessary to begin collaboration with suppliers experienced in types of products and/or processes, but it will make the process more fruitful.

Will it ever happen?

Collaboration has been often talked about by suppliers, OEMs, consultants and analysts at conference after conference. Despite the talk, progress will continue to be slow until all of the conditions are right. But the time will inevitably come. Foreshadowing the future of collaboration are:

• Chrysler Corporation’s experiences with supplier relations and the resulting benefits in the 1990s
  
• The testimonials of suppliers to new domestic manufacturers who have participated in collaboration efforts
  
• The efforts of many intelligent people today investing in developing tools, technologies and processes.

When collaboration will take hold on an industry scale is difficult to even guess. But the timing will be largely determined by the speed at which aggressive price-down squeezing by the customers fails to produce any savings. Then customer-supplier collaboration in product development and production will become a key to survival.

Jason C. Brewer is a manager in the Automotive Supplier Consulting Services Practice of Plante & Moran, PLLC in Southfield, Michigan. Jason.Brewer@plantemoran. com.