VideoAmerican BOA Inc. is feeling squeezed. As a second-tier supplier in the auto industry, the Cumming, Georgia-based maker of exhaust interface products must satisfy first-tier suppliers--its customers-- that are demanding price reductions, while buying its raw materials from third-tier suppliers that refuse to cut prices. "We're stuck in the middle, with no place to go," says Bruce Hirabayashi, vice president and CFO of the privately held company, which has nearly $100million in annual revenues.
Although major automobile manufacturers like Ford Motor Co., DaimlerChrysler, and General Motors Corp. like to call the industry's reconfigured supply chain a "value chain," that value is elusive for many suppliers like American BOA. When automakers impose a 5 percent price cut on their suppliers, as Chrysler did in January, a first-tier supplier such as ArvinMeritor Inc. must find ways to make and sell its components for less. If you're ArvinMeritor, a $7 billion company with power over a galaxy of second-tier suppliers like American BOA, you simply pass the cost-cutting mandate on to them.
Unfortunately, American BOA can't do the same. "Our suppliers are the big steel companies," notes Hirabayashi. "If ArvinMeritor comes to us and says, 'You will reduce costs by 5 percent or you won't ever do business with us again,' and we go to one of these giant companies and say the same, we'd hear them chortling at the other end of the phone. If we tried to make them kneel and whimper, they'd say, 'What's your name again?'"
American BOA is not the only supplier for which the value chain is becoming a noose. Compelled to cut costs, invest in expensive Web-based technology, and produce more modular components that require expensive process changes and new machinery costs, suppliers are being squeezed to death--literally. In an industry that once numbered some 50,000 suppliers, today there are fewer than 30,000; that figure, says Dick Gabrys, Detroit-based vice chairman of Deloitte & Touche, will "shrink dramatically" in the next 10 years.
Many industries are evolving along the lines of the fast-track computer sector, where such companies as Dell Computer Co. set new standards for delivering customized products. Shorter product cycles driven by mercurial consumer tastes are becoming the norm. Ford, for example, is in the midst of a reengineering effort that will enable it to manufacture cars on a "reasonable" build-to-order basis. That will amount to a fundamentally different buying experience for consumers: enter a dealership today and spec out the car of your dreams, and you're usually told it will take months to deliver. "You end up skipping the black interior or the red stripe," explains James Gouin, CFO at Ford Consumer Connect, the Dearborn, Michigan-based division of Ford that is in charge of its customer build-to-order strategy. "Our vision," he explains, "is to provide the consumer [with] the product they want, when they want it, and deliver on that promise. A car is a lot more problematical in terms of actual components and suppliers than a computer. To achieve the Dell model, we have to completely reimagine a century-old supply chain."
The Role of Technology
Ford launched the first phase of its build-to-order strategy as a pilot program in Canada this year. Called "locate-to-order," the system determines whether a customer's dream car is already at another dealer or in the manufacturing pipeline. If so, the car is shipped to the customer's local dealership, typically within 15 to 20 days. If not, it's the usual months-long wait.
Dramatic improvements to the supply chain promise to reduce not only that wait but also the price, by more than $1,000 per vehicle, according to analysts at Goldman, Sachs Investment Research in New York. Savings will accrue from lower inventory, scrap, rework, and administrative costs; increased labor and asset utilization; and the alignment of all material spending with low-cost suppliers. Whether the savings will be passed on to consumers or simply pad automakers' margins is uncertain.
That has provided much of the impetus for trading exchanges like Covisint, the massive E-marketplace funded by General Motors, Ford, and DaimlerChrysler. Partners hope to shift their current $240 billion in purchases of raw materials and vehicle parts to the Web, slashing billions of dollars off their bottom lines--thanks to transaction efficiencies and more-competitive pricing.
By embracing the Internet, the major automakers are forcing many suppliers, particularly those in the first tier, to forgo the millions of dollars they have already invested in EDI (electronic data interchange) systems--which they adopted at the automakers' insistence to begin with. Some major companies, such as Dana Corp., a Toledo, Ohio- based chassis supplier, don't seem to mind. "We were already embarking on the Internet anyway, so the junking of EDI is not an issue," says Doug Grimm, Dana's vice president of global strategic sourcing.
That despite the fact that by Dana's estimate, more than 95 percent of tier-one companies' communications with automakers is conducted via EDI. The silver lining lies in the other direction: downstream connections to second-tier suppliers are about 25 percent EDI, and that figure drops to 10 percent for tiers two and three. "The promise of the Web," says Grimm, "is for us to connect to our downstream supply base": those firms that can't afford EDI.
Reader Comments» Post a comment