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Investing in intellectual capital in the auto supplier industry -- the one asset where there isn't excess capacity.

OEMs and suppliers alike have over 25 percent more capacity than they can presently use. The process-oriented suppliers such as metal stampers and plastic molders are especially plagued by underutilized equipment capacity. As a result, these suppliers are competing against each other using ‘variable cost plus margin’ pricing to fill some of the capacity, but lowering the market pricing for all participants in the process. Even the suppliers that are not process-oriented face similar challenges due to the “commoditization” of components, assemblies and systems by their customers.

If physical equipment capabilities are no longer a means to differentiate a company, then how can a supplier compete? A recent automotive supplier survey conducted by Plante & Moran and the Original Equipment Suppliers Association (OESA) concluded that a driver for superior financial performance was the development, commercial leveraging and protection of intellectual capital. These top performers invest in intellectual capital and use this value stream to support and reinforce their differentiation preposition. However, investing in intellectual capital means more than simply knowing what a company is good at. It means spending money on getting the right talent and spending time and resources to formalize the knowledge into repeatable processes and systems throughout the company.

In a series of articles in Fortune magazine in 1991, Thomas Stewart defined intellectual capital as “the intellectual material that has been formalized, captured and leveraged to produce a higher-valued asset.” For this article, intellectual capital will refer to knowledge that can be repeatedly leveraged to create value for the customer and the supplier company. A high profile example is the supplier Gentex that generates continuous streams of innovative new product ideas, including patented products.

Niche product specialists
Black/Gray box supplier
Application engineering

Low-cost manufacturer
Process substitution
Operation elimination
Value-added processes

Solutions/problem solving
Difficult to navigate/satisfy customer
Multiple-point customer intimacy

Types of supplier intellectual capital
Not all types of intellectual capital involve patents. Knowledge can be leveraged in different ways to create value. Suppliers can develop intellectual capital in at least three areas: product knowledge, process knowledge or customer knowledge.

Product knowledge.
Deep knowledge of the products a supplier manufactures can be leveraged to create value for the customer and company. A common example is the black or gray box supplier that possesses the knowledge to design the product to meet customer specifications. Product design is not the only way to leverage product knowledge. Experience gained on cost effective manufacture of a particular part can also differentiate a supplier. Suppliers that understand the manufacturing process parameters that impact the product performance or product warranty better than the customer and competitors can also deliver value.

Process knowledge.
A common process knowledge strategy is pursuit of the low-cost producer status for a particular process technology. Unfortunately, there are so many competitors pursuing this model that it is nearly impossible to sustain differentiation with this intellectual capital approach. There are alternative and more compelling ways to leverage process knowledge. A skilled manufacturer may be able to displace one process technology for another, such as converting a traditionally cast iron part to a steel stamping at a lower piece cost. A manu- facturer skilled in process design may eliminate operations to lower the overall manufacturing cost versus competitors. For example, staking parts within a stamping die to eliminate a secondary operation, or selecting a different lubricant to eliminate washing, can reduce the overall manufacturing costs.

Customer knowledge.
Understanding the customer’s needs and problems even better than the customers themselves, and using innovative problem solving can also be a very powerful differentiator. Even without innovative problem solving, understanding how to work with a difficult customer or a customer with poor internal communication or systems can entrench a supplier and keep competitors out. Some customers value the convenience of working with suppliers who have close and multiple contacts within the customer’s organization, use the customer’s own systems and forms, and can get things done quickly without hassle.

The customer is less likely to view an expertise as differentiated if they already possess that knowledge, or don’t recognize they need it.

Building intellectual capital
The first step is to identify the core competencies of the company today. Leveraging intellectual capital is more feasible if it is built on the existing strengths of the company. Clues to core competencies may be found in the successful jobs and what made them successful. Asking additional questions, such as “what do the customers really need now and what will they need in the future” and “how do the customers make money, and for what are they willing to pay” also may reveal opportunities for capturing value with intellectual capital.

Once potential channels for intellectual capital are identified, validate those opportunities by investigating the competitive landscape and explore the notions with customers. If one or more competitors are well established and recognized for a particular value stream, then that approach may not differentiate your company. The customer is less likely to view an expertise as differentiated if they already possess that knowledge, or don’t recognize they need it. Often, however, larger customers’ product engineers and program managers are distant from manufacturing and therefore lack the knowledge to optimize the design and processing to achieve highest performance at the lowest overall cost.

Identifying a particular know-how doesn’t make it “intellectual capital,” however. Converting knowledge into intellectual capital requires some degree of formalization. Begin with documenting procedures, manufacturing standards or other guides to capture the knowledge. Transferring knowledge from a few to many people in the organization is necessary to making the knowhow an asset of the company, not just a skill of a few individuals. Next, structure processes and systems enabled with information technology tools to make mining and using the knowledge quick, easy and a regular part of doing business. Finally, align and optimize the entire business around delivering that value stream. This extends from the type of customers and opportunities that sales pursues, through to determining appropriate in-direct staffing levels in the plant.

For example, simply having relationships with several individuals at a difficult customer may be a competitive advantage to accomplishing tasks, but isn’t intellectual capital. First, fashion a simple customer contact procedure that instructs employees to document who they spoke to, when, about what and what their understanding is of the tasks the customer contact must do and the systems used. Then, enable the entire organization access to view and build upon this information using a shared drive or a formal customer relationship management (CRM) system. This way, anyone from the sales manager to a quality inspector can know who to talk to about what. Perhaps follow this with customizing the customer interfaces to match or complement their systems, such as using the customer’s own PPAP forms or estimating worksheets. Finally, use the extensive network and matching systems to eliminate wastes in the value chain, such as managing product development cycles, increasing speed to market and shortening your own revenue acquisition time.

Then what: Protect and manage
The biggest challenge with intellectual capital is that it is easy to lose or give away. Therefore, strategies to protect intellectual capital must be developed. Not just protection from competitors, but protection from giving it away for free to the customer. Too often, a supplier provides a brilliant idea that the customer then incorporates into the next print and next round of competitive bidding. Strategies and tactics on when in the sourcing cycle and how the value will be delivered are crucial. Proactively managing the intellectual capital is necessary to maintain its value. Implementing knowledge management systems, or planning updates to procedures and tools, or exploring new areas of expertise to keep pace with the market are examples of managing intellectual capital.

In the automotive supplier survey conducted by Plante & Moran and OESA, a strong majority of the very profitable companies indicated that their success was from specialization in a particular value. They minimized spending in areas that didn’t contribute to that value, while spending more on the critical elements that did — even though that spending resulted in higher than average selling, general, and administrative expenses in most cases. These companies transformed themselves into focusing on delivering a particular value using their intellectual capital, and the manufactured part from their equipment capital was merely a transaction to initiate payment for their value.

Jason C. Brewer is a senior consultant with the Automotive Supplier Strategy Services team of Plante & Moran, PLLC, in Southfield, Michigan.

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Wed. February 1st, 2023

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