Lower tier suppliers have been incredibly focused the last several years on cost reduction, scaling the business for the volume slowdown, building product engineering and development capabilities and managing material price increases and spot material shortages. At this same time Tier 1 and OEM customers have been taking on more module and systems design and development projects, integrating acquisitions and establishing international if not global manufacturing footprints.
This divergence in general strategy between customer and supplier provides a unique opportunity for progressive lower tier suppliers to build competitive advantage by developing a realistic and coherent geographic scope strategy (i.e., what geographies should I have a capability to provide product) that reflects both customer desires and prudent commercial considerations.
There are a number of key industry drivers accelerating the need for lower tier suppliers to develop a coherent strategy related to geographic scope. These include:
- Recognition within the industry that vehicle profit drivers are component set economies of scale more than platform economies of scale (i.e., there is more money to be saved in systems such as powertrain, electrical, braking and interior than the base platform (i.e., chassis)).
- Volumes for platforms produced in two or more geographic regions are increasing from approximately 20 percent today, to more than 50 percent by 2008.
- OEMs are targeting their capital and vehicle development resources for fast growth in under-developed markets, particularly Asia.
- Nearly all of the systems integrators have aggressive supplier consolidation programs that are in various stages of execution.
- System integrators are targeting most of their growth in central Europe and Asia.
- Each of these trends contribute to the overall mega-trend that lower tier suppliers will generally be larger (than today) and many will need to operate in multiple geographies in the near and medium-term.
Here we go again . . .
Reticence by suppliers moving headlong into global expansion is understandable. Countless suppliers were lured in the 1990s into international expansion by customer promises of large and lucrative parts contracts, many of which never fully materialized. Part contracts came slowly for most, volumes lagged and ROI struggled to reach positive territory.
Probably as many suppliers closed these operations and returned to their home market as they developed financially viable businesses.
However, savvy middle market suppliers must not allow these horror stories to overly color their view of cross-boarder expansion. Executed at the right time, with the right products and customers, geographic expansion can be strategically important, reinforce differentiation and be financially attractive.
Having sufficient competitor and market segment intelligence to make informed market entry decisions can significantly reduce the risk of your overseas venture turning into an albatross. Let’s review a methodical process that is time tested, practical and effective in developing a coherent strategy for geographic scope.
This starts with an honest assessment of your home market. Is the foundation for the home platform solid and substantial? New operating locations, particularly several time zones away, demand a great deal of management attention, leadership talent and financial resources. Make sure home market operations are in a steady state and predictable.
History is replete with examples of failed efforts to conduct two-front wars. Are awards going offshore? Certain products are well suited to overseas sourcing, others are not. You need data to evaluate the extent of threat or opportunity related to overseas sourcing for your existing product array. Start by compiling information for significant part awards made over the past 24 months by your “A” customers. Useful information to track includes volumes, tooling costs, award price indexed against your price, number of overseas bidders and country location for customer plant.
Thorough analysis of this data will provide a useful snapshot of your customers’ commodity sourcing strategy.
Most suppliers do not have this information sitting on their shelf. But for most, it is because suppliers have not diligently tried to collect such information. Continuous streams of open ended questions posed by your engineers, program managers, commercial managers, production control and quality assurance personnel to peers at your customers can produce incredibly rich streams of information and data that is invaluable in determining customer sourcing strategy and optimal market positioning.
It works somewhat like those old “connect the dots” pictures found in Highlights magazine that populated most doctors’ office in the 60’s and 70’s. You start connecting the dots; one, two, three and by the time your reach 50 in the 60 dot puzzle, the figure you are drawing becomes incredibly clear.
If your conclusion from this analysis is overseas sourcing is a component of your customer’s sourcing strategy, you need to proceed to the next step.
|Quotes received from overseas suppliers have increased from 24 percent of submitted bids in 1998 to 60 percent in 2002. |
Awards have been distributed as reflected in this table.
Award prices expressed as a percent of our final quoted price have declined from 96 percent in 1998 to 82 percent by 2002.
Engage in dialogue
Armed with your sourcing analysis, begin to engage your customer (starting with engineering, progressing to purchasing) in dialog regarding their plans to enter overseas markets. What is your customer’s strategy to source your commodity to support their overseas manufacturing plants? There are many alternative sourcing strategies customers may use, including:
- Customer sources your commodity to local suppliers in overseas market.
- Customer insists incumbent domestic supplier establishes overseas manufacturing capability.
- Customer insists incumbent supplier take responsibility for local sourcing, either by wholly owned business, JV or subcontracted manufacturing arrangement.
There is quite a variation in the openness exhibited by various customers. Some including Ford have been incredibly forthcoming and candid regarding their international sourcing strategy. Others have been somewhat more reticent to share this information.
Either way, you need to collect and compile as much information on award and sourcing data as customers are willing to provide. After all, the worst they can say is either “that is proprietary,” or “I just don’t know.”
Armed with product focus, compiled award data, and an understanding of your customers’ mid- to long-term commodity sourcing strategy, you have much of the necessary information to begin to develop and document a coherent geographic scope strategy. Lets use an example to demonstrate how this analysis might be done. Our product focus is wiper subassemblies. This includes the wiper mounting plate, wiper motor, wiper linkage and various fasteners and small brackets. We have compiled and analyzed sourcing data for this wiper subassembly for the 1998-2002 period and identified several patterns with the following key characteristics (see chart).
This data connects the dots quite clearly.
Wiper assemblies have been targeted by the OEMs as an overseas sourced commodity. Our domestic plants are becoming increasingly uncompetitive and if we plan to maintain or grow this market segment, it appears an overseas assembly strategy may be required.
OEMs have rapidly transitioned over the past ten years from largely a regional supply base to an international, if not global supply strategy. Progressive lower tier suppliers are beginning to use award analysis and dialogue with key customer personnel as a means to develop pinpoint strategy regarding the component manufacturing and assembly footprint required to compete and thrive in the parts manufacturing business.