Plante & Moran

The hyper-competitive automotive supplier industry has eroded EBIT returns (earnings before interest and taxes expressed as a percentage of sales) for most automotive parts suppliers. However, there is a critical mass of suppliers approximately (15-20 percent) that are doing very well financially. These high performance suppliers have a formula that includes highly differentiated and value-driven strategic positioning, effective performance management processes that drive superior execution, strong and deployed culture, and aligned organization and business systems. Let’s first understand the performance gap, and then explore in detail the essential differentiators.

Performance Gap Grows

Since 1998 the earnings gap between the average supplier and the 90th percentile supplier has grown substantially. Table 1 presents EBIT expressed as a percentage of sales for the average and 90th percentile privately held middle market supplier for the years 1998 through 2003.

The decline in earning performance for the average supplier is substantial, while the high performing suppliers were able to accelerate earnings performance substantially through 2001, and have been able to maintain high overall performance levels since then despite tremendous competitive pressures. Table 1 establishes that the difference in financial performance between the best performers and the average supplier is substantial and has grown from a ratio of just over one in 1998 to over four by 2003 (estimated).

Differentiated Strategic Positioning

Our analysis of the profitability data for these middle market suppliers establishes that each of the four predominant business models (i.e., low cost producer, niche component specialist, solution provider, and assembly/module specialist) can drive superior financial performance.

What was common to most of these high performers was its ability to execute strategic positioning so they competed in a comparatively narrow niche segment, effectively reducing the number of “awardable” competitors. Our data suggests average profit margins decline rapidly as the number of “awardable” competitors’ increases above four. Excellence in engineering, product innovation, process innovation, and assembly are competencies that are frequently associated with high performing suppliers. Not only do these capabilities effectively reduce the number of competitors, but they provide avenues to deliver value-based differentiation based on intellectual competencies. These attributes also tend to drive valueadded (sales less purchased materials and outside processing) which was shown in a late 1990s Plante & Moran analysis to be strongly positively correlated with profitability. Most high performing suppliers compete on value instead of price.

Execution Matters

Differentiated strategy becomes valuable only to the extent it translates into superior execution. High performance suppliers out execute most of its competitors. How does it do this? It manages the business tightly based on a compact array of performance metrics that reflect the critical processes associated with its enterprises business model. Monthly business reviews are used to manage a small number of key performance metrics such as manufacturing process capability, value-added percent, and hard cost savings. Many of these companies also set more ambitious goals than its peers.

They use BHAGS (big hairy audacious goals) to stimulate progress beyond what they would otherwise achieve with more traditional stretch goals. A very visible example of this is Toyota’s public announcement of its goal to reduce component part prices by 30 percent over the next three years.

Whether they fully achieve this objective is less important than its use of the goal setting process to drive out-of-the-box thinking and performance that typically leaves its competitors in the dust.

An additional common characteristic for these high performance suppliers is its practice of experimenting in controlled settings with new ideas and processes. They keep what works and deploy it quickly throughout the organization, and abandon what failed. Instead of studying the proposed change to death, high performers use a real-world controlled risk environment to either establish or debunk the value associated with the change.

Elements of Culture Don’t Matter, But…

Endless debate has occurred over the years regarding what culture elements drive optimal performance. Our analysis suggests there is no single cultural recipe that universally works. Instead, any of a number of cultures can work. The culture just needs to be understood throughout the organization, deployed, and consistently applied. Fine organizations like Gentex, Superior Wheel, American Axle, and Magna have quite different cultures.

What is common to most high performing suppliers is its strong emphasis on personnel development, accountability, and performance management. Top performing suppliers have strong management teams; have elevated, objective and well understood expectations; effective performance management feedback systems, and consequences for both excellent and poor performance.

An additional attribute of high performance suppliers is their hatred of bureaucracy. Instead of layers of checks and balances, these high performers have deployed clear expectations and norms, basic systems and disciplined people. These organizations substitute disciplined people for complex systems and energysapping checks and balances.

High performance companies also have the ability to have lively, spirited, and direct discussion and disagreements around important business issues. Decisions in these companies are made based on the strength and power of logic and supporting data instead of conventional wisdom, power or position. Data and logic rule supreme in most high performance organizations. High performing suppliers also seem to have a strong array of what Jim Collins refers to as “level five leaders.” These executives and managers are humble, fearless, modest, and willful with endless reserves of energy. They work tirelessly and with persistence, shunning the limelight and focus exclusively on goal achievement. These executives also concentrate primarily on profit growth instead of revenue growth.

Structure Aligns With Differentiation

Auto supplier businesses typically have between 15-20 major business processes (such as financial planning, program management, and supply chain management). Most businesses attempt to be equally good at all or most of these business processes.

High performance suppliers take a different route. They attempt to be “best in class” in those few business processes that align with their business model and support their differentiation and value capture.

Two other important dimensions of alignment include resourcing department budgets and assignment of “A” people within the organization. High performing suppliers place their strongest leaders and managers in business processes that are critical to marketplace differentiation and value capture.

They place their best people in positions that matter. These organizations also frequently spend 1.5 to 2.5 times as much in the key departments that support the differentiation proposition compared with an average company. Better talent and more resources drives better organizational performance.

While most auto suppliers are suffering under severe margin compression, approximately 15 to 20 of these enterprises continue to enjoy terrific financial performance.

These suppliers have achieved strategic positioning that allows them to compete with fewer and disciplined competitors, have excellence in execution, a strong and deployed culture, and aligned organizational structures and “best in class” systems that support their value proposition.