As a supplier, are you prepared when the economies of standardization win?
In the battle between standardization and optimization, with each new automotive design, optimization has historically been the favorite, especially with the traditional Big 3. Suppliers have enjoyed the benefits of this with more parts and more opportunities. But the case for standardization is building and the tide has significantly shifted. Is your supplier organization ready to compete and succeed in this changing environment?
The Case Against Optimization
With each new American vehicle, design engineers have traditionally strived for the best new design to incorporate new technology or address performance issues and achieve the optimal component or system design for each particular vehicle. The pursuit of optimal design with each passing program has led to a proliferation of system variations, unique components and significantly new manufacturing tooling and equipment.
Obviously each make and model needs unique aesthetics, features and performance characteristics to be differentiated in the marketplace. One vehicle fits all hasn’t worked with the automobile consumer since the peak Model T production in 1923. However, optimization has driven variation into parts of the vehicle that are undifferentiated to the consumer.
Why does each manufacturer have as many variations as they do for parts such as gas caps and tethers, jacks, seat tracks, fuel pumps, driver seat heaters and fasteners? What about the variations in systems, such as window lifts, braking or climate control? There are more examples of variation, while perhaps optimal, may not deliver differentiated value to the consumer.
With each unique component design, engineering at all levels of the supply chain has additional work: design reviews, FMEAs, validation tests, APQP tracking, PPAPs, ECN’s, work instructions, launch support, and quality inspections. And each changing component drives the same engineering workload for the altered system and additional engineering activity to integrate that system into the vehicle. The work load is also increased for purchasing: RFQs, market tests, price-reduction accounting, and supplier quality performance tracking. Not to mention tooling investments and the lost economies of scale reflected in the piece price through the added manufacturing overhead costs of underutilized capacity and changeover expenses.
The Case for Standardization
The reality of today’s automotive marketplace includes significantly reduced engineering head count, reduced cash flow for investment in tooling and equipment and an extreme focus on reduced part prices for purchased components, dictates that the economies of standardization will win.
“Reduce, reuse, recycle” will become more than an environmentalist’s motto, it will become automotive design philosophy: reduce the number of systems variations, reuse components and recycle manufacturing equipment.
Evidence of this approach is already visible in today’s automotive marketplace. For example, many internal components are reused across Toyota’s family of automatic transmissions. This not only enables economies of scale but also enables continuous improvement to reduce manufacturing cost, manufactured variation and ultimately the quality costs.
This evolutionary design approach of reusing components as much as possible to gain and leverage manufacturing experience has been a significant contributor to the advantages held by the automotive manufacturers of Japan. Those advantages being their significantly lower warranty cost per vehicle, lower average tooling investment per model and shorter and less expensive product development cycles.
The evidence is also visible among the traditional Big 3. Auto manufacturers have been working to reduce the proliferation of engine families over time and thereby increasing economies of core component production.
The joint GM-Ford six-speed transmission is another example of reducing variations of systems that will ease the engineering work load. DaimlerChrysler recently demonstrated the benefits of recycling assembly and welding manufacturing equipment in the Brampton, Ontario, facility. The economies of reduce, reuse and recycle are already being pursued and realized.
Auto manufacturers have already standardized a number of components, even those visible to the consumer such as door handles and audio and climate control interfaces. Best practices teams and design review teams are already working hard at selecting a design standard for across platforms and looking for commonization opportunities within a platform for the next design iteration.
Despite an engineer’s desire to design the best component or system, engineering management has begun to and will increasingly push back in favor of carry-over. With limited engineering staffing already spread thin on a system level, engineering departments cannot complete all of the necessary integration activities, let alone cover any issues that may occur.
This will drive further standardization at the system level beyond just reducing components to sets of standard component libraries. The next phase will be when the vehicle manufacturers quantify the trade-off between achieving the price and weight targets against the costs of using a non standard system. Then the standardization of systems and modules will drive very visible economic benefits for the vehicle manufacturers.
Variation in component and system design will persist in some elements of the interior and exterior to provide differences between makes, models and accommodate regional variation in taste and regulations. Likewise, features and performance levels will vary between segments and classes.
But those components and systems that do not deliver differentiated value to the consumer will succumb to less-than-optimal existing designs to gain the economies of standardization. This will result in a growing volume divide between standard components and systems spread across models and platforms and the lower-volume unique products.
Systems that differentiate vehicles will decline in unit volume as automakers continue to pursue white spaces in the market with niche offerings and derivatives in hopes of capturing price inelastic consumers.
This increase in unit volume will mean better economies for the victorious supplier: fewer changeovers, better capacity utilization, easier inventory management and reduced complexity. However, that work will continue to be very price-competitive as the increase in unit volume also means an increased risk of the customer outsourcing the work overseas to supply globally. Higher standardization also means new business award opportunities will be fewer and farther between.
The decrease in unit volume for the differentiating components will mean a new operating model for a traditionally highvolume industry. A change in volume expectations will mean a restructuring of the entire business and its infrastructure for many suppliers. It may also mean higher investments in flexible manufacturing technologies to adapt to fluctuating volumes and frequently changing colors, textures or configurations.
Suppliers have traditionally enjoyed the optimization approach to design. With each new design came a new business opportunity with a new price negotiation opportunity. Occasionally, a supplier may have pointed out to the customer that a component design was very similar to one already in production.
That supplier, however, then ran the risk of not being recognized for the soft cost save and pressured to share significantly in the economies of scale on an already price-reduced part. There was more risk than reward to helping a customer recognize and implement standardization opportunities.
But the economies of reduce, reuse and recycle are too great to ignore. Those suppliers that fight it now run the risk of being left on the losing side of the divide. Instead, encourage opportunities to simplify through commonization and standardization. Because of limited resources, engineering will be reluctant to embrace new designs, but the supplier that can demonstrate the benefits with hard data may be able to influence the new standard.
Those suppliers that embrace and facilitate standardization to their customers will still need to work hard and creatively to keep some of the benefits, but they will have the luxury of having the business.
Jason C. Brewer is a manager in the Automotive Supplier Consulting Services Practice of Plante & Moran, PLLC in Southfield, Michigan. Jason.Brewer@plantemoran. com
As a supplier, are you prepared when the economies of standardization win?