Plante & Moran

What can suppliers do to stem the tide?

 


At the automotive conference in Traverse City last month, a steady stream of executives from the traditional domestic manufacturers stated innovation and talent are the life-blood to survival, yet many of their behaviors appear to discourage innovation and chase away talent. Despite these discouraging behaviors, suppliers must work to protect their talent and innovation to survive.

“Why bother giving them innovations if there’s no return for it!” one sales engineer at a supplier said to me. His story was one of several I’ve heard recently. His company began with the OEM’s base design and reengineered it to reduce several dollars in cost and several kilograms in mass per vehicle. They subsequently did the analysis to convince the OEM engineers that their improved design would work.

The purchasing organization then sourced the improved design to a competing supplier at a lower price, perhaps enabled by the lowerprice supplier’s lack of engineering staff. The sales engineer protested by presenting how much engineering effort went into saving the OEM cost and weight. Purchasing’s alleged response: “You should have gotten an engineering services contract upfront.”

A manager in sales at another supplier told me a very similar story of saving an OEM cost and weight over the base design and subsequently losing the work to a lower bid.

According to him, purchasing’s response to his protest was: “I don’t care. My job is to get the lowest price.”

Historically, patents have protected suppliers’ return on intellectual investments. However, suppliers tell me that they are discouraged by their customers from bringing patented designs or processes. Supplierowned patents restrict the OEM’s ability to move work from supplier to supplier as a lever on pricing. And without patent protection it is difficult to get compensated for innovations once they find their way onto a customer’s print.

Innovation was viewed as one of the few remaining avenues to make money under today’s climate of global pricing and givebacks, online auctions, participation in product development costs, and rising costs of materials and health care. But now with supplier innovations being shopped around to the lowest bidder, the automotive supplier business seems even tougher. Although, one supplier president summed it up for me this way: “This business has always been hard.

But what’s different today is I can’t trust anyone.” He went on to tell me about one colleague who came to that conclusion and left the industry, and another who is biding his time for an early buy-out.

Asking around about trust, one supplier engineer told me about his first day at his previous job at another supplier. He told me on his way in, another engineer was leaving his exit interview nearly crying. “Don’t believe anything they say!” He didn’t stay at that supplier long.

Another incident of a very sensitive nature was relayed to me by a supplier executive. Suffice to say the punch-line of the experience was, “And [OEM executive] said to me, ‘Next time, you’ll get it in writing.’”

The executives at the conference attributed the lack of fresh new technical talent entering manufacturing to the field’s rust-belt image of dirty and old fashioned. I see it differently.

Young people aren’t stupid. They read the papers about plant closings and the loss of manufacturing jobs in the U.S. Plus our children and neighbors’ children ask us about our industry and get the straight story. After listening to a COO of a tier-two supplier tell me about how his customer is pressuring him for another give-back, saying no to steel surcharge pass-throughs, and awarding his company’s innovations to his competitors, I asked him why he stayed. He replied, “I don’t mind working hard — but if my kids go into automotive, I’ll disown them!”

After recounting incidences of price-cutting, innovation going to other suppliers, or irrational sourcing decisions, some suppliers ask me, “You used to work for an OEM— don’t they know what they are doing to us? Don’t they know they are sucking us dry until we can’t afford to invest or until they put us out of business?” This reminds me of the moral from an Aesop fable about a scorpion that gets a ride across a river on the back of a frog, but stings the frog to death before they get to the other side. They can’t help it, it’s in their nature. With their need to generate cash to invest in new products with the hope of gaining share and profits, they will continue to try to cut everywhere and especially the price of what they buy. The behaviors are unlikely to change until the OEMs are successful, or until the structure and economics of the industry don’t allow them.

Suggestions for Suppliers

So if the OEM’s can’t change, what can the suppliers do? One choice is to jettison all costs associated with engineering products or processes and focus on manufacturing excellence as a low-cost supplier. This, however, is a very difficult model for success because there are many companies using this model, with most sectors having participants that are already excellent and improving daily. For some automotive component segments, it will be impossible to survive with this model competing against China, Latin America and Eastern Europe. As Jerry Elson, vice president at General Motors said at the conference, “If we can’t win by technology in this country, we will not win.” Or, as stated by Dr. Venkatesh Prasad at Ford, “If we don’t have innovation, we don’t have a future.”

So how can suppliers bring innovation and still get the work? First option is to sell your innovation to someone who values qualityimproving, cost-reducing ideas. Perhaps to the new domestic manufacturers, who are now developing products in the U.S. Or, some system integrators are open to gaining competitive advantages offered by suppliers of noncompeting process technologies.

If your customer array is such that you don’t have a choice, then an innovation rollout plan is needed as the first step to commercialization. The roll-out plan is the product of thinking through what is the value of the innovation to the customer, the paths the customer might take in adopting it, the trade-offs for the decisions you might have, and ultimately what steps will be taken to sell your idea while trying to get the purchase order.

As part of the plan, identify the decisionmakers high enough in engineering or manufacturing management who will recognize the value the innovation could provide. Explore the level of interest in the benefits from the innovation before exposing the customer to the design or process. As a critical stakeholder in the process, involve purchasing from the beginning. Attempting to go around them may only generate animosity.

Think creatively how to create change barriers, such as delayed timing of full design disclosure. Due to the unpredictable aspects of your customers, everything may not go according to plan. But the point of the plan is to have thought through the possible actions of your customer and your best course of actions and responses. The plan also commits the marketing and selling resources necessary to increase your chances of getting a return on your investment in the innovation. Market bids sill happen, but one cycle of fair returns is better than none.

Innovation is still dependent on good talent like any other successful model. Keeping talented people in this environment can prove to be challenging. First, provide your people with a “safe” environment guided by principles where trust and integrity are still important, at least inside the company. Integrity can be reinforced by holding people accountable to their responsibilities and commitments. All staff can focus on their own responsibilities when they can trust that their colleagues will do their parts. And accountability is dependent on getting clear direction and expectations from management. Most talented people want to feel a part of a successful team.

Building an environment where talented people can thrive, and developing pro-active strategies for carefully rolling out innovation may help your company successfully cross the river of today’s harsh business conditions. Taking steps to stem the tide within your company is worthwhile and perhaps even necessary, even if the OEMs can’t change behaviors that may discourage innovation and talent.