100 + 10: Outsourcing

For the last decade, OEMs have handed over greater responsibility and functions to their Tier 1 automotive suppliers in efforts to streamline their own operations and reduce costs. Rapid shifts in responsibility recast the entire automotive supply base. Now, in a dramatic turnaround of industry-wide supply chain philosophy, Ford Motor Co. has confirmed that it is bringing North American seating design and engineering back in-house. If Ford finds cost savings and improved quality with this strategy, other OEMs could follow suit, and some of the industry’s Tier 1 suppliers could be left scrambling to reorganize and find new paths to profitability.

A Visteon worker builds parts for an FSeries pickup.

From the supplier’s side, it hardly seems fair. Over the last ten years, Tier 1 suppliers were required to perform and integrate more steps of the manufacturing process and to do them even better than the OEMs had done, all the while keeping synchronized with the global business plans of their customers. For those suppliers who accepted the heavier workload and responsibility, large-scale contracts and strategic customer relationships came their way. Those unwilling to respond were consumed or left out of the supply chain entirely.

As these mega-suppliers or total systems integrators emerged, there was a time when their acceptance of deeper responsibilities was predicted to bring these suppliers new leverage. Now, with Ford’s recent accumulation of 300- plus seating designers and engineers in Dearborn, a Tier 1 nightmare may be unfolding: there appears to be a growing philosophy at Ford that it can now save costs and improve quality if it brings the design and engineering of its North America seating back in-house. Will this philosophy spread to other vehicle systems at Ford? Will other automakers follow suit? Is the out-sourcing cycle coming full circle?

Ford defends its new strategy as a natural sideeffect of today’s highly complicated vehicle systems and the intense pressure on OEMs to reduce costs. Take seats, for example. A seat is no longer just a seat — it is an advanced system capable of containing an air bag, numerous occupant sensors, heating and cooling technologies, automatic lumbar support, an active headrest, and versatile enough to fold flat into the floor and return to full comfort and functionality with minimal effort.

“In recent years, OEMs have given up a lot of engineering, cost and quality control to their Tier 1 suppliers,” a Ford spokesman told Automotive Industries. “We’ve given up the ability to control our own sourcing in the most cost effective manner.” Automakers are looking at the option of bringing certain components in-house, he says, because some of the total systems they are receiving from full-service tier-one suppliers are comprised of parts produced by Tier 2, 3 and 4 suppliers who were selected by the Tier 1, but might not necessarily represent the most cost-effective or highest quality solution available. The emerging strategy at Ford includes the automaker’s reclaiming its design and engineering control in certain systems, hand-picking the lower tier suppliers it wants its Tier 1s to work with, and negotiating pricing on all parts and components. To say the least, it is a move that will shake up many tier-one suppliers and force them to re-examine their businesses in a new light — perhaps even launching a new era in the entire automotive supply chain.

Ford’s new strategy is a result of the fiercely competitive global marketplace and the recent automotive sales slowdown. To be sure, OEMs’ declining profitability has relentlessly increased focus on cost reduction. Meanwhile, OEMs continue to raise standards on quality and delivery. The largest suppliers still bear the most responsibility for cost reductions. Many Tier 1s have undergone or are in the process of undergoing a 20-30 percent cost-cutting plan, and these programs have driven shake-out and consolidation throughout all the tiers. What’s emerging is an ultra-lean supply base, with some of the sure-winners from five or six years ago not doing so hot today.

First, there was GM’s spin-off of Delphi in 1999, followed by Ford’s launching of Visteon one year later. The theory behind the strategy: GM and Ford wanted to shop competitive parts makers so they could cut costs, not to mention that Delphi and Visteon could realize great potential if they were free to sell parts to Toyota, Honda, DaimlerChrysler and other global OEMs. The problem has been in execution of the strategy. Delphi and Visteon are bound by high-cost union labor in enough of their plants to curtail profitability and competitiveness. Although the United Auto Workers union recently agreed to lower wages for new employees in union plants, it’s too little too late: Delphi and Visteon are shrinking, not hiring.

On top of that, GM still accounts for 50 percent of Delphi’s sales and 70 percent of Visteon’s come from Ford. As both automakers begin production cutbacks, Delphi and Visteon are feeling the hit immediately. In mid-November, Visteon offered buyouts of up to a year’s pay to persuade salaried workers to retire; when this “voluntary” reduction phase of its strategy is complete, Visteon has made no secret that it may begin firings. Delphi announced mid- December that it will trim another 8,500 jobs (4.7 percent of its worldwide workforce), including 3,000 hourly workers in the U.S. — this announcement came on the heels of its reduction of 9,500 jobs already in 2004.

While it’s true that Visteon and Delphi still have significant business from two customers who make a lot of vehicles, it’s apparent that neither Ford nor GM can (or are willing) to swoop in and save them. Perhaps that’s because Ford and GM face the same cost-cutting and hunt for global competitiveness that haunt Visteon and Delphi. To be sure, Visteon and Delphi aren’t alone; any company with high exposure to GM and Ford — such as Lear, Tower Automotive, American Axle, Intier and others — have seen the writing on the wall.

The industry analysts’ decade-long prediction of a shrinking supply base is coming true, with one forecasting a supply base of only 941 companies by 2008, down by a nearly incomprehensible 95 percent from its high of 21,900 suppliers in 1988. Still, some bright spots remain. One positive strategy is the drive for part commonality across customers and region. Lear, JCI and others have already standardized much of their product offerings. Furthermore, the difficult business climate has led many suppliers to seek diversification across platforms and customers — always a solid strategy. Many tier ones own numerous lucrative patents and have plenty of modern production capacity and tools. Delphi’s capitalizing on the satellite radio boom shines as a clear example that money can be made when one applies innovation and technical know-how to mass manufacturing.