Plante & Moran

Strategy, not operations is key for rest-of-decade performance.

Multiple studies we have conducted over the last decade have shown that profitability among automotive suppliers does not correlate to operational excellence. In a recent benchmarking study, we once again found that the highly profitable companies as a group were just average performers in utilization, quality, delivery and inventory turnover. Our studies have found it’s the strength and execution of a business model, appropriate for the times, that separates the highly profitable from the rest. The trends in place today suggest a few key strategies for automotive suppliers to consider for the remainder of the decade.

Strategy, not operations alone

We have tested several operational metrics over the years to determine if any have strong, consistent correlation to profitability. We have studied different groups of companies: metal forming, plastic molding and lower tier automotive suppliers. Analyzing the companies with greater than twice the average operating income as a group, we found they had average performance, or in some cases worse than average performance in each of these metrics. Figure 1 provides a summary of these findings from our studies since 1999. Based on these studies and years of consulting with automotive suppliers, we concluded that profitability was clearly an outcome of the strength of the business model appropriate for the conditions of the market, and a diligent execution of that model throughout all facets of the business.

Strategies for the rest of the decade

The best business model is largely dependant upon the core competencies of the individual company. However, the conditions of the domestic automotive industry do suggest several key strategies that are consistent for all suppliers, regardless of their respective business models. Those key strategies are:

• Focused alignment of resources and performance metrics throughout the organization with the chosen business model
• Targeted sales and marketing focused on capturing profitable business
• Extreme attention to cost and capital management • Improving the robustness of business processes to scale the business.

An explanation for each of these key strategies follows.

Alignment with the business model

The business model presents how the company is different from its competitors in the eyes of the customer, and what the company must do well that matters to the customer to capture a portion of the value it delivers for itself. In other words, how is the company going to capture profit?

This focus on how the company makes money must then be driven through all processes and activities within the company. Activities and investments outside of this focus are simply waste. In this competitive environment great technical talent is too hard to find, management attention is too diffuse, and capital is in short supply. Therefore, the best talent should be working on those activities that drive the company’s profit, management’s attention should be focused on metrics pertaining to those activities, and investments in those activities will be significantly higher.

Targeted sales and marketing

Global platforms, standardization and carry-over components are all trends reducing the number of commercial opportunities available to suppliers. As these trends take hold it is very important that suppliers take a proactive approach to capturing business. Under price-down pressures and rising input costs, it is even more important that the suppliers proactively capture business that fits their business and provides greater opportunity to be profitable.

Figure 2 presents a simplified concept of a targeted sales process. First, translate the business model into a value proposition describing what’s in it for the customer. This is the flight of the arrow that guides the sales and marketing activities. Next, research the customers and further segment the markets to identify those customers that will have the greatest need and appreciation for the value proposition. This is the shaft of the arrow that keeps the sales and marketing straight on course. Finally, demonstrate that value proposition to the customer that wants and needs what you have to offer. This is the head of the arrow that strikes the target. Pursuing business that is a poor fit for the company, and therefore will likely provide inadequate or negative returns, is a waste of the sales, management and technical resources used in its pursuit.

Extreme attention to cost and capital management

Obviously under increasing price giveback pressure, rising input costs, and falling sales to traditional domestic vehicle manufacturers, driving down cost is everyone’s focus. But few are managing the whole financial picture, including commercial issues with customers, managing receivables to limit exposure to bankruptcies, and working capital needs. Fewer still are focused on strengthening their balance sheets. The financially strong have kept their powder dry, and are able to capitalize on growth in profitable segments during the anticipated supply base consolidation.

Processes robust enough to scale up

Many have speculated how much supplier consolidation will happen during the coming decade and the numbers of surviving suppliers are quite varied. However, all agree that additional consolidation will happen. If half of the companies disappear, the remaining companies will have to consume nearly twice as much business as they have today.
 
Most suppliers have developed business processes, such as estimating, program management, personnel performance management and information systems that are appropriately scaled for the business they have today. However, too often those processes rely upon one or a few highly skilled individuals, or informal communication methods, or simple tools like spreadsheets, or passing paper around, or all of the above. Even if the company has the capital and equipment capacity to accept twice the sales revenue, the business processes used to launch the work and manage the people may constrain the growth of the company. Or worse, the company may accept the opportunities only to lose all of its anticipated profit through excessive launch costs and customer- imposed penalties.

Why operations are still important

The conclusion, from our studies discussed above is that its not operations, but strategy that drive the profitability of a company. That is not to say that operational performance and operational metrics do not matter. For starters, threshold performance in metrics such as quality, delivery and utilization is necessary to be awarded work. Best-in-class performance in one of a few particular metrics may be necessary to execute the chosen business model. For example, a company that focuses on safety-critical components where zero ppm customer rejects is a must will have best-in-class quality performance. That same company may have average performance in, for example, capacity utilization.

Review of the data from our most recent benchmarking survey supports this. Looking at the more profitable companies individually reveals that many of them demonstrate near best-in-class performance in one or more operational performance metrics, but not all. Those few performance metrics with near best-in-class performance are likely well aligned with their business models, fundamental to their value propositions, and in areas where they invest their capital and intellectual resources. Areas with threshold objectives receive less talent, less focus and lower funding. Those companies with strategic focus, investment of people and capital aligned with that focus, and strict financial management will likely enjoy the most growth through the rest of the decade.

Jason C. Brewer is a manager in the Automotive Supplier Consulting Services Practice of Plante & Moran, PLLC in Southfield, Michigan. Jason.Brewer@plantemoran. com.