Automotive Supply Chain Management: As Good As It Gets?

Many observers agree that the automotive industry is running its supply chain well. They also agree there's room for improvement.
By Larry Gould, Contributing Editor

The best Tier 1 suppliers, come "very, very close to 100% perfect orders," says Scott Lundstrom, chief technology officer, AMR Research (Boston, MA). They score perfect deliveries 98% to 99% of the time. Yet a 90% perfect-order score, unheard of in any other industry AMR surveyed, is considered a "failing grade" in automotive. Moreover, the difference in a supplier's "strong" performance versus another supplier's "weak" performance, as measured by perfect-order fulfillment, is a mere 6%. "That is the equivalent between an A+ and a C-. That's how demanding the automotive environment is." exclaims Lundstrom. "The demand is not so much about being an excellent supply chain company. The demand is about what's next."
Being "perfect"
In technological terms, according to AMR, the better automotive Tier 1 suppliers use more packaged software applications and system. They also use "slightly more" e-business, though Lundstrom admits this is deceiving because "automotive has shared data for many years to a degree that's unprecedented in most other industries."
More important, the major difference between "strong" and "weak"—"best" and "worst"—lies in the supplier's commitment to "best practices." The best suppliers are focused on process excellence. They insert technology where they've already improved processes to minimize costs. "Best practices are things that people do," says Lundstrom (emphasis added). Unfortunately, not everybody quite understands this. Too many suppliers struggling to better their perfect-order performance, continues Lundstrom, have "bought into the notion that somehow they can implement their way into a better supply chain. They can not. Technology helps, but technology does not fix fundamental, underlying business process problems in the supply chain."
So forget about silver-bullet software implementations.
"Best" suppliers are also focused on supplier integration, on what and how data are shared up and down the supply chain. For example, an OEM will fully disclose order information and inventory requirements to a Tier 1 as soon as the OEM knows those requirements. The Tier 1 will then fully disclose that information to its Tier 2 suppliers.
"Automotive is an anomaly. You don't find too many supply chains operating with the same purposefulness and degree of information exchange," says Lundstrom.
Of course, this all comes as a double-edged sword. Technology costs. Perfection has a price. There's a fine balance between retaining customers and destroying profit margins. AMR found that the difference in total supply chain management (SCM) costs between the "best" and "worst" automotive suppliers is half the cost. Expressed as a percent of revenue, 20% of the revenue of a Tier 1 automotive supplier is the difference in SCM costs between the best and worst performers.
Given such "perfection, " what should the automotive industry look for to improve its supply chain? "It's not so much whose supply chain automotive should model, but whose business model automotive should adopt," says Lundstrom. Which leads to a discussion about automotive's physical supply chain. But first, let's address two other automotive supply chains.
The design supply chain
According to Detroit-based CIMdata, the automotive industry has a design (or intellectual property) supply chain. There, says Ken Amann, CIMdata's director of research, the automotive industry is making progress in effective integration. But it still has a ways to go.
OEMs and Tier 1s are aggressively pursuing what CIMdata calls "collaborative product development"— collaborative product design and design chain management, which includes such basic issues as working with suppliers, sharing designs and design activities, and realizing that they're not going to do it all themselves. The larger issue in outsourcing design work is in bringing people together more effectively into the overall environment so that all can be managed more effectively.
Such collaboration is not just a technology issue. It's also an operational issue, which involves cultural, organizational, and ownership issues, says Amann. "The technologies provided by the product lifecycle management suppliers are the enablers that allow these collaborative environments to happen. You can't just put the environment out there and expect it to work." For example, how do OEMs and suppliers handle design review-and-approval processes, as well as security and privacy issues? Guaranteed, now that these processes involve different companies, organizational structures, and people, you can't assume the processes are going to work the way they have in the past.
The customer data supply chain
Another challenge, according to Bob Pethick, lead director for automotive and industrial for Pittiglio Rabin Todd & McGrath's at its Detroit office, is in accessing customer data that's meaningful to help drive the supply chain. To date, most automotive customer data reside in dealer management systems, which "are contracted, bought, and paid for by the dealers themselves," says Pethick. "Dealers have been very protective about their customer data, especially since the OEMs a few years ago announced they were going to try to disintermediate the dealer chain."
The solution here is basically to reengineer the entire OEM-to-dealer systems architecture. The goal is to enable better sharing and, adds Pethick, "to figure out how to create processes and data that will let [both OEMs and dealers] mine and use the data to gain competitive position."
Changing the supply chain model
Now for the big-ticket item ripe for change. The automotive industry runs its supply chain "relatively efficiently, " says Karen Peterson, vice president and research director at Stamford-based Gartner. However, she's quick to point out that "efficiently" does not necessarily equate to "well."

Therein lies the rub. The auto industry is very efficient at mass production, at pushing cars out to be sold. "That efficiency is no longer a competitive advantage. It no longer equates to growth," explains Peterson. Mass production is no longer a "best practice" when the goal is to service customers or, at the very least, to implement some form of mass customization.
Pethick states it another way. The automotive industry operates its supply chain well "given that they are limiting themselves to a very introspective model for supply chains—a ‘push' supply chain as opposed to a ‘pull' supply chain. They're very good at optimizing a suboptimal model."
Worse, notes Peterson, the industry might be "as effective as possible, but it also might be building things people don't want." The industry over builds and offers incentives—discounts and rebates—thereby losing money on each car that never should have built in the first place. "That's not very smart," laughs Peterson.
"The industry is paying customers to take the product at a discount because it's not exactly what the customer wanted," reiterates Pethick. He contrasts this to the build-to-order business: "Customers pay extra for product because they are so enthusiastic about the service."

Moving toward mass customization, though, is "causing huge challenges," says Peterson. The industry "has to change its entire perspective so that the pull signal is coming from the customer rather than from some way arbitrarily determined by the OEM." In short, says Peterson, the automotive industry has to change the whole way it operates its supply chain, including the industry's mindset toward customers. "Sure we're seeing information sharing in the automotive supply chain. It's just not being done to support new change processes," she says. For example, the industry needs to focus on building to, if not "Quantity One," at least to customer requirements. "We might not build to a ‘customer of one,' but let's have a better understanding of what the customers' requirements are and build to those requirements at some level of aggregation. " While today's locate-to-order is "a good step ahead," says Peterson, "it's not the end state."
A better way?
What would be a perfect end state? Think of the design-to-order program at Bob's Store, which lets you design your own chinos and jeans with the help of technology. Customer cost: Forty bucks. (Trawl over to http://www.bobsmade 2order.com/ cgi-bin/bobs. pl. For more details, go to the "tier 1"—Archetype Solutions, Inc. (Emeryville, CA)—at http://www.archetyp e-solutions. com/.) Lands' End has a similar program for chinos. And check out the Nike iD program (http://nikeid. nike.com) . There you can design a logo that Nike will fabricate onto your very own pair of Nike athletic shoes.
("That's the fashion industry," you huff. "Everyone knows that people will pay extra for good-looking, good-fitting clothes." Now think about all the people you know who consider their cars a fashion statement.)
What's a more realistic end state? "Move away from a single-mode mass production model to a more flexible manufacturing supply chain," suggests Pethick. "Maintain the mass production model for high-volume vehicles, but have separate supply chains, even separate types of plants, geared to lower-volume niche markets, niche-product supply chains." Of course, admits Pethick, this will involve reengineering the basic capability and flexibility of the automotive assembly process.
"You have to treat supply chain performance just like you treat manufacturing quality," concludes Lundstrom. "You have to create continuous improvement programs, meaning you have to monitor and manage and adapt yourself on an ongoing basis."
What Makes a "Perfect Order"?
A recent study by AMR Research defines several ways automotive orders can be "imperfect." They can be late, contain poor quality, damaged, or incorrect parts, contain the incorrect quantity, or they can be the correct parts but incorrectly labeled. A perfect order, says Scott Lundstrom, AMR's chief technology officer, "is absolutely exactly what the customer ordered. Right quality, right timing, right delivery.
"Anyone in the automotive industry that isn't [an excellent supplier] is already dead."