Today’s component supplier is wielding a mightier sword. There is little doubt that the spate of “preferred supplier” programs, which have emerged or gained steam since the 2009 automotive implosion, is evidence that OEMs are keen to improve relationships with their strong-performing partners. Holding your customers close and your suppliers even closer is the new OEM mantra for the future. Having your key suppliers aligned from a strategy, development, and coordination perspective is success-critical.
This new version of shared destiny is apparent as the overall market growth rate slows through the balance of the decade, and OEMs periscope the landscape to seek their next competitive advantage. Several factors are more closely aligning key suppliers and OEMs in the future. These include:
A leaner, meaner supply base: Suppliers who survived the 2009 market implosion used the opportunity to restructure their manufacturing footprint for the future. By not letting a good crisis go to waste, most suppliers rid themselves of excess or inefficient capacity. Also, several supplier sales executives used the opportunity to meld portfolios toward business with the highest margins or long-term potential. Seeking business with greater volume stability was critical, as well. Today’s efficient and profitable supplier has reinvested in better productivity, is working at more than two shifts and five days-per-week, and focuses on opportunities aligned with their forward strategy.
More democracy—more supplier leverage: NAFTA production is being sliced more thinly now and will continue to be. The Detroit Three no longer make up more than 75% of all NAFTA production volume as they did in 2000. By 2020, the percentage is expected to be less than half. As the field levels out, suppliers have more choice of which OEMs they want to work with. The recent IHS Automotive SuRe Index (an index that tracks the ease of working with an OEM) highlights this trend, by giving lower grades to OEMs who are more difficult to work with, or are erratic in their decision-making. Suppliers now have a choice.
Technology and cost—the new differentiator: The challenges facing the industry throughout the next decade almost make the last decade’s look easy. Fuel economy standards set to rise to 54.5 mpg and an increasingly competitive marketplace anchored by knowledgeable consumers have raised the stakes. In the past, quality combined with cost was the primary consideration for the OEM-supplier relationship. Going forward, the relationship is one of cooperation, with suppliers working with the OEM to deliver the right technology on time (logistics are critical) and at a fair cost. Several tradeoffs will be made, such as considerations of cost versus lower mass, or part/tooling reduction for improved system packaging. Suppliers offering solutions to these ongoing issues, and who continue to reinvest in their discipline, will flourish.
Globalization—follow us to new lands: Global development and supply are rising as the number of platforms decline and volume per platform expands. Doing more with less is the mantra as OEMs seek increased flexibility and speed to market. Utilizing fewer suppliers with the ability to lower OEM overhead costs and improve coordination as production expands to new markets is key. Suppliers of all tiers who are able to efficiently support OEMs as production is shifted closer to the final sales destination will enable lower logistics costs, reduce inventory, and bolster speed to market. The slippery slope is to execute this co-location with a minimum of capital and resource risk, as the supply community is increasingly risk averse and will be cautious to maintain margin gains achieved over the past few years. OEMs and suppliers will need to strike a balance.
In the end, suppliers hold increased leverage with OEMs. Increasingly, as holders and purveyors of the much-required technologies necessary for increased fuel economy gains, improved safety and customer delight, suppliers have an important role. The co-dependency and need for transparency and communication has never been so critical. We are entering a new era of OEM-supplier relations.