A vision of freedom inspired America's founding fathers 220 years ago this month in Philadelphia to embark on a strategy based on the theory of strength in numbers. The automotive supply base is doing much the same thing by consolidating forces to compete in the global market in the 21st century.
Big Three procurement executives make it clear to their suppliers that to continue playing in the big leagues they must be able to deliver complete systems virtually anywhere in the world. This fact is leading suppliers to acquire companies that produce parts missing from their systems equations, those well-established in distant lands or those that have differentiated themselves with advanced technology.
Just as the colonists had to overcome the British to establish the United States, suppliers are facing many hurdles as they consolidate. The United Auto Workers union is trying to ebb the flow of outsourcing by making it a major issue in the 1996 contract negotiations. Suppliers in acquisition modes are having to fork over billions of dollars to buy companies. Globalization is leading to culture clashes and language barriers. And consolidation could put the small tool and die and other similarly sized companies on the endangered species list.
Lear Corp., until recently limited to being a premier seat supplier, isn't confining its acquisitions to small companies. It is putting together the systems puzzle with major moves, including acquisitions of interior components producer Automotive Industries Inc. in 1995, and most recently, carpet supplier Masland Corp. Now Lear is capable of including complete interior systems, minus instrument panels, with its seats. Lear Chairman Kenneth L. Way says he's looking for an IP company to complete the puzzle (see Lear sidebar, p.35).
Although auto manufacturers are a long way from inserting complete interior modules on the assembly line, most experts give Mr. Way credit for pushing the systems envelope.
"He's going to be the guy rewriting the rules," says John Waraniak, principal consultant with A.T. Kearney Inc.'s global automotive consulting practice, which along with the University of Michigan's Office for the Study of Automotive Transportation (U-M OSAT) recently released a study of the changing supplier community. "He will be in a navigation position for the set-up of future assembly plants."
Johnson Controls Inc., meanwhile, is moving in the same direction as direct-competitor Lear in pursuing its own expansion strategy.
One dissenting view of Tier 1 vertical integration is that of Thomas T. Stallkamp, Chrysler Corp. vice president of procurement and supply, who insists that from Chrysler's perspective a supplier need not own every element of the system it delivers. But deliver systems they must. Suppliers usually don't have to stretch too far to gain systems contracts; automakers including Chrysler are demanding that their suppliers offer more complete systems (see Supplier Survey story, p.57).
These demands have prompted moves such as Robert Bosch GmbH's buy of AlliedSignal Automotive's antilock braking system (ABS) and foundation brake businesses in order to offer full braking systems (see Bosch sidebar, p.36).
Shortly after the Bosch-AlliedSignal deal was consummated in late February, British foundation-brake leader Lucas Industries Plc. offered to acquire Varity Corp. to gain access to its Kelsey-Hayes ABS prowess. That deal still awaits shareholder approval. Lucas recently revived its own ABS plans in collaboration with Sumitomo Electric Industries.
Dana Corp. is acquiring a spate of companies around the world to strengthen its global market position in core-product areas (see Dana sidebar, p.37). Conversely, that means other companies are divesting themselves of so-called non-core product lines to concentrate on their own strengths.
In another recent move, Tenneco Automotive last month enhanced its ability to deliver complete modular suspension systems by acquiring Pullman Co.'s Clevite Elestomers Group, a manufacturer of vibration control components.
What might appear to be a mad scramble for position in the global auto industry's supply base is actually part of a process that includes the transfer of engineering responsibility for components and systems from the automakers to suppliers. Another aspect of the transition is a change in the tiering structure. These are among the findings of the A.T. Kearney/U-M OSAT study.
Participants in the study report that the transfer of direct-task responsibilities from automakers to suppliers began in 1985 and is expected to continue to 2005. "The bulk of the change is in front of us," says Kearney's Mr. Waraniak. "There is a tremendous challenge here. Suppliers will be expected to be faster, better and more profitable than OEMs who have been managing these programs for 50 or 60 years."
During the next decade, the study says, suppliers defining themselves primarily as systems integrators will more than double, creating somewhat of a new first tier. The balance of the old first tier, described as "direct suppliers" in the study, will move into traditional second- and third-tier roles. The study labels these companies "indirect suppliers" (see chart, p.40).
Automakers have been threatening in recent years to reduce their supply base. While that is true FOR non-production equipment such as computers, plant supplies and items like toilet paper, it is not the case with vehicle systems and components, say the Big Three purchasing chiefs.
"General Motors does not have any measurement system that says to our purchasing personnel, `Reduce your supply base,' " says Harold R. Kutner, GM's worldwide purchasing vice president, "because when you do that, you send new technology away. If by going into systems the supply base reduces itself, it's the right thing to do. It's a natural evolution."
Ford Motor Co.'s Purchasing Vice President Carlos E. Mazzorin says he is trying to "optimize" Ford's supply base, meaning there are some commodities where suppliers can be added and others where there are too many. "If you have just one supplier in a particular area, you might want another guy in case he goes out of business or holds me for ransom," says Mr. Mazzorin. He says that on a scale of 1 to 10, Ford is at about 6 in the optimization process.
This restructuring, says the Kearney/U-M study, should rationalize resources along the industry value chain by shifting various support activities such as design, engineering, R&D and purchasing from vehicle manufacturers to system integrators.
Even as WAW goes to press, suppliers are deciding where in this new world order they want to be or where they should be. The Kearney/U-M research indicates that size alone will not determine a supplier's role -- that systems integrators will be defined more by their functions and capabilities than by their exact location in the flow of product to the automakers.
"You're seeing now strategic focus on the part of (supplier) companies," says ITT Automotive President Timothy D. Leuliette. "It's a logical thing for us to sit back and say we'll be the technical gurus and allow others to do the assembly. But we have chosen to say that we're going to need both of those capabilities in-house."
Robert Bosch Corp. President Robert S. Oswald says Bosch decides where it needs to be in the supply chain on a product-by-product basis. "In some cases it's easier to be a Tier 2," he explains. "You remove yourself from some of the complications, the added overhead and the added research and development costs.
"On the other side, we feel in the braking area that we have got to be driving technology in new-generation systems," Mr. Oswald continues. "To be in that driver role, you don't have any choice, you have to be Tier 1."
Mr. Oswald says it's still unclear exactly what will be required of a system integrator. "The Tier 1, or system integrator, may not always be the company doing the final assembly work or the manufacturing," he says. "In some cases the system integrator is the one that has the most important technology." The Kearney/U-M study backs up this theory.
Mr. Leuliette has another opinion about systems integration: "If you're going to be the Tier 1 responsible for the delivery of a system and the guarantees that implies, not to be involved in the final assembly tends to jeopardize that position," he says, adding that a major challenge for companies such as ITT is to be technically intensive and also low-cost, just-in-time assemblers.
"If, in fact, our role is just to take Ford's or Volkswagen's list (of preferred suppliers) and bring no other value, then there's no economies," says Mr. Leuliette. "If our value add is not only to assemble but to design and develop and to move that part of the vehicle forward technically, to not have an integral loop in the assembly and manufacture is, I think, a risk."
The Kearney/U-M study indicates that systems-level integration, effective communication and modular sourcing are developing somewhat slowly, but Mr. Leuliette disagrees with this finding. "The industry has been talking systems and modules for a decade or longer, and one morning we woke up and it happened," he explains. "When the first discussions of modules and systems were thrown out to Tier 1s, quite honestly few were capable. it took some time to develop the ability to engineer and be global, as well as the financial strength. You must also be a bank because you're funding things for a period of time. Those things didn't start to gel until the last few years. And now the time has come."
After the chosen suppliers take over responsibility to design and manufacture certain vehicle systems, automakers expect them to deliver those specific systems to every corner or the globe. "I don't need everybody in every place," says Ford's Mr. Mazzorin. "We are going to full-service suppliers. That's a fancy way of saying: 'You design it.' If it is your design, I have to take you to India."
Suppliers chosen to follow the Big Three around the world are forced to raise their proficiency in so-called "program management," an industrial art that began in the aerospace and construction industries in the 1950s, was adopted by automaker platform teams in the '70s and '80s and is trickling down to the automotive supply base in the '90s.
"Program management is managing time, cost, performance and customer satisfaction," says Kearney's Mr. Waraniak "It really is a way to drive cost out of the system."
But no matter how much program management prowess suppliers attain, automakers will never give up having at least a finger, if not their whole hand, in the process.
"We want empirical data on who is doing what within that system," says GM's Mr. Kutner, "and we're willing to spend the time with the Tier 1 supplier to understand who and what technology makes up the total system."
Chrysler's Mr. Stallkamp says he likes to get involved in the lower tiers because he wants them to know where their products are going. He cites an example of a $2 Eaton Corp. roller lifter, which includes parts from 33 different companies. "Most people on the third and fourth tier don't know where the stuff they make goes," he says. "It could be on the Space Shuttle or the Grand Cherokee. We tell suppliers they need to worry about this guy because he controls the quality of your part."
Mr. Stallkamp says Chrysler manages its supply base but doesn't attempt to control it. "We're going to be the vehicle integrator," he explains. "It's so complicated that managing the chain is much better than controlling it. If we were to control this chain, we'd go crazy."
Mr. Mazzorin has a similar philosophy. chain, we'd go crazy."
Mr. Mazzorinhas has a similar philosophy. "We said we don't want to manage the supply chain in the sense that we tell them where to buy, what to do with (the lower tiers) and how to negotiate," he says. "We are into empowering the supplier so that he is free to deliver the best product with the best quality.
"In 90% of the cases, we have given the supplier responsibility to select their suppliers," Mr. Mazzorin adds. "There are some where we will not. For example, we will control safety and regulatory issues."
Chrysler was the first domestic automaker to plunge head first into analyzing the entire supply value chain. It looks for waste in the system and cost-saving possibilities from the raw material supplier through delivery to the assembly plant. Now each of the Big Three is looking at the value chain.
"We are not experts on the value chain because we've been doing it for less than a year," says Mr. Mazzorin. "But we are becoming better and better at it. By viewing the complete value chain, we're getting double-digit savings. This is the way to go about the business when you are looking for significant increments of savings."
Also, by examining the entire worldwide value chain, automakers are discovering new second- and third-tier partners for Tier 1 suppliers and encouraging certain acquisitions, joint ventures and strategic partnerships.
With that kind of encouragement, and with supplier survival at stake in many cases, the sourcing scramble is likely to continue at least until the U.S. celebrates its 230th birthday.
