Time to Start Insourcing

For decades, the U.S. “Big Three” auto makers outsourced just about every component they could. They turned that work over to non-union suppliers mainly to bypass expensive United Auto Workers union-represented employees.

But that logic has run its course. It’s time to think about bringing that work in-house again.

The 2-tier wage level for new hires finally allows GM, Ford and Chrysler to pay wages that are competitive with supplier companies. Even with recent wage hikes the UAW gained in its latest labor contracts, American auto makers still are competitive with suppliers. Why not leverage that competitiveness?

There are multiple cost-saving advantages that come with in-sourcing. First and most obvious is the profit margin every supplier tacks onto the product and service it provides to an OEM. When you have suppliers selling to other vendors that in turn supply to an auto maker, the stack-up of profit margins turns into real money an OEM could put in its pocket.

Shipping represents another opportunity to cut costs. When suppliers assemble and ship bulky parts such as seats and instrument panels, it also means they’re shipping a lot of air. It’s impossible to fully pack a semi-trailer or shipping container with instrument panels and seats, meaning logistics costs are un-necessarily high. Why not assemble them under the same roof and do away with all that?

Because suppliers have to ship on a just-in-time basis, typically they or the OEM have to maintain a near-by warehouse, especially if the supplier is located some distance away.

Those parts are loaded up at the supplier facility, off-loaded at the warehouse, loaded up again to get moved inside the assembly plant, and then off loaded again once they are inside. This is efficient? Of course not! Nor is it true just-in-time production. It’s just an inventory management system that simulates JIT.

An insourcing strategy makes even more sense when it comes to dies and tooling. The Detroit Three have lost much of their institutional knowledge on how to tool up a car because they have outsourced most of that work.

Worse, they are at the mercy of their tooling suppliers’ schedules, making it difficult to bring new cars to market faster. And most critical of all, they have lost the ability to surprise their competitors with new products.

When you turn your future programs over to your tooling suppliers, you’ve made it very easy for your competition to learn what you have in the product pipeline. It’s not supposed to happen, but information leaks out of the supply chain.

Not every part and component makes sense to in-source. Some suppliers always will have greater mass-production scales than any auto maker. Others will have core competencies that don’t make sense for an OEM to duplicate. But vertical integration offers the same benefits it did a century ago when Detroit auto makers made everything they could in-house.

They slowly but surely dismantled their vertically integrated operations due to sky-high UAW wages and benefits. The union won the bargaining battles, but it lost the outsourcing war. Until now, maybe. The 2-tier wage not only allows GM, Ford and Chrysler to cut their labor costs, it allows them to rethink their business model.

John McElroy is editorial director of Blue Sky Productions and producer of “Autoline” for WTVS-Channel 56, Detroit and “Autoline Daily,” the online video newscast.