It's in your hands: automakers hold the real key to lower costs

Afront-page Wall Street Journal article tells of Ford Motor Co.'s objective to hold its costs at 1995 levels through the end of the decade.

The company "hopes to force parts suppliers' prices down 5% a year, reflecting the auto industry's continuing attempts to reverse the upward spiral of component costs," says The Journal. Who can argue with that objective, with the average cost of a car at about $20,000 and -- like the statement says -- "spiraling upward"?

Wouldn't it be nice if the customers had someone like Inaki Lopez? Remember the old GM purchasing czar who was good at issuing edicts? Maybe he could issue edicts to the car companies to reduce their prices 5% a year. I think it's a good idea; unfortunately our Mr. Lopez doesn't exist for the customer, so I guess I've got to talk about the real world.

I can understand why some people are led to believe that if the car companies want to reduce their costs, they must concentrate on their parts suppliers: Chrysler buys 70% of its parts, Ford about 50% and GM around 45%.

This may be true, but people have to realize that the greatest opportunity to reduce costs is in design and engineering. Only a few suppliers have their own product design. Most components built by outside suppliers are designed and engineered by engineers at the car companies themselves.

Automakers like to talk about the open arrangement they now have with suppliers that gives them more leeway to propose cost-effective design changes.

If you listen to suppliers, however, this is more rhetoric than reality. Any ideas suppliers offer must first be approved by engineering, then testing labs. In between, engineers up and down the line will stick their two cents worth in. In the end, few supplier cost-saving ideas ever get implemented.

Suppliers of proprietary parts have a better shot at achieving a 5% per year cost reduction because they control the engineering, but they also have a tough time. Many costs are not within their control (taxes, gas, electricity and insurance, to name a few) and, of course, prices for the cars and trucks they need for their business keep "spiraling up."

Suppliers now have to cope with another added cost burden. In an effort to pare their administrative and inventory costs, automakers have pared the supplier ranks by choosing to deal with a few large suppliers rather than with a lot of smaller companies.

What really has happened, of course, is that these administrative and inventory costs have been shifted to suppliers. When you add all these things together, there's little, if any, money left to invest in productivity improvements. That makes achieving a 5%-per-year price reduction extremely difficult, if not imposible.

When you strictly focus on prices to achieve cost reductions, your total costs could very well go up. A purchasing agent may buy tools -- like dies and assembly tooling -- on price alone, but many times you find out later, when you are well into the launch, that the low-price tools don't produce quality parts when running higher volumes.

By this time, both the contractor and the purchasing agent have quietly stepped out of the picture, leaving it to others to cope with the problems. How many times have you heard in recent years that a vehicle launch has been held up because of quality problems?

Revenue lost due to production delays caused by defective tooling or sub-quality parts will almost always exceed any savings that comes from lower prices.

Analysts report that the GM Lordstown plant lost $1 billion due to over-budget costs and lost revenue. If you prorate this loss over GM's total production, it amounts to more than $200 per car, and that's just from one assembly plant.

Many things need to be done to get every ounce of fat out of an operation. If you want to produce quality parts and optimize costs it's very important to engineer and design products that fully utilize the manufacturing processes.

Manufacturing also must strive for gradual and continual improvements in its processes. This approach may be less dramatic (and less disruptive), and payouts may be small, but they're continuous. Revolutionary changes are almost always disruptive -- and payouts are usually erratic and elusive.

Then there are technical changes made from one model year to the other for no apparent reason -- change for the sake of change. You can't see how they saved any money, and they don't look like they improved anything. In some cases something functional is made worse.

My 1994 car, for example, had an on/off button on the cruise control. I pushed the top button to turn it on, pushed another button to engage it and the cruise light went on.

In 1995 they changed it. You now must push the lower button to turn the cruise control on and the cruise light goes on. But you have to push another button to engage it, and you don't know if the cruise control is engaged because the light tells you only that the system is on.

Otherwise, everything is the same. I see no reason for the change. It certainly didn't save any money, and I like the old system better.

If they had to make an engineering change, why didn't they eliminate the on/off button? I see no need for two buttons to activate the cruise control; step on the brake and it's off.

I believe it's time for a reality check. If the auto companies really want to reduce costs, they should step back and take a good look at their entire operation and not just at supplier prices.

I think they'll find that the potential for real cost reductions is in their hands.