Modules: Not Ready for Prime Time

Nothing stays the same. Suppliers, whether Tier 1s, 2s, or 3s, must modify their organizational structures and upgrade their managerial and sales capabilities as they increase their engineering skills and expertise to accommodate the more complex module and system needs of the OEMs.

It seems that virtually every supplier is concerned about the impact the Internet will have on how it conducts business with the OEMs. At the same time, only the top Tier 1 suppliers are giving serious consideration to another change that also will have a significant impact on how suppliers will interact with OEMs, as well as with each other. The movement of the OEMs to modules and systems has gained considerable momentum as the OEMs look for ways to drive down costs. Yet, in a recent study we found that few suppliers have taken the time or expended the resources needed to acquire the skills and capabilities necessary to manage the complex projects typically associated with modules and systems. Even fewer suppliers have considered making the organizational changes needed to meet these OEM needs.

In our study, which involved multiple in-depth interviews with more than 20 purchasing and engineering personnel in the six major North American OEMs, we were told that few top Tier 1s have made the transition to modules and systems, and far too many Tier 2s and 3s are woefully deficient in their skills to be effective suppliers to the Tier 1 module and system producers.

Several Tier 1s, through mergers, acquisitions, and internal improvements, are in the process of developing their module and system design, production, and management capabilities. But no matter how good the capabilities, the Tier 1s must also have available sufficient resources to meet the OEM needs. On several occasions we were told by OEM personnel that they were fearful of outsourcing a system because they believed that potential suppliers, even when possessing more than adequate managerial and technical capabilities, did not have sufficient production capabilities and numbers of engineers to offer and subsequently support the systems they required. This concern was further exacerbated when the OEM personnel discussed the lack of capabilities in the supporting Tier 2 and 3 suppliers.

Our study also found that while most Tier 1s talk about supply chain management, few have the programs and procedures in place to support Tier 2 and 3 efforts in quality improvement, cost reduction, and program management. More importantly, it is the rare Tier 1 that has the skills, let alone the inclination, to manage a group of suppliers to work together effectively, particularly when competitors are involved.

Aside from the managerial and resource challenges, there are several other areas where suppliers need to come up to speed in this new era. Suppliers and OEMs tend to focus on three primary concerns when discussing a module or system with the OEMs: 1) obtaining the greatest cost, weight, and space savings possible; 2) maintaining or improving the quality of the system over the quality of the individual components it replaces; and 3) enabling the system to be easily installed at the OEM's assembly facilities.

Suppliers seem to forget the fourth concern, in spite of its importance: The need to design and build serviceability into the system. Although potentially increasing the price of the system, designing and manufacturing service considerations into the system may be more than offset by lower warranty costs. For this effort to be worthwhile, however, it will be necessary for the OEMs to take a total cost approach, rather than a piece-price perspective when evaluating competing offers.

Tier 1 suppliers also must be prepared to justify the costs of components purchased from other suppliers that are incorporated into its modules and system. It is not uncommon for the Tier 1 supplier to add an arbitrarily determined fixed percentage mark-up, e.g., 10%, to the price of all purchased components that are added to the modules and systems they sell. OEM purchasing organizations, recognizing that this practice is not consistent with the supplier's contributed value, are increasingly insisting on a full accounting of all costs in an attempt to identify and eliminate mark-ups of this type. It, therefore, behooves the sales person to be prepared to justify these mark-ups.

The study also found that sales peoples' skills and capabilities have not been updated to support selling modules and systems, nor have suppliers structured their sales and engineering organizations to support the OEMs' module and systems activities. In this new era, salespeople must understand and take into account the increased numbers of purchasing and engineering personnel with whom they must work, plus the increased expectations and demands unique to module and system acquisition, and apply this knowledge to the manner in which they sell these goods. Suppliers also must give serious consideration as to how they can best structure themselves to effectively interface with the OEM commercial and engineering module/systems-related activities.

Nothing stays the same. Suppliers, whether Tier 1s, 2s, or 3s, must modify their organizational structures and upgrade their managerial and sales capabilities as they increase their engineering skills and expertise to accommodate the more complex module and system needs of the OEMs. The time required to do this suggests that beginning today wouldn't be too soon.

John W. Henke Jr., PhD, is president of Planning Perspectives Inc., a Birmingham, MI-based consultancy specializing in buyer-supplier relation-ships, and a marketing professor in the School of Business Administration at Oakland University. He can be reached at [email protected]