The following posting is this author’s weekly guest commentary on the Supply Chain Expert Community web site.
Today’s Wall Street Journal features an article, Detroit’s Unsold Cars Pile Up (paid subscription or free metered preview) regarding the building inventory of unsold cars among the U.S. big-three OEM manufacturers, namely General Motors, Ford and Chrysler. The premise of the article is that despite brisk levels of auto sales across the U.S., domestic manufacturers have built up some alarming levels of finished goods inventories, akin to the economic downturn three year ago.
I call special attention to both supply chain management and sales and operations planning (S&OP) teams to perhaps share awareness of the lessons brought forward since, in my view, it is a classic example of how corporate business strategy and desired business outcome can conflict with the realities of the processes and tools provided to operations and supply chain management. It is perhaps another industry example of how the conflicting goals among finance, sales and marketing as well as supply chain can result in an undesirable situation. Also, at least in my view, it presents a snapshot of certain S&OP processes not factoring the realities of the market with the required capabilities desired within the overall supply chain.
This industry situation developed when Japan based automotive brands, such as Honda, Nissan and Toyota, who were recovering from huge sales setbacks as a result of the 2011 Japan tsunami supply disruption, began to aggressively market their models in the U.S. market at the beginning of this year. The goal was clear- regain lost U.S. market share through aggressive marketing and discounting of vehicles. Some industry players would refer to this as “old behaviors”. Regardless, U.S. consumers responded by scooping-up Japanese branded models, and sales volume growth among Japanese nameplates has soared to near double digit levels almost every month.
U.S. OEM’s, especially GM and Chrysler, renewed by the bankruptcy and legacy infrastructure bailouts of 2008, have established corporate goals of increased profitability. GM’s goal is to boost sales, market share and profitability without the need for promotional discounting. That strategy would be fine, provided the S&OP and supply chain management process had a means to dynamically adjust the supply chain based on actual vs. predicted demand, with the means to both identify and dynamically adjust inventories by model, by region, or by geographic region. Chrysler and Ford were somewhat more pragmatic and elected to continue aggressive promotions on certain specific models of vehicles.
According to the WSJ article, GM both miscalculated actual demand for certain models of its products while not dynamically adjusting inventory and capacity output. Normal industry finished goods levels average between 60 and 70 days. GM entered December with over 788,000 unsold vehicles, which included 138 days inventory of various model pick-up trucks, 96 days inventory of the newly introduced Chevrolet Cruze model, and a five month supply of Chevrolet Malibu and Camaro’s. Other examples cited were Chrysler, having nearly a six month inventory of its new Dodge Dart model and over 3 months of Dodge Ram pickup truck inventory. Ford has more than four months’ worth of Fiesta subcompacts. Contrasted are Toyota’s current 60 days of actual inventory, and Honda is now operating its North America plants at 90 percent capacity to satisfy consumer demand.
While the U.S. market has been the bright spot, global automotive demand has been on the decline, especially across Europe where the ongoing severe economic crisis has cut deeply into auto sales volume. The overall market in China is contracting, with the exception of GM, where its model line-up is currently highly favored by Chinese consumers. Not only must automotive supply chains deal with the sales incentive dynamics of the U.S. market, they must also deal with the realities of a currently hemorrhaging market across Europe, dynamically changing markets in China, Asia and other developing markets. The industry realities are radically different market demand pictures, highly competitive market competition, all fueled by singular global product platform and supply strategies. If there were ever a definition of a highly dynamic industry supply chain with conflicting forces, it would be today’s global automotive industry.
Supply chains can indeed impact business outcomes and help deliver bottom-line results provided they have the tools and processes that are necessary. In the case of the U.S. automotive market, and certain U.S. automotive OEM’s, these supply chains need senior management support, involvement and commitment in the understanding that a highly dynamic supply chain requires highly responsive supply chain resource and decision-making capabilities. That would include the ability to sense individual product, market, and geographic demand, with the ability of the supply chain to dynamically and flexibly change resource plans.
This latest automotive industry development perhaps provides evidence that while come OEM’s get it, other do not quite get-it.
I encourage feedback and comments from Community members currently residing or interacting with this industry.
In a recent study, The U.S. Auto Supply Chain at a Crossroads, sponsored by the Labor Market Information Offices of the states of Indiana, Michigan and Ohio, researchers from Case Western Reserve University outline two possible futures for America’s automotive industry supply chains. One is optimistically characterized by collaborative relationships between firms at all tiers of the supply chain. The other path speculates that fickle relationships and fear of investment will prevent progress at each tier of the supply chain. This study was conducted between July 2010 and June 2011 and came about from funding generated from the recent American Recovery and Reinvestment Act or so-termed stimulus bill.
What is most interesting about this study is its focus on the smaller “tier two” and “tier three” suppliers that comprise U.S. automotive supply chains, firms that suffered from the effects of industry upheaval and dramatic demand declines bought about from the last global recession. According to this study, these firms account for 30 percent of current employment in the supply chain, and have been previously rather difficult to target and study.
The study points to some good news, namely that there is evidence that supplier relationships are indeed becoming more collaborative. Yet, other evidence points to the continued presence of short-term cost-cutting with larger OEM’s and suppliers passing the burden of cost cutting down to lower-tier suppliers. An interesting finding of a noted interview of a representative of a tier one supplier states the following: “At (this company), everything is short-term Today is everything. That mentality drives the behavior: Get it now, and don’t worry about the out years… Focus on today; worry about tomorrow tomorrow.” The report goes on to cite findings related to firms that adopt “high road” practices, namely higher wage, worker training, process investing in product and production process capabilities faring much better in the wake of recession than those that did not. Noted was that two-thirds of firms surveyed chose to postpone investment in equipment and process improvements. The reasons cited were twofold:
“Customer purchasing strategies in many cases did not allow suppliers the financial or organizational resources they would need to implement such practices, and
Public policies (that) do not do enough to pave “the high road” and block the “low road”.”
Supply Chain Matters happened to read of this Case Western Study while also reading a recent article, Dan Akerson is Not a Car Guy, appearing in the August 29 edition of Bloomberg BusinessWeek. For readers unfamiliar with Daniel Akerson, he is the recent chairman and CEO of General Motors whose background originates primarily from the telecom industry and private equity. He follows several other CEO’s who have led GM since the beginning of the bankruptcy crisis. The BusinessWeek article makes note that Akerson has moved GM out of survival mode and is purposefully challenging the previous management culture of GM. The article cites a particular example. Teams presented a plan to build 45,000 of the new hybrid Chevrolet Volt in 2012, after supplier contracts were already in place to support that volume. According to the article, Akerson challenged his management team to put together a plan to support a more profitable build plan of 120,000 Volts in 2012, a significant threefold increase. GM’s engineering team was concerned not only for the radical change of ramp-up, but also the effect on quality if GM pressured suppliers to nearly triple output volumes of newer high tech parts. After four months of fact finding, Akerson had to back off his plan because suppliers would not take on the risk of building enough lithium-ion batteries unless GM guaranteed to pay their capital investment, should sales fall short of the build number. In the end, GM settled on a build number of 60,000.
That article along with the Case Western study caused us to ponder about yet another industry supply chain at the crossroads. On the one hand, smaller suppliers continue to seek broader collaboration and support from their upper tier customers, avoiding the trickle –down “you get the burden of cost’’ or “our way or the highway” procurement behavior. On the other hand, change agents with non-industry biases such as GM’s Akerson attack the culture, but lack sensitivity and attention to the overall cascading impacts to the overall supply chain. The jury is still out regarding Chrysler’s new infusion of Fiat’s management influence which seems grounded in operational management.
It would seem that the U.S. automotive industry needs to foster senior management that is willing to challenge the old norms of trickle-down impact among OEM’s and tier-one players, while having an operational and supply chain grounding to the cascading effects of build plan changes across the entire value-chain.
In 2009, this author, along with others, opined that the U.S. automotive industry’s greatest risk was a collapse from the bottom vs. the top. Two years later, the U.S. government through its stimulus funding programs, brought both GM and Chrysler out of bankruptcy. However, this latest study from Case Western provides qualitative and quantitative reminders that the industry still remains at a crossroad.
We are again interested in hearing from U.S. auto industry readers. Has supplier collaboration practices on the whole really changed? Do you believe that the U.S. auto industry is more sensitive to supplier collaboration and investment?
There was some rather significant news this week concerning the automobile parts and distribution industry which promises to be of continued interest within the U.S..
General Motors announced that it will sell its steering-parts operation to a Chinese based venture. The Wall Street Journal and other sources noted this development “as the largest move by a Chinese company into the U.S. auto parts industry.” Nexteer Automotive, which was once known as GM’s Saginaw Steering group, is to be sold to Pacific Century Motors, a joint-venture of Beijing-based Tempo International Group and a Chinese government-owned company known as Beijing E-Town International Investment & Development Co. Ltd. (E-Town). Financial terms were not disclosed. The transaction is expected to close sometime in the fourth quarter.
GM assumed ownership of this parts unit a year ago from major Tier One supplier Delphi as part of an arrangement to insure a reliable flow of parts supply and help Delphi exit out of a complex bankruptcy. The press release announcing the sale notes the following statement: “E-Town and Tempo have followed the developments of Nexteer closely during the last two years and worked diligently over the past six months with General Motors, the UAW, global customers, critical suppliers, and Nexteer management, to ensure a successful transaction and seamless transition of Nexteer to an independent automotive supplier with a market-leading position and unrivaled steering technologies.”
The obvious question for the automotive supply chain management community is what, if any, may be the longer-term implications of this sale?
Nexteer currently operates 22 global manufacturing plants, and according to the WSJ article, does business with more than 60 automotive manufacturers. This does not include relationships with parts distributors serving the global auto parts aftermarket. While there have been other deals involving Chinese owned companies, this is certainly the biggest to date, and Tempo International is also a part owner in the former Delphi brake and suspension parts business.
While the U.S. provides a huge market in autos, the largest and most promising worldwide growth segments reside in the markets of China and India. The major Chinese automotive companies are expanding operations to serve their high growth domestic market, and to some day export world-class autos to other markets, including the U.S. As we all know, any world class company supporting robust markets requires the support of innovative and cost competitive supply chains.
E-Town, which was inaugurated in March of 2009, is noted as providing financial development support for companies residing in the Beijing Economic Technological Development Area (BDA) to help promote industrial upgrades and clusterization. That implies that this announced investment has a lot to do with insuring Chinese competiveness or control in key automotive parts supply. My fellow bloggers in China may want to offer more commentary.
GM, which is 61% owned by the U.S. government, states that it is working to get its finances and operations in order ahead of a planned public offering of new stock to pay back the U.S. government. While it may not be in the strategic interest of GM to continue to be in lower-tier supply businesses, this development certainly raises questions as to the longer-term implications to U.S. based auto and aftermarket parts supply chains.
In March of 2009, I penned a commentary, Prescriptions for Detroit’s Supply Chain Crisis, which related to the raging U.S. debate concerning the bailout of GM and Chyrsler that essentially agreed with the conclusions of a Forbes published article, which stated: “The growing fear is that without help the auto industry may collapse from the bottom, rather than top down.” At the time, I and others argued that the real issue to a bailout was not just saving the OEM’s but rather saving the essence of the parts supply chain, which was in far more serious financial trouble. I called attention to a profound quote from Laura Macero of the Corporate Advisory and Restructuring Services team at Grant Thornton: “Without a structured approach of consolidation to the benefit of the entire supply chain, the industry may lose critical partners with the technology, scale and geographic footprint that are linchpins in the viability equation”
Now, fifteen months later, it appears that the U.S. government, as an owner in GM may be strategically conflicted. Is the milestone really the renewal of GM or Chrysler, or the renewal of the entire industry supply chain, or both?
While the interests and employees of Nexteer gain renewed financial banking, and perhaps new strategic perspectives, one has to wonder whether the U.S. government is giving-up on the broader and more important strategic objective.
What’s your view? Is this a watershed event or just a reality to the current state of automotive supply chains?
It is becoming apparent to all of us that the U.S. automotive industry has reached a fundamental crossroad. The current realization of financial crisis among two of the top-three U.S. based producers is finally sinking in among U.S. consumers, and President Obama has taken a highly visible role in insuring that U.S. brands, as well as U.S. suppliers, can have yet another opportunity to compete on the world stage.
Another realization that has finally sunk in among senior industry leaders is that the future of this industry no longer lies with selling more and more gasoline-guzzling vehicles, but rather in alternative energy, hybrid, or electric powered vehicles. As the industry attempts to make this next critical transformation, one key tenet of the supply chain will become the most crucial.
There is an excellent article in April’s Fortune Magazine written by Paul Keegan (Recharging Detroit: The future of the U.S. car industry hinges on cutting-edge battery technology.) which is worthy of a deep read. Keegan makes the conclusion, well known by our supply chain community, that whoever controls the battery industry, which will make-up a considerable part of the future value-chain of automobiles, will also control major influence over the automobile industry itself. Whether consumers adopt hybrids or all-electrics, the common denominator will be innovative lithium-ion battery technology that can be produced in large volumes, with a lower cost. These are tough challenges, and the article rightfully points to the conclusion that it will be battery technology that will define the next era of the modern car company, and the intellectual property and high volume production capability may not necessarily be something to outsource from the resident country.
Keegan further notes in his article that the big U.S. carmakers have been reluctant to sign a major deal with promising American companies because they are not yet convinced that they will be around for the long-term. Ford Motor Company selected Saft Groupe of France for their technology and Johnson Controls for U.S. based high volume production. General Motors selected a division of Korea based LG Electronics, and a $200 million plant is being built in Michigan to initially supply LG Chem-Compact Power batteries for the new Chevrolet Volt.
Chrysler on the other hand selected U.S. based A123 Systems, which currently has high volume production capability in China and Korea, but is seeking government assistance to build a high volume production facility in Michigan. Interesting enough, A123 has also been designated as a technology supplier to Chinese automaker SAIC Motor Corp. and has been reported to be in talks with French automaker Renault SA.
It would seem to me that if U.S. governmental leaders and legislators are truly committed to both a viable alternative energy transformation plan, as well as a vibrant value-chain supporting the automotive and other alternative energy related industries, than two obvious priorities come into play. First, U.S. based battery producers need to step-up their efforts in developing innovative lithium-ion technology and production capability, including more U.S based value-chain components. Second, the U.S. government also needs to place more emphasis on encouraging a more vibrant battery supply network to serve multiple supply chain needs.
The race is on, and Warren Buffet has one bet on BYD Company of China. For the sake of the long-term viability of a U.S. based automotive industry, let’s hope that Buffet and the industry will also select to invest in a U.S. based supplier.