Electric vehicles. Autonomous cars. Shared car ownership through Uber and Lyft. While the automotive industry emerged from the recession with the best balance sheet performance of any manufacturing industry, the future poses new challenges. Today’s questions are: “Can the industry reinvent itself? Is Google the new General Motors?” Traditional automakers fear the “Google effect” in the same way that retailers fought the “Amazon impact” a decade ago. All know that it is coming. The question is “Can the traditional automotive industry adapt?” The jury is out. The processes are old and stodgy, and supplier relationships are combative. This is not the industry of enlightened supplier development or inter-enterprise process automation. The industry responds in traditional, rote processes. A recent example is the failure to recognize the shift from four-door sedans to family-centered SUVs in 2017. The processes are consistently out of step with the market.
To better understand the industry in the context of supply chain management, let’s start by looking back. As shown in Table 1, the impact of the recession, with a decrease in consumer spending, surprisingly drove growth in the automotive industry at a faster pace than any other manufacturing industry. In the automotive value chain, the auto manufacturer fared much better than component suppliers or the other supporting manufacturing industries. The industry has consistently pushed cost and waste back in the supply chain, lengthening payables and enforcing tougher procurement policies. Investment in traditional work processes, and factory automation, improved operating margin and inventory turns.
To understand the table, let’s walk through some of the details. Most automotive manufacturers would like to forget the end of the recession. 2010 was a tough year. This industry, hit hard by the recession, was regrouping in 2010. Balance sheets and income statements were just starting to recover from the blow of the economic downturn. As a result, when we compare 2016 to 2010, the results of 2016, with a post-recessionary recovery, show a marked improvement to the weak performance of 2010.
In the period of 2010-2016, the automotive industry averaged 5% annual growth. When the period of 2016 is compared to 2010, growth is down 45%. The green arrows in Table 1 indicate improvement while the red arrows show a decline in performance when 2016 is compared to 2010. Across all metrics except growth, inventory turns, and Sales & General Administrative expense (SG&A), the position of the automotive manufacturer in 2016 is dramatically better than 2010.
Table 1. Industry Overview of Trends for the Period of 2010-2016
The automotive world is largely ‘push’. In North America, automotive manufacturing plants are scheduled to maximize Return on Assets (ROA) and the automobiles are pushed to dealers. The selection of cars at a dealer does not match demand. Demand sensing, localized assortment and customer sentiment are gaps. Companies struggle to redesign to embrace e-commerce and new business models.
In the past seven years, as automotive supply chains became more global with greater dependency on sourcing, the severity of product recalls increased. The effective translation of quality of design into quality of conformance in a global supply chain of interconnected supplier relationships remains an opportunity. Likewise, as a larger percentage of the automobile becomes software and technology, the management of maintenance with shorter high-tech life cycles is testing the warranty, repair and claim service model.
When we examine actual performance, as shown in Figures 2 and 3, a different picture emerges. An orbit chart enables a study of year-over-year patterns at the intersection of metrics. The averages for each company are shown in the boxes on the chart. The larger the pattern, the less resiliency of the supply chain.
In Figures 2, 3 and 4 we contrast the performance of automotive manufacturers. The business models of North American giants General Motors and Ford are dramatically different than the Asian or European manufacturers.
Fuji Heavy Industries, Ltd. (now Subaru) is the supply chain leader. Fuji drove greater metrics improvement with higher performance than any other competitor. In general, North American manufacturers post worse performance than those headquartered in Europe and Asia. In Figure 2, let’s take a closer look at the performance of Ford and General Motors. The average operating margin for Ford for the period of 2010-2016 is 4%, as contrasted to a negative 3% for General Motors. The inventory turns for Ford are 16 versus 7 for General Motors. However, the patterns tell the story. The wide performance swings of General Motors show a lack of control of the Metrics That Matter. The tighter the pattern, the more resilient the company on delivering supply chain performance. In Figure 2, Ford is more resilient and a higher performer than General Motors.
Figure 2. Orbit Chart of General Motors and Ford Motor Company
In contrast, Fuji and Audi (two of the top performing supply chains within the industry) show a pattern of more controlled improvement in Figure 3. Audi is performing at a higher level of value with an operating margin of 8% and inventory turns of 9%. However, Audi performance shows a downturn in 2014-2016 while Fuji performance continues to improve. Topping out in supply chain performance of a supply chain leader like Audi is common. Across the industries, companies struggle to balance improvement with performance. The stronger the performance of a company, the harder it is to drive improvement. An analogy is that of a lean athlete in top performance. When individuals train, it is easier to drive lean muscle mass for the unfit. For the top tier athlete, the rate of performance improvement is slower.
Figure 3. Orbit Chart of Fuji Heavy Industries (now Subaru) and Audi
Figure 4. Orbit Chart of Toyota and Honda
While many would advocate that the investment in Lean processes is the answer for sustained improvement, we do not see this in the numbers. Toyota and Honda, both known for Lean processes, struggled in this time frame as shown in Figure 4. Honda is regressing while Toyota has only been able to reverse a negative trend in the last three years.
With a strong culture of cost reduction and high labor input, automotive companies focused on reducing labor cost per unit. When we compare the values of 2004-2006 to the post-recession period of 2010-2016, we see that employee productivity improved drastically at 226% while operating margin improved slightly. The increase in platform complexity along with globalization challenged the industry. While cash-to-cash improved, the greatest driver was the increase in payables. The industry posted a slight improvement in inventory for the period of 2006-2010.
Table 2. Company Overview and Performance for Automotive Companies
Post-recession, the automotive industry made the most progress of any manufacturing sector. In general, European manufacturers post the best performance and North American companies the worst. With a strong focus on supply, the automotive value chain is based on traditional buy/sell relationships and enterprise automation. There is an opportunity to redefine demand, outside-in, and build/operate effective value networks.
While Audi, BMW and Fiat posted positive performance trends, Fuji Heavy Industries, now known as Subaru, rose above and made the 2017 Supply Chains to Admire awards list (driving improvement faster than competitors while outperforming the industry).