Amid New Supplier Tier Structure and High Warranty Costs, Auto Industry Needs to Think Differently, Says Freudenberg-NOK President & CEO
4 August 1999
Amid New Supplier Tier Structure and High Warranty Costs, Auto Industry Needs to Think Differently, Says Freudenberg-NOK President & CEO
TRAVERSE CITY, Mich., Aug. 4 -- With a major shift occurring
in the automotive supplier tier structure, warranty cost issues, increased
expectations and merger mania, the automotive industry must think "out of the
box," target total costs, embrace lean systems and focus on value for the
consumer, said Joseph C. Day, president and CEO of Freudenberg-NOK, in a
presentation here today at the University of Michigan Management Briefing
Seminars.
In his speech, "Tiers, Technology and Total Cost Down -- A Supplier's View
of the Millennium," Day challenged the nearly 1,000 automotive executive
attendees to be out-of-the-box thinkers -- and to be prepared to make some
radical changes -- if they plan to drive excellence, or even survive, in the
21st Century.
Asking the classic question about a half glass of water, Day illustrated
that the glass was neither half-empty nor half-full -- it was simply too big,
and that the use of a smaller glass can make it full. Out-of-the-box
thinkers, he said, not only find the right answers, but also ask the right
questions.
"The right question is not, 'Is the glass half-empty or half-full?' ...
the right question should be, 'What size glass do we really need?'" he said.
Asking the right questions and thinking out of the box are key strategies as
automotive manufacturers continue to demand more of suppliers, who are
struggling to survive amidst constant change, cost pressures, investor
expectations, dramatic consolidation and a newly emerging supplier tier
structure.
Tier 1.5 Technology Specialists
According to Day, automotive industry observers are acknowledging that
growing automaker demands are creating a new supplier hierarchy -- consisting
of half tiers, such as the Tier 0.5 systems integrators and Tier 1.5
Technology Specialists.
Day noted that this inevitable shift, which will ultimately strengthen the
industry, is forcing suppliers to re-evaluate their positions and to find
their rightful place in the supply chain.
"Suppliers need to pick the tier that fits their situation and strategy,
and also brings the most value to their customers," he said. "If you don't
make the decision and develop the strategy to support it, someone else will
make the decision for you."
Day said that the Tier 1.5 position is held by Technology Specialists --
including the Freudenberg and NOK Group -- who are differentiating vehicles
and adding market power through innovative products, such as self-dimming
mirrors, adjustable pedals, inflatable seat belts, fuel cells and various seal
and vibration-control technologies.
"The Freudenberg and NOK Group is proud to be a leading member of this new
sub-tier," Day said. "Being a Tier 1.5 is not about size, it's about focus.
These suppliers are intensely focused on technology, not being systems
integrators. A company becomes a Tier 1.5 by choice, by strategy and by
discipline ... not by acquisition, sales volume or happenstance."
Slashing Warranty Costs
Day also challenged the industry to embrace total cost evaluation -- not
piece cost -- to improve profits, drive out cost and enhance value for the
consumer. Focusing on total-cost down -- coupled with creating robust
products and diligently practicing lean manufacturing -- can dramatically
slash, if not totally eliminate, warranty costs.
"Total cost is what counts in this industry today. Toyota's warranty
costs in North America are measured in hundred millions, while one of the
domestic automaker's costs are measured in multi-billions in that same
market," he said, attributing the difference to the Toyota Production System.
Day said that five years ago the repair rate for oil seal failures on
American Big Three made cars varied between 8 and 14 per 1000 vehicles, versus
.03 to .07 -- 200 to 300 times less -- for Japanese cars. With the domestic
automakers making only modest progress, there is plenty of opportunity for
improvement through lean systems.
On three recent projects for North American suppliers, the Freudenberg and
NOK Group -- which recently completed its 12,000th kaizen (continuous
improvement) project -- used lean systems to help reduce its customers'
warranty costs by $6 million, $15 million and $48 million, respectively, on
steering, axle and compressor warranty costs.
Global Capabilities, Big versus Better
Day also noted that a key ingredient for supplier success is to possess
true global capabilities, not just a global presence. Suppliers should be
able to deliver uniform-quality and interchangeable products anywhere in the
world, day in and day out. However, he cautioned that increased size -- being
big -- does not necessarily have a direct correlation to profitability or
fulfilling customer expectations.
"Big can be good if it comes with the right strategy, the right market
power and if it brings along economies, absorption of risk, geographic
presence or expanded product strategies. Big can be bad, if the combinations
of strategy and tactics don't create market power ... but better is always
better. And better means specialization, unique capabilities, niche
orientation, a focus on differentiation and targeting total cost."
Plymouth, Mich.-based Freudenberg-NOK is part of the Freudenberg and NOK
Group Companies, which have total annual sales of more than $6 billion. With
global automotive sales of approximately $3.5 billion, the Freudenberg and NOK
Group ranks among the world's top 20 automotive suppliers and is one of only
eight in the top 100 that has global balance in each of the three major
automotive markets -- Asia, Europe and North America.
Through a global network of facilities spanning 24 countries with some
23,000 automotive employees worldwide, the supplier group offers its
automotive customers globally integrated products, including sealing packages
for transmissions, engines, brakes, axles and steering, NVH (noise, vibration
and harshness) components and packages, and all rubber, plastic and PTFE
components for suspension, electrical and fuel systems.
The Freudenberg and NOK Group also offers an extensive portfolio of
precision-molded products for the aerospace, appliance, business machine,
fluid power, marine, medical, off-highway equipment and recreational vehicle
markets. For more information, visit the Freudenberg-NOK web site at
http://www.freudenberg-nok.com .