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An
upbeat remark about the economy this week, coupled with some
sobering news about auto parts suppliers raises the question:
how to make money in the automotive industry?
Last
week at MIT's commencement ceremonies, Federal Reserve
Chairman Ben Bernanke stated that America's strong
productivity performance was growing at significantly faster
rates than previous decades in part because of the increase in
the economy's flexibility. Good news for many who have
accepted and strived to adapt their business models to a
changing consumer and global competition. A recent article in
APICS: The Performance Advantage (Strengthen and Tone:
A flexible approach to operations can build some serious
muscle, June, 2006), coauthored by this writer, described
flexibility as one of the main characteristics of a truly
responsive and reliable supply chain (the other two being
predictability and simplicity).
This
week, another statistic made the news: at least 38% of North
American auto parts makers are at risk of filing for
bankruptcy within the next two years (Alix Partners LLC; John
Hoffecker). The article went on to say there had been $60
billion of U.S. supplier bankruptcies since 2001.
How
can this be? Why aren't the auto parts suppliers benefiting
from their relations with the automakers? After all, we often
hear of highly productive automotive plants with very lean
operations and little if any inventory. Virtually all Tier one
suppliers are delivering parts to the automakers' assembly
lines on the hour seemingly in lock step with their customers.
So what's wrong if nearly 40% are in danger of going bankrupt
and the rest are generating operating profits in the 3-4%
range?
I
think it speaks to a fundamental problem of the automotive
industry in that the business models for many are flawed. So
much time and money have been invested in becoming lean and
productive that the tradeoff in lost flexibility is killing
many. Effective has been supplanted by efficient. Being
effective means producing the right things based on customer
orders. Efficient means to produce something very quickly,
even if it isn't what the customer wants. For all we hear
about lean and JIT, the North American automotive supply chain
suffers from too much inventory, too many discounts and
rebates, and too high costs.
Mr.
Bernanke challenged the graduates to "not be afraid to be
unconventional". Mr. Hoffecker stated, "Suppliers
and automakers are at a crossroads, and only those ambitious
enough to take bold actions today will be winners tomorrow".
For many in the automotive industry, that might mean scrapping
their current way of doing business. Otherwise, someday the
only people making money in the automotive industry are the
bankruptcy lawyers. From the sounds of it, they are already
doing pretty well.
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