The Road Ahead for the Automotive Supply Chain

After a string of bailouts, bankruptcies and recalls, the automotive supply chain finally got some good news on February 24 when General Motors announced its largest yearly profit in more than a decade – and the company’s first annual profit since 2004. For the industry as a whole, total U.S. auto sales for February ticked up 27 percent as consumers began coming back to dealers’ showrooms to check out new models and new discounts. That bodes well for full-year sales, which industry analysts believe will hit in the range of 12.5 million to 13.5 million, up from 11.8 million units that moved off the dealers’ lots in 2010.

From his vantage point at the Southfield, Mich., headquarters of the Automotive Industry Action Group, AIAG Executive Director Scot Sharland says that the industry clearly is on the rebound, if not returned to fully robust health. “The industry is off life-support and appears to be well on its way to recovery,” Sharland says. But he cautions that the overall financial health of the automotive supply chain remains fragile, and the industry will need a few more years of steady growth to return to pre-recession levels, at least in North America.

Sharland has firsthand experience from inside the automotive supply chain, having spent four years as an executive with American Team, Inc., a custom molding business serving automotive OEM and supplier customers. He started his career with General Electric, and he also worked in the electronics supply chain. He’s headed up AIAG since 2005, capping a 30-year career in industry.

AIAG provides a neutral ground where OEMs and small, medium and large suppliers, as well as service providers and academics, can come together to develop, harmonize and improve standards, technologies, business practices and processes that can be adopted across the automotive supply chain, as a way of creating efficiencies that benefit all industry players. “We don’t do political advocacy, per se,” explains Sharland, “but we do technical advocacy. We obviously don’t get involved in form, fit and function of product or in pricing, but we get involved in business processes, and our objective is to eliminate as much rework, error and waste as we can from these processes.”

Dramatic Changes

Exposure to all the players in the industry gives AIAG, and Sharland, unique perspective on the current state and future prospects for the automotive supply chain. Sharland currently sees three broad trends impacting the industry: globalization, consolidation and collaboration.

Starting with globalization, Sharland says, “Clearly we are a much more global market than ever before, and there is no going back.” The organic growth opportunities for the industry, he notes, are not going to be in North America, but in Asia, South America, Russia and the African continent. China, for example, has seen automotive production rise from just over 2 million units at the start of the new millennium to the high teens by 2010, and the country now can stake a claim to being the largest automobile market in the world. In South America, Brazil is becoming the regional automotive powerhouse. The major OEMs are moving into these markets, establishing manufacturing operations or forging partnerships to build for the domestic consumers.

The automakers also are moving toward a smaller number of more global platforms that can be modified on a regional basis to satisfy the unique requirements of consumers in different countries. This plays into Sharland’s second theme of consolidation, which he views as being necessary to sustain the financial health of the industry. Consolidation also means that OEMs are looking to contract the size of their supply base in favor of fewer, but larger, more global suppliers that can support them across different regions.

The key to successfully managing these consolidated supply bases, Sharland adds, will be financially healthy collaboration. Here, he harkens back to the 1996 book Co-Opetition by Adam Brandenburger and Barry Nalebuff. He sees the OEMs already working together in markets where it makes sense, for the sake of speed to market, scale and capacity. “You’re going to see many of the tier-one suppliers working more tightly together, as well as the tier-twos, -three and -fours looking for ways to work together where each can contribute and maintain some level of financial integrity going forward.”

“Check the Ego”

As for AIAG’s current work with its members, Sharland highlighted three areas, including quality, corporate social responsibility and effective material management on a global scale. With regard to the first, the ongoing effort is to instill a more holistic view of quality throughout the supply chain. AIAG’s initiatives in this area focus on developing standards and tools to better manage quality collaboratively in all tiers. “The primary enemy of quality is variation, and we’re trying to drive that out by harmonizing the way we speak and using a common toolkit.” AIAG also is working to take reliability approaches from the truck and heavy equipment sector – where a truck’s lifespan expectation might be a million miles – and transfer those to the light truck and passenger side. And finally, the group is focused on identifying and standardizing best practices around warranties for the industry.

Sharland is optimistic about the industry’s prospects in the wake of the recession, and he’s confident that AIAG will continue to have a role in meeting the challenges ahead for the automotive supply chain, in no small part because of its unique position in the industry. “We’re not holding hands and singing Kumbaya about how it would be nice if we could all work together – we actually are working together.” The price, he adds, is that members of the group must be able to “check the ego at the door” and come willing to share ideas and accept the ideas of others. “We’re business process guys,” he concludes. “It’s not sexy, but it really works – and when it works, it works really, really well.”