Auto Motives Supply Chain

8/2/2019 Auto Motives Supply Chain

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Massachusetts Institute of Technology

Cambridge, Massachusetts Materials Systems Laboratory

MSL STEERING COMMITTEE

ASSESSING GLOBALIZATIONAND SUPPLY CHAINSTRATEGIES OF AUTOMOTIVEMATERIAL SUPPLIERS

Francisco Veloso



AN EMERGING GLOBAL VALUE CHAIN

Effects

Drivers IncreaseOutsourcing

Reduction in directOEM suppliers

Standardization

Market growthBarriers to importsLow factor costsNo worker barriers tonew forms of supplychain organization

New OEM andsupplier investments

Experiments withnew manufacturingand sourcing

systems

Industry TrendsOpportunities inEmerging Areas

Supply chaindisaggregation

New supplier roles Pressures on suppliersfor global presence

and performance

SupplierStrategies

Global Specialists Global Integrators Firm Consolidation

Regional innovativesupply solutions

Industryexpansion

and new formsof supply chain

organizationtaking place in

emergingregions


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75%

80%

65%

65%

70%

50%

45%

INCREASING VEHICLE OUTSOURCING

Source: Wards; Automotive News

1997

2000 (est.)

PSA

Renault

Fiat

1985

Percentage of Vehicle Value



75 7465 61

25 2635 39

48.3

VEHICLE GLOBAL SALES TREND

Source:Automotive News, IMC - Forecast

54.4 62 68100%=

Emerging markets

Triad

Forecast

1994 1999 2005 2010

Demandgrowth willtake placemainly inemergingmarkets

Millions ofVehicles


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SUPPLIERS AGGRESSIVE MARKET EXPANSION

Company Major Products Globalization Strategy

Federal MogulUS

Sales increased 276% from 1997 to 1998.

Growth strategy: focused acquisitions

Components forEngine Systems

SimoldesPortugal

Sales increased 52% from 1997 to 1999

Development through investment in newplants in France and Brazil

Injection moldedcomponents forinteriors

ZaniniSpain

Sales increased 30% from 1997 to 1999.

Growth both through acquisitions andgreen field investment in Europe, LatinAmerica and India

Hub Caps

Source: Company web pages, Federal Mogul 10k report

Large and Small firms alike



VALUE CHAIN DISAGGREGATION

Example Situation Impact of spin-off

Shed estimated 10-12% overhead Increased sales from $1.5 to $2.0 bil.

Sales doubled by 1994 Highly profitable Major innovator in diesel technology

Early examples of disaggregation are showingincreased cost savings and innovation due to a higherlevel of entrepreneurship as a higher scales achieved

Early examples of disaggregation are showingincreased cost savings and innovation due to a higherlevel of entrepreneurship as a higher scales achieved

Growth in sales of 116% of offurther-processed products from1996 to 1997

GM internal axle,chassis component,spun off in 1994

GM diesel engineproducer, taken overby Roger Penske

Fiats Stampingoperations in Brazilpassed to Usiminas

Usiminas

Detroit Diesel

American Axle

Source: Industry Press; Mckinsey


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Commodities

Small Stamps

Small InjectedParts

Low Value Added

Build to Print

Development

Components

Door

Dashboard

ABS

High Value Added

Black-Box Design

Differentiated

Commodities

Rear View Mirror

Fuel Injector

Steering Column

Medium Value Added

Grey-Box Design

Component Subsystem System

2nd + Tier 1st Tier

Growth Strategy

SUPPLIER POSITIONING IN THE VALUE CHAIN



Source: Automotive Industries; Wards Automotive Reports; Hoovers online

In 1985 most auto revenues came fromselling seat frames

Entered complete seats businessthrough acquisitions:

! Ford (1993) and Fiat (1994) operations

! Automotive Industries (1995)

! Keiper, Dunlop Cox and ITT (1997)

! Delphi and Hyundai businesses (1998)

These purchases included globalnetworks in virtually the whole world

Growing to be a full interior supplier

! Acquisitions and JV to accesstechnology in acoustics, instrumentpanels and trims

Dana core products include axles,brakes, driveshafts, structuralproducts and engine components

Now moving to provide completemodular systems across the world

Leading example is complete chassisto new Chrysler Dakota pickup truck

! Invested $15 million in new plant

! Incorporates 200 parts from 70suppliers

! Represents one-third of truck value

! Chassis assembled and placed inChrysler's line within 2 hours oforder

Danas Brazilian Rolling Chassis Lear seat and interior integration

EXAMPLES OF SYSTEM INTEGRATION


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CONSOLIDATION TREND WITHIN SUPPLIERS

Worldwide Sales

5

11 13

28

36

4715

24

25

32

291520

1992 1995 1998

Companiesinsegment

less than $100 million

$100-$500 million

$500-$1000 million

$1,000-$5000 million

over $5,000 million

Source: Automotive News

Largest 100 North American based suppliers



MATERIAL SUPPLIER COMPETITOR PERSPECTIVE

From

Supplier of steel coils orblanks

Global supplier ofaluminum ingots

...

To

Supplier of fully formed bodyparts to the assembly line

Global supplier of aluminumcastings

...

Goal: Explore new global opportunities generated in theauto supply chain through the development ofinnovative material based solutions that can generateincreased value added for the OEMs and the supplier

Critical issues yet unanswered:

What value do new supply chain configurations generate?

Who is more likely to capture the value created?

Which strategies ought to be pursued by materials suppliers?

Focusof

Research


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MATERIAL SUPPLIER EVOLUTION IN SUPPLY CHAINFrom To

Regional or global

automotive raw materialsuppliers

Global raw material supplier,

component manufacturer orsystem integrator

RawMaterialSupplier

Global car

integrator

StandardSetter

ComponentSpecializer

RawMaterialSupplier

RawMaterialSupplier

RawMaterialSupplier

ComponentSupplier

SystemIntegrator

Assembler Distr ibu tor

RawMaterialSupplier

SystemIntegrator

Assembler Distributor

RawMaterialSupplier

Componentstandardsetter

Global car

integrator

StandardSetter

RawMaterialSupplier

SystemIntegrator

Assembler DistributorComponentspecializer

ComponentSpecializer

Global car

integrator

StandardSetter

RawMaterialSupplier

Assembler DistributorComponentspecializer

SystemIntegrator



Fiat

CASE STUDY: USIMINAS-FIAT STAMPINGS

Add value to its product

Move downstream into highervalue products

Sales growth of 116% onfurther-processed products from1996 to 1997

Investment in press shop? Sharing presses among clients? Factor costs? Logistics costs? Other?

Reason:

Usiminas

Expected

Benefits

Impact

onCosts

Release space and resourcesto invest in assembly capacity

Increased capacity Reduced asset intensity

Manufacturing vs. Sourcing

cost? Logistics costs? Other?

Reason:

Expected

Benefits

Impact

onCosts

Assess economic implications of the 1993 agreement tosubcontract part of Fiats stamping operations to Usiminas

Goal:


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EXPECTED EFFECT OF OUTSOURCING ON COST

Cost Driver Effect Reasoning

Factor Costs Margin on raw material sale is reduced Usual OEM wage premium is absent in supplier Reduced transaction costs on scrap material

Logistics Costs Increased cost of transporting finished goods

rather than raw materials

Fixed Costs Shared capacity among several clients Cost of capital in OEM vs. Supplier can go either way

Processing Costs Stamping technology and practices are likely to be

the same

Overhead Costs Depend on efficiency of firm organization Can initially assumed to be the same

TOTAL COSTS

Important to assess difference in cost to

understand implications of decision for bothsupplier and assembler



CASE STUDY: ALUMINUM ENGINE BLOCKS IN BRAZIL

Disadvan-tage

Advantage Capabilities alreadyin place

InexpensiveManufacturing

Aligned with industry trend

Lighter more efficient carsare a plus in Brazil due togasoline price

Full economies ofscale in foreign plants

No local investment orlong term commitmentto one supplier

Solution againstindustry trend

Preventsinternational

alignment ofpurchases

Important investment todevelop local capabilities

Low scale may requireseveral automakers to

commit to one supplier

Expensive logisticscosts

Significant importcosts due to

Brazilian regulation

Continue with CastIron Engine Blocks

Import Cast AluminumEngine Blocks

Breed Local Manufacturersof Cast Aluminum Blocks

There are important economic trade-offs betweenscale, required investment and logistics

There are important economic trade-offs betweenscale, required investment and logistics


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ALUMINUM ENGINE BLOCK COST BEHAVIOR

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

0

25

,000

50

,000

75

,000

100

,000

125

,000

150

,000

175

,000

200

,000

Production Volume

Cost

Aluminum Brazil

Aluminum Importsfrom Germany

CROSS -OVERCROSS -OVERInvesting inBrazil is a

difficultdecision due to

limited andfluctuating

scale

Very preliminary results



CASE STUDY: HYDROFORMED ENGINE CRADLE

ILLUSTRATIVEILLUSTRATIVE

Cases Considered :

Integrated Hydroformer:Integrated Tube Maker:Integrated Tube/Hydroformer:Integrated Materials-to-Tube Maker:Integrated Materials-to-Hydroformer:

HydroformerTube

MakerSlitter

Material

Supplier

Rover 75


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Inventory

2.6% Warehousing 0.4%Transportation 8%

Maintenance 5%

Building 1%

Overhead

8%

Tooling

16%

Machinery6%Energy

2%

Labor

6%

Materials

45%

11%Logistics

Cost

36%

Fixed Cost

53%

Variable Cost

COST BREAKDOWN OF BASE CASE



Sensitivity for Material Supplier in Supply Chain

$28.00

$30.00

$32.00

$34.00

$36.00

$38.00

$40.00

$42.00

$44.00

Material

Cost

Scrap

Price

WageR

ate

Costof

Capital

Utiliz

ation

CostperPart

25%/yr

3 shifts

2 shifts2 shifts

10 %/yr10 %/yrBase CaseBase Case

$31.42/part$31.42/part

$0.56/kg$0.56/kg

$0.50/kg $0.08/kg $6/hr

$40/hr$40/hr$0.04/kg$0.04/kg


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Costs by Process Step

ILLUSTRATIVEILLUSTRATIVE

Carrying

Warehousing

Transport

Maintenance Cost

Building Cost

Overhead Cost

Tooling Cost

Main Machine Cost

Energy Cost

Labor Cost

Material Cost

Fixed

Logistics

Slitting Tube Making Hydroforming

Variable

40

50

60

70

80

90

100

CostperPart,

%

$14.90

$17.08

$31.42

Date post:	05-Apr-2018
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