The Auto Industry's Big Changes and Second Chances

With production capacity of automobile makers heading back to pre-recession levels, car makers and suppliers are at a crossroad. Will they take the opportunity to create win-win supplier-customer relationships?

Actor Harrison Ford once said “We all have big changes in our lives that are more or less a second chance.” That observation might be taken to heart by executives in the automotive industry (and elsewhere) as they think about their supply chain strategies for 2013 and beyond. A recent IndustryWeek article, The Auto Industry’s Next Bottleneck, noted growing concerns about the ability of suppliers to keep up as production levels pushed back towards pre-recession levels. Such concerns are well founded. On a recent visit to Detroit, two of the four companies that I was working with were already implementing “Plan B efforts” to address supply shortfalls.

What is remarkable about this challenge is that for so many years, the auto industry has been the poster child of overcapacity, at both the carmaker and the parts supplier levels. For the industry as a whole, capacity increased on almost an annual basis, with very few interruptions, over the twenty years from 1987 to 2006. Only once during that interval did excess capacity dip below 15%, and there were many years during which it topped 30%. 

The unfortunate consequences of that situation festered for many years. Among the factors that produce price and margin pressures, excess capacity tops the list. That’s a fact that just about every industry participant can document. The sad stories of conflict between customers and suppliers are legion, and, with the recession adding fuel to the fire, it generated bankruptcy after bankruptcy. Commerce Department and other estimates all suggest that literally hundreds of suppliers disappeared from the base during that period. By any assessment, what has happened to the automotive industry qualifies as a “big change.”

What remains to be seen is whether the industry participants will take advantage of it from a “second chance” perspective, or fail to realize the potential for value creation that exists from well-managed supplier-customer relationships.  Suppliers could implement a “what was good for the goose is now good for the gander” perspective and put all of their energies into achieving short-term pricing victories. Customers could again implement their earlier efforts to encourage new suppliers to enter the market and, despite the recent flurry of charges about illegal trade practices, there are more than enough candidates in China to get back to the bad old days of excess capacity in a few years. Either practice will reflect a failure to take advantage of the second chance the industry has been given. And, both in the short term and over the long term, shareholders of both carmakers and suppliers will see value creation opportunities wasted if that happens.

Change will be a challenge for this industry. The bad memories of past relationships are still fresh in the minds of most industry executives, and many can say “I tried that once, and was badly burned in the process.” It will take strong champions from both supplier and customer organizations to manage the change process necessary to evolve relationships from zero-sum to win-win. Here are three actions that such champions can take that have been successful in other industries in which win-win outcomes reward both suppliers and their customers.

3 Actions to Ensure a Win-Win Outcome

The first foundation for success involves information flow, the communications between the two firms. Best-practice customers tell their strategic suppliers what they need to know in order to be successful. They share their forecasts, their plans, their headaches, etc. They don’t keep suppliers guessing and, as a result, suppliers have a chance to be successful. At the same time, best practice suppliers are proactive in bringing information to their customers, avoiding unpleasant surprises and suggesting ways in which the relationship can be taken to a higher level. It is always remarkable how many relationships are assumed to be like mushrooms, best kept in the dark.

A second key principle is that there must be an openness to the relationship, with quite a few people involved. In many of the auto industry relationships that I’ve observed, everything goes through purchasing and sales. There are gatekeepers involved on both sides of the relationship. They will justify that on the basis of competitive fair play or company secrets or some other rationale. But the end result is that there’s a choke point in the relationship, and the right people and departments never connect with one another. Any relationship that hopes to yield innovation and breakout ideas must allow interactions between the experts who have the potential to collaborate towards such outcomes.

A third lesson from best practice success stories is that the two firms need to take a “systems perspective” when thinking about strategy and about their relationship. They need to be open to changes in the roles and boundaries between the two firms. It’s a simple principle of optimization that when you focus on the whole system instead of its components in isolation, you have more options for improvement. This applies when suppliers and customers are confronting problems – and despite improvements in demand, the industry has many that still must be addressed. Sometimes the solution requires a new way of doing things, shifting responsibilities from one firm to the other or making changes in processes in one firm that open the route to savings in the other.

The automotive industry is certainly the most visible example of one that is experiencing a big change that can be transformed into a second chance, but it’s not the only one. Hopefully, in a few years, we will be able to look back and see a dramatic change in the nature of supplier-customer relationships, one that will generate new ideas that will solve the challenges facing such industries, delight their customers, and generate an ongoing stream of rewards for their shareholders                

George F. Brown, Jr. is the CEO and cofounder of Blue Canyon Partners, Inc., a consulting firm working with leading companies on growth strategy.  See www.bluecanyonpartners.comand @GeorgeFBrownJr on Twitter.  Along with Atlee Valentine Pope, he is the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, TX. He has published frequently on topics relating to growth strategy in business markets, including articles in IndustryWeek, Industrial Distribution, Chief Executive, Business Excellence, iP Frontline, Industrial Engineer, Industry Today, and many others.

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