Automakers: How to Survive the Cost of Regulation

Jan. 9, 2015
To achieve compliance with new fuel efficiency and emissions standards, many automakers need to manage a whole new set of factors that threaten to drive the cost of their products up and profits down.

With an increased emphasis on managing environmental quality and reducing dependence on foreign oil, governments around the world are putting increasing pressure on automotive manufacturers to improve fuel efficiency and reduce emissions.  

In the U.S. market, automakers must meet Corporate Average Fuel Economy (CAFÉ) standards, which are scheduled to increase rapidly over the next few years. 

In Europe, the European Commission launched a long-term, strategic and integrated policy known as the Clean Air For Europe program that recently set an emissions cap of 130 g/km (approx. 52 MPG) averaged over all new vehicles produced by each manufacturer by 2015.

Cost Impact Across the Product Lifecycle

While these directives have been instrumental in reducing regulated emissions, they also have significant product development and cost impacts for automotive manufacturers – at a time when profits are already under significant pressure. 

To achieve compliance, many automakers now need to revisit design concepts, redesign entire powertrain and emission systems, re-tool manufacturing processes, find new suppliers that can meet the new requirements, insert checkpoints to ensure compliance and manage a whole new set of factors that threaten to drive the cost of their products up and profits down. 

  • Many of the mandated adjustments also require additional electromechanical systems and computer software that are harder to prototype and QC than mechanical systems. This often means integrating information from a wide variety of design tools.
  • The capital investments associated with retrofitting and re-tooling existing facilities to meet new requirements are significant, and they vary by geographic market adding further cost and complexity.
  • Coordinating product development and manufacturing efforts between internal teams from different cultures, languages, time zones nd information technology infrastructures is also extremely challenging and can negatively impact time to market and result in costly rework in engineering or excessive scrap costs in manufacturing.
  • OEMs and Top-tier suppliers are outsourcing more of their detailed design and manufacturing to partners located in geographies far from their own. As above, managing engineering changes and costs across these extended supply chains adds additional levels of complexity and difficulty.
  • For Tier 1 suppliers, negotiating price and product cost on a complex mix of products flowing through the supply chain makes it more difficult to provide timely and accurate response to RFQs from OEM customers.

For most major automotive OEMs and large Tier 1 suppliers, cost data is scattered across the entire organization in PLM, ERP, SCM and MES. Different departments and product groups each have their own, often conflicting, cost goals and agendas. As a result, manufacturers often discover too far along the product lifecycle that they are already unprofitable. 

Navigating Cost and Complexity

These challenges are significant, but many leading automotive manufacturers and Tier 1 suppliers are adopting a set of best practices to offset their cost impacts and improve profitability.

Design for Supply: Incorporating suppliers earlier in the product design phase enables automotive OEMs and Tier 1 suppliers to leverage the expertise of their extended supplier community, negotiate better pricing and delivery terms and ultimately reduce time to market and overall vehicle development costs.

Exchange Product Data with Supply Chain Partners: Committing to the advancement of an industry-standard, neutral file format for exchange of product model data (e.g., STEP and JT) will make it easier for manufacturers and suppliers to collaborate on product design, manufacturing process and materials, streamlining response time for cost estimates and RFQs and providing greater predictability on cost and profitability. 

Deploy Enterprise-Wide Product Lifecycle Management (PLM) Systems: Implementing a single enterprise infrastructure for all intellectual assets of a product development program can lead to a significant reduction in overall program expenses related to legacy IT systems. It also enables effective communication with suppliers and is critical to eliminating design rework and manufacturing scrap.

Make Product Cost Management an Enterprise Focus: Deploying an enterprise-class product cost management system to complement and extend the benefits of your existing PLM system with costing specific capabilities:

  • Automated quote generation leveraging solid CAD model designs: To quickly and accurately generate detailed cost estimates, evaluate different design alternatives and tradeoffs as well as understanding the “should cost” of outsourced parts.
  • The ability to track the on-going product cost across the entire product team: The integration of all the cost data scattered among different enterprise systems into a single collaborative platform, accessible by everyone in the product development team - design, engineering, sourcing, cost engineering and manufacturing. 
  • The ability to calculate and manage weight values: To ensure that vehicle development projects achieve weight targets that ultimately translate into achievement of critical fuel efficiency and emission objectives.
  • The ability to cost entire Bills of Materials (BOMs) and complete product assemblies: To enable program managers and engineering leaders to quickly evaluate cost of trade-off decisions for global vehicle configurations and module configurations that accounts for price elasticity of different geographic/consumer environments.
  • The capability to generate detailed Tooling BOMs: To help OEMs and Tier 1 Suppliers understand what tooling should cost so that they can conduct more effective negotiations with suppliers.

Increased government regulations are having a significant impact on automotive manufacturers. While the environmental benefits are to be recognized and celebrated, the automotive industry must also find new ways to offset the negative cost impacts. 

There are a number of different ways to accomplish this and they all start with taking a more strategic and enterprise-wide view of product cost management. 

These initiatives start at the design stage and continue throughout the entire product development lifecycle, and can instill a very healthy culture of cost management across the organization.

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