The Automotive Supply Chain Revolution

The automotive supply chain revolution

Bangkok post.

KANISHKA GHOSH AND CHRIS CATTO-SMITH

With the 24th Thailand International Motor Expo 2007 under way, we thought it an opportune time to explore the radical transformations that are taking place in the automotive value chain.

This year's show will aim to maximise vehicle "sales" across the 34 vehicle brands that are on display. However, higher cars sales do not necessarily translate into confirmed revenue streams for manufacturers across a car's lifespan. To address the issue of maintaining ongoing revenue, consider what a typical customer looks for when he/she decides to buy a car.

The key purchasing factors are: mobility and service, not necessarily ownership of pounds of metal, plastic, glass and rubber. Along with car ownership comes other overheads that include car taxes, insurance, servicing requirements and the challenge of negotiating with dealers to get agreement on the fair residual value when upgrading or changing to new models. Conversely, the various burdens of ownership can be alleviated by flexible, low-cost leasing agreements that provide both a premium mobility solution and all inclusive full service support. Full-service lease agreements can offer a whole new approach for the customer.

From the standpoint of vehicle manufacturers, the first point of sale usually generates minimal profit due to existing industry structures that are marred with overcapacity and high levels of competition. By leasing rather than selling the car, manufacturers can capture the full lifetime value of the "asset" that they have manufactured.

Research also suggests that 90% of the profits associated with a car arise from downstream value creation or, in other words, well after the first sale. Possible downstream revenue drivers for manufacturers include used vehicles sales, finance and insurance, service, parts, leases and rentals. Through such services, manufacturers can remain close to customers, capture their information, build accurate profiles and develop a clear understanding of their needs. As vehicle manufacturers move downstream to be more service-driven, much of the engineering, design and manufacturing work can be outsourced to upstream players such as Tier 1, and Tier 2 Suppliers.

OEMs and Tier 1 players are aggressively pursuing collaborative product development referred to as "design chain management", which includes such basic issues as working with suppliers, sharing designs and design activities, and realising that they're not going to do it all themselves. The larger issue in outsourcing design work is in bringing people together more effectively into the overall environment so that a greater span of activities can be managed more effectively.

Spin-offs of such developments are extensive and include research and development initiatives on the part of suppliers to develop high-capability, high-margin and high-volume systems and modules for manufacturers. This can be coupled with improved operational agility through performance- based contracting. This in turn provides additional revenue sources from support and maintenance services. The major driver of increased profitability for manufacturers is the change from a sales model to leasing.

To capture lifetime revenue streams, prevailing concepts such as "Power by the Hour" (PBH), from the aerospace industry, can be adopted. The PBH concept stipulates that instead of focusing on a single sale, concentrate on locking in the lifetime service, repair and spares revenues, while at the same time offering a flexible, variable cost structure. Another challenge with sales based trading models is in accessing customer data that is meaningful to drive supply chain improvements.

To date, most automotive customer data resides in dealer sales management systems, which are contracted, bought and paid for by the dealers themselves and not manufacturers. Dealers have been very protective about their customer data, especially since manufacturers a few years ago announced they were going to try to "disintermediate" the dealer chain by selling directly to consumers.

The auto industry is very efficient at mass production, pushing cars out to be sold. However that efficiency is no longer a competitive advantage. It no longer equates to growth or sustainable revenue and is no longer a "best practice" when the goal is to service customers through mass customisation. The industry over builds and then offers incentives, discounts and rebates, thereby losing money on each car that never should have been built in the first place.

All of this is quite contrary to customer-oriented supply chain management principles. The industry should change its entire perspective so that the pull signal is coming from the customer through leasing rather than an arbitrary sales target. Kanishka Ghosh is the joint ventures operations manager with Thai Summit Group. Weekly Link is co-ordinated by Barry Elliott and Chris Catto-Smith CMC of the Institute of Management Consultants Thailand.