Engage Digital Networks to Grow Auto Supplier Margins
In October I will have the pleasure to speak at the Best Practices for Automotive Conference on the topic of procurement strategy and how to engage digital networks to create margin opportunities for automotive suppliers. Margin growth and reduction of cost of goods sold (COGS) is definitely on the mind of board members, whether they be Chief Procurement Officers (CPOs), Chief Financial Officers (CFOs) or Chief Information Officers (CIOs) in automotive supplier companies. In my conversations with suppliers today it seems that if the company is part of the top supplier “tier” (usually the top 30 or 20 according to the Automotive News annual rankings), they are interested in protecting and increasing their market position and competitiveness. If the supplier isn’t part of the top tier yet, they are looking for ways to structure their operating model to become more competitive in this space.
When SAP looks across the automotive supplier landscape we find some rather compelling trends around financial performance and leveraging SAP innovations and best practices. In particular when we consider the Top 15 automotive supplier landscape, these companies are able to:[i]
- Perform corporate accounting consolidations across languages, currencies (100%);
- Enable direct and/or indirect procurement, globally across languages, currencies (100%); and
- Manage global design, manufacturing and/or logistics operations across regions (93%).
This translates into a broad set of capabilities which allow automotive suppliers to build talent, reduce structural costs, easily integrate acquired entities, and build growth-minded processes.
Strategy 1: Enable Global Financial Reporting and Product Consolidation. When companies are able to look across their enterprise seamlessly a number of competitive opportunities emerge:
- Top global suppliers operate their financial organizations as enabling bodies to business units and subsidiaries which in turn operate performance based on BU needs, customs, and preferences. Accurate forecasting is the norm.
- In a global operating environment, cash is managed with great precision to maximize treasury performance. Reports are generated as needed based on a financial continuum. Planning operates in a continuum as well with real-time risk and cash flow adjustments as needed. Close and disclose cycles are outputs.
- Local currencies can be aggregated in a multi-language environment and summarized in the central financial organization.
SAP sees a 22% shorter cycle time for Financial Forecasts (in days) for automotive companies in North America where budgeting and forecasting is a continuous loop process of planning, measuring and simulation that relies on up-to-date insight from multiple functions and regions.
Strategy 2: Leverage Global Manufacturing, Design in Cost Model. When companies can manage across global regions with cost visibility and product insights, top global suppliers typically find they are able to:
- Leverage build and sell to market concepts across manufacturing, design and logistics elements of the operating model.
- Reduce local stock outs and ensure the right component or assembly goes to the proper destination at the appropriate cost and duration.
- Accurately manage internal cost transfers – potentially across multiple currencies and customs rules – and track stock transfers and cost margins.
SAP sees a 47% lower warehouse management cost (% of revenue) for automotive companies in North America that perform formal, globally applicable constraint based supply planning process at a regular interval.
Strategy 3: Connect to Global Business and Talent Networks. Top automotive suppliers tap into digital networks to acquire and retain materials and talent. This generally addresses a number of key growth areas:
- Top global suppliers work across digital networks to maximize quality, financial ratios, and schedule performance. This ensures consistent sourcing across approved and managed spend for both direct and indirect materials.
- Product and materiel catalogues are centralized per region / operations to ensure contract managed spend provisions in markets and across product categories. This reduces “maverick” spend and increase in flexible Days Payable Outstanding (DPO).
- To avoid talent “vaporization” as Boomers exit the manufacturing industry, both permanent and contract labor is managed using right fit, right time models via digital platforms. This allows the best staff to perform the right task regardless of geography particularly in design and service functions.
SAP sees a 34% higher addressable spend under contract-Overall (in %) for automotive companies in North America where the organization has a single, centralized electronic repository of supplier contracts.
To learn more on how to start your company on its journey to become a top automotive supplier visit me at the Best Practices for Automotive (BP4Auto) conference October 12-14, 2015 in Detroit.
[i] Based on biennial study of Automotive News top 15 NA automotive suppliers, 2012-13.
Value driver statements taken from SAP Benchmarking surveys for NA automotive companies.