Relentless pursuit of cost reductions across the automotive supply chain forces all participants to execute flawlessly to protect profitability.
But despite the ongoing emphasis on collaboration between OEM’s and Suppliers, uncompensated variability in demand and an imbalance in information create significant profit leakage for Suppliers.
The opportunity for recovery is not unknown, but the ability to negotiate effectively based on valid data has historically resided with the customer, who can justify investments in data collection and analysis at a level that suppliers have not been able to match.
Since the best data invariably wins, when customer business practices drive supplier costs in excess of what was quoted, suppliers often lose. Not because they don’t have a contract to protect against loss, but because they don’t have the data analysis capability to negotiate for recovery.
It’s not uncommon to have contract clauses protecting the supplier from the impact of excessive customer demand variation. Concepts like fab and raw authorization have been in existence for many years, offering suppliers the opportunity for recovery should actual demand fall significantly short of customer commitment. OEM contracts may also set limits on the period to period on the same material release, or between the current and prior release to offer the supplier a defensible position if demand cannot be met.
Similarly, the Supplier may have agreements with their lower tiers on volume expectations, or in some cases capacity commitments.
Taken together, these agreements are a rational approach to mitigating the effects of demand variation across the supply chain and to ensuring that the impact does not cause undue cost or disruption at any tier.
At least, that’s the concept.
But as we know all too well, agreements made in good faith are subject to enforcement only when backed up by data to prove compliance or non-compliance. In some cases, particularly when demand changes necessitate premium freight or perishable rather than returnable packaging, the processes for cost recovery are well understood and at least partially implemented.
That still leaves significant margin leakage. Recently, we’re been having discussions with a number of leading component suppliers about how to capture the data necessary to substantiate recovery of other categories of cost, a task that has historically been extremely difficult due to the need to understand large volumes of data at a highly granular (part, period, plant) level of detail within the context of a global relationship.
Fortunately, a task that was once required significant investment in data marts and reporting is now becoming an element of standard cloud-based software.
Consuming transactional data from one or many ERP systems, as well we information from contract management repositories, and – of course – assuming that these sources have the relevant metrics, we can now quickly assess and flag all instances where a new material release exceeds a change or absolute value.
Analogous testing can be done on outbound releases to lower tier suppliers, as can testing to ensure that the lower tier’s commitments in return meet valid requirements and identify exceptions for action.
The result is a fully informed Supplier, equipped with a richness of data that matches that which the customer brings to the negotiation table.
On a transactional basis, the Supplier now has the data to support invoicing for extraordinary costs within the terms of the contract, citing specific instances where material releases triggered an exception to the master agreement.
On a longer term basis, the ability to analyze the frequency and severity of exceptions across customer, geographic, and product hierarchies informs a robust cost-to-serve calculation that will enable better management of the Supplier’s book of business at a portfolio level. When the ability to monitor the plant and equipment capacities associated with current and potential programs is added, the Supplier can make informed decisions that maximize overall margin, perhaps accepting some leakage from favored customers who contribute significantly overall. Or, deciding to exit business that creates issues not justified at the individual or aggregate level.
Increased transparency and availability of data to manage a business relationship is of benefit to the OEM customer and the Supplier, and will contribute to increase stability and profitability for all.