SCOR Supply Chain Benchmarking European Automotive Industry

Transcription

1 Institute for Supply Chain Excellence SCOR Supply Chain Benchmarking 2007 European Automotive Industry SCM Ranking for OEM

2 Table of Contents 1. INTRODUCTION SUPPLY CHAIN OF EUROPE S AUTOMOTIVE INDUSTRY MAIN ROLES IN THE SUPPLY CHAIN UPSTREAM ACTIVITIES DOWNSTREAM ACTIVITIES IMPORTANCE OF GLOBAL SUPPLY NETWORKS EUROPEAN CAR DISTRIBUTION SWOT ANALYSIS TRENDS OF AUTOMOBILE SUPPLY CHAIN CONSOLIDATION CLOSER RELATIONSHIP BETWEEN OEMS AND THEIR SUPPLIERS MODULES AND SYSTEMS IN SUPPLIERS FIRST TIERS INCREASES PRESSURE ON THEIR SUPPLIERS FOR CLOSER COORDINATION GROWTH OF AFTER-SALE MARKET THE EUROPEAN MARKET FOR AUTOMOTIVE SPARE PARTS CONSTRAINTS OF AUTOMOBILE SUPPLY CHAIN MANAGEMENT CUSTOMERS REQUIREMENTS GOVERNMENTS REQUIREMENTS ENVIRONMENTAL REQUIREMENTS TECHNOLOGICAL REQUIREMENTS SCOR METRICS BENCHMARK

3 1. Introduction 1 The European car industry has focused its efforts almost entirely within the boundaries of its domestic market. Since the rise of the Japanese car industry and those of emerging economies such as Malaysia and Korea, the Europeans have found that the levels of competition in the world market have intensified. The main responses of the European producers in the home market, albeit late, have been to reduce costs, shed labor, rationalize plants, raise productivity and improve their relationships with suppliers in attempt to boost 1 efficiency. Outside Europe, in the search of global status, they have sought new markets, entered into joint ventures and opened new plants worldwide. Nonetheless, Europe remains the weakest of the triad car producers. When we compare the European market to its main rivals, we see that its specificities are the mirror image of the limitations of globalization, in the sense that certain segments that are important outside of Europe are marginal there: in the United States light trucks represent nearly one-half of automobile sales (vs. less than 5% in Europe); and mini-cars are very present in Japan (30%). The European consumer expects a model that is different both in terms of design and technical characteristics (with diesel motors being very important and accounting for 43% of the market). As a result, vehicles sold in Europe differ from the ones being sold in the other Triad markets. Moreover, as regards their design capabilities European carmakers continue to benefit from a strong competitive advantage. 1 Based on the work of Donnelly, Mellahi & Morris, 2002 and Lung,

4 In production system terms, many of the concepts that have attained a paradigmatic status in the automobile industry are non-european in origin. This is true for Fordism and for Toyota-ism and can be applied in all areas, ranging from production organization to supplier relationships and product development. Even modular production, a domain ostensibly led by the European automobile industry, draws its inspiration from modes of productive organization in other sectors (notably the computer industry) and is mostly experimented with in other locations (Brazil, Central and Eastern Europe). Even if the emergent productive model is not an original one, the specificities of the practices being implemented raise questions about the two possible foundations for a cooperation-based European model: work organization; and supply relationship management. 2. Supply Chain of Europe s Automotive Industry The automotive industry is characterized by large internationally owned manufacturers and suppliers as well as a number of small and medium sized companies which meet the criteria of component suppliers 2 (Figure 1). 2 Based on Lung,

5 Figure 1: Automotive Supply Chain 2.1 Main roles in the Supply Chain 3 The main players in the automotive supply chain are the following (Humphrey & Memedovic, 2003): OEM s. Increasing scale required to spread costs of vehicle design and branding. Innovation and design capabilities remain critical as first movers in new markets sections can gain important rents while other companies catch up. Some companies, such as Ford, appear to believe that core competences lie more in branding and finance, and they are outsourcing parts of manufacturing. Others, such as Toyota, maintain an emphasis on manufacturing excellence and competence. 3 Based on Humphrey & Memedovic,

6 First-tier suppliers. These are firms, which supply direct to the assemblers. Some of these suppliers have evolved into global megasuppliers. First-tier suppliers require design and innovation capabilities, but their global reach may be more limited. Second-tier suppliers. These firms will often work to designs provided by assemblers. They require process-engineering skills in order to meet cost and flexibility requirements. In addition, the ability to meet quality requirements and obtain quality certification (ISO9000 and increasingly QS9000) is essential for remaining in the market.29 These firms may supply just one market, but there is some evidence of increasing internationalization. Third-tier suppliers. These firms supply basic products. In most cases, only rudimentary engineering skills are required. A study by Leite (1997) of skills and training at different parts of the automotive value chain in Brazil showed that in the third-tier of the component chain, skill levels and investments in training were limited. At this point in the chain, firms compete predominantly on price. Aftermarket. A further important segment of the automotive value chain is the market for replacement parts. This is the sector that many firms in developing countries first moved into, even before local assembly sectors were developed. Nowadays, there is an international trade in aftermarket products. Firms in this section compete predominantly on price. Access to cheaper raw materials and process engineering skills is important. Innovation is not required because designs are copied from the existing components, but reverse engineering capability and competence to translate designs into detailed drawings are important. 2.2 Upstream Activities 4 The supply chain s upstream restructuring has had a direct impact on suppliers operating at tiers below the FTS, who have passed their increasingly stringent OEM demands on to their own suppliers. The consequences of this restructuring included greater design and innovation capabilities and thus new competencies; internationalization (hence investment) to keep up with one s customers; a permanent reduction in prices/cost; inclusion in a logistical chain, etc. Suppliers, often family-run companies, were facing very difficult adaptation 4 Based on Lung,

7 problems even as FTS were choosing an increasingly limited number of companies to satisfy their demands. On one hand, the SMEs found it difficult to develop their technological and organization capabilities 5. They were given an incentive to develop forms of cooperation, creating regroupings so as to be able to offer their customers a global product range. This presupposed the emergence of new and doubly cooperative modes of coordination, both amongst the SME and also with their customers. On the other hand, this restructuring occurred in a context of great financial vulnerability for the SMEs. Capacity and productivity investments infer being able to access financial resources, but this is not always a straightforward proposition and due to their indebtedness SMEs will often suffer from cash flow problems whenever a carmaker postpones its model launches, something that occurs more and more often due to technological (i.e., electronics control), coordination or economic uncertainties. This delays their receipt of the funds that will allow them to pay for the investments they have made. In this sort of environment, rationalization led to an intensive bout of mergers-acquisitions and alliances, deeply changing the landscape of the European automotive system, especially since American (and even Japanese) multinationals were taking advantage of these opportunities to consolidate their presence in Europe. All in all, the main changes in the upstream system corresponded to (1) a reinforced competencies transfer trend, (2) the continuation of suppliers concentration trend, notably via mergers and acquisitions, (3) a generalization of modularization and commonalization strategies, (4) the entry of new actors, and finally (5) diversified activities and actors and a significantly more complex system. At this level, we should be able to verify the transition from a hierarchical sort of industrial organization to one based on networks and involving a more intensive type of integration, as well as generalized interdependency. 2.3 Downstream Activities 6 Automakers have had to rationalize their retail networks, cutting their high distribution costs and finding other arguments to dissuade potential competitors from entering these lines of businesses. The rationalization trend encouraged concentration in the retail sector and diffusion of ICT as companies tried to exploit their polyvalent networks in such a way as to be able to offer customers a whole menu of services - something their competition would find difficult to 5 Based on Chanaron &Lung, Based on Lung,

8 match. For example, one of the manufacturers main advantages is that they can repurchase a used car as part of a new vehicle sale. Based on specific competencies instead of on (rapidly dissipating) regulatory protections, this type of advantage was supposed to drive a reconstruction of brand policies that would in any event have led to a diversification of commercial approaches and an acceptance of the idea that the customer interface role should be shared with other service providers. Note that under the new distribution regime, the direct link to consumers could dissipate, causing leading OEM to lose some understanding of consumer needs, thus necessitating new competencies to avoid such problems. With this in mind, vehicle customization is seen as one way for manufacturers to leverage their advantage, thus reinforcing the pull logic that assumes that the production process first starts when the customer orders his/her vehicle. Instead of having to sell the vehicle products that the OEM were forcing on the market at just any price (a system based on offering discounts, thus further eroding already mediocre profit margins), the distribution network is supposed to intervene in a more active manner. It remains that the difficulties inherent to an ideal built-to-order system, on one hand, and the relatively standardized and foreseeable nature of most customer demand on the other, persuaded the carmakers to give up on their excessively ambitious earlier goals, like being able to deliver vehicles only 3 to 7 days after they were ordered. Where requested, vehicle specification (customization) could become the responsibility of the distribution network, or even of the logistical firms in charge of ensuring the new vehicles transportation from assembly plant to dealer room. With regards to maintenance and repairs, carmaker networks had to cope with the rise of specialized actors, and in particular with the rapid and cheap repair chains that they tried to counter through acquisitions (Midas Europe by Fiat via Magneti Marelli; Kwik-Fit by Ford before it was resold in 2002) or by building their own networks (Renault s launch of the Car Life rapid repair chain). Recent modifications in European automobile distribution regulations are doing away with the two rents that the carmakers and their networks had been enjoying. On one hand, carmaker networks are losing their rents on spare parts, whose sales generated substantial profit margins. On the other hand, the regulatory modifications are also forcing carmakers to compete with independent repair shops on after-sales service and maintenance, despite the fact that vehicles ever-greater electronic content infers specific equipment and competencies and therefore constitutes an entry barrier. 8

9 2.4 Importance of Global Supply Networks 7 Global supply networks are becoming increasingly important in the auto industry. Assemblers and suppliers develop parallel networks across the world. These changes are represented in Figure 2, which presents a model of how relationships would develop if follow design and follow sourcing were applied extensively. For simplicity, this shows just a single product being supplied to one assembler operating in three different countries: the country of the assembler s core operations, and operations in two other locations. Value chain relationships typical of the 1960s are contrasted to those developing as a result of follow design and follow sourcing. The top box of the figure shows how design relationships change. In the 1960s, the assembler would have been responsible for designing a large part of the car. Detailed drawings would have been provided to suppliers in the different locations. The subsidiaries would have received these drawings from the parent company and then have chosen a local supplier. As Helper has noted, it was common practice for assemblers in North America at this time to provide detailed drawings for relatively simple components, and this created a large pool of potential suppliers. The provisions of designs and the breaking up of components into easily made parts also facilitated access for domestic component manufacturers to auto industry value chains. The vertical dotted arrows in the middle box of Figure 2 represent this ease of access. Contracts are allocated separately by the parent company and its subsidiaries. Local companies would be able to compete for contracts from the subsidiary. This pattern of design and contract allocation changes significantly with flows design and flows sourcing. First, the component manufacturer in the core location plays a much more important role. It designs the part or system in conjunction with the assembler (hence the double-headed arrow indicating their relationship). In many cases, the design belongs to the component manufacturer, and it becomes responsible for transferring its design to a partner (subsidiary, affiliate or licensee) in other locations. The horizontal arrows in the top box of Figure 2 indicate this. This has clear consequences for supplier selection, as shown in the middle box. The preferred option for the assembler becomes follow supply. As a result, inclusion in the global supply network becomes essential for survival as a first-tier supplier. Without this, developing country firms cannot obtain designs or the contracts that go with them. The assembler s first preference is to use the follow design provided by the follow source. 7 Based on Humphrey & Memedovic,

10 The bottom box of the figure shows the flow of materials. For the 1960s, the dotted arrows represent these. In each location, the assembler is supplied locally. For the 1990s, lines of supply are similar. The centralization of design and supplier selection does not preclude decentralized production. However, flows of components between countries are likely to be more common. In other words, the major changes in the value chain involve the conditions of access to the value chain and the division of labour between component manufacturers and assemblers. Trade in components will change, but not nearly as dramatically. 10

11 Figure 2: The changing nature of the automobile value chain 11

12 2.5 European car distribution 8 The average European spends 4.7% of his total consumption expenditure, on motor vehicles. The real pattern of consumer expenditure on cars is volatile, with big drops frequently followed by significant rises on the following year. Even though, consumer expenditure increased on average across the EU (Denmark, Germany, Spain, Estonia, France, Hungary, Italy, the Netherlands, Poland, Portugal, Sweden and the UK), within the context of the period, no upwards trend is observed. Since new registrations give us direct information on the demand size for new cars, we present the world s car market in figure 3. The Euro zone accounted for 42% of global car demand in This means the EU continues to be the largest (in terms of volume) market in the automotive industry. More than 14 million new cars were registered all over Europe every year since Based on London Economics,

13 New car registrations 11% 19% 15% 3% 5% 2% 42% 3% USA Europe Brazil India China South Korea Others Japan Figure 3: New car registrations. Source: ACEA New registration of passenger cars in Europe Coef. of 2004 Variation ,50% Source: UNRAE At present the best image of the growth in parc density is the current 492 cars per 1,000 inhabitants in the EU 9 and in total, new car registrations across the EU have increased cumulatively by 7.6% over the period. Various academic researchers have tried to measure the correlation between household income and car demand. Dynamic estimation methods 10 implying that (in the UK) an increase in real income of 10% leads to an increase in the number of vehicles of 3% within about a year, and of 8% in the longer term. This result can be extrapolated to EU. 9 ACEA University of London s Transport Studies Unit for the UK 20th September

14 However in some countries (Spain, France and Sweden) the demand grew higher than household income this suggests that financial methods such as leasings are being adopted in these nations by the new motor vehicles distribution industry. Car distribution in EU is regulated by the BEM (Block Exemption Regulation) which is a new regulation that covers distribution and after sales services of new cars. BEM s aim is to ban on territorial restraints encourage innovation in car distribution, and protect small firms in the On the brand side, aggregate demand is volatile, this reflects the cyclical nature of durable goods (such as cars) Volatility differs across brands, hence new registrations fluctuate considerably for new and small brands e.g. Land Rover, Kia, Daewoo). Large and long established manufacturers (e.g. Ford, Renault) show more stable demands in the analyzed period. Significant growth rates in 2004 are noted for Mini, Lexus, Kia, Daewoo/Chevrolet, Hyundai, Škoda, Jaguar and Land Rover. It is pertinent to note that volatility differs also across countries. In this respect UK, Germany and Italy suffer less volatility in new cars registrations. 14

15 2.6 SWOT Analysis 11 Taking account of all these trends, it is possible to consider an analysis of the strengths, weaknesses; opportunities and threats (SWOT) of the European automotive industry in comparison to its main competitors. Some SWOTs are common to all carmakers. In addition, the effects of some changes are not yet clear, for example, the new block exemption (NBE) for retail and repair. STRENGTHS Competitive market and demanding consumers which drives innovation. Strong lead in many future automotive technologies and in infrastructure communication technologies. Innovative and well-engineered products. Strong lead in the expanding knowledge intensive services sector. Strong presence in the premium and high performance sectors which generate innovation and are highly profitable. Presence in all world markets and a strong presence in emerging ones. Lead in the truck and bus industry. Strong and independent supply base. Supportive public policy framework. OPPORTUNITIES Potential to gain a lead in new vehicle technologies. Potential to gain a lead in traffic management technologies. Very strong presence in the emerging Chinese market. Future economies of scale and innovation through cooperative ventures. Increased demand for trucks and buses from developing world. Potential to develop a customer-oriented retail system linked to the upstream component supply. Export of high value services design and engineering. Export of re-cycling expertise. Potential to gain external economies via strategic networks. Potential to work more closely with the supply industry and the retail sector to provide more consumer orientation and take a market lead. WEAKNESSES Continued difficulty in matching the Japanese companies on quality this threatens market share. Less consumer-oriented than the US industry. A number of (relatively) smaller scale companies, especially among the supply industry vulnerable to take-over. Relative failure to enter the US market because of lack of appropriate products except in the premium segment. Industry has, mostly, been a follower rather than a leader of major trends, e.g., on lean manufacture. Poor industrial relations in some plants and a lack of flexibility in some traditional working practices. THREATS Some companies are in a weak position financially and lose market share. Take-overs could threaten technology lead, especially in the supply industry. Outsourcing strategy may lead to a loss of core competences, especially compared to Japanese manufacturers. New players such as Japanese or US electronics or software companies could threaten the technological lead. Capacity in new markets may be underutilised, exacerbating capacity issue in Europe. Lack of brand loyalty among European consumers. Smaller suppliers, lower in the supply chain, threatened with competition from low cost locations. Difficulties in recruiting the skills needed for the future, especially in the smaller supply companies. 11 Based on European Foundation for the Improvement of Living and Working Conditions,

16 3. Trends of Automobile Supply Chain 12 Over the last decade, the European automobile supply chain has experienced major changes to the organizations, manufacturing and vehicle technology. The main trends are consolidation of the suppliers and OEMs, outsourcing and the growth of the supplier sector, consumer demand and the growth of after-sale market. 3.1 Consolidation -- Plan Sweeping change has been reshaping the automotive industry during the past several years. The movement, paced to a large degree by mergers and acquisitions, continues to transform the sector through consolidation in all areas of the automotive supply chain. While mergers and acquisitions activity taking place as shown in the figure 3.1, persistent consolidation continues to change the industry playing field, particularly among the ranks of the suppliers, industry followers note. The trend of consolidation changes the companies business scale and helps the companies to strengthen their core competencies, realize specialization and concentrate the resources. As to the supply chain management processes, the consolidations simplifies the supply chain networks for all the members since there are less players in this industry and for the customers, particularly for the OEMs and higher tier suppliers, their supplier interfaces are continuously narrowed. By taking this advantage, the companies could manage to slash the costs and increase the margin, which has been already sharply lowered down because of the fierce competition in this industry. 12 Based on European Foundation for the Improvement of Living and Working Conditions, 2004 Based on European Commission,

17 Figure 3.1 Also, OEMs have been expanding into new and global markets, first tier suppliers have had to cultivate or acquire the capability to follow their vehiclemanufacturing customers into those new markets. All of those factors have been pressuring automotive suppliers to become bigger and more diversified players, and many have used mergers and acquisitions to achieve the skills required to remain vital players in the field. At the second tier level there is a continued drive for scale. Since many second tier suppliers are regional companies that provide commodity types of products, the desire for geographic expansion and economies of scale will be the main drivers of mergers and acquisitions activity among those firms. Second tier suppliers are striving to gain engineering and design capabilities to make them less susceptible to obsolescence, such as from contract manufacturing companies. The second tier suppliers are trying to add value from an intellectual standpoint, not only take a design and simply manufacturing or assembly a part but also add value from doing engineering and design work. At the same time, 17

18 the suppliers are bearing the responsibilities to share the risk of investment in new tech, the OEMs are giving up some add value activities to the suppliers. 3.2 Closer Relationship between OEMs and Their Suppliers -- Source 13 The manufacture of automotive parts involves many types of enterprises in different relationships with the manufacturer or assembler of the final product, from subsidiary companies to contractors and subcontractors. The OEMs rely on outsourcing for nearly all its automotive components. Their core activity is assembly, which range from moulding sheet metal to assembling auto bodies, including the painting and final assembly. According to company sources, the subcontracting company in the case being studied here maintains commercial contracts with suppliers. These subcontracted companies in turn buy components from other companies. Although the situation varies from component to component, in some cases there are as many as three levels of subcontracting. Some of the first tier suppliers do only assembly; all the parts used are purchased. A regular flow network has been established between the subcontracting company and the various other companies. These companies maintain close ties with the OEMs. One first tier supplier company serves as a link between the various companies, assuring a steady flow of materials to supply the assembly line and handling transport of the components to the assembly plant. For instance, the Volkswagen plant is located in Palmela, Portugal, and a number of other companies that provide various types of maintenance services and assistance in the painting and treatment of paints are located in the same workplace. The companies are set up from the beginning with this organisational design. Volkswagen's objective was to obtain better technical quality in production through specialisation. Having suppliers nearby allows for greater control over the organisation of production and product quality. The relationships between types of cost are important. In the metrics, we can see that for the suppliers, the Inventory Days of Supply is much shorter in suppliers than in OEMs, because the suppliers are under pressure of their customers in the lead time. As the Value Added Productivity is generally lower in suppliers than in OEMs, the wages in suppliers are lower than those in OEMS, so this is another reason why the OEMs and the higher level tier suppliers are outsourcing -- labour cost aspects. The wages in the OEMs and higher level tier suppliers are higher than the lower level tier suppliers, since the value added productivity is much higher in the OEMs and higher level tier suppliers as we ll measure afterwards. 13 Based on ACEA,

19 3.3 Closer Relationship between Suppliers Source 14 Along with the gains of increased design and supply work, comes the responsibility to deliver more complex products on time and at a fixed price. To meet this objective first tier companies will press their suppliers for closer adherence to ever tighter delivery schedules. There is increased pressure on lower tier suppliers to use EDI. This pressure is greatest (or at least most immediate) between first and second tier suppliers, but there is a need for electronic communication to ripple through the entire supply chain, putting a great deal of pressure on smaller suppliers. The first tiers ask for a full range of interchange - standards based for the predictable, high volume information, and less structured and automated for the lower volume, less predictable data. In essence, the first tier companies will do to others as has been done to them. However, that many second and lower tier companies are relatively small, and do not have the technical expertise or the resources to implement complex systems. Sweeping change that has been reshaping the automotive industry during the past several years continues to pressure both vehicle manufactures and parts suppliers to strengthen their core competencies, realize specialization, operate more efficiently, concentrate the resources, and slash costs. The movement, paced to a large degree by mergers and acquisitions, continues to transform the sector through consolidation in all areas of the auto moti ve sup ply chai n. 14 Based on ESRC, Figure 3.1

20 While mergers and acquisitions activity taking place as shown in the figure 3.1, persistent consolidation continues to change the industry playing field, particularly among the ranks of the suppliers, industry followers note. Also, OEMs have been expanding into new and global markets, first tier suppliers have had to cultivate or acquire the capability to follow their vehicle-manufacturing customers into those new markets. All of those factors have been pressuring automotive suppliers to become bigger and more diversified players, and many have used mergers and acquisitions to achieve the skills required to remain vital players in the field. At the second tier level there is a continued drive for scale. Since many second tier suppliers are regional companies that provide commodity types of products, the desire for geographic expansion and economies of scale will be the main drivers of mergers and acquisitions activity among those firms. Second tier suppliers are striving to gain engineering and design capabilities to make them less susceptible to obsolescence, such as from contract manufacturing companies. The second tier suppliers are trying to add value from an intellectual standpoint, not only take a design and simply manufacturing or assembly a part but also add value from doing engineering and design work. At the same time, the suppliers are bearing the responsibilities to share the risk of investment in new tech, the OEMs are giving up some add value activities to the suppliers, and sometimes, the OEMs have to share suppliers with their competitors, an example is Visteon is the supplier of GM and Ford. 3.2 Closer Relationship between OEMs and Their Suppliers -- Source 15 While much is known about the final assemblers of automobiles, less is known about their supplier which provides up to two-thirds of the components used to assemble the vehicles. The manufacture of automotive parts involves many types of enterprises in different relationships with the manufacturer or assembler of the final product, from subsidiary companies to contractors and subcontractors. While the first tier suppliers concentrate on a specific component - chassis, interior, exterior, electronics, climate control system etc. - each of these are further supplied by second and third tier contractors. The OEMs rely on outsourcing for nearly all its automotive components. Their core activity is assembly, which range from moulding sheet metal to assembling auto bodies, including the painting and final assembly. According to 15 Based on ACEA,

21 company sources, the subcontracting company in the case being studied here maintains commercial contracts with suppliers. These subcontracted companies in turn buy components from other companies. Although the situation varies from component to component, in some cases there are as many as three levels of subcontracting. Some of the first tier suppliers do only assembly; all the parts used are purchased. A regular flow network has been established between the subcontracting company and the various other companies. These companies maintain close ties with the OEMs. One first tier supplier company serves as a link between the various companies, assuring a steady flow of materials to supply the assembly line and handling transport of the components to the assembly plant. For instance, the Volkswagen plant is located in Palmela, Portugal, and a number of other companies that provide various types of maintenance services and assistance in the painting and treatment of paints are located in the same workplace. The companies are set up from the beginning with this organisational design. Volkswagen's objective was to obtain better technical quality in production through specialisation. Having suppliers nearby allows for greater control over the organisation of production and product quality. The relationships between types of cost are important. The reason that the OEMs and high level tier supplier are outsourcing their components production also lies in the labour cost aspects. The wages in the OEMs and higher level tier suppliers are higher than the lower level tier suppliers, since the value added productivity is much higher in the OEMs and higher level tier suppliers as we ll measure afterwards. 3.3 Closer Relationship between Suppliers Source 16 Along with the gains of increased design and supply work, comes the responsibility to deliver more complex products on time and at a fixed price. To meet this objective first tier companies will press their suppliers for closer adherence to ever tighter delivery schedules. There is increased pressure on lower tier suppliers to use EDI. This pressure is greatest (or at least most immediate) between first and second tier suppliers, but there is a need for electronic communication to ripple through the entire supply chain, putting a great deal of pressure on smaller suppliers. The first tiers ask for a full range of interchange - standards based for the predictable, high volume information, and less structured and automated for 16 Based on ESRC,

22 the lower volume, less predictable data. In essence, the first tier companies will do to others as has been done to them. However, that many second and lower tier companies are relatively small, and do not have the technical expertise or the resources to implement complex systems. 3.4 Modules and Systems in Suppliers -- Make 17 Vehicle manufacturers are increasingly demanding that their suppliers deliver larger "chunks" of vehicles - modular automotive components or systems. A module is a series of components combined to form a complete unit delivered directly to the automaker's assembly plant in complete synchronous flow with vehicle production. (Definition from Faurecia) As pressure has been placed on first tier suppliers to provide complete systems or modules, and to become systems integrators that can assemble those modules, suppliers have been required to gain product design, development, and testing capabilities in order to secure lucrative contracts. Mounted directly on vehicles during assembly, the module reduces assembly time and production costs, simplifies logistics, and shortens the vehicle assembly line. For instance, Faurecia assembles its modules, seat, cockpit, door, acoustic package, front-end and exhaust alongside carmakers plants, and their delivery time is generally about 2 hours. The module therefore contributes to greater production flexibility, so that the number of vehicles manufactured corresponds exactly to what the customers want. 3.5 Growth of After-sale Market --Deliver 18 Just as with dealers, service and aftermarket sales have the problem of balancing inventory costs with customer service. Inventory is distributed in different parts of the supply chain - retail locations where sales take place, numerous OEM and independent distributors, and finally, at OEMs and independent aftermarket manufacturers. All members of this supply chain have an interest in reducing inventory while still maintaining a high level of customer satisfaction. To do so, they need to move toward a lean supply business model. As with vehicle customization, this business trend raises the problems of on-demand manufacturing, inventory distribution and timely delivery. In addition, the aftermarket does not have the systems and standards in place to allow single-query checking for availability across different 17 Based on Faurecia ( 18 Based on International Labour Office,

23 sources of supply. There are inconsistencies in part numbers, catalogues are not standardized, and query systems are proprietary. All members of the supply chain already have computerized systems that do a reasonable job of identifying their stock. The primary issue for enterprise integration is how to successfully implement the new systems as they arrive. The implementation challenge extends beyond technology, into the realm of business process. Members of the supply chain (some of whom compete with each other) must be willing to exchange information on parts availability. 3.6 The European market for automotive spare parts The spare parts supply chain involves several actors, from one end, the parts manufacturers and, to the other end, final customers, including car owners and repairers. Between both ends there is a more or less complex set of levels of wholesalers. They act as accumulators so that final consumers can access different spare parts from diverse suppliers. Spare parts production Vehicle manufacturers (VMs); Original equipment suppliers (OES) they may source from VM and independent channels. Indep. equipment suppliers (IES) that supply only to aftermarket. However they have little or no access to VM s parts or the authorized repairers. Spare parts distribution Parts are delivered through VM s channel or indep. channels such as repair services. VM in fact produce only 20% of the parts they supply to OES the rest is sourced. A strong player entering the spare parts scene is the independent wholesalers that sell directly to the after market component manufacturer, this economic actor has taken over 45% 19 of the market share the rest is in the hands of carmakers. The later have aggressively invested in IT and logistics systems to defend their 19 Sorce: Environmental Compliance for Automotive Recycling. CHALMER P (ECAR) 23

24 traditional spare parts market, as a matter of fact according to estimations 20 their gross margin on this activity is up to 65%. This margin is, however extremely volatile and accounts for a small part of the VM s total turn over. EU Spare parts market structure 4. Constraints of Automobile Supply Chain Management 21 The automobile supply chain management faced the following constraints, which lie in the customers requirements, governments requirements, and environmental requirements aspects. 4.1 Customers Requirements With the technological development, the fierce competition in the market place and the emphases to humanity, the customers requirements get higher and higher in the automotive industry. First of all, the customers are always asking for lower price and energy-saving cars. At the same time, customers want the cars to be more safe and reliable. Since the PricewaterhouseCoopers, Consultancy data base. 21 Based on Parker & McGinity, 2006 Based on European Foundation for the Improvement of Living and Working Conditions,

25 component s production is outsourced, the OEMs as well as their suppliers must be more responsible for the quality-control and the reverse logistics became another net work. What s more, customers want more sophisticated and customized cars with some additional settings and also on-time delivery or even a 3-day car. One objective of the industry is to move toward mass customization, a system wherein buyers configure vehicles to their liking, and rely on an efficient supply chain to deliver the vehicle in a reasonable amount of time. The current system of mass production coupled with inventory stocking will not go away. Market conditions and production efficiencies will keep mass production an acceptable business model for the foreseeable future. A system is needed, which will let potential customers obtain information on the availability of uniquely configured products. the system must link to dealers' inventory, OEM's production schedule and the OEM's production capability. In addition to availability, the system must generate pricing information on a much wider range of products than do existing pricing systems. Mass customization will only work if the entire supply chain is characterized by an efficient two-way flow of information from top to bottom. When information flow is high, the required technology is standards based EDI. For members of the chain where information flow is low, EDI technology is highly recommended. 4.2 Governments Requirements Safety and Recall: The industry is pursuing several measures in the interests of both passive safety, to protect occupants when an accident occurs, and active safety, designed to avoid accidents altogether. And the legislation also requires that the callback of the cars with serious safety. 4.3 Environmental Constraints Recycling of ELV: The ELV (End-of-Life Vehicles) regulates the takeback and recycling of used cars, costing the vehicle manufacturer about 4,000 EUR for a single car, and this amount of money is close to the average return on a new car sale. (As researched by University of St.Gallen) 25

26 4.4 Technological Requirements Increased engineering capabilities are required today in order to limit the CO 2 emissions emitted from new vehicles. In fact the Euro 5 regulation, currently under discussion by the European Parliament would tighten emission limits of particles and of NOx for new cars and vans sold in the EU market. For example, the Euro 5 regulation calls for an 80% cut in the emission limit for particulate matter from diesel cars. 22 GPS-based technologies since cars with GPS receivers and short-range wireless transceivers should be able to tell one another where they are, helping drivers avoid collisions and determine who has the right of way at an intersection. May be robotic cars be a solution to road rage. The Swedish government hopes to make warning systems mandatory for all cars by Car designers are trying to put more complex car modules to put new materials stressing the use polymers instead of steel. The use of materials engineering, should provide the industry with new shapes, durable, cost-effective and lightweight plastics. 24 Increased application of biofuels and technical options to reduce fuel consumption at the vehicle level. 4.5 Economical Constraints A continued economic recession and continuous loss of consumer confidence in the car market, caused by rising fuel prices, can trigger a decline in demand for automobiles over a short period of time. Volatility on demand caused by many factors, including increasingly fierce competition, short-term fluctuations in demand from underlying economic conditions, changes in import regulations, shortages of certain supplies and high material prices. Overcapacity within the industry has increased and will likely continue to increase if the economic slowdown continues Based on International economy fuel policies. WALSH M ( 23 Based on Edge of networks reviews December 2005 ( 24 PONGRATZ E, University of Oulu, Department of process and environmental engineering Based on Honda,2006 ( Investors Annual report

27 OEM s in Europe such as DaimlerChrysler announced the development of a deeper relationship with a select group of key suppliers. An improved model of co-operation with suppliers called Highly Integrated Partnership Organizations ("HI-POs"). The deterioration of the financial condition of the supply base and certain OEMs due to volatility of steel, resin and other commodity prices have led, since the start of 2004, 35 parts makers have filed for bankruptcy protection. 26 increases in gas prices prompting consumers to purchase passenger cars instead of large SUVs. The global automotive industry is cyclical and consumer demand for automobiles is sensitive to changes in certain economic and political conditions, including interest rates and international conflicts (including acts of terrorism). Economic instability; trade, customs and tax risks; currency exchange rates; currency controls 5. SCOR Metrics 27 The metrics used in the study is based on the Supply Chain Operation Reference-model 8.0 of Supply Chain Council. Level One Metrics: Cost reduction: As analyzed in the constraints, the fierce competition forced the companies to cut their costs. Cost reduction is also the measure of the removal of the non-value added processes and the increase of efficiency. To measure the effectiveness in this, we chose: %COGS = (Ending Inventory of Last Accounting Period + Cost of Goods Sold Ending Inventory of This Accounting Period) / Sales Revenue Cost of goods sold is an expense of the companies who sell inventory that is an asset until it is sold. To matching an expense with the revenue generated as a result of that expense, to get rid of the influence of the inventory value and to make the metrics more comparable among these companies, we calculate the percentages. Cash-to-Cash Cycle Time = Inventory Days of Supply + Days Sales Outstanding Days Payable Outstanding 26 Based on Magna, Based on SCOR Model

28 The market environment generally gives higher level tiers more negotiation power in the supply chain. To measure the efficiency in making use of the current assets, we apply Cash-to-Cash Cycle Time, since the longer the cash-to-cash cycle, the more current assets/working capital needed related to current liabilities and it takes longer to convert inventories and receivables into cash. Level Two Metrics: Inventory days of supply = Gross Value of Inventory / (Annual COGS / 365) This metrics indicates the timing curacy of the plan of sourcing, and the best practice is to send the received supply directly to the working-in-process, JIT delivery. But actually, in the real automotive industry, it is highly recommended to hold some inventory as ABC suggested. Assets turn using net assets = Total Gross Product Revenue / Total Net Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue the higher the number the better. This metrics also indicates the different sectors pricing strategies, since companies with low profit margins tend to have high asset turnover those with high profit margins have low asset turnover. Financial Metrics: Value Added Productivity = Total Revenue / Number of Employees In Europe, the labor cost is relatively high, so the measurement of the value added productivity is an important financial metrics. As afore-presumed the value added productivity is one of the reasons of outsourcing because of the different wages, we use this metrics to analyze this trends in a quantitive way. Business growth = Total Revenue of Last Accounting Period / Total Revenue of This Accounting Period 1 In the highly competitive market, the OEMs and suppliers are fighting for economic well-being or even survival to some low level tier suppliers, so the measurement of the business growth is more than worthy. Level Three Metrics: Days sales outstanding = Accounts Receivable / (Total Gross Annual Material Purchases / 365) Days payable outstanding = Accounts Payable / (Total Gross Annual Material Purchases / 365) 28

29 These two metrics measures the length of time from purchasing materials, labor and/or conversion resources /selling products or service until cash payments must be made /received expressed in days. We use these two metrics to analyze the characteristics of the payment terms in the supply chain, and also to prove our presumption about the power since each company wants to make full use of other company s resources. Autonomy financier The ratio of financial autonomy (net debts with regard to stockholders' equities) gives an indication onto the level of debts of the company. Superior to one, he can translate an appeal too important for the loan. 6. Benchmark Our Panel We focused on the OEM (Original equipment manufacturer) and main suppliers of OEM. Our panel is as follow: For OEM s : OEM Passengers cars produced in the World Passengers cars produced in the Europe Volkswagen PSA Ford GM Renault Fiat DaimlerChrysler Toyota BMW Nissan Honda TOTAL

30 Our panel compared to the automobile market : Number of passenger cars produced % of our panel In the World % In Europe % In western Europe % Of the 45 million passenger cars produced in the world in 2005, 39% were produced in Europe and 32% in Western Europe. (Source ACEA 2006). 30

31 For suppliers: Market Share in Europe Turnover for Europe Siemens 56,20% 42,244 Bosch 68,40% 27,351 Thyssenkrupp 62,60% 24,628 Faurecia 84,80% 9,09 Continental 71% 8,944 Johnson controls 38,50% 8,218 Magna International 47,30% 7,857 Michelin 49,20% 7,38 ZF 71,80% 7,107 Valeo 70% 6,607 Delphi 25,50% 5,867 Lear 39% 5,317 TRW 55% 5,311 Visteon 21% 3,15 Autoliv 57,20% 2,825 Denso 13,10% 2,714 GKN 51% 2,654 ArvinMeritor 39,40% 2,544 Federal Mogul 45% 2,233 Dana 19,60% 1,427 Aisin Seiki 7,60% 1,029 Automobile Sector Analysis using SCOR Metrics : We chose a Panel of companies in order to represent a significant part of the European Market in terms of volume. In this section, using SCOR metrics and business indicators, we measure the performance of different European car Manufactures and Suppliers. 31

32 Business Growth Business Growth is useful to see the evolution of the market in terms of Turnover. Automobile Manufacturers: Business Growth OEM 15,00% 13,50% 10,00% 9% 5,00% 4,64% 5% ,00% -5,00% BIC Advantage Parity-1% -1,73% If we compare the figures of the 2006 Benchmark to the 2005, we can see that for the majority of the car manufacturers, there is a slight decrease compared to the previous benchmark. In general, the market in Europe is stabilizing. This is due to a low renewal rate of cars and the market is quite saturated. Also, the increase in the price of petrol has also slowed down the demand for new cars. GM has -2% growth rate, which is not a surprise, the company having severe difficulties. Japanese manufacturer are having very good growth rates, with Nissan and Toyota increasing by 10% and 7% their revenues. This is because Japanese OEM s have really adapted their products to the European market and have a very good image of quality. 32