Automotive

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Automotive Parts Suppliers Use Site Selection to Meet OEM Demands

31 Dec, 2003

By: Robert M. Ady

If the intensity of global competition can be epitomized by one industry group, it is the automobile industry. Trying to gain, or regain, market share worldwide, while simultaneously introducing new car concepts and new manufacturing technologies at a record pace, is the environment of today’s OEMs.

To meet competition, OEMs have been siting new $500 million-plus assembly facilities almost as quickly as Starbucks has been opening coffee shops. Some of the newest ones and some still on the drawing boards include:

Hyundai-Hope Hull, AL- $1 Billion
Mercedes-Vance, AL-$600 Million Expansion
Toyota-San Antonio, TX-$800 Million
Honda-Lincoln, AL-$500 Million Expansion
Peugeot-Europe-$TBA
Volkswagen-TBA, MEX-$2 Billion
Toyota-Tijuana, MEX- $500 Million
Hyundai-Zilina, Slovakia- $872 Million
Ford-Shanghai, China- $500-plus Million

In addition, OEMs are expecting a much higher level of supplier support and participation than ever before. As OEMs concentrate more and more on marketing, design, and car assembly activities, parts suppliers are being looked to for direct assistance in manufacturing, supply chain management and information integration.

What is evolving is a much closer relationship between OEMs and their suppliers which will have profound effects on how suppliers operate, how they interface with car companies, and how and where they site facilities. As part of this new relationship, suppliers have been given a number of challenges from OEMs. These include reductions in the cost of parts, shorter-term contracts, assembly modularization, supply chain restructuring, and information integration through e-commerce acceptance.

These new supplier responsibilities are driving the need for new supplier manufacturing facilities worldwide. In many cases, existing facilities suffer from disorientation to new OEM assembly plants, inflexible work space that cannot accommodate new cutting edge equipment, inability to reduce costs, or work forces that are steeped in traditional manufacturing skills.

Given these constraints, parts suppliers are looking at new locations to meet OEM needs. In addition, because of the speed of change being pushed back to suppliers, many have decided that retrofitting existing facilities is too expensive and too time-consuming to undertake. It is better to “start over” and put all the state-of the-art pieces together at a new location. Playing into this strategy is the low cost of money in recent years and the level of incentives that countries, states, and local governments are providing.

To provide some basic understanding of the impact of the new supplier responsibilities on operating specifications and site selection, it is necessary to look back only a little over one decade ago to see the implications.

Defining the Site Selection Challenge

Translating OEM requirements into supplier action creates a number of counterbalancing alternatives that directly affect site selection for supplier facility locations. Some of the most important OEM requirements affecting the location of parts supplier facilities include supplier proximity to their new assembly plants, significant reductions in the cost of parts, technological/quality improvement requirements, and the need for quick response from the suppliers. In order to better understand the location implications of each of these requirements, it is necessary to understand the strategic dynamics and tradeoffs involved.

Location Strategies Associated with OEM Proximity Requirements

Many OEMs have implied or written requirements that their suppliers be located within one or two hours trucking time from their assembly plants. This allows the OEMs to eliminate their parts inventory by using suppliers’ facilities or the back of the supplier’s truck.

This requirement presents two counterbalancing location options for parts suppliers. Selecting a location fulfilling the proximity need will frequently prevent the supplier from servicing other OEMs. And with shorter-term contracts and aggressive competitors, suppliers are hesitant to build expensive new facilities to serve a single OEM.

The proximity requirement also presents another complicating location issue for suppliers, the problem of “congestion”. That is, with a multitude of parts suppliers servicing an OEM assembly plant, location near the plant can create labor supply and labor quality issues. How many towns within the required timeframe can support supplier facilities that may employ as many as 75, 100 or more people?

This is a work in progress in Alabama, where Hyundai’s suppliers are clustering around Hope Hull to meet Hyundai’s proximity requirement. This strategy can create labor shortages, labor rate rigidity, high turnover, and the possibility of unionization.

Location Strategies Associated With OEM Cost Reduction Requirements

Major automotive companies have been pushing the need for cost reduction to suppliers. With only a few very large customers available, suppliers must comply.

The common consensus by suppliers is that this requirement can be met by either (1) locating/joint venturing outside the U.S. and/or (2) increasing productivity through new equipment and/or systems. These options present suppliers with another facility location conundrum---do we move production out of the U.S., or do we build a new state-of-the-art manufacturing facility near OEMs in the U.S.?

The present automotive landscape in Mexico suggests that in the past, many suppliers have opted for cost reductions through facility siting there. Well over 100 parts suppliers now operate in Mexico including some of the largest—Bosch, Budd, Delphi, American Axle, Denso, TRW Automotive, ITT Automotive, and Magna Seating Systems. Prompted by NAFTA and the ability to significantly reduce labor costs while being near a growing Mexican car market and in reasonable proximity to U.S. assembly plants, suppliers have flocked southward.

Now, many of these suppliers are leaving Mexico as well as the U.S. for the Far East, notably China, where significant cost reductions are possible and a vast new market awaits. The current level of location activity by parts suppliers into China is similar to the migration of companies from Northern cities to Southern cities in the U.S. during the 1960’s and early 1970’s.

Obviously, the alternative to foreign expansion is increasing efficiency and reducing costs through more efficient facilities and equipment in the U.S. Because of the large investment that this alternative usually requires, some suppliers are consolidating and/or joint venturing with other vendors in an effort to spread risk and increase available capital.

Location Strategies Associated With OEM Technology/Quality Requirements

Simultaneously, with cost reduction is the need for suppliers to meet the most demanding quality standards and to convert OEMs design and engineering concepts into efficientmanufacturing capabilities. A brief list of some of the car concepts of the future underlines how daunting will be this task.

Just focusing on 2004 model vehicles indicates that the increasingly sophisticated equipment necessary to produce the high-tech parts are still on the drawing boards. Many auto manufactures are introducing new vehicles or restyled models with high-tech and multifunctional accessories, including climate controlled glove boxes, spoilers that convert into bike and ski racks, electronically controlled mirrors, and keyless, remote entry. Parts and accessories manufacturers that do not upgrade capabilities to produce high-tech equipment will lose sales opportunities.

Looking to future car concept features only exacerbates the difficulties. New manufacturing technologies not only require expensive investment in new equipment but new and expensive investment in work force training.

Many manufacturers require their suppliers to comply with QS9000 (quality control classification), a manufacturing guide. QS9000 demands evidence of continuous quality improvement, and is therefore more stringent than the better known ISO9000.

Again, counterbalancing strategic considerations come into play. Should sizeable investments in cutting edge equipment be made to satisfy the requirements of only one or two OEM customers? In addition to quality improvement, can the new investment reduce operating costs through greater efficiency? How does the need for skilled technicians match with areas of potential operating cost reductions?

Location Strategies Associated With OEM Timing Requirements

As with all of the requirements noted above, speed of implementation is mandatory. For OEMs to get, and keep, the jump on competitors and respond to ever quickening changes in the tastes of car purchasers, greater changes must be made ever faster. For parts suppliers, it comes down to complex decision making of the greatest magnitude in the shortest amount of time.

In today’s environment, the luxury of two or three years to bring a parts supplier plant on-stream is no longer possible. When these plants are planned in concert with an OEM assembly plant startup, some of the time pressures are alleviated. Otherwise, time compaction is the driver. Frequently, this approach can lead to an imperfect site selection at best and an operating disaster at worst. How can parts suppliers balance speed with deliberate, thoughtful analysis of location strategies?

Putting Together the Site Selection Pieces

In order to optimize through site selection all of the sometimes disparate OEM requirements for parts suppliers, two over-riding scenarios should be considered. First, site selection must focus on providing maximum flexibility for meeting the sometimes conflicting, sometimes counterbalancing, location strategies. Complementing this scenario, and equally as important, suppliers should undertake simultaneous investigation of a number of sites. In fact, consideration should be given to inventorying additional properties BEFORE they are actually needed. The advanced purchase of one, two or more sites is a small price to pay in order to greatly reduce OEM response time and to further increase operating flexibility. Putting these pieces together provides a parts supplier location strategy that can best accommodate the most demanding of requirements by OEMs.

Maximizing Flexibility Site Considerations

One of the most important considerations for maximizing flexibility to accommodate various strategy outcomes is to be certain to purchase a site considerably larger than typically needed. This allows for implementing a number of strategic options. These include increased latitude in plant design and layout which might be required to accommodate new state-of-the-art equipment and improved material flow within the facility. In addition, the extra land could allow for consolidation of operations with other parts suppliers on the site, and/or provide room for the introduction of new car concepts in the future. If 10 to 20acres seems adequate given present needs, parts suppliers should strongly consider 50 to 100 acres to account for future uncertainties.

Similarly, a site should be selected with utility infrastructure in-place to meet the most demanding of future needs. Only consider sites with guaranteed (as much as can be determined) electric power supply and reliability at reasonable rates. Generally, every additional dollar in equipment investment increases power needs. In order to meet uncertain future operating requirements, it is necessary to assure power capabilities.

Finally, any site purchased must be ready-to-go now. To accept less is to abrogate a prime tenet for meeting OEM requirements---speed of implementation.

Work Force Considerations

In order to achieve work force flexibility, any property selected should be near superior training facilities. Even utilizing such concepts as distance learning and regimented employee relocations, the work place demanded by future innovations will require a continuous upgrading and multiplying of worker capabilities. The most cost effective way to achieve this degree of training is through partnership with local vocational/technical schools and utilizing training programs provided by most states for little or no cost.

If a potential OEM customer requires a parts supplier to locate within a certain distance of its assembly plant, care must be taken to eliminate, or at least minimize, the impact of other parts suppliers locating in the same area to meet the OEM requirement. In this situation care must be taken to identify independent labor sheds where outside influences will be minimized. This might require selecting a location off the interstate highway where the local labor market is more “self-contained”. A community that has experienced recent layoffs offers a unique opportunity to staff a new parts plant even if the former skills are not directly relevant to the proposed operation.

Multiplying Alternatives

Selecting a single site that can meet all the needs of an OEM is most difficult and, eventually, tradeoffs will have to be made. Selection of a single site that can meet the OEM requirements of cost minimization, technological innovation, and proximity to assembly plants is unrealistic. In most cases, this triumvirate of needs is mutually exclusive as it relates to site selection. Meeting the needs of one of these requirements usually precludes meeting the needs of the others.

Cost minimization might suggest location in a low cost, foreign country or a smaller, rural community in the U.S. However, to meet the technological criteria suggests an environment where creative, multi-skilled people live or where they can be easily transferred from other company locations.

OEMs desire supplier proximity to their assembly plants in order to minimize supply chain interruptions. Low cost foreign locations and even smaller rural communities in the U.S. do not have the transport capabilities to need this requirement. Companies such as BMW manufacture vehicles which are customized in many respects, not only in consumer preferences but also taillights, exhaust systems and other features based on numerous countries they supply. In these cases, it is likely that a supplier base must be in the U.S. to allow for complex just-in-time delivery and assembly operations.

So, how can parts suppliers reconcile these differences? The recommended approach is to purchase, or at least control, a number of sites, each one satisfying a specific OEM objective. The exception would be if the supplier is considering a foreign location, the joint venturing process might take the place of an actual site purchase.

Using the multiple site approach, the parts supplier might opt for selecting individual sites, one where lowest costs can be achieved, one that meets skilled work force requirements, and another near OEM plants. As the operating strategy starts to codify, and the relative importance of operating criteria is evaluated, the disparate alternative locations can be prioritized. The inventoried site that achieves key goals for the new facility is the site that should be selected.

Considering new supplier parts operations can cost upwards of $60 million, the price of purchasing one, two, or even three individual sites is miniscule. Further, the existence of these sites provides significant additional leverage when negotiating location incentives at the national, state, and local level.

It is also important to note that by controlling/owning a number of sites in advance of any final strategy, the timeframe for startup can be significantly reduced. Instead of a site search starting after a final strategy is determined, the search will already be completed and construction can begin on the preferred site. This gives the parts supplier an advantage in meeting OEM requirements.

In today’s competitive market, parts suppliers need every competitive advantage they can achieve, whether it’s cost minimization, technological innovation, supply chain management or the ability to quickly meet OEM needs. Site selection plays an important role in determining the winners from the losers. Developing a site selection strategy to maximize opportunities will prepare suppliers for the challenges of tomorrow!

 

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