What is the impact of Cost Cutting among suppliers? Automotive News World Congress April 21, 2005.

What is the impact of Cost Cutting among

suppliers? Automotive News World Congress

April 21, 2005

Questions to be addressedQuestions to be addressed

1. Is China truly as cost competitive as is said, or are there hidden costs that erode savings?

2. How has the push towards lower cost product affected suppliers?

Traditional Elements of CostTraditional Elements of Cost

Element

Labor

Material

Overhead

• Tooling/Equipment

Support Costs

Working Capital

Other

Traditional Elements of Elements of CostTraditional Elements of Elements of Cost

Element

Labor

Material

Overhead

• Tooling/Equipment

Support Costs

Working Capital

Other

Potential 20:1 savings

Motivated and educated workforce

Additional labor costs – fringe and bonuses

Extensive Training and development requirements.

Traditional Elements of Elements of CostTraditional Elements of Elements of Cost

Element

Labor

Material

Overhead

• Tooling/Equipment

Support Costs

Working Capital

Other

Savings from high labor input

Availability of material may be limited or not competitive now

Traditional Elements of Elements of CostTraditional Elements of Elements of Cost

Element

Labor

Material

Overhead

• Tooling/Equipment

Support Costs

Working Capital

Other

Savings

Salaried Workforce

Skilled Technical People

Facility costs

Tooling and equipment

Costs

Energy, inefficiencies

Traditional Elements of Elements of CostTraditional Elements of Elements of Cost

Element

Labor

Material

Overhead

• Tooling/Equipment

Support Costs

Working Capital

Other

Up to 90% savings

Immediate savings to program

Substantial support and follow-up.

Traditional Elements of Elements of CostTraditional Elements of Elements of Cost

Element

Labor

Material

Overhead

• Tooling/Equipment

Support Costs

Working Capital

Other

Varying degrees of Supplier development

Considerable support costs – time and resources

Extra logisticsFreight

Ground transportation

Repackaging

Washing

Traditional Elements of Elements of CostTraditional Elements of Elements of Cost

Element

Labor

Material

Overhead

• Tooling/Equipment

Support Costs

Working Capital

Other

Payment terms

Up-front program costs

Prototypes

Tooling

Program development

Increased supply chain inventory

Traditional Elements of Elements of CostTraditional Elements of Elements of Cost

Element

Labor

Material

Overhead

• Tooling/Equipment

Support Costs

Working Capital

Other

Facility/Equipment Relocation costs

Trailing liabilities

Decreased asset utilization

Effects to current home country supply base

Risk

Commodity PriceHigher Lower

DevelopedDeveloped DevelopingDeveloping Under-developedUnder-developed

Supplier Development StagesSupplier Development Stages

RiskHigher Lower

Development Support HigherLower

How to define the opportunity for Cost Savings?How to define the opportunity for Cost Savings?

Not all commodities appropriate

Considerations

Size and Mass

Raw material availability

Manufacturing process

Volume

Total Purchasing Mass

Effect of Cost Cutting to SuppliersEffect of Cost Cutting to Suppliers

Forcing changes to the business model

Changes to the value chain

What could be purchased vs. What is purchased.

Move up the Bill of Material

Re-evaluate Core Processes

Develop Integrated Strategies

Moving up the Bill of MaterialMoving up the Bill of Material

Final Assembly

Sub-assemblies• Manufactured Components

– Final component manufacturing

» Raw materials

Add Labor content to the Material Purchased from China

An Integrated StrategyAn Integrated Strategy

Purchase of Components only

Emphasis is to reduce product cost from the existing supply base

Strategic Sourcing

Changes to the Business Model and a re-evaluation of the value chain

Integrated China Sourcing Strategy

Consideration of China’s domestic market potential

Integrated Supply chain and Global Manufacturing Strategies

What is the Impact of Cost Cutting?What is the Impact of Cost Cutting?

Relocation of the Supply Base

Changes to the Business Models

Regional and global supply models

Greater role for supplier support and development

New Partnerships and Relationships

Do Chinese Factories really Produce the Cheapest Parts?Do Chinese Factories really Produce the Cheapest Parts?

The entire value chain must be addressed

Labor costs offset by additional factors

These factors may be only temporary

Must move to an integrated strategy

Yes…….But,……..

Thank You!