Supplier bankruptcies make headlines, but Kim Korth, president of Grand Rapids, Mich.-based consulting firm IRN Inc., said they aren't the whole story.
``You've got 25 percent of this industry that dominates 60-70 percent of the profit. The key is to figure out how you're going to be in that 25 percent,'' she said during an Aug. 8 interview at the auto industry's Management Briefing Seminars in Traverse City. ``And the industry is big enough. We're not talking about five or 10 companies that are doing well; you're talking about hundreds of companies.''
Korth said there is a new supplier model emerging, focusing on flexibility and making key parts that few others make.
Question: So they may just make something like a moving cup holder?
Korth: Not even the entire cup holder sometimes, just a connection inside the cup holder that the automaker wants.
Q: Beyond finding niche products, what should suppliers do?
Korth: Diversify within a customer. There are going to be good programs within Ford and there are going to be lousy programs in Ford. The same for Chrysler and GM. First and foremost, suppliers need to be more proactive in terms of which programs they want to be on, and which programs are going to be a lot more volatile in terms of production.
Everybody and their brother chases the large-volume programs, the F-150 [pickup truck] or the GMT900 [General Motors Corp.'s large truck platform]. Why do they do that? Because in most instances their companies are still set up on a mass-production model. They think, ``I make money in large volumes, it's steady, it's going to be there for a long time.'' That world is increasingly going away. And even if you're successful getting on those programs, the bid process you're going through - because everybody and his brother is going after that - unless you truly are the lowest-cost producer, your ability to make money on that program is slim.
So where are you likely to make the most amount of money? You're going to make it on niche vehicles, and you're going to make it on niche vehicles that leverage new technologies, and that appreciate engineering support. That's the good news. The bad news is that it's shorter life cycles and smaller volumes. But it's a fundamentally different business model than most suppliers have.
Q: Should suppliers avoid big-volume contracts?
Korth: It's not that strong suppliers are afraid to chase big programs, but they do it at a price point that they are comfortable with. If everyone else is bidding 15 percent below them, and they know they can't make money at that, they'll walk away.
Q: What kinds of skills are needed to follow that new model?
Korth: The more flexible you are, in terms of the ability to redeploy resources - in flexible manufacturing, capacity, moving equipment around - the less you will care how much the outside environment changes.
I visited one of the plants [of wheel trim supplier Florida Production Engineering Inc.] last year in Ohio, and their average setup time is five minutes. How do they do that? They commonized all the lines. They commonized the water; they have everything on wheels. When they change one design from another, their ability is then to get to where they can do two, three, four changes a day and not be hit by setup times. Not having the issue of setup times enables you to take on work and make money, as opposed to being less profitable.
That's really the core of the Toyota Production System. It doesn't have anything to do with capital, it's integrating your systems all the way through your company, and that's a daunting thing for a lot of suppliers.
Q: What are the rewards for that flexibility?
Korth: That's where the profit is. And that's where you begin to find suppliers who have done well. We have a number of suppliers we have worked with in the past few years who have had record sales and profits, and that's not supposed to happen right now, according to conventional wisdom. So how did they get there? They're highly diversified. They're very flexible. They're pushing lean. They're looking at pricing.
From a good news standpoint, particularly for more focused, non-Tier 1 suppliers, the industry is coming back to the strategic component, process-oriented supplier.