Our 11-year US bull market has come to a screeching halt while global stock markets experience extreme daily volatility. Globally, countries such as Germany, France and Italy have put daily life on hold to slow the spread of Coronavirus (COVID-19). The US has largely followed suit closing schools, canceling gatherings and limiting travel.
The resulting rapid deceleration of global spending will reduce US auto sales. The question is by how much and for how long? Complicating matters, there’s often a lag in our economic reality on the ground versus available data (e.g., US GDP growth estimates), industry volume projections and OEM production forecasts; however, early data is starting to provide clarity. On March 13th, Oxford, England based consultancy LMC Automotive revised their annual US light vehicle sales forecast 2% lower to 16.5 million units. The last economic slowdown taught us how swiftly the economy can shift directions ahead of supporting broad industry reports.
Automotive suppliers that avoided potholes during our last bumpy ride did so by purposefully making early adjustments to their operations, even with limited data. These leaders better positioned their organizations to be profitable at lower volumes so they could thrive during both the bad and good times. As the number of hurdles for the US automotive market continues to stack up daily, the time to act is now to reposition your organization to thrive in our new dynamic times.
If you find yourself needing to reduce your current spend to optimize your near-term cash flow, below is a short list of some of the top areas to review, along with estimated best practice cost savings percentages, payback periods and returns on investments.
10 Ideas to Improve Near-Term Cash Flow at Automotive Suppliers
1. Reduce Inventory Minimum Levels
Developing a Plan for Every Part (PFEP) and then evaluating low supply risk, high dollar impact part numbers to reduce minimum inventory and buffer stock levels can provide a quick jolt to cash flow. Inventory and buffer stock levels should be evaluated weekly during volatile economic periods to avoid both obsolescence and downtime charges. Easy to implement Automated PFEP cloud software provides a valuable alternative to manually modeling, maintaining and reporting data in Microsoft Excel. It also offers an invaluable real-time collaboration sandbox for teams working remotely due to the current Coronavirus crisis.
Best practice project baseline results should be expected as follows: cost savings of 0-22%, return on investment of 0.5-1x and timeline of 7 days.
2. Reduce Indirect Spend Through Automation
Indirect spend, specifically office supplies, maintenance repair and operations (MRO) and service parts have historically proved difficult for supply management professionals to consolidate and reduce spend. Today, many leading automotive suppliers are using new smartphone software applications (mobile apps) to better control rogue spending while ensuring the ideal supply quantity, lowest cost and preferred supplier are realized. Further, newer indirect mobile apps can be supported by technology-enabled managed services firms that execute purchases, and track and trace deliveries, not only further lowering your costs, but also improving the procurement experience for internal stakeholders.
Best practice project baseline results should be expected as follows: cost savings of 5-37%, return on investment of 1-2x and timeline of 30 days.
3. Optimize Production Parts Spend
When the economy is humming along, poorly performing suppliers tend to be ignored as larger more impactful, strategic supplier relationships are prioritized. High-cost and poorly-performing suppliers should quickly be identified, optimized and/or re-sourced as the economy turns south. Resourcing poor performing suppliers represents a fresh start where cost savings can be achieved by partnering with current supply partners to strengthen their business or creative new suppliers that can remove waste from the value chain.
Best practice project baseline results should be expected as follows: cost savings of 5-30%, return on investment of 1-2x and timeline of 30-90 days.
4. Consolidate Logistics Network
Mapping your current facility footprint can uncover location and route consolidation opportunities for production and inventory when simultaneously considering customers, suppliers, ports, warehouses and partners. As the economy, industry and OEMs change, continuous adjustments can enable cost savings. “Rapid 1-2 week studies enable more rapid changes without the risk of becoming obsolete by unforeseen market changes,” adds Steve Johanson, President of Traverse City, Michigan based network design software company Starboard.
Best practice project baseline results should be expected as follows: cost savings of 10-30%, return on investment of 1-3x and timeline of 30-90 days.
5. Optimize Services Spend
Services spend, especially for engineering, design and testing (ED&T), consulting and staffing can vary widely. If you have many services suppliers, it’s likely driven by a lack of geographical people capacity at your preferred suppliers. There are many traditional strategies to realizing cost savings (e.g., negotiations, reverse e-auction, bundling opportunities) but during market volatility, discussing your goal to reduce costs and offering supply partners attractive levers to optimize their costs such as longer-term contracts and/or the ability to use technology to deliver work, can enable you to meet your cost reduction goal while emboldening your partnerships, and enhance your cash flow.
Best practice project baseline results should be expected as follows: cost savings of 5-50%, return on investment of 1-5x and timeline of 30 days.
6. Partner with Services Firms to Execute Projects
In good times, our backlog of continuous improvement initiatives tends to build up. Invite consulting firms in to review your data, at no cost to you, and recommend specific projects. Prioritize firms that support day-to-day supply chain operations, can implement and manage projects, and share in project outcome-based performance to see lower-risk cost savings more quickly.
Best practice project baseline results should be expected as follows: cost savings of 5-50%, return on investment of 0.5-5x and timeline of 30 to 90 days.
7. Outsource Tasks to Technology Enabled Services Firms
Overall needs at a supplier spike during major market shifts. Leading suppliers are micro outsourcing select tasks and portions of processes to niche, best-of-breed suppliers to unlock additional productivity cost savings and facilitate better cash flow. Suppliers that have invested heavily in software technology automation stand to offer much lower cost and risk than traditional people-only services suppliers that rely too heavily on low-cost country labor arbitrage.
Best practice project baseline results should be expected as follows: cost savings of 5-50%, return on investment of 3-4x and timeline of 30 days.
8. Outsource Prototype Supply Chain
Project-based periodic builds such as auto show vehicles, prototype mules and advanced test vehicles offer substantial near-term cost savings. As we get busy during good times our supply bases tend to expand too much which hinders our buy leverage or contract too much from bundling for convenience; both of which result in high percentages of pass-through spend. Require suppliers to input their suppliers, your Tier IIs, and costs into collaborative bill of material software so both organizations can partner to identify cost savings.
Best practice project baseline results should be expected as follows: cost savings of 5-50%, return on investment of 3-4x and timeline of 30 days.
9. Outsource Supplier Quality Support
The current labor shortage of experienced supplier quality professionals that are well versed in IATF, VDA and Lean Six Sigma is driving leading automotive suppliers to tap a newer breed of technology enabled services firms. Typically, on demand Supplier Quality as a Service (SQaaS) can augment, and in some cases replace, program or organization teams to support day-to-day APQP, PPAP and supplier performance tasks.
Best practice project baseline results should be expected as follows: cost savings of 10-20%, return on investment of 1-2x and timeline of 30 days.
10. Outsource Current Production Programs
As the number of OEM platforms balloons, driven largely by a race to accelerate the launches of electrified propulsion systems and autonomous driving capabilities, suppliers are left with an increasing number of lower-volume programs. Many suppliers are finding these niche programs painful to fold into their existing high-volume operations, in some cases losing money supporting them. Engaging a turnkey technology enables services firm – e.g., Supply Chain as a Service (SCaaS) – can offer a scalable, lower-cost supply chain to support, development, launch and ongoing production operations.
Best practice project baseline results should be expected as follows: cost savings of 10-50%, return on investment of 3-5x and timeline of 30 days.
The Time to Act is Now
As a leader, reducing ongoing operating expenses is a valuable and needed lever to pull when the economy starts to soften, but it’s critical that you choose your initiatives wisely. Not all cost savings pursuits are equal. When given the option of reducing $1, some choices could hamper organizational flexibility while others could expand your art of the possible.
You want to select projects, like the above, that improve both organizational agility and profitability. Although the current crisis is serious and rightfully should command a large portion of our mental attention, we’ll get through this. As leaders, we need to drive change now that will not only allow us to weather the current storm, but also to reposition our operations to win in the new mobility landscape: lower volumes, electric-autonomous vehicles and fewer dealerships.
It’s important to act boldly, yet not overreach during short-term market volatility. You can certainly improve profitability through cost cutting, but you can’t cut your way improved cash flow and/or long-term success. Thus, a careful balance needs to be made to align operations with evolving market conditions without cutting so much that you hobble the organization’s ability to scale to support new growth opportunities when boom times return.
As Winston Churchill once said, “never waste a good crisis.” The time to act is now.
-William
