Dan Hearsch is a manager at Ricardo Strategic Consulting, a management consulting group part of a larger organization, Ricardo Incorporated. Ricardo PLC is part of the parent company which is a 100 year old English engineering consultancy. The main things Dan has been involved in since being with Ricardo are cost reduction and supplier risk management projects with some of the OEMs, mainly the American OEMs.
Dan has been leading work streams that have to do with cost reduction on a number of different commodities, some supplier diversification, which has to do with the risk management, given the recent downturn and the ongoing issues within the automotive supply chain world.
Supply Chain Risk
Obviously, it doesn’t take a lot of reading of the news to see that supply chain risk is increasing. Right now I think you are coming to a head in a lot of ways. The things that caused the current downturn, ie tightening credit markets, the contraction of automobile production, are all factors that are creating problems for the OEMs themselves and their suppliers. There is an interrelatedness and interconnectedness of the supply chain. For example, a company like Leer who supplies GM, Chrysler, Ford, and probably all of the OEMs as well. When they have a problem because GM can’t pay their bills it creates a problem for Ford because it may be that the same plant is producing parts for multiple OEMs, they are producing for GM and Ford.
Even if what they produce is a common part it creates an issue where Ford isn’t able to get their parts even though they pay their bills. Put this issue with the fact that the OEMs are no longer able to sell as many cars, so they are not producing as many cars which means they are not buying as many parts.
The automotive industry is a fixed capital industry, like almost any manufacturing industry. There are many fixed costs that suppliers are forced to re-coup their variable cost. When volumes go down that is another weight on the scale, going the wrong way.
All of these issues together are creating the current environment where suppliers are failing. You have got companies that are not able to cover their costs, they are not able to get credit to get them past this difficult time. All of these things build onto one another.
What we advocate is being more attuned to your supplier’s financial health. We do a lot more analysis for our clients, looking at suppliers not just from a pure balance sheet standpoint, but also who else are they doing business with. Let’s say I am representing Chrysler, I don’t just say how much of your business is with Chrysler, I look also at how much is with GM, how much is non automotive, and work to actively manage those relationships, or those ratios if you will.
We are doing a better job of working with an eye toward where commodity markets are going. We are also trying to do a better job at forecasting actual demand. Some of the forecasting tools have been based on historical volumes, historical purchase behaviors. Right now you can almost throw them out the window
All of the OEMs have stopped selling quite so many vehicles to fleet organizations. A company like Ford doesn’t just dump its excess capacity by selling to Hertz. All of those relationships are gone. Well, it has significantly changed the models. Where it used to be a spike in demand could actually cause the model to completely mis-forecast, we are taking a little bit more of a deep dive, a more holistic approach to working on forecasting. The forecasting is a big one.
Making sure that the data makes sense.
If you have a particular part that you are trying to determine how many you are going to buy over a certain period, this can be an important cost reduction exercise when you are watching a part for the first time. As a part goes from a current model application where it is on a car that is in active production into a past model application where you only need it for service and anticipating how many parts you are going to need over a certain period, what you are willing to pay for it, and also what you should be selling it for. All of these things become very important
From an IT standpoint, making sure that the data you are getting is the data that you expected and the system isn’t mis-reporting. What we have been doing for our clients is bringing a fresh set of eyes and a fresh perspective to they way they have been doing business for so long because it is what is necessary today. Things really have changed.
It is a little bit of the frog in the pot of water. If you put a frog in cold pot of water and heat it up, the frog is not going to jump out and will eventually be boiled. If you take a frog and put it in the hot pot of water he will jump out. Right now the automotive industry is..the water has gotten very hot and now we are trying to help companies jump out, or at least not repeat the same mistakes.
3 Recommendations for Keeping Pace with These Risks
1. I would say the biggest one is re-think the way think customers are going to buy your products. With regard to volume and with regard to their behaviors.
Companies have gotten used to replacing batteries at a certain rate. The technology has improved and the cars are better and people are not replacing them quite as often because the credit is not there. Really think about your forecast. My experience, not just as a consultant but my history as a buyer has been that the OEMs have predicted we are going to make 100,000 of this vehicle. In my time in the automotive industry those volumes almost never happen. Being more intelligent about the way you do those.
2. Being smart about who you are partnering with. Doing those types of financial analysis, really understanding the risks you are exposing yourself to when you do business with a company.
More beyond just “hey this is a great company, can they make what I need them to make?”, but also are they going to be around for a few years?
3. I would say challenge the paradigms about localization, or the benefits of being a low cost country. The rules have really changed there as well. It used to be a few years ago you could get almost anything cheaper in China and it would cover the trade-off of transportation. Nowadays the opportunity costs are different. But it doesn’t mean just come back to the US. Really analyze and study what the right place to buy this thing for your business from a total landed cost and then also take into account the risk.
I think as a firm what we bring as a management consulting firm. We focus not just on the automotive industry but also the transportation industry, anything that moves. Airplanes, trains, it is a core in automotive and truck manufacturing, power trains, and engines. But what we bring that I don’t think any other management consulting firm can bring is the technical expertise.
Most of our consultants have been engineers in the past. I am almost the lone exception at the firm. All of my experience is in supply chain. We have a strong engineering group that is actively involved with pretty much every company making an engine, a transmission, or anything like that. We can leverage that experience and expertise when we come to a company.
The benefit is, for example on a cost reduction project, or a warranty improvement, we are not just running your typical set of metrics or trying to bring in smart people and have them learn how to do what we need to do. We are bringing in very experienced people in the automotive industry who have a very strong backup of technical expertise and experts back at the shop, if you will. We are able to bring both of those sets of expertise. We are able to bring the best of both worlds from an engineering and a management consulting standpoint.
We have a pretty good background in improving process. That is the core competence of most management consulting firms, change management and process management. However, we have expertise that is focused on product development requirements and also it is diversified across a lot of industries that are core manufacturing industries. I think that one of the key things that we bring that makes us very innovative is that we have expertise in helping aerospace manufacturers. We help these huge international companies improve their processes and we learn things from them that we are able to bring back to automotive where they are applicable and can help improve the processes of a 100 year old company like Ford or GM that have great processes but the businesses are almost starting to converge. GM is getting smaller because it is a lower volume type of world. For GM to re-learn how to be a lower volume type of company. I think we are able to do that better than almost anyone because of our experience working with aerospace companies or alternative energy generation companies, power manufacturers, etc.
The supply chains share a lot of similarities but they also have some big differences. We are bringing these lessons as we go to new markets like Russia and China. Not just brining our core lessons learned over the years but also our expertise working in the Automotive industry in the Western world of established markets as well as the things we learned working on a white board, a big white space like Russia where we figure out how to set up a supply chain in Russia. I think we bring a lot of lessons back and then re-apply them to the established markets. This is something that has really helped to add value to our clients.
About Dan Hearsch
Associate at Ricardo Strategic Consulting
Greater Detroit Area