By now, automotive materials and components suppliers should be well aware of the changes in procurement practices which have swept through the vehicle manufacturers of the west as they have sought to emulate their Japanese competitors. In Europe and in the USA that process of change has been given added impetus by the arrival of Japanese transplant assembly plants and a growing R&D presence, together with the arrival of Japanese components suppliers. So, with existing western vehicle manufacturers emulating the new lean supply practices of the Japanese, and with the growth in the direct Japanese presence, the 1990s have seen a continuing transformation in the way automotive components companies do business.

Across Europe, the vehicle manufacturers have cut the number of direct suppliers with whom they deal from thousands to hundreds - in the process a first tier of suppliers has been created. To date, the main thrust of competitive strategy in the automotive components sector has been positioning to ensure first tier status. This has entailed two main elements:

  • Internal organisation and systems to ensure the procedures and practices are in place to deliver quality supply
  • The search for market leadership in well-defined product areas

The vehicle manufacturers themselves have invested considerable effort into ensuring that their supply base is effective. In particular, they have developed teams of staff whose role it is to audit all aspects of the suppliers' business - even down to the detail of shop floor layout - and to lay down the terms for continuous improvement. Materials and components suppliers may be forgiven for thinking that this is enough. Quite simply, it is not. That is, the 'Japanisation' of the supply base is only a first step for the vehicle manufacturers who, in the face of mounting competitive pressures and some fundamental threats to core areas of technology, are seeking to create new ways of thinking about components and materials supply.

The vehicle manufacturers - new procurement priorities

The automotive materials and components suppliers are well aware of the emphasis placed on quality by the vehicle manufacturers in recent years, and equally are well aware of the huge pressure being exerted to contain price increases in the supply base. Indeed several vehicle manufacturers have taken a more aggressive stance and demanded year-on-year price reductions from the supply base. We can identify three main issues in procurement which are underpinning the transition to modular supply:

  • Continuing developments in the search for higher quality
  • A wider view of cost savings
  • New materials and technologies


Quality and productivity - entry level requirements

There is a growing awareness of the costs to the vehicle manufacturers of managing the supply base. Large numbers of vehicle manufacturer staff are engaged in quality and performance audits, logistics, invoicing and contracts, etc. while the components and materials suppliers often have to face a variety of (sometimes conflicting) procurement systems run by each vehicle manufacturer. To an extent, the system approach to quality as epitomised in the Ford Q1 has been seen to have failed, or at least that while such systems do help ensure that suppliers get the basics right they have not formed a sound basis for continuous improvement.

The next logical development, therefore, is for quality systems to become harmonised (and this is already happening in Europe with various vehicle manufacturers entering bi-lateral agreements to recognise each others' quality accreditation), and ultimately to become so firmly embedded in the supply base as to need much less management from the vehicle manufacturers. The most likely format is QS-9000, which builds upon the well-known ISO 9000 requirements and is being promoted by Ford, GM and Chrysler and affects their world-wide suppliers. So, we may expect the vehicle manufacturers to outsource quality control - putting a greater burden and responsibility on the supply base. A residual hit squad of production engineers, quality staff and other key personnel is likely to be retained by the vehicle manufacturers, so that they may be dispatched to any supplier with a particular problem at any time.

Quality and productivity must be taken as more of a given, a basic entry requirement because the vehicle manufacturers are not prepared to keep investing in developing this in suppliers. But this does not mean that quality is no longer an issue, on the contrary it is one of several areas where pressure will continue to mount on suppliers.

'We have to get tougher on quality issues because our customers are getting tougher on quality issues. They demand more and so must we.'

Ed Hagenlocker, VPAutomotive Operations, Ford. Quoted in Automotive International, September 1996, p3


New thinking on costs

The second major development in terms of procurement by the vehicle manufacturers is a growing willingness to take a wider view of cost savings. Thus far, the focus has been on driving down the delivered cost piece price. Various vehicle manufacturers have announced freezes on components spending, as did Ford in 1995 for example.

The next phase is to credit suppliers with cost reductions if they introduce innovations which reduce costs for the vehicle manufacturer themselves, for example by reducing the assembly time required to fit a part. That is, rather than simply seek a piece price reduction, the vehicle manufacturers are taking a broader view of costs. It also gives suppliers the opportunity to gain competitive edge by offering services which add-value to their products. As we explain below, modular supply is a key element here because it drives down the direct assembly hours required per vehicle. It is illustrative that when Ford introduced a raft of 'modularisation' changes to its Valencia plant in order to build the new Ka model, the number of parts per car directly handled by Ford workers fell from some 3000 (for the existing Fiesta model) to 1200 for the Ka, and that as a result final assembly time fell by 25%. It is possible to take this process further, and have supplier staff actually working on the final assembly line to install their components, as happens at the VW Brazil plant in Rensede, which produces light commercial vehicles.


New materials and technologies

At the same time as these major changes to procurement practices are being pushed through the supply chain, the process of technological change in the automotive sector remains extremely dynamic. The automotive industry is well used to the continuous development of established core technologies and sub-technologies. What is different, however, is that now more than ever before the vehicle manufacturers are moving into completely new materials and technologies to form the basis of radically different products.

Some of these new technologies can be bolted on to an existing vehicle with relatively few implications for the rest of the vehicle - navigation systems would be an example. Others are much more fundamental, and much more likely to have widespread impacts throughout the supply chain. Prominent examples here include battery, electric or hybrid powertrains, and alternatives to the all-steel body. The vehicle manufacturers act to co-ordinate a constellation of suppliers, but rapid technological change will entail creating new constellations. In the future material choices and technology choices will be driven by environmental issues.

The vehicle manufacturers - new R&D practices

The R&D process in the vehicle manufacturers is critical to the emerging module supply system. By placing responsibility for the detailed development of a limited set of modules in the hands of suppliers, the vehicle manufacturers are seeking to reduce co-ordination costs in the R&D process. In a bid to drive down costs while simultaneously increasing product variety to meet market fragmentation, the vehicle manufacturers are adopting a two-pronged strategy:

  • Platform rationalisation
  • Modular design and differentiation

So, in all the vehicle manufacturers the intention is to reduce the number of vehicle platforms, but also to increase the number of models produced from each platform. Platforms give core economies of scale over high- investment items in the vehicle body and suspension, and in powertrain items such as the engine and gearbox. The vehicle manufacturers are aware of the need to deliver product differentiation to consumers, and that this must go beyond mere re-badging of models if it is to be believable. As a result, differentiation is being sought at minimal cost in all areas of the vehicle which are visible to the consumer. Suppliers involved in core platform products will clearly enjoy very high volumes across a range of models. Suppliers involved in product differentiation will face a more difficult and unpredictable situation as their fortunes may be tied to those of one particular model, rather than the platform as a whole. The way in which a vehicle manufacturer chooses to define differentiation and the proliferation of variety will have important consequences for suppliers, especially in terms of how a module might be defined.

As in production, the vehicle manufacturers are acutely interested in reductions in development cost and time, and modularisation makes a contribution here too. Suppliers are provided with performance parameters, packaging constraints, and cost limits, and then expected to engineer components to meet these requirements. Major changes in procurement practice also tend to happen at new model time - it is for these reasons that, for example, the impact of VW's ex-Director of Purchasing (Sr. Lopez) - will most clearly be felt on the next generation Golf due out in 1998.

In placing more responsibility on their suppliers, the vehicle manufacturers are in effect looking for a more pro-active approach to problem solving. The automotive components industry has often been told that it must meet 'customer requirements', but modularisation implies an extension of this thinking. Again, an example might help to illustrate the point.

In the case of vehicle body structures, the primary suppliers are the steel materials producers (e.g. British Steel). They have been active in developing new skills and resources to help the automotive manufacturers get the most out of steel - for example by developing technical centres with expertise in steel flow under pressing. This is indeed serving the customer. But what if the best solution to making car bodies is in fact a multi-material solution embracing aluminium and plastic? If the steel companies were truly interested in serving customer needs, as opposed to selling more steel, then it might be the case that external body panels are better made from plastic. In which case, the problem-solving automotive supplier would have to present such a multi-material solution. At present in the automotive sector the various materials suppliers (aluminium, steel, plastic) are aggressive in defending any and all parts of the vehicle which uses their material regardless of merit.

So, for automotive components and materials suppliers, the terms of competition are shifting under modularisation. In the past, the main competitive threat to a supplier was from the supplier of a similar component or material. Under modularisation, depending on how this is defined, the threat may come from unexpected quarters. In the next section, we show how modules might be defined, before moving on to give some recent examples.