Beginning component production in
low cost, emerging countries is not as simple as it looks

In today’s super lean, hyper efficient
automotive supply chain, suppliers are constantly looking for new ways to squeeze
expenditure and keep costs as low as possible. Such is the nature of the industry that any
firm that fails to do so will not survive very long – competition is fierce, and the
number of component suppliers in the supply chain is continuing to shrink.

With this in mind, the chance to relocate
to a greenfield site with no planning permission complications, and where the labor is
substantially cheaper, seems like the stuff that dreams are made of. Yet these are
precisely the opportunities on offer to companies who are prepared to take the plunge and
move out of the developed western world and relocate to a region that is only just finding
its feet economically. It is not difficult to understand why many are racing to grab the
opportunity.

For example, component suppliers are
increasingly looking to take advantage of the significant cost cutting potential the
recovering ex-Soviet countries offer. The temptations are considerable – labor costs
are among the lowest in Europe and companies are more or less free to build production
facilities wherever they desire. Few were surprised when both GKN and Bundy recently
announced their intention to open factories in Poland.

Yet every silver lining has a cloud, and
this apparent cost cutting utopia comes at an oft ill-considered price. Relocating
anywhere – let alone to a country with an undeveloped market – is a major upheaval
that can seriously impact upon business process, and ultimately costs, in the short term.
The transfer of production can be extremely complicated.

One particularly pressing concern for any
relocating company is how adequately supply levels can be maintained. Moving to a new
country will almost inevitably force a change in suppliers – as the automotive supply
chain increasingly moves towards lean inventory stocks and need-one-make-one methods of
production, suppliers with local production sites are becoming a prerequisite. Part of the
reason these new regions are so cheap is that they do not have an automotive industry that
is in any way comparable to those in the economically booming areas.

However, switching to local component
suppliers can mean compromising quality standards even in the established western markets.
This was a problem that even Mercedes faced when they switched production of the M-Class
into the US for the first time in their history. With this in mind, the problems that lurk
for non-VMs relocating to emerging regions with little or no supply infrastructure are
difficult to ignore.

As a consequence of this supply changeover,
manufacturers may find they have to maintain temporarily high inventory levels in order to
safeguard against the sizeable penalties of pauses in production. The protection and
security offered by these high stock levels is necessary, but will inevitably impact upon
efficiency levels. Furthermore, continuing (albeit temporarily) to use previous, trusted
suppliers means that components have to be shipped across longer distances – the
complications here are evident, and the cost of bringing in these supplies can be
considerable.

Another, and potentially much more serious,
concern is that of staffing the new plant. Although the cost of labor will be considerably
lower than in established regions, it is quite often the case that the local workforce
will not have the appropriate skill sets required. Training a new workforce to appropriate
levels takes time, and transferring temporary labor from existing plants is not always
straightforward. Moreover, staff experienced in effectively utilizing the IT
infrastructure – whether it be the completely new or transplanted – will be
vital in the first few months of production. The relocation of members of the workforce
will almost certainly impact upon the operational efficiency of the plant they are taken
from, yet this is the only way to introduce skilled staff to the fledgling production
facility.

Paradoxically, the fact that the automotive
industry has become increasingly lean – as a result of the pressure to reduce costs, both
in terms of staff and stock levels – is a real barrier to the introduction of new
suppliers and staff, despite the potentially huge savings they can offer. The bottom line
is that relocation – and particularly relocation to a country with an infrastructure
in its infancy – will inevitably put strain on resources.

It is a question of being prepared to bear
short term penalties for long term gain. None of the problems that relocating companies
may face are insurmountable, but they could be very significant to those companies who are
moving primarily because they are so desperate to cut costs. The competitive advantage
that can be achieved in the long term is undoubtedly considerable, but in order to reach
the promised land manufacturers have to ensure they are adequately prepared for the
logistical pitfalls that lie ahead.

About JBA

JBA is a leading worldwide supplier of
enterprise management software to the highly competitive mid-market sector. Typically, JBA
customers gain competitive edge from the rich functionality of our products combined with
our @ctive™ Enterprise strategy. This strategy optimizes business process
performance, based on international best practices, to consistently reduce costs and
improve margins without continuous systems development.

JBA industry focused solutions meet the
exact needs of selected target industries by incorporating industry best practice
functionality integrated with best of breed partner products and services. In the Food and
Beverage, Apparel & Footwear, Automotive Supplier and Electronics sectors, JBA
Industry Teams skilled in both industry and products, optimize their use for each
customer.

In 1998 JBA completed its 18th year of
continuous growth with revenues over $470 million, growth built on our consistent
investment in people, products and most importantly our customers. JBA employs 2,700
people, supporting over 4000 customers in 53 countries.

About JBA Automotive

JBA Automotive solves the key business
issues facing Automotive Suppliers. Designed in conjunction with leading industry players,
the solution provides production management, competitive purchasing, flexible scheduling,
labor projections and plant requirements. JBA Automotive has the ability to manage
customer demand requirements and to integrate the business demand through to supply
process. With JBA Automotive’s integrated quality management capability, JBA
customers can manage quality-related issues in accordance with the automotive specific
quality standard – QS9000.

 By Andy Brookman, Automotive Sector
Leader, JBA