McKinsey’s Automotive & Assembly sector is a global practice comprised of consultants who combine professional experience in the automotive industry with functional expertise in a broad range of relevant disciplines, including economics, engineering, distribution, supplier management, product development, manufacturing, purchasing, human resources, footprint planning and plant construction. just-auto talks with Dr Andreas E. Zielke, leader of the global Automotive & Assembly Sector at McKinsey.
just-auto: Can you briefly sum up McKinsey’s achievements in the Automotive Sector?
Dr. Andreas E. Zielke: McKinsey is well known as a top management consultancy, and its Automotive and Assembly Sector is helping Automotive Original Equipment Manufacturers (OEMs) and Suppliers in facing forthcoming challenges. 65 Partners and 300 consultants in this sector serve clients around the world in virtually all areas of the automotive and assembly industry, and the sector has achieved deep functional expertise in nearly every aspect of the value chain, for example in product development, manufacturing, purchasing and supply, as well as in branding, distribution and retailing. Last year we did about 350 engagements world wide. Furthermore, as part of our own R&D, we have developed perspectives on issues relevant to the industries, such as how new technologies (e.g telematics, m-commerce) may influence these industries.
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just-auto: What are the challenges?
Dr. Andreas E. Zielke: The global automotive industry is currently mired in a perplexing contradiction. From the point of view of the customer, this is the industry’s Golden Age. Vehicles today have never been more efficient, handled better, lasted longer or cost less. For the OEMs and suppliers, however, profits are under relentless pressure, excess capacity is prevalent and competition dictates that more features should be added to the car for which the consumer seems stubbornly unwilling to pay.
One explanation for this contradiction is that, in most of the main markets around the world, there is almost no unit growth beyond population increase. And on the supply side, we have persistent overcapacity.
For OEMs, for example, the single most critical strategic choice may be whether to drive for the lowest cost provision of high-quality mass market vehicles, or to push for the highest-value, attractively branded vehicles, sold into a series of niche market segments.
just-auto: So how can the OEM and the Supplier mitigate against costs pressures?
Dr. Andreas E. Zielke: For suppliers there are more choices, defined by value propositions that may focus on technological innovation, lowest processing costs, integration of parts and functions into total systems, and highly flexible modular assembly, to name a few. The key challenge is the interface in the supply chain, as highlighted in the findings of a latest report on OEM Supplier Interface (OSI). Inconsistent management at the interface between car manufacturers and their suppliers costs the Western European automotive industry around €14 billion a year. That is an average of approximately €900 for each vehicle produced. This drops to €521 for North American vehicle manufacturers.
We wanted to understand the differences between the supplier relationships in each region and define the characteristics that control their efficiency. The results of our study suggest that savings of around €790 per vehicle could be made by European vehicle manufacturers and €417 per vehicle could be saved by those headquartered in North America.
just-auto: How was the OEM and Supplier Interface conducted?
Dr. Andreas E. Zielke: McKinsey’s consultants analysed 67 components and systems developed and manufactured by suppliers for a variety of car models around the world. Interface costs were identified during the development and production phases of each product program and best practice was defined.
just-auto: What were the key findings and where?
Dr. Andreas E. Zielke: The findings include eye-opening facts such as a potential for European vehicle manufacturers to reduce engineering change costs by 30 to 40 percent, just through better programme management.
The study reveals that around 80 percent of unnecessary supplier interface costs are related to engineering. From this total, 68 percent is due to the impact of late design changes, particularly on tooling and inefficiencies associated with rushed revisions, and 11 percent is due to missed carry-over opportunities. Other causes of unnecessary costs are a large number of variants, excessive focus on piece cost and short-notice changes to production volumes.
just-auto: Does this cover individual OEMs, or OEMs with multi-national and cultural practices?
Dr. Andreas E. Zielke: The cost at the supplier interface differs significantly between vehicle manufacturers in the same regions, but what is more surprising are the sharp variations among models within the same brand. McKinsey has found that some individual vehicle projects at West European automobile manufacturers achieved interface costs as low as those typical of Japanese manufacturers. This shows that the Europeans do have the necessary skills, but lack the process stability and smooth knowledge transfer that an efficient approach to product development creates.
just-auto: So which OEMs are the best?
Dr. Andreas E. Zielke: It may come as no surprise to find that the Japanese vehicle manufacturers are performing better is this respect. Interface Management costs the Japanese approximately €120 for each vehicle produced.
just-auto: Why?
Dr. Andreas E. Zielke: The Japanese are performing better due to long-term supplier management, early and precise clarification of specifications, rigorous process management, and a closely synchronised development process between manufacturer and supplier.
just-auto: So what recommendations would McKinsey make and what can be learnt from the Japanese?
Dr. Andreas E. Zielke: Western European OEMs often manage the interface with suppliers on a short-term, project-by-project basis. The Europeans OEMs are extremely good at systematically and quickly working through design changes at a very late stage in development, yet McKinsey would recommend that it would be much more efficient to place a higher value on preventing such changes rather than creating elaborate systems to handle them.
just-auto: Beyond interface efficiency, what other topics does McKinsey’s Automotive & Assembly Sector currently invest in?
Dr. Andreas E. Zielke: Besides its traditional strength in facilitating sustainable and significant performance improvements across a wide variety of issues important to our clients, we look in particular at the implications of CO2 abatement for the industry, at the changes caused by the continued inflow of electronics and software, and at the question whether the industry’s evolution in new markets – such as Russia, China or India – will follow established patterns or might take new and unprecedented turns.
