2013 Automotive Vendor Tooling Study

The results of this industry survey set the stage for suggested practices and strategies that could help the entire vendor tooling value stream be more competitive, have adequate capacity and reach its desired success.

Tooling spending by automotive OEMs is expected to grow to $15.2 billion by 2018, but vendor capacity will be inadequate to meet this demand, according to a study of the North American vendor tooling industry.

Harbour Results Inc. (HRI) and the Original Equipment Suppliers Association (OESA) collaborated on the 2013 Automotive Vendor Tooling Study to provide an understanding of the role of each stakeholder (OEMs, Tier 1 and Tier 2 parts suppliers, and vendor tooling suppliers) in the entire vendor tooling value stream. This study also served to uncover the root cause of inefficiencies, waste and risks impacting the supply chain, while identifying best practices and cost-saving opportunities.

In addition to reviewing the expected future challenges for the industry associated with capacity shortages, the results shed light on many of the levers used by OEMs to drive down the price of individual tools as well as those cost factors that drive price up, including costs below the surface and processes that are mostly overlooked by OEMs. The study also shares best practices and ideas for improvement that may generate the savings needed to maintain and grow this industry in North America.

In addition to talent and skill shortfalls, there are many other challenges facing the North American automotive industry. Off-shoring, for example. Although OEMs are not specifically requiring that Tier 1 suppliers use off-shore tooling operations, the fact that the OEMs set unrealistic target prices for tooling forces many Tier 1 suppliers to use low-cost country sourcing (LCCS) to meet those target prices.

OEMs believe that the level of LCCS will remain the same (not increase), primarily due to a few key factors: an overall increase in the demand for tools and for more complex tools, in particular, in North America; dramatically changing economic factors in China; and timing concerns. OEMs are demanding lower costs on tools and are expecting them to be delivered faster, which is generally not possible when tools are made overseas. The study results found that the actual savings from LCCS is not as high as most OEMs may believe and that there is a disconnect between perceived and actual costs.

Payment terms also are one of the major sticking points in the automotive tooling industry for tool suppliers and Tier 1s. Eight out of 10 OEMs acknowledge that their standard payment terms follow PPAP (production part approval process) or the equivalent, which takes place near the launch of the vehicle and much later than when the tool was delivered to the Tier 1. As demand increases and strategies evolve, OEMs realize that to attract and retain the best tool suppliers and obtain capacity, they must improve payment terms. HRI believes that there will be an increase in the use of progressive payments with certain OEMs.

“Transactional waste” impacts pricing, too. Tool suppliers have increased prices to cover things such as unrealistic profit expectations, capacity impact on pricing, lack of visibility in long-range planning, program delays, feasibility and development, and inability to get paid on time, just to name a few.
Most OEMs and Tier 1 suppliers do not realize that the amount of quote activity at a tool supplier and the subsequent hit rate for those quotes also have a huge effect on capacity, but this is the nature of the tool supplier’s daily life. The study revealed that a typical tool supplier has a hit rate of between 4 and 5 percent on all business it quotes, although HRI believes many shops would tell you that this number is actually high and could be more like 2 to 3 percent. As a result of this poor hit rate, suppliers must quote in excess of their annualized sales each month just to maintain current revenue levels. A key reason tooling suppliers have to quote so often is that they have virtually no insight into the business opportunities prior to the request for quotation.

The 2013 study does present opportunities for the vendor tooling industry in North America over the next 5 to 7 years. Growth in total OEM tool spending in North America is forecasted to be $15.2 billion by 2018. This is a 64 percent increase over current spending. Figure 1 validates this growth expectation by analyzing the anticipated growth of foreign OEMs in North America. This chart shows the number of expected product launches each year out to 2018 (provided by LMC Automotive) and then plots the percentage of available tooling for sourcing locally by OEMs. Substantial growth is expected in particular for European OEMs who are relatively new to the North American market and have been getting the majority of their critical tooling primarily from Germany. Additionally, there are some years that Asian OEMs are expected to have more demand than the Detroit Three. The main reason for this shift in mindset for tooling sourcing is the tremendous complexity and number of automotive models these foreign companies are now producing.

HRI believes that there are several factors that will make LCCS and China, in particular, less of an option to meet this growing tooling demand in North America and around the globe. The Chinese are working on improving labor productivity and have made this a new focus over the last couple of years as labor rates have risen. Yet studies show that, even with labor efficiency, labor rate increases are outpacing this productivity and will not reduce the gap. Many other costs in China are rising as well. The price of energy is up 15 percent; fuel cost also is up, making transportation more expensive; there are restraints on the number of new ships being built, and a container shortage is expected by 2015, making it more difficult to ship tools to North America. Additionally, the cost of land in China is almost double the global average.

Another reason for the anticipated growth in the North American vendor tooling industry is the trend of European companies moving their tool sourcing to the region in which they are building vehicles. The economy is still not good in Europe, and it remains a high-cost area in which to manufacture tools. Many European companies have said that North America is becoming a low-cost country to them. There are other regions of the world that could help close the capacity gap in North America for vendor tooling, however they are small players like Indonesia and Thailand.

Although HRI believes a significant portion of future capacity needs will be filled by North American tooling suppliers, we acknowledge that they will not entirely close the gap, and OEMs will continue to utilize some off-shore resources for tooling. This does open up opportunities for new shops to enter the market, however, and those opportunities may come from European, German or Chinese shops that may invest in a new plant on this continent.

Every OEM that participated in the 2013 Automotive Vendor Tooling Study indicated that it recognizes the need for establishing a more collaborative relationship with the supply chain, including with tool suppliers (Figure 2). Cited reasons include receiving supplier input into part design, the optimization of manufacturing feasibility, increased robustness of tools and a reduction in cost. Another benefit of collaboration cited by OEMs is gaining an understanding of new technologies, new processes, supplier capabilities and capacity.

Some Japanese and domestic OEMs are finding ways to get tool suppliers involved earlier in the process, with varying degrees of success. There is a definite relationship between tooling supplier performance and the level of collaboration within any specific supply chain. The primary benefits of a collaborative relationship include receipt of a high-quality tooling at the best price.

Another major area of true cost opportunity lies in the completeness of tool data as it comes from the OEMs and Tier 1 suppliers. Completeness of tool design is tied to the degree of design change—in other words, how big is the change when it comes to the tool supplier? These two elements are a great portion of the root cause of the problems related to the total cost of tools. If OEMs can get a better handle on this tool data and submit it to the tool supplier in a much more complete form, and limit the number of engineering changes, the OEMs can benefit from substantial savings in overall tool cost.

The projected increase in tooling demand over the next five years, as well as exponential growth in mass customization and complexity, mean the total cost for tooling at each OEM also will be far greater than any has paid in the past and will want to pay in the future. As a result, most OEMs have set very aggressive cost-reduction targets for their tooling purchase teams. These new, aggressive budgets will be very difficult to meet if the OEMs focus on price levers applied in the past without working toward greater collaboration with suppliers. The challenge will be how to meet customer demands and maintain profit margins in this changing dynamic.

In the past two decades, there has been an increased use at specific OEMs of another sourcing structure that HRI has classified as direct buy (Figure 3). In this structure, the OEM actually establishes its own preferred or required list of tooling suppliers.

Another structure identified through this vendor tooling study is described as direct sourcing (Figure 3). It involves the OEM contracting with the tooling supplier directly and basically circumventing the Tier 1 supplier, increasing the opportunities for early OEM/tooling supplier collaboration. In many examples studied by HRI, the tooling supplier was selected before sourcing of the Tier 1 supplier.
Those OEMs that have trialed direct-sourcing models have had issues with executing programs, which has led some to abandon this new structure, at least temporarily. In the traditional sourcing model, the Tier 1 supplier is responsible for the program management of the tooling supplier. When OEMs move to a direct-sourcing model, they take on this responsibility themselves, and they can be unprepared for what “program management” comprehensively entails.

When it comes to tooling supplier profits, HRI has identified a minimum profit margin expectation for tooling suppliers (Figure 4). This includes provisions for both reinvestment in people and reinvestment in process improvements, including capital equipment. OEMs that believe this profit amount is too high are again focusing on the wrong areas. Measures to drive down tooling-supplier profits are levers that will not enable OEMs to realize lower overall costs. The ability of tooling suppliers to reinvest in their businesses will determine the long-term successful reduction in supply-chain costs.

So, how do OEMs, Tier 1 suppliers and tooling vendors work together to solve the anticipated capacity gap and reduce costs while still making a fair profit margin? OEMs must create a structure in which Tier 1 suppliers and tooling vendors will be encouraged to work together to examine the “below-the-surface” issues that drive overall costs and will be rewarded for doing so. Working together to solve problems and improve part and tool designs may be the only means of jointly capturing cost-reduction opportunities

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