© 2005 Process Quality Associates Inc Page 1 of 11 05BC01001C10.doc How to Compete andWin in Auto Parts Manufacturing
By Glenn Black, President, and Don Whitred, Senior Associate, Process Quality Associates Inc., London, ON
“Auto parts suppliers should not wait for the current economic conditions to go away. We should realize that our
industry has changed, and will never be the same again. Adjust to that change. Planning for our new future must
take place now.” Sr. Executive, Siemens’ Automotive
SECTION ONE: The Problem
Executive Summary
The success of an Auto Parts Manufacturer depends on its ability to be profitable in an extremely competitive market. Foreign
competition, and the OEM customer’s demands for price reductions are the main challenges. Ever-increasing costs for
material, labour, and energy have added to the difficulties.
The OEM’s now use the price of foreign-made parts (from China and similar regions) as the maximum price they are willing
to pay. Canadian manufacturers meet it, or lose the business.
Some parts manufacturers have tried implementing expensive, long-term programs such as Lean Manufacturing, Six Sigma,
ERP, and many others; only to find limited success. For most, the break-even point is years into the future with their current
implementation strategy.
Unfortunately too many auto parts manufacturers are waiting for things to get better. Things aren’t getting better. For those
that wait, it will be significantly worse.
This Special Report discusses the customers (OEM’s), their impact on the parts suppliers, and PQA’s research on the
solutions proven successful in this competitive market. It was found that auto parts suppliers can afford to reduce their selling
prices by as much as 7.6% per year, every year, and still remain profitable.
Based on this research, PQA developed the Get P.A.I.D. program especially for the auto parts manufacturing sector. With
this program, auto parts manufacturers can
Compete and Win. OEM’s Assembly Plant Productivity
47
Issues Faced by the Canadian 45
Auto Sector 43
41
The 3D’s are in Trouble Again 39
Ford Worst
The 3D’s (Detroit’s finest: GM, Daimler- 37
DCX
Chrysler, and Ford) are in trouble again. 35
GM
Their problems and symptoms are: 33
Honda
•
Man-hrs per vehicle
31
Low Productivity In spite of huge
Nissan
improvements, the 3D’s continue to trail 29
Toyota Best
the Japanese OEM’s (the 3 J’s) in assembly 27
Figure 1
line productivity by more than $300 per 1997 2004
vehicle, as shown in Figure 1.
© 2005 Process Quality Associates Inc Page 2 of 11 05BC01001C10.doc
• Sales Incentives The message: The cars are
over-priced, or not good enough to buy
without incentives. The expensive incentives
only time-shift future sales to today, but at a
huge cost.
• Low Profitability 3D’s profitability per car
$ per Vehicle
OEM’s Profits Per Vehicle
2000
1000
Worst
0
is significantly less than the 3Js (see Figure 2). Nissan Toyota Honda Ford DCX GM
Best
• -1000
Losing Market Share The 3D’s lose market
share at 6.5% per year, compounded annually. -2000
• Weak Stock Prices 3D’s stock prices under-
perform the Dow Jones Industrial Average. On Figure-3000 2
a Price/Earnings ratio, the 3D’s are heavily
discounted at 5:1, while Toyota demands a premium price of 15:1. The 3D’s can’t sell enough stock to finance the
solutions they need.
• Expensive Union Contracts Union members almost get life-long employment at premium wages, but fall short on
productivity when compared to others.
3D’s Dump on their Parts Suppliers
The 3D’s are downloading their problems onto their auto parts suppliers as a quick way of solving their problems.
• Price Reductions - They aggressively demand price reductions of 5% per year. GM wants a 20% price reduction over
the next 3 years (6.3% per year for 3 years). Auto parts suppliers report that 93% of them have been asked for price
reductions by their customers. OEM’s have threatened 71% of the parts manufacturers with “Reduce prices or we’ll
buy from a foreign parts supplier”.
• Delayed Payment – They stretch their payments to 60 days or more. Auto parts manufacturers buy steel, resin, and
other supplies on Net 30 (or sooner); getting caught in the cash flow squeeze.
• Design Responsibility - They download part design onto some manufacturers. The 3D’s get the benefits of Best-In-
Class design, but refuse to pay the full costs of these design efforts. This downloading also facilitates the 3D’s avoidance of
responsibility and liability.
• Warranty Costs - They have been forcing some auto parts suppliers to assume warranty and recall costs for the parts
supplied. Even if you do a great design job, you aren’t immune to back-charges or lawsuits for warranty costs.
• Tooling Costs - They refuse to pay some or all tooling costs. If a piece-price surcharge is obtained, often the projected
volumes don’t materialize, or the program is cancelled before its anticipated end. The parts supplier is stuck with the
cost.
Transplanted OEM’s & Others
While the 3D’s are recognized as the worst offenders, they aren’t the only OEM’s who relentlessly squeeze the auto parts
manufacturers. The Transplants (ie. Toyota, Honda, Cami) and others (e.g. Mercedes, Saab, etc.) tend to be more co-
operative, and sometimes act with more patience and teamwork. However, if you don’t meet the Transplants expectations,
or keep up with your peers, don’t expect future programs.
With the Auto Pact gone, and NAFTA rules in place, the Transplants have little concern about importing parts from their
home country or other geographical regions.
© 2005 Process Quality Associates Inc Page 3 of 11 05BC01001C10.doc
Lost Profitability
Value in $ (Billions) Figure 3 shows that gross profits in the Canadian auto
Gross Profits, Auto Parts Manufacturers parts sector is down again for the 4th year in a row.
The results for 2005 are expected to be just as bad, or
worse. All factors in the profitability calculation are
simultaneously negative, with no off-setting positives.
8
6
4
2
0
Figure 3 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Manufacturing Cost Explosion
Manufacturing Costs in the
The major costs for manufacturing are Raw Materials,
Labour, and Energy. Based on a weighted averaging of the Auto Parts Manufacturing
average auto parts manufacturer’s cost structure,
Energy Costs in $ (Millions)
manufacturing costs are going up by 6.4% per year, more 20 500
than double the rate of inflation, as seen in Figure 4. 6.9%
15 400
• Raw Materials & Supplies This is 79% of the
10 300
total manufacturing cost, and is rising at a compound 5.6%
annual growth rate (CAGR) of 6.9%. The auto parts
Labour, Materials
in $ (Billions)
5 200
sector is vulnerable to any fluctuation in the prices of
materials and supplies, as experienced with the
dramatic increase in the price of steel and plastic over
the last two years.
19
94
19
95
19
96
19
97
19
9
19 8
99
20
00
20
01
20
02
20
03
4.6%
0 100
Materials Labour Energy
Figure 4
• Labour Costs - Labour is 19% of the manufacturing
costs in the Canadian auto parts sector, and is increasing at 4.6% per year CAGR. The average wage in the auto parts
sector was $51,314 per year, while Canadian manufacturing average wage was $43,186 per year. Labour costs for the
auto parts sector are 18.8% higher, and growing 18% faster than industry averages.
• Energy Costs – Energy is only 2% of the total manufacturing costs, but this category is growing more than twice the rate
of inflation. The recent trend in energy costs is set for even more dramatic increases. In the last year, we have seen
energy price increases of 30% in Canada.
Cheap Imported Parts & Tools
“One of our customers outsourced the manufacture of an auto part to China because Dura could no longer compete on
price.” Lawrence Denton CEO , Dura Automotive Inc
• Auto parts can be imported to Canada at prices 18% to 80% cheaper than Canadian auto parts.
• Tooling (molds, dies, fixtures, etc.) can be imported into Canada from China, Viet Nam, S. America, and other countries
at 20% to 25% of the Canadian price for the same tool.
• Chinese manufacturing workers are paid an average $1.10 per hour (compared to $24.70 in Canada). This wage
difference gives an average part price advantage of 18.24%.
© 2005 Process Quality Associates Inc Page 4 of 11 05BC01001C10.doc
• The Chinese currency is undervalued by as much as 40%.
• Export of Chinese auto parts has increased by 34.2% CAGR in the last 4 years.
Auto parts manufacturers that built their own tooling, or had long term relations with Canadian tooling manufacturers are
being forced to re-consider these costly habits.
US-Canadian Exchange Rate
Between 1999 and 2005, the Canadian dollar value has moved from US$ 0.63 to US$ 0.84 exchange. This is an increase of
over 30%. With similar costs structures to the US, Canadian suppliers historically quoted in US$ and manufactured in CDN$,
keeping the 45% difference as windfall profits from currency exchange. Some feel these windfall profits led to complacency
and loss of competitiveness; neither of which can be afforded today.
Some reported their cash flow dropping to 25% of its former glory due to the simultaneous loss of US export business (due to
the loss of the competitive price advantage of Canadian-made parts), and the loss of exchange profits on those US exports they
were able to fight to retain.
“In the good old days, we initially quoted with standard markups, but were always beaten down by competition and
the OEM’s target pricing. We didn’t make much on the piece price, but the exchange rate profits kept us well fed.”
Sales & Productivity
Value of Manufacturing Shipments in the
Figure 5 shows that the value of shipments in auto parts has
remained flat for the last 4 years. After increasing at 11.4%
CAGR over the period 1994 to 1999, the increase for the period
2000 to 2003 is only 0.8% CAGR.
Productivity Increase, %
V.P. of Sales, Canadian Tier I Auto Parts Supplier
Value in $ (Billions)
Auto Parts Sector
40
30
20
10
0
Productivity Increases
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Figure 5
40
Figure 6 shows US manufacturers are getting significant productivity
US
35
gains, far more than Canadian manufacturers. The Canadian auto
Canada
30
parts manufacturers are significantly worse than all others; a miniscule
Cdn Auto
25
0.15% CAGR improvement during the last 4 years.
20
15
10
5
0
91 92 93 94 95 96 97 98 99 00 01 02 03 04
Figure 6
Research on Successful Strategies
In order to better understand why some Auto Parts Manufacturers flourish while others flounder, we set out to determine if
there was a process by which significant improvements to business performance could be achieved and sustained.
© 2005 Process Quality Associates Inc Page 5 of 11 05BC01001C10.doc
Our staff spoke with individuals from engineering and sales, as well as executives, managers, supervisors, workers, and union
representatives. In one part of our research, we spoke with over 60 Six Sigma Black Belts and Master Black Belts to get their
insights. We have also done extensive literature searching; combing through magazines, research papers, government
statistics, and annual shareholder’s reports.
Based on this research, we identified the characteristics differentiating “Good” and “Excellent” companies. Two major
characteristics were found:
1. The most successful companies developed a strategic plan that was different from the traditional plans put together by the
“Good” companies:
The plan was customized to suit the organization, not a copy-cat version of others.
•
Management made the hard choices and exclusions that define a specific strategy, focusing on the key issues and opportunities the
•
organization is facing.
“All significant change originates from outside of the system”
Dr. Edwards W. Deming, Quality Consultant, Father of Modern Quality Control
2. The most successful parts suppliers executed their strategic plan with unwavering commitment at all levels of the
organization to a degree not previously achieved. We coined a new phrase to describe this unique phenomenon:
Cultural Imperative.
Culture, by definition is an accepted practice by a group of people. When this culture is consistently practiced by 100% of the
population with no counter-culture, you have a Cultural Imperative.
As every company is different, as well as starting from a different point and history, no one plan will fit everybody. To be
truly successful, every company must find a customized path and goal. To follow the herd, or copy last year’s plan, or the
successful plan of another organization holds a significant risk of failure. The accurate re-assessment of past, current, and
future conditions, and previously un-recognized opportunities is mandatory for success.
During this research, it was found that a good model and persistence were everything. Management must understand their
crucial role in controlling strategy, then providing the leadership to create a Cultural Imperative that would sustain the
process. Hard choices had to be made to focus efforts on a particular, agreed-upon strategy. With this kind of structure and
process, everyone was able to focus on the crucial needs in a timely manner.
Working Towards Cultural Imperatives
Analysis of the “Excellent” organizations identified that their path to success
was primarily due to four factors and seven underlying principles.
Some “Excellent” companies based their philosophy and systems on one or
more of the following: Total Quality Management (TQM), Six Sigma,
Lean Manufacturing, ISO 9004, Malcolm Baldrige Quality Award Criteria, If both strategy and tactics are
the Canada Awards for Excellence (CAE) criteria, and similar types of chosen wisely, Cultural Imperatives
models. In all cases, it appears the common element was the consistent will create the necessary success.
application of these Principles of Excellence (regardless of which of these Each success automatically leads to
models was chosen) that drove these organizations forward in their journey to
the next in a chain reaction, similar
business excellence. to falling dominoes.
© 2005 Process Quality Associates Inc Page 6 of 11 05BC01001C10.doc
On the surface, this may appear deceptively straightforward, or seem to be the same to what you or others are already doing.
However, successful implementation of this complex process, with many layers and inter-connections, is anything but
simplistic. While many talk, few achieve.
We have done the necessary research to gather all of the best practices of the leading auto parts suppliers. While the Toyota
Production System has an excellent track history at building Cultural Imperatives, it can take 20 years or longer to achieve.
We have done the research work necessary to develop similar results in a fraction of the time.
“It takes at least 20 years to fully indoctrinate an employee into the Toyota way of manufacturing.”
Jim Womack, “The Machine that Changed the World”, Classic Book on Lean Manufacturing and World-wide Automotive Competitiveness
SECTION TWO: The Solution
The Get P.A.I.D. Process
Based on our research, PQA designed the Get P.A.I.D. process. There are 9 steps to implementing a successful Get
P.A.I.D. program:
Step One: Business Re-assessment
Unlike traditional Strategic Planning, it is crucial to ask yourself the right questions, not just the typical questions which you
are easily and/or readily able to answer. Also, don’t be too concerned about the “low hanging fruit” that you are already
aware of, and are perfectly capable of harvesting any time you please.
Our research showed that almost without exception, the re-assessment process was led by someone who had a broad business
background, specific expertise, plus a powerful analytical side, enabling them to ask the right questions. This person was
sometimes one of the Senior Management group, but was often an outsider (eg. from Corporate, or a consultant). In one
case, it was a senior manager from a non-competing peer company. In almost all cases, it was accepted that answering these
tough questions was mandatory. The “Good” companies tended to acknowledge that the question had been asked, but moved
on without providing a comprehensive answer. The “Excellent” companies fully answered these questions.
Step Two: Training & Planning
In this session the senior management team has the opportunity to develop an in-depth understanding of the principles for
excellence that underlie a successful business strategy. This is necessary to develop a clear definition of the customer base, and
to clarify the aim (vision/mission) of the organization. Strategy options are considered, and then tough strategic decisions are
made. Review of the assessment results can now be made, judging ideal vs. reality, and proposing reasons for the differences
observed.
Step Three: Measurables, Recognitions, & Rewards
Without measurements, management cannot manage. While almost all auto parts manufacturers have Key Performance
Indicators (KPI’s), they are far from the shift-by-shift involvement of all employees. The truly “Excellent” parts suppliers had
re-vamped their measurables into a hierarchical system that was balanced, focused, minimal bureaucracy, timely, challenging,
and motivating. The excellent measurement systems avoided Management Psychosis and rotating priorities. These
measurement systems will be used in Step Seven, but need to be developed now to help draft the plans in the next Step.
Step Four: Implementation Plan
Within the constraints of the adopted strategy and exclusions, the plan will identify and prioritize the actions that are needed
© 2005 Process Quality Associates Inc Page 7 of 11 05BC01001C10.doc
to launch and sustain your journey to excellence. It will identify the tasks that need to be achieved, the owner responsible for
each task, and the timeline for completion. The “Excellent” companies did not “beat up” their project managers, nor did they
provide unlimited time & resources. The “best of the best” had schedules that were seen as do-able, but very challenging. The
plan was simple enough to communicate to everyone, but not simplistic nor un-realistic. Plans were comprehensive, and
included all probable events, as well as the special needs of the various departments and groups.
Step Five: Communicate the Plan
This is possibly the most important step. You must develop awareness across the
organization for the principles that act as the foundation for the company, the
Strategy, and the plan. “Excellent” companies ensured a 2-way dialogue that sought
potential problems, ambiguity, co-ordination and logistical issues, and an
explanation of how the proposed plan benefited each individual, work group, and
department. While not all companies did it to the same degree, some significant
effort was placed on risk assessment, potential problems, and maximum buy-in by
the major groups and players.
This cascade of knowledge for the Strategy, and its implementation through the
plan was seen as crucial by all “Excellent” companies. Every organization that
considers a key improvement focus has to re-analyze how this focus is
communicated. Some had to take 2 to 3 runs at the plan and/or the communication before they were satisfied. You can’t
communicate a vision by email — an email gives information, it does not communicate. Communication will be an on-going
process for as long as the plan is in effect (i.e. forever).
Step Six: Implement the Plan
Initially, this involves implementing changes in some key areas using a
consultant and/or key personnel to demonstrate that a solid approach
is in place. Subsequently, the focus will shift to improvement across
the organization and will eventually involve all personnel. The
journey to business excellence through Cultural Imperatives
requires that everyone be on board, with no counter-cultures.
Step Seven: Measuring the Plan’s Effectiveness
The improvements to strategies and business processes are measured
by the process owners, and presented to Senior Management and the
entire organization on a regular basis. The process owners identify
and implement modifications needed to ensure that the improvement objectives are met.
Step Eight: Consolidating the Gains
Process owners will develop the controls required to ensure that the process improvements are built into the process, the
gains previously achieved are not lost, and the conditions are optimum for new Cultural Imperatives to take root.
Step Nine: Start All Over Again
An ongoing cycle of strategic decisions, planning, implementing, measuring and consolidating is needed to ensure that the
business excellence process is sustained. No matter how much planning or forethought was done (it varied extensively across
our sample group), everybody learned and realized further improvements that could & should be made on the next cycle.
Often, the “Good” companies failed in this last step while the “Excellent” ones placed great importance on it.
© 2005 Process Quality Associates Inc Page 8 of 11 05BC01001C10.doc
Results from Cultural Imperatives
Readers are naturally interested in what types of results
they can expect from implementing a Get PAID Program.
While individual results may vary, and Get P.A.I.D. is too
new for long term results to be available, we can see the
potential of this program from the results already achieved
by “Excellent” auto parts manufacturers:
• As high as 1700% ROI
• 91% growth in operating income (the norm was a
48% increase)
• 69% increase in sales (37% higher than the norm)
• 79% increase in total assets (42% higher than the norm)
• Twice as many new full-time jobs as the norm
• Increased return on assets of 9%. This is 3% higher than the norm.
In small business, the results are just as compelling, with small businesses achieving a 63% increase in sales (almost twice as
much as the norm), and a 17% improvement in return on sales.
We have concluded that it is reasonable (and proven possible in similar industries) for an auto parts manufacturer to reduce
their selling prices by as much as 7.65% CAGR and still be viable over the long term. See PQA’s Whitepaper #05BA “Price &
Profit Squeeze in the Auto Parts Sector” for details on this conclusion.
Are these results achievable? We think so. Difficult? No doubt it will be demanding. Will everyone try and succeed? Some
will choose to ignore, and when those “walking corpses” finally fall down, the competition will be reduced, and those still
living will get more market share as a reward for taking timely action. Others will fail to maintain course and speed, as they
don’t have the necessary self-discipline, skills, attitudes, endurance, or perseverance.
Motivated, skilled employees under the excellent and resilient leadership found in the Canadian auto parts industry can achieve
this challenging goal.
SECTION THREE: Taking Action
Before changing your company’s strategy or its implementation,
PQA recommends you consider 6 aspects. These aspects are
unique to you, so we present most of them as questions to
consider, rather than generic statements that may not apply to
your unique situation. Think about the following aspects before
implementing:
Is this a real problem?
Are these challenges soon to disappear on their own? While
many managers agree on the issues and solutions, these issues
may be neither the cause nor the solution for you. Only detailed
© 2005 Process Quality Associates Inc Page 9 of 11 05BC01001C10.doc
analysis can identify and confirm the optimum strategy for you.
Is this your Top Priority?
There is only one Top Priority. Has it been chosen correctly? In all cases, you need to take care of your people and systems so
they keep delivering quality parts without missing a beat. Next is short term cash flow. Without these, is there a future?
Necessary Resources?
Ideally, your solution should reduce employee stress, improve quality & on-time reliability of each truckload shipped, and
improve short-term cash flow. Can your people achieve all of these while they do their regular job as well?
Right now, your resources are 100% occupied on something. Distracting them with the issues and methods raised in this
report will cause some loss of momentum, delays, and additional risks. If you hire (or transfer internally), finding the right
resource can take considerable time (time you may not have). Will the added resources be self-managing, or add to the
workload of existing management and support staff? Can they analyze, synthesize, and implement the right solution?
Project Management?
If it’s Priority #1, then it needs to be implemented as soon as possible, getting all necessary resources so as to ensure rapid
success. Next, the second priority should select resources (provided #2 stays out of the way of Priority #1). Are your
Project Management systems up to the challenge? You are in a race (with your sister plants, competitors, or bankers). In
races, most people will eventually cross the finish line given sufficient time and resources. But you need rapid implementation
with minimal resource consumption. Do you use antique methods (eg. 1910’s Gantt, or 1950’s CPM, PERT), or just “wing
it”? CCPM is 10% to 50% faster & cheaper than the best of these other methods.
Can you Do-It-Yourself?
Everybody can (and has to) learn sometime. Is this the time for developing new skills, or using existing skills (internal or
external)? Do you need to get it right the first time, or can you risk trial & error?
Guaranteed Success?
Even if you are confident in your current plan, it helps to get a second opinion.
If a second opinion agrees with your plan, your plan gains buy-in from everyone. If issues are raised, you can quickly improve
the plan. Either way, you win!
Remember, some solutions take years to implement. Others can start next week. Nothing starts until you take action.
About PQA
PQA is a team of professional who help organizations improve their quality, productivity, profitability, and stakeholder
satisfaction.
We have specialized in the automotive parts manufacturing industry for the past 17 years.
We offer consulting, coaching, implementation, and training on 65 different topics. This includes modern management
methods, strategic planning, environmental, energy, auditing, statistical data analysis, ISO management systems, Lean, Six
Sigma, Theory of Constraints, project management, and Business Excellence.
© 2005 Process Quality Associates Inc Page 10 of 11 05BC01001C10.doc
About the Authors
Glenn Black, President
Glenn is a Chemical Engineer, a Certified Quality Engineer, and a Certified Quality Auditor,
with 25 years experience in automotive, plastics, rubber, paint, metal stamping, plating,
machining, casting, petro-chemicals, Oil & Gas, and agricultural pharmaceuticals. Glenn
specializes in APQP, Design of Experiments (DOE), Control Plans, FMEA, Quality &
Environmental Management Systems, Lean, Risk Management, Theory of Constraints, Process
Control, Process Improvement, Project Management (CCPM), Troubleshooting, Energy
Conservation, and Statistical Analysis.
Don Whitred, Senior Associate
Don is a Mechanical Engineer, Certified Quality Engineer, and Certified Quality Auditor with
35 years experience in Quality, Product Management, and Business Development for the
telecommunications, automotive, electronics, pharmaceutical, healthcare, and manufacturing
sectors. Don specializes in assisting companies to develop & implement ISO-based Quality
Management Systems (eg. ISO 9001, QS 9000, ISO/TS 16949, ISO 13485, etc.), Continuous
Improvement, Six Sigma, and Business Excellence.
© 2005 Process Quality Associates Inc Page 11 of 11 05BC01001C10.doc
By Glenn Black, President, and Don Whitred, Senior Associate, Process Quality Associates Inc., London, ON
“Auto parts suppliers should not wait for the current economic conditions to go away. We should realize that our
industry has changed, and will never be the same again. Adjust to that change. Planning for our new future must
take place now.” Sr. Executive, Siemens’ Automotive
SECTION ONE: The Problem
Executive Summary
The success of an Auto Parts Manufacturer depends on its ability to be profitable in an extremely competitive market. Foreign
competition, and the OEM customer’s demands for price reductions are the main challenges. Ever-increasing costs for
material, labour, and energy have added to the difficulties.
The OEM’s now use the price of foreign-made parts (from China and similar regions) as the maximum price they are willing
to pay. Canadian manufacturers meet it, or lose the business.
Some parts manufacturers have tried implementing expensive, long-term programs such as Lean Manufacturing, Six Sigma,
ERP, and many others; only to find limited success. For most, the break-even point is years into the future with their current
implementation strategy.
Unfortunately too many auto parts manufacturers are waiting for things to get better. Things aren’t getting better. For those
that wait, it will be significantly worse.
This Special Report discusses the customers (OEM’s), their impact on the parts suppliers, and PQA’s research on the
solutions proven successful in this competitive market. It was found that auto parts suppliers can afford to reduce their selling
prices by as much as 7.6% per year, every year, and still remain profitable.
Based on this research, PQA developed the Get P.A.I.D. program especially for the auto parts manufacturing sector. With
this program, auto parts manufacturers can
Compete and Win. OEM’s Assembly Plant Productivity
47
Issues Faced by the Canadian 45
Auto Sector 43
41
The 3D’s are in Trouble Again 39
Ford Worst
The 3D’s (Detroit’s finest: GM, Daimler- 37
DCX
Chrysler, and Ford) are in trouble again. 35
GM
Their problems and symptoms are: 33
Honda
•
Man-hrs per vehicle
31
Low Productivity In spite of huge
Nissan
improvements, the 3D’s continue to trail 29
Toyota Best
the Japanese OEM’s (the 3 J’s) in assembly 27
Figure 1
line productivity by more than $300 per 1997 2004
vehicle, as shown in Figure 1.
© 2005 Process Quality Associates Inc Page 2 of 11 05BC01001C10.doc
• Sales Incentives The message: The cars are
over-priced, or not good enough to buy
without incentives. The expensive incentives
only time-shift future sales to today, but at a
huge cost.
• Low Profitability 3D’s profitability per car
$ per Vehicle
OEM’s Profits Per Vehicle
2000
1000
Worst
0
is significantly less than the 3Js (see Figure 2). Nissan Toyota Honda Ford DCX GM
Best
• -1000
Losing Market Share The 3D’s lose market
share at 6.5% per year, compounded annually. -2000
• Weak Stock Prices 3D’s stock prices under-
perform the Dow Jones Industrial Average. On Figure-3000 2
a Price/Earnings ratio, the 3D’s are heavily
discounted at 5:1, while Toyota demands a premium price of 15:1. The 3D’s can’t sell enough stock to finance the
solutions they need.
• Expensive Union Contracts Union members almost get life-long employment at premium wages, but fall short on
productivity when compared to others.
3D’s Dump on their Parts Suppliers
The 3D’s are downloading their problems onto their auto parts suppliers as a quick way of solving their problems.
• Price Reductions - They aggressively demand price reductions of 5% per year. GM wants a 20% price reduction over
the next 3 years (6.3% per year for 3 years). Auto parts suppliers report that 93% of them have been asked for price
reductions by their customers. OEM’s have threatened 71% of the parts manufacturers with “Reduce prices or we’ll
buy from a foreign parts supplier”.
• Delayed Payment – They stretch their payments to 60 days or more. Auto parts manufacturers buy steel, resin, and
other supplies on Net 30 (or sooner); getting caught in the cash flow squeeze.
• Design Responsibility - They download part design onto some manufacturers. The 3D’s get the benefits of Best-In-
Class design, but refuse to pay the full costs of these design efforts. This downloading also facilitates the 3D’s avoidance of
responsibility and liability.
• Warranty Costs - They have been forcing some auto parts suppliers to assume warranty and recall costs for the parts
supplied. Even if you do a great design job, you aren’t immune to back-charges or lawsuits for warranty costs.
• Tooling Costs - They refuse to pay some or all tooling costs. If a piece-price surcharge is obtained, often the projected
volumes don’t materialize, or the program is cancelled before its anticipated end. The parts supplier is stuck with the
cost.
Transplanted OEM’s & Others
While the 3D’s are recognized as the worst offenders, they aren’t the only OEM’s who relentlessly squeeze the auto parts
manufacturers. The Transplants (ie. Toyota, Honda, Cami) and others (e.g. Mercedes, Saab, etc.) tend to be more co-
operative, and sometimes act with more patience and teamwork. However, if you don’t meet the Transplants expectations,
or keep up with your peers, don’t expect future programs.
With the Auto Pact gone, and NAFTA rules in place, the Transplants have little concern about importing parts from their
home country or other geographical regions.
© 2005 Process Quality Associates Inc Page 3 of 11 05BC01001C10.doc
Lost Profitability
Value in $ (Billions) Figure 3 shows that gross profits in the Canadian auto
Gross Profits, Auto Parts Manufacturers parts sector is down again for the 4th year in a row.
The results for 2005 are expected to be just as bad, or
worse. All factors in the profitability calculation are
simultaneously negative, with no off-setting positives.
8
6
4
2
0
Figure 3 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Manufacturing Cost Explosion
Manufacturing Costs in the
The major costs for manufacturing are Raw Materials,
Labour, and Energy. Based on a weighted averaging of the Auto Parts Manufacturing
average auto parts manufacturer’s cost structure,
Energy Costs in $ (Millions)
manufacturing costs are going up by 6.4% per year, more 20 500
than double the rate of inflation, as seen in Figure 4. 6.9%
15 400
• Raw Materials & Supplies This is 79% of the
10 300
total manufacturing cost, and is rising at a compound 5.6%
annual growth rate (CAGR) of 6.9%. The auto parts
Labour, Materials
in $ (Billions)
5 200
sector is vulnerable to any fluctuation in the prices of
materials and supplies, as experienced with the
dramatic increase in the price of steel and plastic over
the last two years.
19
94
19
95
19
96
19
97
19
9
19 8
99
20
00
20
01
20
02
20
03
4.6%
0 100
Materials Labour Energy
Figure 4
• Labour Costs - Labour is 19% of the manufacturing
costs in the Canadian auto parts sector, and is increasing at 4.6% per year CAGR. The average wage in the auto parts
sector was $51,314 per year, while Canadian manufacturing average wage was $43,186 per year. Labour costs for the
auto parts sector are 18.8% higher, and growing 18% faster than industry averages.
• Energy Costs – Energy is only 2% of the total manufacturing costs, but this category is growing more than twice the rate
of inflation. The recent trend in energy costs is set for even more dramatic increases. In the last year, we have seen
energy price increases of 30% in Canada.
Cheap Imported Parts & Tools
“One of our customers outsourced the manufacture of an auto part to China because Dura could no longer compete on
price.” Lawrence Denton CEO , Dura Automotive Inc
• Auto parts can be imported to Canada at prices 18% to 80% cheaper than Canadian auto parts.
• Tooling (molds, dies, fixtures, etc.) can be imported into Canada from China, Viet Nam, S. America, and other countries
at 20% to 25% of the Canadian price for the same tool.
• Chinese manufacturing workers are paid an average $1.10 per hour (compared to $24.70 in Canada). This wage
difference gives an average part price advantage of 18.24%.
© 2005 Process Quality Associates Inc Page 4 of 11 05BC01001C10.doc
• The Chinese currency is undervalued by as much as 40%.
• Export of Chinese auto parts has increased by 34.2% CAGR in the last 4 years.
Auto parts manufacturers that built their own tooling, or had long term relations with Canadian tooling manufacturers are
being forced to re-consider these costly habits.
US-Canadian Exchange Rate
Between 1999 and 2005, the Canadian dollar value has moved from US$ 0.63 to US$ 0.84 exchange. This is an increase of
over 30%. With similar costs structures to the US, Canadian suppliers historically quoted in US$ and manufactured in CDN$,
keeping the 45% difference as windfall profits from currency exchange. Some feel these windfall profits led to complacency
and loss of competitiveness; neither of which can be afforded today.
Some reported their cash flow dropping to 25% of its former glory due to the simultaneous loss of US export business (due to
the loss of the competitive price advantage of Canadian-made parts), and the loss of exchange profits on those US exports they
were able to fight to retain.
“In the good old days, we initially quoted with standard markups, but were always beaten down by competition and
the OEM’s target pricing. We didn’t make much on the piece price, but the exchange rate profits kept us well fed.”
Sales & Productivity
Value of Manufacturing Shipments in the
Figure 5 shows that the value of shipments in auto parts has
remained flat for the last 4 years. After increasing at 11.4%
CAGR over the period 1994 to 1999, the increase for the period
2000 to 2003 is only 0.8% CAGR.
Productivity Increase, %
V.P. of Sales, Canadian Tier I Auto Parts Supplier
Value in $ (Billions)
Auto Parts Sector
40
30
20
10
0
Productivity Increases
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Figure 5
40
Figure 6 shows US manufacturers are getting significant productivity
US
35
gains, far more than Canadian manufacturers. The Canadian auto
Canada
30
parts manufacturers are significantly worse than all others; a miniscule
Cdn Auto
25
0.15% CAGR improvement during the last 4 years.
20
15
10
5
0
91 92 93 94 95 96 97 98 99 00 01 02 03 04
Figure 6
Research on Successful Strategies
In order to better understand why some Auto Parts Manufacturers flourish while others flounder, we set out to determine if
there was a process by which significant improvements to business performance could be achieved and sustained.
© 2005 Process Quality Associates Inc Page 5 of 11 05BC01001C10.doc
Our staff spoke with individuals from engineering and sales, as well as executives, managers, supervisors, workers, and union
representatives. In one part of our research, we spoke with over 60 Six Sigma Black Belts and Master Black Belts to get their
insights. We have also done extensive literature searching; combing through magazines, research papers, government
statistics, and annual shareholder’s reports.
Based on this research, we identified the characteristics differentiating “Good” and “Excellent” companies. Two major
characteristics were found:
1. The most successful companies developed a strategic plan that was different from the traditional plans put together by the
“Good” companies:
The plan was customized to suit the organization, not a copy-cat version of others.
•
Management made the hard choices and exclusions that define a specific strategy, focusing on the key issues and opportunities the
•
organization is facing.
“All significant change originates from outside of the system”
Dr. Edwards W. Deming, Quality Consultant, Father of Modern Quality Control
2. The most successful parts suppliers executed their strategic plan with unwavering commitment at all levels of the
organization to a degree not previously achieved. We coined a new phrase to describe this unique phenomenon:
Cultural Imperative.
Culture, by definition is an accepted practice by a group of people. When this culture is consistently practiced by 100% of the
population with no counter-culture, you have a Cultural Imperative.
As every company is different, as well as starting from a different point and history, no one plan will fit everybody. To be
truly successful, every company must find a customized path and goal. To follow the herd, or copy last year’s plan, or the
successful plan of another organization holds a significant risk of failure. The accurate re-assessment of past, current, and
future conditions, and previously un-recognized opportunities is mandatory for success.
During this research, it was found that a good model and persistence were everything. Management must understand their
crucial role in controlling strategy, then providing the leadership to create a Cultural Imperative that would sustain the
process. Hard choices had to be made to focus efforts on a particular, agreed-upon strategy. With this kind of structure and
process, everyone was able to focus on the crucial needs in a timely manner.
Working Towards Cultural Imperatives
Analysis of the “Excellent” organizations identified that their path to success
was primarily due to four factors and seven underlying principles.
Some “Excellent” companies based their philosophy and systems on one or
more of the following: Total Quality Management (TQM), Six Sigma,
Lean Manufacturing, ISO 9004, Malcolm Baldrige Quality Award Criteria, If both strategy and tactics are
the Canada Awards for Excellence (CAE) criteria, and similar types of chosen wisely, Cultural Imperatives
models. In all cases, it appears the common element was the consistent will create the necessary success.
application of these Principles of Excellence (regardless of which of these Each success automatically leads to
models was chosen) that drove these organizations forward in their journey to
the next in a chain reaction, similar
business excellence. to falling dominoes.
© 2005 Process Quality Associates Inc Page 6 of 11 05BC01001C10.doc
On the surface, this may appear deceptively straightforward, or seem to be the same to what you or others are already doing.
However, successful implementation of this complex process, with many layers and inter-connections, is anything but
simplistic. While many talk, few achieve.
We have done the necessary research to gather all of the best practices of the leading auto parts suppliers. While the Toyota
Production System has an excellent track history at building Cultural Imperatives, it can take 20 years or longer to achieve.
We have done the research work necessary to develop similar results in a fraction of the time.
“It takes at least 20 years to fully indoctrinate an employee into the Toyota way of manufacturing.”
Jim Womack, “The Machine that Changed the World”, Classic Book on Lean Manufacturing and World-wide Automotive Competitiveness
SECTION TWO: The Solution
The Get P.A.I.D. Process
Based on our research, PQA designed the Get P.A.I.D. process. There are 9 steps to implementing a successful Get
P.A.I.D. program:
Step One: Business Re-assessment
Unlike traditional Strategic Planning, it is crucial to ask yourself the right questions, not just the typical questions which you
are easily and/or readily able to answer. Also, don’t be too concerned about the “low hanging fruit” that you are already
aware of, and are perfectly capable of harvesting any time you please.
Our research showed that almost without exception, the re-assessment process was led by someone who had a broad business
background, specific expertise, plus a powerful analytical side, enabling them to ask the right questions. This person was
sometimes one of the Senior Management group, but was often an outsider (eg. from Corporate, or a consultant). In one
case, it was a senior manager from a non-competing peer company. In almost all cases, it was accepted that answering these
tough questions was mandatory. The “Good” companies tended to acknowledge that the question had been asked, but moved
on without providing a comprehensive answer. The “Excellent” companies fully answered these questions.
Step Two: Training & Planning
In this session the senior management team has the opportunity to develop an in-depth understanding of the principles for
excellence that underlie a successful business strategy. This is necessary to develop a clear definition of the customer base, and
to clarify the aim (vision/mission) of the organization. Strategy options are considered, and then tough strategic decisions are
made. Review of the assessment results can now be made, judging ideal vs. reality, and proposing reasons for the differences
observed.
Step Three: Measurables, Recognitions, & Rewards
Without measurements, management cannot manage. While almost all auto parts manufacturers have Key Performance
Indicators (KPI’s), they are far from the shift-by-shift involvement of all employees. The truly “Excellent” parts suppliers had
re-vamped their measurables into a hierarchical system that was balanced, focused, minimal bureaucracy, timely, challenging,
and motivating. The excellent measurement systems avoided Management Psychosis and rotating priorities. These
measurement systems will be used in Step Seven, but need to be developed now to help draft the plans in the next Step.
Step Four: Implementation Plan
Within the constraints of the adopted strategy and exclusions, the plan will identify and prioritize the actions that are needed
© 2005 Process Quality Associates Inc Page 7 of 11 05BC01001C10.doc
to launch and sustain your journey to excellence. It will identify the tasks that need to be achieved, the owner responsible for
each task, and the timeline for completion. The “Excellent” companies did not “beat up” their project managers, nor did they
provide unlimited time & resources. The “best of the best” had schedules that were seen as do-able, but very challenging. The
plan was simple enough to communicate to everyone, but not simplistic nor un-realistic. Plans were comprehensive, and
included all probable events, as well as the special needs of the various departments and groups.
Step Five: Communicate the Plan
This is possibly the most important step. You must develop awareness across the
organization for the principles that act as the foundation for the company, the
Strategy, and the plan. “Excellent” companies ensured a 2-way dialogue that sought
potential problems, ambiguity, co-ordination and logistical issues, and an
explanation of how the proposed plan benefited each individual, work group, and
department. While not all companies did it to the same degree, some significant
effort was placed on risk assessment, potential problems, and maximum buy-in by
the major groups and players.
This cascade of knowledge for the Strategy, and its implementation through the
plan was seen as crucial by all “Excellent” companies. Every organization that
considers a key improvement focus has to re-analyze how this focus is
communicated. Some had to take 2 to 3 runs at the plan and/or the communication before they were satisfied. You can’t
communicate a vision by email — an email gives information, it does not communicate. Communication will be an on-going
process for as long as the plan is in effect (i.e. forever).
Step Six: Implement the Plan
Initially, this involves implementing changes in some key areas using a
consultant and/or key personnel to demonstrate that a solid approach
is in place. Subsequently, the focus will shift to improvement across
the organization and will eventually involve all personnel. The
journey to business excellence through Cultural Imperatives
requires that everyone be on board, with no counter-cultures.
Step Seven: Measuring the Plan’s Effectiveness
The improvements to strategies and business processes are measured
by the process owners, and presented to Senior Management and the
entire organization on a regular basis. The process owners identify
and implement modifications needed to ensure that the improvement objectives are met.
Step Eight: Consolidating the Gains
Process owners will develop the controls required to ensure that the process improvements are built into the process, the
gains previously achieved are not lost, and the conditions are optimum for new Cultural Imperatives to take root.
Step Nine: Start All Over Again
An ongoing cycle of strategic decisions, planning, implementing, measuring and consolidating is needed to ensure that the
business excellence process is sustained. No matter how much planning or forethought was done (it varied extensively across
our sample group), everybody learned and realized further improvements that could & should be made on the next cycle.
Often, the “Good” companies failed in this last step while the “Excellent” ones placed great importance on it.
© 2005 Process Quality Associates Inc Page 8 of 11 05BC01001C10.doc
Results from Cultural Imperatives
Readers are naturally interested in what types of results
they can expect from implementing a Get PAID Program.
While individual results may vary, and Get P.A.I.D. is too
new for long term results to be available, we can see the
potential of this program from the results already achieved
by “Excellent” auto parts manufacturers:
• As high as 1700% ROI
• 91% growth in operating income (the norm was a
48% increase)
• 69% increase in sales (37% higher than the norm)
• 79% increase in total assets (42% higher than the norm)
• Twice as many new full-time jobs as the norm
• Increased return on assets of 9%. This is 3% higher than the norm.
In small business, the results are just as compelling, with small businesses achieving a 63% increase in sales (almost twice as
much as the norm), and a 17% improvement in return on sales.
We have concluded that it is reasonable (and proven possible in similar industries) for an auto parts manufacturer to reduce
their selling prices by as much as 7.65% CAGR and still be viable over the long term. See PQA’s Whitepaper #05BA “Price &
Profit Squeeze in the Auto Parts Sector” for details on this conclusion.
Are these results achievable? We think so. Difficult? No doubt it will be demanding. Will everyone try and succeed? Some
will choose to ignore, and when those “walking corpses” finally fall down, the competition will be reduced, and those still
living will get more market share as a reward for taking timely action. Others will fail to maintain course and speed, as they
don’t have the necessary self-discipline, skills, attitudes, endurance, or perseverance.
Motivated, skilled employees under the excellent and resilient leadership found in the Canadian auto parts industry can achieve
this challenging goal.
SECTION THREE: Taking Action
Before changing your company’s strategy or its implementation,
PQA recommends you consider 6 aspects. These aspects are
unique to you, so we present most of them as questions to
consider, rather than generic statements that may not apply to
your unique situation. Think about the following aspects before
implementing:
Is this a real problem?
Are these challenges soon to disappear on their own? While
many managers agree on the issues and solutions, these issues
may be neither the cause nor the solution for you. Only detailed
© 2005 Process Quality Associates Inc Page 9 of 11 05BC01001C10.doc
analysis can identify and confirm the optimum strategy for you.
Is this your Top Priority?
There is only one Top Priority. Has it been chosen correctly? In all cases, you need to take care of your people and systems so
they keep delivering quality parts without missing a beat. Next is short term cash flow. Without these, is there a future?
Necessary Resources?
Ideally, your solution should reduce employee stress, improve quality & on-time reliability of each truckload shipped, and
improve short-term cash flow. Can your people achieve all of these while they do their regular job as well?
Right now, your resources are 100% occupied on something. Distracting them with the issues and methods raised in this
report will cause some loss of momentum, delays, and additional risks. If you hire (or transfer internally), finding the right
resource can take considerable time (time you may not have). Will the added resources be self-managing, or add to the
workload of existing management and support staff? Can they analyze, synthesize, and implement the right solution?
Project Management?
If it’s Priority #1, then it needs to be implemented as soon as possible, getting all necessary resources so as to ensure rapid
success. Next, the second priority should select resources (provided #2 stays out of the way of Priority #1). Are your
Project Management systems up to the challenge? You are in a race (with your sister plants, competitors, or bankers). In
races, most people will eventually cross the finish line given sufficient time and resources. But you need rapid implementation
with minimal resource consumption. Do you use antique methods (eg. 1910’s Gantt, or 1950’s CPM, PERT), or just “wing
it”? CCPM is 10% to 50% faster & cheaper than the best of these other methods.
Can you Do-It-Yourself?
Everybody can (and has to) learn sometime. Is this the time for developing new skills, or using existing skills (internal or
external)? Do you need to get it right the first time, or can you risk trial & error?
Guaranteed Success?
Even if you are confident in your current plan, it helps to get a second opinion.
If a second opinion agrees with your plan, your plan gains buy-in from everyone. If issues are raised, you can quickly improve
the plan. Either way, you win!
Remember, some solutions take years to implement. Others can start next week. Nothing starts until you take action.
About PQA
PQA is a team of professional who help organizations improve their quality, productivity, profitability, and stakeholder
satisfaction.
We have specialized in the automotive parts manufacturing industry for the past 17 years.
We offer consulting, coaching, implementation, and training on 65 different topics. This includes modern management
methods, strategic planning, environmental, energy, auditing, statistical data analysis, ISO management systems, Lean, Six
Sigma, Theory of Constraints, project management, and Business Excellence.
© 2005 Process Quality Associates Inc Page 10 of 11 05BC01001C10.doc
About the Authors
Glenn Black, President
Glenn is a Chemical Engineer, a Certified Quality Engineer, and a Certified Quality Auditor,
with 25 years experience in automotive, plastics, rubber, paint, metal stamping, plating,
machining, casting, petro-chemicals, Oil & Gas, and agricultural pharmaceuticals. Glenn
specializes in APQP, Design of Experiments (DOE), Control Plans, FMEA, Quality &
Environmental Management Systems, Lean, Risk Management, Theory of Constraints, Process
Control, Process Improvement, Project Management (CCPM), Troubleshooting, Energy
Conservation, and Statistical Analysis.
Don Whitred, Senior Associate
Don is a Mechanical Engineer, Certified Quality Engineer, and Certified Quality Auditor with
35 years experience in Quality, Product Management, and Business Development for the
telecommunications, automotive, electronics, pharmaceutical, healthcare, and manufacturing
sectors. Don specializes in assisting companies to develop & implement ISO-based Quality
Management Systems (eg. ISO 9001, QS 9000, ISO/TS 16949, ISO 13485, etc.), Continuous
Improvement, Six Sigma, and Business Excellence.
© 2005 Process Quality Associates Inc Page 11 of 11 05BC01001C10.doc
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