Memo to Automotive Suppliers: Prepare for Detroit 2.0

This is a memo to all automotive suppliers at all tiers of production, providing parts, components, assemblies, and services that make their way into cars and trucks produced by the Big 3 automotive companies. The opinions expressed in this memo do not necessarily represent those of any of the Big 3, though as you've learned over the years, you can't really trust that they will honor the agreements they've arranged with you previously. I have divided this memo into three sections: preparing for a new landscape; making yourself invaluable; and reducing your cost basis.

Preparing for a new landscape: The coming months are not going to be easy. Bail out or not, many suppliers will be left with unpaid invoices and/or DSOs well past the industry norm. During this period, it will become essential to free up working capital even at the expense of meeting JIT and other requirements demanded by your customers. Your survival is at stake. But once this shake out occurs, it will be essential to plan for a new landscape. Here are some of our predictions regarding the shake up that is sure to happen. Chances are GM and Ford will look like very different companies (we will not make specific predictions regarding Chrysler because we believe it is unlikely that they will survive independently -- or at all -- in the current market).

As GM and Ford emerge from bankruptcy and/or fresh with new government financing, both will retool around their product lines and brands which: A) Have the highest chance of thriving in a continued downturn; B) Are competitive with the market; and C) Have highest brand loyalty. I suspect these lines will include both trucks (especially in the case of Ford) and smaller car lines (e.g., Saturn, Ford Focus, etc.). It is unlikely that GM or Ford will ever be able to rebuild a profitable and competitive sedan product line to stand against Honda, Toyota and Nissan. The luxury car market is another question entirely, but in a prolonged downturn, it is probably not the best investment area.

Making yourself invaluable: How does a supplier make itself an invaluable supply partner, differentiating on areas other than price? Think about how the new GM and Ford will look. They will not be hamstrung by the labor requirements that require them to purchase a larger percentage of parts (to be assembled by their expensive labor) than their Japanese counterparts. So start thinking in terms of how you can streamline their bottom lines by shipping components and assemblies rather than individual piece parts. This is just one example. Additional considerations might include: becoming an integral part of the design and R&D phases; suggesting and incorporating alternative materials (to save money and reduce weight); and coming up with more creative contracting arrangements that provide flexibility to your customers and greater potential upside to you.

Reducing your cost basis: Reducing your cost basis is essential. But don't just follow the lead of the Big 3 in their former iteration and beat up on your suppliers. Think through new sourcing strategies that balance total cost and risk. Gain greater visibility into your spend. Become more efficient and effective internally -- create shared services environments or outsource your A/P, transactional and high mix, low volume part buying, etc. Audit your indirect and services suppliers for invoice accuracy and compliance. And don't forget about lean and inventory reduction. Eliminate waste in virtual and physical inventory in both your processes and actual stock.

These steps are just a start. If you don’t have significant capital to fund these initiatives, work with solution providers who offer SaaS pay-as-you-go models and seek out consultants who will work on a gain-share basis (although the smart ones will want to scrutinize your books because of their concern with your long-term viability).

Jason Busch

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