Are Automobile companies doing enough to optimize Cost?
Automobile is a fiercely competitive industry, most companies are struggling to be in the BLACK, Ford and GM are registering losses year after year, but same time Toyota and Honda continue to register profits. What is it that they do differently? Are there things that we can learn? Yes, Toyota and Honda have managed costs better and use it to fuel growth.
Increased regulations and alternate fuel technology is going to take a lot of investment, therefore companies have to re look at their cost structures and generate enough profits for future investment.
Companies are Outsourcing, Shifting manufacturing facilities to LCC or Contract Manufacturing and benefitting from that, but what companies require is a more wholistic and integrated approach, look at impact of an activity across the value chain and lifecycle of product.
Companies have to look at every element of cost and look at reducing it, be it product development cost, material cost, inventory cost, marketing cost, employee cost or warranty Cost.
Let us take a look at the impact of a relatively low cost line item like warranty - the difference in warranty cost as a % of revenue between the best (Toyota) and worst (Daimler Chrystler) is a around 3%, Daimler spent $6.1 bn as against $2.37bn of Toyota, where as General Motors’ warranty cost was $4.46 bn and Ford $4.10 bn. Toyota clearly saved over $2 billion on warranty alone which it could invest in new product development for e.g Hybrid cars.
Daimler, Ford , GM could add 2 to 4 billion on their bottom line if they managed their warranty cost better (not by reducing warranty term but increasing Quality and Reliability) .
Image the savings that can come from big ticket item. Are companies doing enough? Are they thinking differently? Are they pushing their boundries? Are they thinking innovatively? Are they collaborating with partners?
Comments
Good article
Posted by: anil | June 24, 2008 11:14 AM
Automotive industry, no doubt, is mother of the industries and there is a lot to learn from its evolution in two centuries.Japanese manufacturers have re-invented themselves from the time they were seen as cheap, low quality product players to now the ones, known for the best industry standards.
Coming to the point of optimizing costs, the industry as a whole (and especially the west) is now forced to relook at the cost drivers - high health costs, fixed costs in plants, lower plant utilization in face of over production, high logistics cost and SG&A spend. In fact, the value is least for OEMs in the value chain.
This all has led industry leaders to look at innovative ways to reduce costs and up their revenues, some of the trends include
- Lean engineering and manufacturing (Waste elimination in product/processes)
- Flexible plant layouts
- Outsourcing to LCCs and Global product design
- Platform based design and part re-use
- Co-optetion (competing and collaborating with others in industry)
- Digital product creation and validation
- Digital factories leveraging CAD/CAM/MES/ERP
- Lifecycle service bundling e.g. infotainment, GPS
- Fleet services
- Financing
The gas prices, regulations and competitive environment is impacting the customer demand and the business models (e.g. SUV to smaller fuel efficient cars, higher quality at lower price, consolidation in industry and emergence of east as a dominant player).
Extra ordinary times bring out the best, and the best from automotive industry will probably emerge as we see this century unfold.
Posted by: Vikas Ohri | August 13, 2008 11:07 AM