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Automotive Industry to Face Capacity Constraints

By: Brad Kuvin

Wednesday, January 01, 2014
 

By 2018, the demand of the vendor tooling industry supporting North American automotive manufacturers will reach $15.2 billion, with available current supply of only $9.25 billion and capacity of $11.25 billion. So finds a recent industry survey compiled by Harbour Results, Inc., Royal Oak, MI, in partnership with the Original Equipment Suppliers Association. Vendor tooling—tooling purchased by the original equipment manufacturer (OEM) and run in a Tier 1 or Tier 2 facility—accounts for an average of $550 per vehicle in North America.

“Capacity will become a serious challenge for the automotive industry,” says Laurie Harbour, president and CEO of Harbour Results. “If North American tooling suppliers fail to respond to the challenge, European and Asian tooling suppliers may help fill the void.”

We spoke with Harbour to better understand what’s at stake, and for her thoughts on how North American tooling companies can meet the expected uptick in tooling programs. The study references information gathered from 10 automotive OEMs, nearly 50 major Tier One suppliers and more than 50 global tooling suppliers. Up for discussion:

Automotive suppliers were asked: How do you see the purchasing of LCC tooling changing in the future for your company?
• Mass customization

• Increased tooling complexity

• Europe and Asian OEM tool localization to North America

• Increased vehicle content

• The North American labor shortage

• Increased price pressure

The Business Model is Broken

“The business model is broken,” Harbour says, “in terms of payment terms and the practices being used to drive down costs. There’s a real opportunity for U.S. tool shops to grow along with their OEM and Tier One customers, particularly in the south, but a lot of change must occur to allow this growth to happen.”

By 2020, vehicle production is predicted to grow by nearly 150 percent in Mexico and the southern United States, from less than 2 million vehicles/yr. now to 3.4 million units in 2020. More importantly, stresses Harbour, will be the proliferation of new models.

“For example,” she says, “Mercedes will replace its M Class vehicle with five different models, signifying an overall trend toward lower-volume higher-mix platforms. Similarly, the Honda plant in Alabama manufactures four models of light trucks, and every tool used there is unique. The existing tool-supply base cannot handle the resulting escalation in the number of tools needed. Of immediate concern is the need for local tool maintenance. Here lies significant opportunities for Midwest tool shops to establish satellite facilities in the southeast United States—to handle tool maintenance at first, then evolve to include tool-build capabilities.”

What about the labor shortage and the ability to support an expanding onshore tool base?

 Several study participants feel the gap is closer to 10 percent.
“There are numerous training programs in place, and others that will come online soon, in several southeast states. I believe that by 2020, several states will have successfully addressed the skilled-labor needs of the expanding automotive industry,” insists Harbour, “particularly Alabama, Tennessee, Georgia and Mississippi.

“A lot can get done in 5 years,” Harbour continues. “However, locating a maintenance-focused facility is difficult to sustain. Company return-on-investment improves, and becomes more sustainable, if tool build also becomes possible. This requires significant changes in the value stream, and how suppliers and customers work together to lower costs, as well as prices.”

Collaboration, Value-Stream Management Top the To-Do List

Contributing further to the coming crisis is escalating tool complexity. “A supplier used to manufacture one tool that ran, say, 500,000 parts for one model,” says Harbour. “Now he has to manufacture five or six tools that stamp 100,000 parts in five or six styles to support a platform of customized vehicles. While this means more work for the tool builders, it poses huge project-management challenges for the Tier One companies and the OEMs. This, along with the fact that we’re launching new vehicles faster than ever before, contributes to a ‘Perfect Storm’ effect that raises the cost structure through the entire value stream.”

To solve the imminent capacity challenges and reign in costs, Harbour urges OEMs and their Tier One and tooling suppliers to revisit current strategies throughout the entire value stream. Key strategies for reducing the capacity discrepancy and cost pressures: early collaboration, a focus on cost (as opposed to price) and better management of the value stream.

According to Harbour, “the industry would see a 10- to 20-percent reduction in absolute tool costs if there is more collaboration between OEMs, Tier One and tooling suppliers as early as 36 months before vehicle launch. Increased collaboration leads to improved manufacturing feasibility, increased input on part design and improved understanding of supplier capabilities. Modifying processes throughout the value stream—planning through to development, kickoff, production and beyond—not only would reduce tooling cost, but also boost capacity.”

 Automotive suppliers were asked: How often does tool shop capacity impact the price of the tooling quoted?
While industry thought leaders have been discussing the need to design and build tools more collaboratively for years, Harbour insists that the notion must now become a reality. Among the inefficiencies plaguing the industry and inhibiting capacity growth, according to Harbour, where collaboration would make an impact: multiple or late-in-the-game engineering redesigns. A majority of the costs associated with the vendor-tooling value stream result from process wastes and, when improved, can make a considerable difference on the overall cost of the industry.

“A few OEMs are once again revisiting how and when they bring tool shops into the tool-design and build timeline,” shares Harbour, “and this time they must succeed. And, others must follow the same path. Collaboration, visibility into capacity and completeness of design and engineering before build begins promise to greatly reduce overall cost and streamline the build process. Avoid delays and control costs and we can really change the face of the tooling industry.”

Payment Terms—OK, I Said It

Of course, any discussion of tooling cost always winds its way to the topic of payment terms, and my talk with Harbour is no exception.

“To encourage and incentify the best tool shops to grow to the needed capacity, a big step forward is getting them involved up front during engineering and design feasibility work, and then paying them progressively for the work done, rather than waiting until production-part approval,” insists Harbour. “That’s the best way OEMs and Tier One suppliers can ensure capacity. We started to see a trend toward progressive payment coming out of the recession, when so many new models were launched. However, in the last six to 12 months we’ve seen a return to standard payment terms.”

Harbour’s survey reveals little optimism—only 15 percent of participants believe the trend toward progressive payment terms will improve, while 28 percent expect payment terms to worsen.

“If the focus does not shift to managing costs, the industry will face incredible challenges as capacity grows,” continues Harbour. “To do so, we must move to progressive payment plans, which would change the tool shop’s entire perspective. Such plans allow managers to optimally schedule production and better manage resources and capacity. Shops realize better cash flow in and out of the business—I can attribute a five- to six-percent savings in tool cost alone to a shift to progressive payments.”

Add to this the savings realized from up-front collaboration and the expected drop in engineering changes and tool-build delays and we could be on to something here.

Disturbing Data on Quote Success

The Harbour Results study also uncovers some disturbing data related to success rates on quotes. “There are some 750 North American tool shops (150 in Canada, 650+ in the United States), and they’re all feeling the reach of the OEMs and Tier One suppliers,” explains Harbour. “A tool shop could be quoting the same part for three different Tier One companies, and they have to do it. They may get the business from any one of those companies, so their quote complexity and volume has soared out of control.”

The average tool shop (according to the study) sends 3000 to 6000 quotes per year. “This is astounding data to us,” Harbour says, “and a key reason why the average tool shop cannot grow beyond $15 million in annual revenue. You can’t build the infrastructure needed to grow and remain effective and profitable when you’re constantly having to quote, and then hoping to get the business.”

What’s the cure for the quoting quagmire?

“Several successful tool shops have begun to develop much stronger relationships with their Tier One and OEM customers,” says Harbour, first and foremost by investing in sales and marketing programs.

“This allows them to quote less and enjoy a hit rate of 20 to 30 percent,” Harbour adds. “These tool shops then can focus in on specific commodities, because they’re getting more visibility.” MF

 

Related Enterprise Zones: Tool & Die


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