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The Steps Suppliers are Taking to Prepare for a Leaner Tomorrow

As OEMs put the squeeze on, and global markets weaken, suppliers take steps to protect themselves and meet price demands, ensuring survival in a flat or declining market.

August 2012
Many suppliers to original equipment manufacturers (OEMs) in all industries are happy now - the worst is over; business is good! The Great Recession of 2008-2009 is a thing of the past - a bad dream, only faintly remembered.Better think again.

Take automobile production - that's the engine that drives the American economy. In 2009, U.S. automakers built just 9.17 million automobiles and light trucks. This year, production is predicted to register about 14 million cars and light trucks, a substantial improvement.

However, you'd better put your car in reverse and back up to 2005. Then, American domestic auto and light truck production was 15.9 million - about 42 percent higher than 2009, and 13.6 percent higher than 2012's rosy predictions. Bottom line: the American economy is still struggling, with unemployment stuck at over 8 percent, productivity declining, home values still tanking, and consumer confidence in the pits. In light of these trends, what should suppliers be doing now to prepare for a less torrid tomorrow?

Today's Customer Demands
Supplier prosperity depends upon the world's OEMs. In an effort to control their costs, most OEMs are concentrating on assembly of equipment and they are outsourcing more and more of the components they need. This trend began in Detroit and spread to farm equipment, aerospace, and medical and office equipment-makers, as well as producers of consumer durables like refrigerators, washing machines, and similar big-ticket items. (See Table 1)

Table 1
Growth in Percentage of Outsourced Components Contained in Final Products

Source: Imberman & DeForest Industry Surveys - 1995, 2007, 2011

In their efforts to control expenses, these OEMs are intensifying the squeeze on their suppliers. They are preparing for tomorrow, fearing future slack demand worldwide and politicians dithering in their efforts to revive their slow national economies.

The World Outlook
In April, FedEx reported a 9 percent drop in international shipments through its main Memphis hub. That shows the European slowdown is deepening and another one is starting in Asia. The world steel industry is also signaling slower times. Prices for benchmark hot rolled steel have fallen to $723 a ton from $827 in February, and are expected to fall below $700 a ton this summer, says World Steel Dynamics.

European politicians mumble bailout as the 17 eurozone nations watch their national economies stumble. Their politicians are reluctant to okay the transnational fiscal union needed to make their monetary union effective. That won't happen until European nations cede economic sovereignty to a supranational authority. Since there's little chance of that happening anytime soon, don't look to European sales for a quick fix.

In the Far East, exporting nations face rising labor costs adding to the woes of export-based economies hurt by slack international demand. Beijing's government faces an additional problem. Migrant workers, who account for a large portion of the work force in China's special economic zones (coastal areas with market economies), are becoming restive. Harsh working conditions, official corruption, repressive policies like the one-child rule, and the nation's government efforts to cool its real estate bubble make them question the legitimacy of Communist rulers whose key concern is maintaining political power. So don't expect sales to mainland China's superheated but slowing economy to grow at their previous pace.

Taking Steps Now for Survival Tomorrow
Given the gathering economic storm clouds, what should astute suppliers be doing now to protect themselves from the distant thunder? Wherever they make - be it castings, valves, wiring harnesses, precision-machined components, fasteners, springs and wire-formed assemblies, plastic parts, or gears - those suppliers who best meet their customers' pricing requirements will be the survivors. This means preserving cash by building fortress balance sheets, training executives to execute faster, and motivating workers to improve productivity. Together, these efforts will result in lower per-unit costs needed to meet OEM price demands, ensuring survival in a flat or declining market. Thoughtful suppliers know the economy is chancy. While business is good now, they are taking steps to prepare for a leaner tomorrow. Their overall goal is to define and focus on core markets and products, keeping only the most profitable ones with the greatest potential growth.

Second, they assess their strengths and weaknesses honestly. Through market analysis and sales force reports, they conduct an external competitive survey of customer demands and competitors' strengths to determine where their greatest opportunities lie. They follow-up with a rigorous review of internal costs and productivity and an internal audit to identify strengths and weaknesses in order to decide how best to prune costs and keep customers happy.

There is usually an overwhelming response to an internal audit of employees, supervisors, and mid-managers when done by an impartial outside expert with no turf to protect. Staffers happily offer a host of good suggestions for improving operations and cutting costs because they have often been frustrated by perceived top-management indifference to inefficiencies that fly in the face of daily operating realities. Together with productivity and cost data, the audit enables a company to pinpoint its current competitive position and plan what must be done to improve it.

Astute suppliers often find they must implement three changes in order to capitalize on their internal strengths:

  • 1. Free senior managers' time so they can focus on long-term goals. As the problems of the organization come into focus, senior managers can learn in special training sessions how to relate their activities to their major key goals so they can concentrate on critical matters, while delegating the "hum-drum" activities to back-office staffers.

  • 2.Develop a cadre of mid-managers and supervisors who can learn the difference between busyness and effectiveness. That can be accomplished by training efforts to show them how to focus on their key goals and the activities they must undertake to reach those goals.

  • 3.Generate employee cooperation in meeting company efficiency goals. This can be accomplished by implementing the motivation/compensation systems needed to generate an enthusiasm for excellence. Senior executive compensation is quite often tied to company performance. Why not tie compensation of lower-level employees to their performance and innovation as well? By sharing some of these cost-savings through pay-for-performance programs, both employees and the company benefit.

What's Necessary Today for Tomorrow's Prosperity?
Focusing on markets with the greatest potential, shedding unprofitable products, cutting costs, and installing motivation/compensation systems to boost employee productivity and achieve company efficiency goals are all sound strategies for executives who understand that being the lowest-cost supplier means success. However, no matter how well executives plan to meet tomorrow's challenges, their efforts will falter unless their employees are right behind them, sharing in their company's success.

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