Hamid Noori and Dan Georgescu - Laurier Business & Economics
Wilfrid Laurier University - Waterloo, Ontario, Canada
In a seminal article, which appeared in Harvard Business Review in 1997, Marshall Fisher argues that “managers lack a framework for deciding which [supply chain structure] is best for their particular company’s situation.” He then outlines a guideline to help “managers understand the nature of the demand for their products and devise the supply chain that can best satisfy that demand.”
Charles Fine observes that different industries develop their supply chains at different rates at different “clockspeeds” and some much more quickly than others. He argues that supply chains are basic elements in business strategy and sees strategy development as a three-dimensional concurrent engineering (3DCE) of product, process, and supply chain.
In a follow-up work , based on the GM Powertrain Operation Business Unit, Fine develops a Value-Chain Strategy Framework to guide OEMs in making sourcing decisions based on economic and strategic value assessments. “In particular, once one recognizes the strategic nature of supply chain design, one feels almost compelled to integrate it with product and process development.” This is, however, a bird eye’s view of the issue and is rarely considered practical since the existing supply chain structures being implemented by firms usually ignore the impact of product characteristics and attributes.
In this paper, which is based on an in-depth study of existing supply chain structures within the North American automobile industry, we build on the findings of Fisher and Fine and offer a practical framework to enable the application of the supply chain (SC) structure design early in the new product introduction (NPI) process in the Automotive Industry.
SC Design and Synchronization is the Differentiating Characteristic of the OEMs
Several mergers and acquisitions in the components side of the auto industry during the second half of the 1990s are attributed as reactions to the earlier increased buying power of the OEMs. The ownership of the parts manufacturers was consequently fused together into new global companies with significant technological and innovation capabilities. At the same time, the OEMs divested their components and sub-systems divisions in an effort to tap into the non-OEM automotive markets. These developments intensified the OEMs’ move to outsource the bulk of the manufacturing and design of the sub-systems and components to their suppliers and, in effect, lost most of their manufacturing strength and bargaining power to them; the suppliers currently account for 28% of the total automotive industry profits as opposed to only 24% for the OEMs. The outsourcing trend has thus resulted in OEMs relinquishing their historical strategic role and to position themselves more like original brand manufacturers (OBMs).
As the components and sub-systems are being outsourced, and the suppliers are leveraging the innovation and technological costs across OEMs, industry SC structure has also evolved into an extremely complex and intricate network in which all suppliers have short-term relations with several OEMs. The result: any difference in quality, performance, safety, fuel efficiency, and amenities has been reduced significantly.
The OEMs, in many ways, have historically been treating SC design as a “tactical” issue separate from concurrently designing the product and manufacturing process: after the concept design phase, the Purchasing Department would start a continuous quest for the lowest cost components by establishing an optimum between the capacity and production costs, location of the supplier's facility, and transportation and logistics costs. Chain performance would be measured in oversimplified and sometimes counterproductive (cost-reduction-based) terms.
However, the performance measures that emphasize mainly costs distort the way in which the chain members reach key decisions concerning which customers are the most important and therefore the most profitable to serve. The fundamental problem of cost-centric measures is its focus on individual costs minimization rather than on maximization of value to end customers. While the cost-centric measures might still be acceptable for components with low strategic importance, low customer visibility and low clockspeed (e.g., nuts and bolts), they are not appropriate for those with high clockspeed.
The lessons learned from fast moving industries teach us that the companies that have successfully outsourced their manufacturing in order to lower their costs and increase their flexibility (e.g., Dell and Nike) concomitantly created extremely valuable SC controls that led them to remain the dominant player of the SC. This in turn has permitted these companies to further differentiate themselves from their competitors and has allowed them to maintain a sustainable competitive advantage. Not following the strategy of implementing SC controls, on the other hand, has severely limited the ability of the OEMs to make the fundamental SC design and synchronization decision and has ultimately caused them lose their role as integrators within the value chain.
To maintain their role as value chain integrators, the OEMs should put more emphasis on the restructuring of their existing SC; the industry has to shift its differentiation focus into the realm of SC design and synchronization. This implies that the supplier selection decisions should be guided not only by operational factors but also by strategic factors such as flexibility, capacity to innovate, and the supplier’s business–technology alignment – See Figure 1. In fact, in our opinion, the design of the SC links that precede the final assembly should be considered as the rational differentiating characteristic of the OEMs from an operational point of view (agility, innovation, quality and reliability). Styling, and distribution channel design and management (the post-OEM assembly operations) are the emotional differentiating characteristics from a brand perspective.
Classifying Components Based on their Clockspeed
As mentioned, there are different clockspeeds for different auto sub-systems and components. To illustrate, we can consider 10 of a vehicle's most representative components. The sheet metal and the hardware (screws, bolts, nuts, rivets, etc…) have the lowest clockspeed because these components' rate of change and innovation is relatively low. Sheet metal and automotive hardware is produced in large-scale manufacturing facilities with very little flexibility. The engineering efforts are focused on efficiency and optimization of processes and not on new product design. At the concept design stage all the product and process characteristics are well known and can be easily planned for. To a lesser extent, the same is valid for glass and other automotive construction materials such as steel, aluminium, rubber and plastic - See Figure 2.
Exterior and interior ornamentation components and colours are closely related to the latest design trends and, as a result, they are associated with a higher clockspeed than the other components. During the concept phase the design fashion trends are still evolving but the core product attributes (plastic moulds, pigments, etc.) are known, as are the basic manufacturing processes. The batches are smaller than the ones used for the previous components in order to ensure flexibility.
The electronic components and software have the highest clockspeed among the automotive sub-systems. During the concept design phase only the performance specifications can be determined. Even these specifications are subject to change pending technological advancement during the design phase as well as the social preferences of the customers.
In the automotive industry the highest financial burden is created by the huge time gap between the capital investment and the moment of the first sale. This creates an acute need for accurate sales volumes predictions and, even more importantly, sales option mix. The base models volumes (with lower sticker prices and profitability) are easier to predict than the high option content vehicles which bring in the most profits. In general, the higher the clockspeed the less predictable the demand becomes. The clockspeed of the components and their associated clockspeed scores are instrumental in prioritising the product design, process capacity planning and SC coordination activities during the NPI concept design phase.
Classifying Components Based on their Strategic Importance
From the government requirements and customer preferences point of view, the components and sub-systems could also have different strategic importance to the OEMs. In fact, as we will show later, the "make or buy" decisions as well as the design of the SC during the concept phase of the NPI also require a greater understanding of the components’ strategic importance.
How could we organize these strategic differences? Generally, the architecture of a product is considered a constraint for the sourcing decisions. In the open architecture (the one whose specifications are public) as long as the performance specifications of a product are met the manufacturing process could be spread outside the boundaries of one corporation. One of the great advantages of an open architecture is that anyone can design add-on products for it. By making architecture public, however, a manufacturer allows others to duplicate its product. Bicycles and PCs are excellent examples of modular products with open architectures. Putting together standardized parts will result in the final product.
Naturally, the extreme complexity of a vehicle (4,000-5,000 main components and up to 20,000 parts) and the inherited integral character of the system make it difficult to develop robust interfaces and performance specifications to serve as a development base for the individual sub-systems and components functional specifications. However, the applicability of the open architecture concept to auto manufacturing is a growing phenomenon. Today, the "Open Source" design and manufacturing of an entire vehicle may be a concept of the future, but in the realm of low strategic importance components it is very much a current event.
In North America, although the OEMs are gradually opening up the architectural dimensions of their products to their suppliers, it is safe to argue that today the auto industry is more of a hybrid between open and closed architectures. Components with relatively low strategic importance that do not contribute to the differentiation of the products (e.g., sheet metal, hardware and glass) are excellent candidates for open-source car designed manufacturing.
The interior functionality, the non-functional components and the seating and comfort systems have a higher strategic importance. They play a greater role in the customers' evaluation of the product and post-purchase satisfaction but do not define the brand. The visual design, power train, telematics and, most of all, the safety and security of the vehicle define the automotive brand - See Figure 3.
Matching the Clockspeed and Strategic Importance of the Auto Sub-system
Having determined the auto sub-systems map we can employ a matrix to formulate the four possible combinations of component clockspeeds and their strategic priorities – See Figure 5. One interesting observation from this Figure is that, to a large extent, the abscissa axis also represents the continuum of “efficient” to “responsive” supply chains as well. That is to say the low clockspeed components match the characteristics of functional products for which an efficient SC system is more appropriate. Conversely, the high clockspeed components fit the description of innovative products for which a responsive SC system is more appropriate.
We will come back to the matrix of Figure 5 later on and will show how it could be utilized in designing the right SC designs based on the characteristics of each of the four quadrants. For now, let us discuss the relevance of the 3D-CE framework to the NPI process from the OEMs’ point of view. The 3D-CE Auto NPI Optimized Framework Design and Implementation
The Big Three are continuously faced with an influx of new models introduced each year by the European, Japanese and Korean competitors. In order to maintain their competitive position, they too must accelerate their NPI processes and simultaneously develop flawless launches of their new products, free of re-calls and problems.
As we mentioned earlier, the extent of the openness of an architecture is considered a constraint for the sourcing decision because it determines the level of engineering that must be kept in house for integration purposes. So is true for whether the product is designed modularly or integrally. A modular product can be assembled from different components, which can be upgraded and redesigned individually without affecting the system as long as they satisfy many of the interface specifications such as exterior mouldings, glass, and telematics. In an integral product, by contrast, the relationship between components is delicate and can be described by a function with optimal performance. In this case, the product and process specifications are inseparable and the final product amounts to more than just the sum of its components. A good example of an integral sub-system is the powertrain in which the designs of the engine and transmission have to be synchronized for optimal performance.
Fine proposed his 3D-CE framework in order to explain the “links” among product design (e.g., customers' needs evaluation, market segments targeting, and product architecture decisions), process design (e.g., operating objectives, policies & procedures, and equipment strategies) and SC design (e.g., make/buy & partner selection decisions, SC relationship and management decisions, and logistics & inventory management decisions) – See Figure 6.
In the traditional NPI process, after the part is designed, the technology link provides the connection between the product characteristics and the production equipment specifications. Synchronizing the production process activities with the material handling logistics (incoming and outgoing) through the focus link is the basis for the JIT philosophy. In this two-dimensional system (a special case of the 3D-CE), the main objective is to minimize the time-to-market by designing the product and the production process simultaneously and thus compressing the NPI timing. The architectural link, the third dimension, provides the means to design the SC concurrently with the design of the product and the production process. The modularity of the sub-system dictates the structure of the SC and, at the same time, the limitations of the SC influence the product architecture design. A modular architecture is conducive to larger outsourcing freedom for the OEMs and creates competition among suppliers which in turn optimizes the costs of the outsourced components. However, the availability of capable suppliers and the geographical locations may seriously limit the outsourcing opportunities.
While desirable due to the high complexity of the automotive products and the high variety of components (which have different competitive importance and clockspeeds), the application of the 3D-CE framework would make the NPI process impractically long and expensive. This contradicts the objective of minimizing time-to-market. To address the challenge, we propose that the 3D-CE model be adapted for the auto industry in order to ensure an effective and efficient NPI process. To do so, we go back to Figure 5 and the Auto Sub-systems Map, and consider employing the 3D-CE framework of Figure 6 for each of the four quadrants - See Figure 7. Clearly, depending on the characteristics of each of the quadrants the strength of the links among the product, process and SC designs would be different. In fact, one could argue that Figure 7 displays four distinct strategies in formulating the right SC design given the clockspeeds and strategic importance of different components. In Figure 8, we use specific examples to illustrate the importance of the three links in each of the quadrants of Figure 7.
The Implementation Strategies
In order to facilitate the application of our proposed NPI framework we have developed an implementation plan based on the various required tasks of the NPI process (i.e., idea generation, concept design, planning, and product, process and SC designs) and have applied it to the four quadrants of Figure 7. We explain the four distinct strategies below and developed Figure 9 to display the similarities and differences between them.
Quadrant 1- Commodity Components (Low Strategic Importance and Low Clockspeed):
The sub-systems that have both a low competitive importance and a low clockspeed (e.g., sheet metal, aluminium, and glass) are located in the Commodity Components quadrant. The technology link between the creation of the product materials and functional specifications part of the product design and the creation of the technological and equipment specifications part of the unit process design is critical in order to maximize efficiencies. The NPI planning has to be handled by a joined OEM/supplier team in order to ensure commonality of milestones and the proper scheduling of the sequential tasks. The OEM has to facilitate the creation of open architecture from a supply dynamics perspective. The performance specifications for these components are generally public and different suppliers compete in producing as efficiently as possible parts that meet these specifications. The process design focuses on efficiency and the ability to produce products of predictable quality. The supplier selection remains an optimum decision between the production costs and the market mediation costs.
Quadrant 2- Critical Components (High Strategic Importance and Low Clockspeed):
As soon as the competitive importance of the sub-systems become strategic to the OEMs (e.g., brake systems, electrical architecture, and power-train), in addition to the technology link between the product and the unit process design, the architecture link between the product and the SC becomes critical. The systems in the Critical Components quadrant are highly interdependent and have complex interface specifications. In addition, these systems are critical to the final product differentiation between OEMs in the eyes of the customer. The OEM's marketing department should generate the new concept ideas for the high strategic importance sub-systems since they are closer to the customer than the suppliers, as shown in Figure 9. The cross-functional NPI team should include marketing, finance and purchasing representatives in addition to engineering, operation and logistics experts.
The OEM's NPI team has the concept design responsibility for the critical sub-systems. They must take advantage of the other product lines’ existing information and knowledge. The OEM has to be able to coordinate the internal and external capacities and global logistics for the low clockspeed critical components in order to maximize efficiency. For these critical sub-systems (e.g., engines and transmissions) it is imperative to leverage the existing designs in order to mitigate the enormous fixed asset costs of the OEMs. Sharing components and sub-systems across platforms and models will further maximize the efficiency and velocity of the NPI. The capacity decisions have to consider long term planning objectives and business strategic goals. The main criterion in determining the in-house manufacturing or the outsourcing of these sub-systems is the creation of an OEM's knowledge dependency to the supplier. The potential loss of tacit knowledge associated with the design and manufacturing of the strategic importance sub-systems have to be evaluated against the potential economic and technological benefits of outsourcing. For the critical component, for which a buy decision has been reached, the architectural link of the 3D-CE model has to be very strong. The SC decisions have to be geared towards long-term relations and may even involve the OEM taking an equity position in the (sub-systems) suppliers – similar to the Japanese model of "kankei-gaisha" (affiliated companies), which are considered to be the vertical keiretsu of the parent company.
Quadrant 3- Styling Components (Low Strategic Importance and High Clockspeed):
When the competitive importance of the sub-system is relatively low but its clockspeed is fast (e.g., the colours of the interior trim, and the profile of the rims) the link that gains importance, in conjunction with the technology link, is the focus link between the manufacturing system design objectives, flow, people and capacity and the logistics system design. The sub-systems positioned in the Styling Components quadrant are influenced by the fashion and design trends and have a relatively short life cycle. The supplier's marketing department should be the source of ideas for the high clockspeed components since they would be more familiar with the design trends in the high clockspeed industries inside and outside the automotive sector. The OEM's responsibility for the styling components is to ensure adequate modularity and detailed performance and interface specifications.
The supplier's NPI team has the main responsibility for the concept design of the styling components. The supplier must leverage its expertise across OEMs. For the high clockspeed components, the supplier must adapt its capacities to the OEM's needs. The supplier facilities have to ensure both the production and logistics flexibility to integrate with the difficult to predict demand for these high clockspeed components. The modularity of the OEMs final product architecture is critical for the smooth integration of the low strategic importance and high clockspeed styling sub-systems like interior and exterior trim. The design of the manufacturing process and SC will be geared towards small batches, production and capacity planning flexibility and reliable and fast logistics. The decision to make versus buy is based on the OEM’s capacity availability and on the supplier's supply chain responsiveness, capacity flexibility, innovation and design trends know-how. A balance has to be maintained between the efficiency and responsiveness of the styling components supply chains.
Quadrant 4- Essential Components (High Strategic Importance and High Clockspeed):
Finally, for the sub-systems that rank high on the competitive importance and on the clockspeed scale (e.g., safety systems, in-vehicle telematics, and high performance electronics) all three links are critical because these products combine the requirements for quadrants 1, 2 and 3. In addition to the performance characteristics, the design for manufacturability aspects is reinforced by the technology link. The modular architecture creates the conditions for the successful outsourcing of these components to strategic partners. The focus link reinforces the level of flexibility in production and logistics required by the essential components. The suppliers are selected based on their ability to innovate and their technological leadership. The products are highly modular allowing the development of the actual products long after the concept design phase is over in order to capitalize on the latest developments for such ultra high clockspeed components. For the essential components the idea can be generated by either of the two departments independently or through a collaborative effort of the two departments.
The joint OEM/supplier NPI teams will address the high strategic importance and high clockspeed essential sub-systems due to the complexity of the design and the importance of the intellectual property aspects. The OEM should bring its experience with high complexity systems integration and the supplier will bring its specialized technical knowledge. The cross-functional team concept will ensure innovative synergies and tacit knowledge creation. The need for close collaboration for the essential components is accentuated by the fact that some of the technical aspects of these very strategic components will not be known in the concept design phase. The essential sub-systems have high strategic importance (e.g., safety and telematics) and are critical to the OEM's product differentiation in the eyes of the customer, which means they should be treated as the critical sub-systems. Moreover, these products have a high clockspeed, which makes the specialized Tier 0.5 suppliers the ideal candidates for outsourcing. The product design process has to be not just concurrent with the process design but it has to be simultaneous between the OEM and the supplier engineering teams. This can be accomplished by the creation of a common engineering change control procedure and a common computer assisted design, engineering and simulation platform must agree to facilitate the sharing of drawings and information across firms' boundaries. The manufacturing processes and equipment strategies and specifications need to be aligned between both the OEMs' and the suppliers' facilities. The newest process control methods and quality assurance operating systems have to be implemented by the two partners. The make versus buy decision, however, is more delicate due to the intellectual property ownership issues. The SC has to be developed jointly and combine the physical efficiency of the Just-In-Time models and the responsiveness dictated by essential components attributes.
Evaluating the Success of the NPI Framework
During the product launch, the North American OEMs have different milestones to assess the performance of the NPI process components, like concept design, concept prototype built or pre-production prototype. At each milestone during the NPI process certain conditions have to be met before the management review team approves proceeding to the next milestone. Some of these conditions refer to design, some to process and some to SC management (or supplier readiness).
During the NPI, the product and process design have to be validated. The Design Verification and Process Verification (DV/PV) tests are performed at different stages of the NPI to validate the performance specifications of the product and to validate the volume and quality capabilities of the manufacturing process and equipment. The product is tested to prove that it meets the engineering specifications and, by extension, the customer requirements. The process engineer has to prove that a set number of parts can be built at the designed line speed and within engineering specifications and in process control. Our Optimized Framework implies that the SC design has to be assessed as well during the NPI. The Supplier Readiness Reviews (SRR) determines the availability of supplier’s capacity as well as its ability to meet the predictable quality standards. The SC design engineer has to prove that the components and sub-assemblies are sourced and that the flow of materials from higher tier to lower tier suppliers, as well as to the OEMs, can be accomplished within the timing, transportation and sustainability specifications.
If these specifications or conditions are not fully met, the product, process and SC design engineers have to return to the drawing table and execute design reiterations. Meanwhile, in order to obtain the management’s approval to proceed (so that the program timing and cost is not endangered), the engineers must write a "Design, Process or SC Design Specification Deviation". The success of the product design phase is reflected in how low the number of design specifications deviations written at every milestone is.
Final Comments
In order to regain profitability and market share, the North American auto industry OEMs should focus on efficient, effective, frequent and flawless NPI. After the outsourcing of significant portions of the manufacturing and product design activities, the SC design and synchronization has become the differentiating factor in today's competitive climate. The NPI process has to become three-dimensional and should include the SC design and synchronization in addition to product and process design.
By implementing "The 3D-CE Auto NPI Optimized Framework", the North American OEMs can regain and enforce their role as the “value-chain” integrator and maintain a controlling position in its design and synchronization. This will allow them to gain flexibility in the planning of their capital investments and attain maximum effectiveness and efficiency. By leveraging a more efficient and effective NPI, the North American OEMs will be able to maintain a positive cash flow during the low economic growth periods and maximize their profitability in peak economic periods.
The automotive components can be classified based on their clockspeed and on their strategic importance. We created the auto sub-system map, which integrates the concepts of strategic importance and clockspeed of the sub-systems. Further we developed an Optimized Framework (OF) to lessen the large number of components of a complex system like an automobile during the integration of the 3D-CE in the automotive NPI. We took the idea even further and proposed an implementation strategy for the OF and detailed the metrics for every concurrent engineering dimension.
This OF can be applied outside of the automotive industry to any other complex, mass-produced products like appliances, military products and industrial equipment as well as in telecommunications and consumer goods. Since the framework was developed based on the components’ characteristics, different quadrants or a reduced format of the framework could apply to different products that match its criteria. The OF can also be used as a strategic positioning map by the Tier I and Tier II suppliers.
It would be interesting to study the impact of the strategic implementation of the OF from the mega-supplier’s perspective. Furthermore, it would also be interesting to explore the effects of these actions deeper in the SC structure. For example, to investigate the impact on the ability of suppliers to leverage R&D, black box components and sub-systems NPI across multiple OEMs, and on the contractual relations and strategic alliances between the OEMs and the suppliers.
