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What is the impact of Cost Cutting among
suppliers? Automotive News World Congress
April 21, 2005
Questions to be addressedQuestions to be addressed
1. Is China truly as cost competitive as is said, or are there hidden costs that erode savings?
2. How has the push towards lower cost product affected suppliers?
Traditional Elements of CostTraditional Elements of Cost
Element
Labor
Material
Overhead
• Tooling/Equipment
Support Costs
Working Capital
Other
Traditional Elements of Elements of CostTraditional Elements of Elements of Cost
Element
Labor
Material
Overhead
• Tooling/Equipment
Support Costs
Working Capital
Other
Potential 20:1 savings
Motivated and educated workforce
Additional labor costs – fringe and bonuses
Extensive Training and development requirements.
Traditional Elements of Elements of CostTraditional Elements of Elements of Cost
Element
Labor
Material
Overhead
• Tooling/Equipment
Support Costs
Working Capital
Other
Savings from high labor input
Availability of material may be limited or not competitive now
Traditional Elements of Elements of CostTraditional Elements of Elements of Cost
Element
Labor
Material
Overhead
• Tooling/Equipment
Support Costs
Working Capital
Other
Savings
Salaried Workforce
Skilled Technical People
Facility costs
Tooling and equipment
Costs
Energy, inefficiencies
Traditional Elements of Elements of CostTraditional Elements of Elements of Cost
Element
Labor
Material
Overhead
• Tooling/Equipment
Support Costs
Working Capital
Other
Up to 90% savings
Immediate savings to program
Substantial support and follow-up.
Traditional Elements of Elements of CostTraditional Elements of Elements of Cost
Element
Labor
Material
Overhead
• Tooling/Equipment
Support Costs
Working Capital
Other
Varying degrees of Supplier development
Considerable support costs – time and resources
Extra logisticsFreight
Ground transportation
Repackaging
Washing
Traditional Elements of Elements of CostTraditional Elements of Elements of Cost
Element
Labor
Material
Overhead
• Tooling/Equipment
Support Costs
Working Capital
Other
Payment terms
Up-front program costs
Prototypes
Tooling
Program development
Increased supply chain inventory
Traditional Elements of Elements of CostTraditional Elements of Elements of Cost
Element
Labor
Material
Overhead
• Tooling/Equipment
Support Costs
Working Capital
Other
Facility/Equipment Relocation costs
Trailing liabilities
Decreased asset utilization
Effects to current home country supply base
Risk
Commodity PriceHigher Lower
DevelopedDeveloped DevelopingDeveloping Under-developedUnder-developed
Supplier Development StagesSupplier Development Stages
RiskHigher Lower
Development Support HigherLower
How to define the opportunity for Cost Savings?How to define the opportunity for Cost Savings?
Not all commodities appropriate
Considerations
Size and Mass
Raw material availability
Manufacturing process
Volume
Total Purchasing Mass
Effect of Cost Cutting to SuppliersEffect of Cost Cutting to Suppliers
Forcing changes to the business model
Changes to the value chain
What could be purchased vs. What is purchased.
Move up the Bill of Material
Re-evaluate Core Processes
Develop Integrated Strategies
Moving up the Bill of MaterialMoving up the Bill of Material
Final Assembly
Sub-assemblies• Manufactured Components
– Final component manufacturing
» Raw materials
Add Labor content to the Material Purchased from China
An Integrated StrategyAn Integrated Strategy
Purchase of Components only
Emphasis is to reduce product cost from the existing supply base
Strategic Sourcing
Changes to the Business Model and a re-evaluation of the value chain
Integrated China Sourcing Strategy
Consideration of China’s domestic market potential
Integrated Supply chain and Global Manufacturing Strategies
What is the Impact of Cost Cutting?What is the Impact of Cost Cutting?
Relocation of the Supply Base
Changes to the Business Models
Regional and global supply models
Greater role for supplier support and development
New Partnerships and Relationships
Do Chinese Factories really Produce the Cheapest Parts?Do Chinese Factories really Produce the Cheapest Parts?
The entire value chain must be addressed
Labor costs offset by additional factors
These factors may be only temporary
Must move to an integrated strategy
Yes…….But,……..
Thank You!
