The Hindu Business Line : How to control manufacturing costs

Manufacturers can address the challenges of globalisation through initiatives that focus on three primary areas: the customer, the supply chain, and business support services.

Steve E. Patton

The economic downturn in most markets and rising prices for commodities have contributed significantly to declining profits and a resulting focus on cost control, especially in the automotive industry.

Concurrently, the world saw energy prices soar as much as 50 per cent in 2008, only to be followed by even greater declines, yet shifting consumers’ buying preferences to smaller, more fuel efficient vehicles and limiting the manufacturer’ s ability to pass along cost increases to cash-strapped buyers.

This environment is perhaps one of the most difficult financial situations for the automotive industry in a generation, as evidenced by the government intervention in some countries.

Continuing globalisation is resulting in the export of new, highly competitive automobiles from countries with lower cost of production, such as Korea, China and India. These exports tend to upset traditional market share balances in the markets they enter. Throughout the value chain, manufacturers and assemblers alike have been faced with increasing costs and limited ability to pass along those increases or to raise prices.

Many manufacturers can begin to address these challenges through a series of initiatives aimed at taking costs out of their processes. These initiatives will focus on three primary areas: the customer, the supply chain, and business support services.

Customer-focused initiatives will have the largest impact on vehicle assemblers. With rapidly changing preferences, it is imperative to insert the will of the customer into the redesign of supporting processes. One such area is around vehicle complexity and the reduction of orderable configurations.

Reducing complexity

By dramatically reducing this complexity — in many cases by more than 90 per cent of orderable configurations — assemblers can minimise the vehicle-to-vehicle variability during the assembly process, and greatly reduce the forecasting inaccuracies that often lead to excessive (or insufficient) inventories. A detailed understanding of customer preferences is required prior to initiating such reductions.

Pricing is also increasingly important and can be variably applied by vehicle configuration or geographic placement, for example, through incentive plans that target specific customer segments. Variable pricing has long been debated in the automotive industry, and through rich data analysis and customer understanding, targeted pricing could lead to enhanced top-line revenues.

There are also several areas of opportunity in the overall supply chain, and one topic getting much attention is in the area of global trade optimisation. Given the expanding nature of the value chain, supply networks have become increasingly complex.

Supply networks

With higher fuel costs, increasing commodity costs, and reducing labour arbitrage opportunities, the factors that were incorporated into sourcing decisions, years and even months ago, are now in need of review in order to ‘re-optimise’. Early candidates for this assessment include those that do not have a large investment infrastructure where the payback period would be necessarily extended.

Many aspects of the procurement function should likewise be evaluated for cost improvement opportunities.

Examples include assessing contract risk (particularly for emerging market sourcing decisions and sole-source arrangements), increasing focus on cost reductions, and introduction/expansion of centralised procurement to gain maximum purchasing leverage from scale of operations.

Within business support services there are many areas that are getting attention, but perhaps none of higher priority than creating or expanding global shared service centres.

With traditional functions such as accounts payable, human resources, information technology and even non-production procurement, there are significant gains to be had in standardising and centralising these activities to gain scale efficiencies.

Many companies are also investigating the next step: complete business process outsourcing.

Many external specialised providers of these services already exist, but a complete benefits/risk analysis of both shared service centres and outsourcing must be completed to determine whether this is a viable approach.

(The author, a principal in Ernst & Young’s Advisory Services practice, is based in Chicago, US.)