Strategy – The Key to Supplier Profitability
By Jason C. Brewer
Manufacturer, 2005 Issue No. 3
Over the last decade, Plante & Moran’s Strategy & Global Services Team has conducted a variety of studies that have revealed that automotive supplier profitability doesn’t necessarily correlate to operational excellence. In a recent benchmarking study, we once again found that highly profitable companies were just average performers in utilization, quality, delivery, and inventory turnover. Rather, it’s the strength and execution of an appropriate business model that separates the highly profitable from the rest. From the industry trends, we’ve extrapolated a few key strategies for automotive suppliers to consider for the rest of the decade.
It’s All About Strategy
The best business model is largely dependent upon the core competencies of the individual company. However, the current climate within the automotive industry suggests several key strategies that are consistent for all suppliers, regardless of their respective business models. They include:
- Focused alignment of resources and performance metrics throughout the organization with the chosen business model
- Targeted sales and marketing focused on capturing business that is profitable for the organization
- Extreme attention to cost and capital management
- Improving the robustness of business processes to scale the business
Focused Alignment With the Business Model
The business model defines:
- The characteristics of the preferred customers
- The scope of products and services for the market
- How a company distinguishes itself against its competitors
- How a company will capture profit
It follows, then, that investments outside of this focus are a waste. It’s too difficult to find talent, management attention is scattered, and capital is in short supply. It’s important that the best talent is focused on working on activities that drive the company’s profit and that management’s attention is focused on metrics relating to those activities.
Targeted Sales and Marketing
Given the increasing cost-cutting pressures and rising input costs, it’s important that suppliers capture the “right” business, thereby improving the potential for profitability. Consider the following steps:
- Translate the business model into a value proposition that defines what’s in it for the customer.
- Conduct research to determine which potential customers will have the greatest need and appreciation for the value proposition.
- Demonstrate the value proposition to those customers that have the greatest need and appreciation for it.
Failing to target sales and marketing can result in business that’s a poor fit for the company, which will likely provide inadequate or negative returns. It’s a waste of the sales, management, and technical resources used in the pursuit.
Extreme Attention to Cost and Capital Management
Driving down cost is, of course, a significant concern for everyone. However, many suppliers are failing to manage their entire financial picture, including commercial issues with customers, managing receivables to limit exposure to bankruptcies, and working capital needs. Fewer still are focused on strengthening their balance sheets. The financially strong are able to capitalize on growth in profitable segments during the anticipated supply base consolidation.
Processes Robust Enough To Scale Up
Speculation regarding supplier consolidation is varied; the one common conclusion is that additional consolidation will occur. If half of the companies disappear, the remaining half will have to consume nearly twice as much business as they have today.
While most suppliers’ business processes are appropriate for the volume of business they currently have, too often they rely on a few highly skilled people, informal communication methods, simple tools like spreadsheets, or passing paper around. These processes may constrain the growth of the company or, worse, the company may accept opportunities only to lose its anticipated profit due to excessive launch costs and customer-imposed penalties.
Operations Are Still Important
Although our studies have concluded that strategy, not operation, drives profitability, that’s not to say that operational performance doesn’t matter. Threshold performance in metrics such as quality, delivery, and utilization is necessary to obtain work. In addition, best-in-class performance in one of a few particular metrics may be necessary to execute the chosen business model.
While operations are important, strategy is key. Companies with strategic focus, investment of people and capital aligned with that focus, and strict financial management will likely enjoy the most growth through the rest of the decade.
