Challenges for industry decision makers

Challenges for industry decision makers

Laurie Harbour-Felax

Today’s decisions in automotive product and process development have significant implications for suppliers chosen now and in the years to come. Industry decision makers are constantly striving to design and manufacture vehicles better, faster and cheaper. With productivity returns, efficiency requirements and quality improvements demanded by customers and governments, the pressure to stay competitive in the automotive market is greater than ever. In producing vehicles better, faster and cheaper, many in the industry have, in recent years, looked to outsource non-core parts of purchasing functions. The accompanying operational and financial challenges (and risks) cannot be understated. As competitive pressures mount, the risks and returns that can be garnered by such decisions become greater and greater. However, few industry decision makers have faced these challenges before, and few will face them again if a poor decision is made or inadequate outcome is realized.

Increased competition, a difficult domestic market, uncertain political environments and a host of other issues make the effort to stay competitive in the automotive industry more difficult. However, in many instances competitiveness can only be achieved by focusing on core competencies, rather than on improvement in areas the company is not proficient in–sometimes less is more.

Opportunities to outsource non-core activities include procurement; information technology; maintenance, repair and operations; and others. None of these efforts come without significant challenges and risks to the supplier or manufacturer. In some instances, the input of personnel throughout the organization is sought; in other instances these decisions are made based on corporate presentations without consideration of the challenges perceived by plant-level personnel.

Operational Challenges

There are two general operational challenges: personnel and financial. In the case of the first, often strong relationships have been built at the plant level with local service and product providers. Outsourcing or consolidating these services can be a spark for significant internal resistance. This can manifest itself in many ways. For example, plant personnel have the ability to undermine such efforts causing significant risk to corporate opportunities. As this resistance continues, the actions of the specific employees can ultimately result in litigation if these actions cause a contract termination or breach of contract. Additionally, floor personnel typically have a more in-depth understanding of operational activities. As such, while an idea may be well conceived, the input of these individuals can disclose risks and challenges that would otherwise be overlooked. For example, though the inclusion of standard performance metrics may be well intentioned (holding both parties accountable), the ability of plant personnel to collect or manipulate information can undermine the reliability of the information. In addition, the outsourcing of any significant purchasing activity can lead to more complications than consistency. The need to monitor inventory, maintain consistent accounting methods, and have improved internal controls can mean added training, systems, processes, procedures, etc. For example, the use of a tool crib may be effective in certain environments for the use of routine hand tools and other supplies. However, if these purchases are outsourced through another provider, the internal controls of the tool crib will likely be insufficient and employees may be resistant to more rigorous methods of control. Contracting with third-parties for the outsourcing of non-core activities can result in the loss of control of a number of corporate attributes. In evaluating these opportunities, industry decision makers should be careful and cognizant of these risks. The loss of corporate and plant culture; the loss of specific expertise and the loss of meaningful business relationships are all possibilities. Each of these is extremely difficult to replace.

Then there are the financial challenges. Though typically intended to reduce financial burdens (in addition to operational challenges), outsourcing efforts can result in financial challenges and risks. Many of these costs are related to process implementation costs, as well as the operational challenges noted above, including: cost resulting from in-house resistance and inefficiencies; hidden fees and costs of outsourcing, particularly those related to contract compliance and expedited delivery; cost of advanced methods of inventory controls; costs of gathering information to assure contract compliance and financial metrics.

The operational and financial challenges and risks that can result from the outsourcing of non-core parts of purchasing functions cannot be understated. Failure to recognize and address these challenges proactively can result in widespread frustration, added costs and even costly litigation. As few industry decision makers have faced these challenges before, there is a significant need for collaboration in the industry to develop best practices to better face and overcome these challenges. Through collaborative teams these challenges can be addressed and managed effectively to allow suppliers and manufacturers to compete successfully.

Laurie Harbour-Felax and Neil Steinkamp

Laurie Harbour-Felax, Managing Director, Stout Risius Ross, Inc.

Neil Steinkamp, Director, Stout Risius Ross, Inc.

COPYRIGHT 2008 Gardner Publications, Inc.

COPYRIGHT 2008 Gale, Cengage Learning