Five Ways Automotive Suppliers are Increasing Margins
August 1, 2022
Prior to 2020 and the resulting shutdown of many crucial global supply chains, automotive suppliers enjoyed some of the most profitable business environments in history. However, as the pandemic drew on and supply chains calcified, profit margins suffered. The result has been extreme pressure on suppliers, a tense relationship with OEMs, and ever-shrinking revenue. Many suppliers are trying desperately to improve their lot, but the environment and relentless supply chain issues are creating a never-ending stream of challenges. Fortunately, there are concrete steps that company leadership can take that may offer a light at the end of the tunnel for many businesses. Here, we’ll examine five ways automotive suppliers are beating the odds and returning to pre-pandemic revenue levels.
To the degree that it was possible, supply chains before the COVID-19 pandemic ran seamlessly and created a great deal of prosperity for automotive suppliers. However, since the pandemic started, global supply chains have slowed or halted entirely, leaving suppliers in a difficult position to fulfill contractual obligations to OEMs. Suppliers have been stuck eating the costs of rising inputs, and a semiconductor shortage has caused much of the automotive supply chain to experience severe delays.
Still, suppliers are becoming less profitable, and OEM’s revenue continues to grow. This disparity is also leading to a lot of tension and frustration between the two former bedfellows. At Seraph, we recently identified several reasons that this crisis is occurring: poor capacity planning, HR issues, outside unforeseen events like new technology, or black swan events.
5 Tactics Executives Employ to Boost Margins
Our experience has shown that there are five tactics that executives can use to help boost margins and increase EBITDA. First, automation can help reduce human error and increase throughput while eliminating bottlenecks. Open communication channels between executives and the shop floor and bringing in outside help can eliminate many problems caused by lack of communication and information. Finally, addressing any inefficiencies by eliminating bottlenecks and re-imagining processes can help remove unnecessary bloat.
1. Hands-On Understanding
Nothing can separate a company’s leadership from the boots-on-the-ground the way that a turbulent market can. Unfortunately, the administration of many companies is missing valuable information that could be gleaned by talking with shop floor workers. In our experience, those who are working hands-on often have the best insights as to where inefficiencies lie. As a corollary, they often have great ideas on how to solve these same problems. Unfortunately, a divorce between the leadership and the shop floor can also cause workers to lose morale or be unaware of the expectations and goals for the company at large.
Executives can cast visions for their employees, set expectations, create cohesion through the company, and get a boots-on-the-ground understanding of how the company is working. Seraph recently worked with a company to reconnect executive leadership with the shop floor. Our professionals worked with the leadership to implement leader-standard work, effective daily management meetings, and the 5S methodology. The result was a drastic improvement in efficiency and elimination of waste, resulting in improved EBITDA.
2. Addressing Bottlenecks
Bottlenecks can kill the productivity of any supplier, and it’s not always easy to understand what the fix for the bottleneck should be. However, removing unnecessary delays and allowing the assembly line to run as efficiently as possible is one of the most significant actions a company can take.
Seraph recently worked with a company that identified supply chain delays as the main bottleneck affecting the OEM. However, upon closer analysis, even if the material arrived on schedule, the assembly line would not have been able to keep up with the demand of production. By changing processes, implementing new training methods, and providing clear leadership, they eliminated the bottleneck and increased production by approximately 67%.
3. Outside Expertise
The average car has about 30,000 different components and many are made by distinct companies that each has its own inputs. Truthfully, there is no one-size-fits-all answer since each automotive supplier company is different. One of the best ways to return to pre-pandemic normalcy is to get the best outside help that knows the market and has experience resolving enterprise-level problems. Sometimes a company’s leadership is, through no fault of their own, too close to a problem to be able to see the solution. A detailed understanding of the overall market and supply chains can help companies overcome the current supply chain issues in the markets.
Since the onset of the COVID pandemic, many suppliers have started looking for ways to cut costs and increase efficiency. One of the most obvious ways to do this is through implementing automated operations and processes wherever possible. The addition of automation and robots into assembly lines and manufacturing processes has increased throughput while simultaneously reducing the cost of production. Most of the costs are front-loaded since purchasing the hardware for automation can be costly. However, the ROI is nearly always positive and promises lower costs for the life of the machinery.
One company that Seraph worked with benefited greatly from implementing robots on their assembly line. A new generation product formerly required 19 people, which has now been reduced to three people. The other 16 were relocated to more productive roles within the company.
5. Process Reengineering
Reengineering processes is different from eliminating bottlenecks in that it attempts to maximize the efficiencies of processes that are already running well. Perhaps the capacity is 1000 units per day without changing the status quo, but it could be 1300 units with a re-engineered and optimized process. The goal is to create sustainable value, improve already-adequate performance, and improve utilization capacity.
Conclusion and Call to Action
Instead of mourning over the past, wise leadership is looking toward the future and taking practical steps to begin to construct a brighter one. This change of mind is not an easy process–the supply chains are in a sub-optimal state. However, the key to overcoming adversity is to take responsibility for what is in the sphere of influence. Seraph has been helping automotive suppliers navigate business cycle ups and downs for over 10 years. We’ve helped companies survive and thrive in the most challenging climates by optimizing processes and working with the leadership to find real business solutions. Contact us today to schedule a discovery call with Seraph to see how we may be able to help your business.