Why virtual tiers could be the future for automotive manufacturing

18 October 2012
In the youth of the automotive industry, vertical integration was the order of the day. Henry Ford and the like smelted their own iron, poured their own castings and may have even tapped their own rubber trees. The modern concept of a ‘supplier base’ did not exist. Today the marque owner is an assembler rather than a manufacturer. With the exception of power train and bodyshell everything is bought in. As a result, the supply base is ‘tiered’ – tier one suppliers delivering ready to fit systems or assemblies, themselves receiving sub-assemblies from tier twos, who in turn are supplied by ever more remote ranks of component suppliers. The assembler has a close relationship with its first-tier suppliers; may have a relationship with the second tier; and as for the component suppliers, they are “a far away country of which we know little”. That model has worked fairly well, but the cracks are beginning to show. Firstly, recent natural disasters have shown the potential for massive disruption to production from the failure of little considered lower-tier suppliers in far-away countries. Second, the number of components in a modern vehicle is rising inexorably, typically 40,000 or more, and many of these parts are not being supplied through the established tiers. The result is that original equipment manufacturers (OEMs) have an increasing proportion of their supply base that is not under close control, while from the supplier’s perspective, they are typically caught in a relationship characterised by a buyer’s focus on cost rather than partnership. It is simply not practical for the OEMs to have a close relationship with every vendor. So what are suppliers to do? One option is to try to build a relationship with a tier-one assembler, but that may be a case of “out of the frying pan, into the fire”. But why shouldn’t component manufacturers become first or second tier suppliers themselves? Not individually, but in collaboration with other manufacturers and using the supply chain, assembly and organisational competences of a logistics service provider to deliver complete assemblies to the OEMs, creating a ‘virtual tier one’. There could be considerable benefits for both OEMs and suppliers. There should be a significant reduction in cost and risk, a better integration of production and delivery schedules, individual component manufacturers would gain a better understanding of production, and in turn this should lead to the development of better products. However, collaboration goes against the grain for many businesses. One of the roles of a service provider would be as facilitator and arbiter, managing the client relationship and ensuring all parties get a fair slice of the benefits. The logistics service provider collaborates with the supplier to reduce their costs and risks, enabling the supplier to give a better service to the OEM, with opportunities across the value chain, not just on logistics and transport. For the OEM, the service provider offers a simpler supply net with a single point of contact, and in all probability the opportunity to sub-assemble, configure and sequence close to the production line. Identifying the right groups of suppliers to work with would require sight of the OEM’s tiered bill of materials, which may be sensitive. But if such collaborations can make life easier and more profitable for OEMs and suppliers, why wouldn’t they want it to happen? ☛ Martin Nobes is business development manager at Unipart Logistics
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