Profit per vehicle for the past eight years has been higher for the New Domestics (Honda, Toyota, and Nissan) compared with the Detroit Three (Chrysler, Ford, and General Motors). All six automakers have been struggling of late, with only Honda maintaining a profit on vehicles sold—an estimated $150 per vehicle. The Detroit Three averaged an estimated loss of $4089 per vehicle in fiscal year 2008.
Labor costs make up about 10% of the total cost of a vehicle, with the other 90% being materials, manufacturing, engineering, and marketing. “We wanted to get our arms around this bigger portion of the gap, and that’s really why we studied vendor tooling,” said Laurie Harbour-Felax, president, Harbour-Felax Group.
Vendor tooling consists of molds, dies, jigs, and fixtures (but not machinery and equipment) used by suppliers to make parts for their OEM customers. Vendors either build or acquire the tooling. The OEM customer then purchases the tooling from the vendor. The study does not address tooling used by the OEMs themselves to make parts. “It’s been a topic that neither the OEMs nor the suppliers have even spoken about in the past five to six months,” Harbour-Felax said. “The cost of vendor tooling today is rapidly becoming an increasing percentage of the total cost of the vehicle.”
Vendor tooling now outweighs the total cost of machinery and equipment residing at OEMs, a fact resulting from, in part, more outsourcing that shifts costs to suppliers, according to the study. A 10% savings in vendor tooling is roughly equivalent to the total cost of developing and launching a new vehicle.
The data for the study followed all stages of the tooling cycle, from quotations to post production, from 2001-2008, and more than 6000 tools at suppliers for the top six OEMs in the North American market.
The advantage for the New Domestics over the Detroit Three in terms of average cost per tool is 8%. Honda had the lowest costs and enjoyed a 4% advantage over Toyota. General Motors and Nissan’s costs were 9% higher than Honda’s, Ford’s 13%, and Chrysler’s 26%.
Overall, the New Domestics had lower tool costs than the Detroit Three 62% of the time over the data studied. The cost of one component must also be multiplied across the entire model line, and so savings for Toyota, with 10 North American models, would be less than savings for GM, which has 44 North American models. “This certainly confirms the government’s argument that there are too many brands at some of the Detroit Three and too much model complexity,” said Harbour-Felax. “So obviously the goal becomes how do we commonize these kinds of parts to reduce tooling costs across the company?”
Several differences have resulted in the higher costs for the Detroit Three. On average, the New Domestics spend more time on design, and the study found that 73% of time, when more time was spent on design as a percentage of the total cost, the average tool cost was lower. Also resulting from more design time was higher quality material specifications, which resulted in longer tool life and better parts, less time building the tools, fewer engineering changes, and lower tryout time.
The study identified several strategies that have advantages in terms of vendor tooling costs:
• Common architectures and global components
• Early supplier input
• Tooling standards
• Volume accuracy
Another advantage for the New Domestics is the practice of mutually beneficial payment plans: they make payments to vendors over the period during which the tools are produced. In contrast, the Detroit Three pay for tools at tool certification time, or at the end of the production process, which causes difficulties as suppliers may have to fund tool programs for up to 24 months.
Investing in engineering at the beginning of the process saves time and money downstream in the process. Nevertheless, several of the poorer performing companies studied are sending tool designs to the suppliers that are 50 to 60% complete, leading to engineering changes as the OEM gets through the product development cycle. This affects the magnitude and type of engineering changes to the tool design, further driving up costs.
A more well-rounded approach to choosing suppliers is also of benefit to OEMs. Some make selections based entirely on cost, whereas the leaders make selections based on technical capability, quality, efficiency, design, and cost.
Cost-reduction strategies are also preferable to price targets. “The best companies we are seeing are saying, ‘How can we get the cost down? Don’t talk to me about price, talk to me about better processing to get costs down,’” said Harbour-Felax. The laggards are saying, “Give me a better price without the processes that go behind that.’”
Leading companies value collaboration, have an integrated structure and forward-looking behavior, and promote a culture of trust between themselves and suppliers. The outcomes of these themes are based in the final results of the study: a compilation of all the data and a ranking of companies in terms of performance. Honda led, followed by Toyota, Nissan, GM, Ford, and Chrysler. The ratings were based on vehicle product development, manufacturing engineering, purchasing, vendor tooling, production planning, and resource integration.
“Honda has kept the focus on engineering as its core, and on being an engine company,” said Harbour-Felax. “They’ve not been sucked into the market to do heavy full-frame trucks or V8s. They didn’t grow faster than they felt they were capable to grow. It is very flexible from a manufacturing standpoint as well as from an operational and product development standpoint—very agile.” The company also has kept its capacity aligned with demand.
Honda made a small profit and experiences a much smaller change in profit over the year compared with Toyota. “
She added that she would not count the Detroit Three out. “You have to remember one thing: the Detroit Three have been the best managers of chaos in this business for 30 years, and it’s been the New Domestics that don’t know or have not been able to manage chaos because their rigid production systems have been very effective all these years.”