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Relevance of successful claims management in crisis years

Munich, July 2024

Relevance of successful claims management in crisis years

Munich, July 2024
W

hether the COVID-19 pandemic, supply bottlenecks, the war in Ukraine, or inflation – the crises seen in recent years have also presented the automotive industry with challenges in the form of rising interest rates, high energy costs, and volatile raw materials prices – and continue to do so.

In addition, manufacturers are exerting pressure on suppliers due to increasing price competition, which is further exacerbating the revenue and profitability situation and has already led to massive job cuts at many suppliers. Among the TOP 100 suppliers worldwide, a decline in margins from 8.3% in 2017 to around 6% in 2023 can be observed.

Suppliers had to contend with some significant cost increases in 2023. This was the result of an expert survey in which German representatives from medium-sized companies to the largest global suppliers took part. Around 76% of respondents stated that costs had risen by more than 5% (7.9% on average). The main reasons given for the increase were the higher cost of materials, wages, and energy. For 2024, the majority of experts surveyed predict the recent downward trend in producer prices to continue and lead to lower cost increases than in the previous year. Only just under 30% of experts expect costs to rise by more than 5%, with an average increase of 4.2% in 2024.

However, measures taken on the supplier cost side alone will not be sufficient to counteract the rise in costs and the further increase in pressure from OEMs in 2024. Any claims arising from cost increases, volume fluctuations, etc. need to be systematically identified and implemented. Claims management has great potential to boost revenue and earnings.

Actual cost increase in 2023 and expected cost increase in 2024 compared to the previous year

Source: Berylls by AlixPartners

While 38% of all respondents still covered more than 75% of their cost increases through claims in 2023, the outlook and level of confidence in the ability to successfully manage cost increases via claims has deteriorated for 2024. Only 19% of suppliers still expect to be able to pass on more than 75% of their increases to OEMs through claims. The majority expect less than 50% of their claims to be successful.

This development has led to a thought experiment regarding the relevance of successful claims management. According to Berylls experts, companies with outstanding claims management skills can realize up to 15% of their revenue through claims. Let us now imagine a supplier with total annual revenue of 1 billion euros, a 6% profit margin and claims realization of 100%. Based on these figures, 150 million euros of that company’s revenue is generated through claims. If the claim rate now falls to 50%, this corresponds to a drop in revenue of 75 million euros. Assuming costs remain the same, the profit margin is then reduced to –1.5% in this case and therefore in the red. Effective claims management is therefore highly relevant for the company’s results. The decline in the assertion of claims predicted by the experts for 2024 could have dramatic consequences for individual suppliers and threaten their very existence.

A shift can be observed with regard to the reasons for claiming. While higher materials costs were the most common reason for claiming in 2023, volume fluctuations are expected to be the main cause in 2024. This trend is in line with current forecasts, which recently revised production volumes in Europe slightly downwards for 2024, largely due to declining sales volume predictions for BEVs.

Actual (2023) and expected (2024) coverage of the cost increase through claims

Source: Berylls by AlixPartners

However, despite the worsened outlook, the experts surveyed rate their claims management as positive on average, according to the survey. In summary, the maturity of claims management is usually well below the optimum level, resulting in the following fields of action for suppliers:

Create transparency: In order to process claims both swiftly and successfully, comprehensive transparency regarding all options for claims, contracts with customers, cost developments, and ongoing claim processes is essential.

Establish clear rules and processes: Successful claims management requires clear structures, responsibilities, and processes. It is important to establish coherent rules for communication with customers and the involvement of management levels.

Enforce claims systematically: KPIs must be used to manage, control, and incentivize the enforcement of claims. They serve as a trigger for initiating a claim process and help to boost performance and drive effectiveness. The involvement of cross-departmental and cross-functional teams from purchasing, production, sales, and finance as well as external experts in critical negotiations is crucial to successfully asserting claims.

A final look at the survey results: In 2023, the experts surveyed were unable to compensate for a total of some EUR 2.7 billion of the total cost increases via claims. As the enforcement of claims is likely to become even more difficult in 2024, it is therefore imperative for all suppliers to further professionalize their claims management processes.

Main reasons for claims

Source: Berylls by AlixPartners

Authors
Dr. Alexander Timmer

Partner

Thorsten Lips

Partner

Philipp Stütz

Associate Partner

Maximilian Deuringer

Consultant

Philipp M. Stütz

Philipp M. Stuetz (1981) joined Berylls at the beginning of 2021. He has over fifteen years of experience in the automotive industry. Thereof he spent seven years at an international automotive supplier with assignments in Spain, the USA and Mexico and over eight years in consulting. His focus is in operations excellence, especially in large transformation programs, process optimizations and efficiency improvements in administrative functions and indirect operations areas. He counts suppliers and OEMs to his clients alike.

Philipp M. Stuetz graduated in business administration from the universities of Stuttgart and Strasbourg.

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Dr. Alexander Timmer

Dr. Alexander Timmer (1981) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry, as a partner in May 2021. He is an expert in market entry and growth strategies, M&A and can look back on many years of experience in the operations environment. Dr. Alexander Timmer has been advising automotive manufacturers and suppliers in a global context since 2012. He has in-depth expert knowledge in the areas of portfolio planning, development and production. His other areas of expertise include digitalization and the complex of topics surrounding electromobility.
Prior to joining Berylls Strategy Advisors, he worked for Booz & Company and PwC Strategy&, among others, as a member of the management team in North America, Asia and Europe.
After studying mechanical engineering at RWTH Aachen University and Chalmers University in Gothenburg, he earned his doctorate in manufacturing technologies at the Machine Tool Laboratory of RWTH Aachen University.

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Thorsten Lips

Thorsten Lips (1972) is a partner at Berylls by AlixPartners (formerly Berylls Strategy Advisors). He began his career as a management consultant at PricewaterhouseCoopers Düsseldorf in 1998. After spending six years at Malik Management Centre in St. Gallen, Switzerland, he took the cross-industry, global responsibility for Pricing, Sales, Service and Marketing as a partner at Horváth. At Berylls, his area of expertise is Pricing & Revenue Management. This encompasses classical topics like new- and used-car pricing, aftersales pricing and the like. In addition, he is an expert in innovative Pricing and Revenue Management approaches for digital products and services as well as in the field of data-driven Pricing.

Industrial engineering and management studies at the Technical University of Ilmenau and the Technical University of Darmstadt.

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