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Getting profitability back on track: Rethink your operations network now

Munich, September 2024

Getting profitability back on track: Rethink your operations

Munich, September 2024
M

argin pressures for OEMs and suppliers are here to stay and increasingly make the competitive difference - our self-assessment tool identifies the areas for action that will boost performance across the production network.

Since ever, the OEMs have been the driver for their suppliers to both diversify and grow their installed manufacturing capacities. And this was part of the “old rule” as suppliers had also been slightly outperforming OEMs on EBTIDA profitability level. However, since 2021 the usual pattern has been disrupted and the profitability has flipped the first time since more than a decade. OEMs now outperformed their suppliers by 3.5% points on profitability level – until today. The profitability of both automakers and suppliers has suffered in recent years, as the industry has navigated a series of major external crises while also managing its own transformation for an electric future. And there is no soft landing in sight – auto industry margins will remain under pressure from multiple economic challenges.

These include new forms of protectionism that are likely to hurt the car industry’s global supply chain – for example, the estimated $500bn-a-year cost of planned import taxes in the US if Donald Trump wins the presidential election in November, including a 60% tax on all goods from China. At the time of publication, the European Union was also planning to introduce tariffs of up to 38.1% on Chinese EVs amid an anti-subsidy investigation. Workforce issues are also disrupting production – the lack of skilled workers in Germany will cost the country’s economy around $52bn this year, estimates show, and a six-week strike by United Auto Workers union members in the US last year cost OEMs an estimated $10.4bn.

There is also the overarching challenge of climate change, both the changes required by regulators to reduce vehicle and factory emissions, and the impact of more frequent extreme weather events on production and supply chains.  

So how to get back on profitability track given the installed production network?

As a result, every department of an automotive company should be asking itself what it can do to stop the slippages of margins. In this piece we look specifically at operations, and what major levers are available to chief operating officers (COOs) to protect and increase profitability in the production network. Especially, how and what levers you can trigger with a competitive payback period within 2-3 years? You can also take our benchmark assessment at the end of the article, and we will share our insights directly with you.

In short, we believe the major opportunity for COOs is to rethink their approach to steering plants – to shift their focus from optimizing individual factories to the performance of the production network as a whole. Five key differentiators will enable this change:

1. Network design
2. Sourcing excellence
3. Industrialization excellence
4. People and talent
5. Sustainability

The importance of holistic network profitability management

In recent years, disruption to production has had a major negative impact on profitability as carmakers and suppliers have faced high volatility in order levels, and multiple issues in global supply chains ranging from pandemic shutdowns to attacks on shipping in the Red Sea.

In a period of so much geopolitical and economic uncertainty, OEMs and suppliers know they need to increase the flexibility and resilience of their supply chains. Operating factories as part of a network, where another plant can take over the work of one that has been impacted by shutdowns or disruption to its supply chain, requires companies to define a clear steering concept for the network, made up of governance, allocation and incentivization.

Governance: A certain degree of standardization is required to enable overall management and leverage potential across the entire network. This can be achieved by harmonizing definition and calculation of KPIs, transparency around production performance or current challenges, consistent use of network-wide MES and maintenance software and standardized supplier management processes and standards in product design and material usage.

Allocation: To hedge against order volatility and absorb high demand at peak times, COOs should be looking at ways to balance capacity between plants, and increasing the flexibility of production lines, to make it possible to quickly rethink product allocation when needed.

Incentivization: To increase network profitability, automotive companies and suppliers need to secure buy-in from all their plants, down to the level of individual employees. To incentivize teams to support the network concept, plant managers will have goals that are, at least in part, based on achieving network profitability rather than only their single plant’s profitability. This of course includes any intercompany complexities.

1. Network design

Is network design a continuous task? Yes – it should be a continued optimization once set up. The way the production network is designed and set up is crucial to making it highly profitable. At some point in time, it is also right to question the status quo and initiate a more structural footprint transition including re-allocations, downsizing or consolidation. Payback ratio here should not exceed 3 years. However, those costly restructuring efforts can be avoided by risk prevention actions.

For instance, OEMs and suppliers should have the maximum level of standardization across all plants, along with the ability to be both highly flexible when needed and to give enough power to individual plant managers to be able to delegate complex issues locally, decentralizing decisions where possible.

Of course, achieving this is very challenging. Planning robustness is key. The major risks to profitability are volatility in orders and customer requirements, which make it difficult for OEMs and suppliers to plan for the right production volumes; shortages of resources, both components and staff, which lead to constant changes in production schedules and potentially shutdowns; and external risks to production locations. We should note here that handling overcapacity by identifying the best and most efficient production footprint is something that only a few automotive suppliers have successfully achieved. More information and guidance on this topic can be found in this Berylls publication (link)

To build in the right level of standardization and flexibility in production, COOs need to take the following steps:

  • Start by assessing their existing production models and product allocations, and questioning if they are still the right ones
  • Adjust budget factory hourly rates twice per year and monitor actual cost development
  • Create a series production blueprint including qualification that standardizes the way production happens, so that volumes can be quickly transferred from one plant to another
  • Increase the flexibility of fixed assets such as machinery and buildings/real estate so that variations in areas such as volume and changeover can be easily accommodated, both through machine modules adapted to produce different parts and through different financing models. For further information on this, see (link)
  • Increase the flow of data within the network through measures such as shared databases, standardized IT interfaces, excellence initiatives driven from the top and harmonized solutions for data storage and security across the network
  • Put in place a standard KPI framework and consistent calculation across plants, for better decision making. This may allow for ‘gamification’ in which teams and factories compete for the best results
  • Make production and equipment planning decisions, including technology selection and make or buy, at a network level


Making these changes will allow automotive companies to radically improve their existing asset structures and increase cost competitiveness, which in turns allows for higher flexibility. For more on the topic of future-proofing supply chains, download our report here.

2. Sourcing excellence

Sourcing and supply chains are fields where the automotive industry has been very efficient for decades. However, the multiple crises of recent years, including Brexit, the US/China trade war, COVID-19, the wars in Ukraine and Gaza, and escalating tension between China and Taiwan, have made clear that the industry’s global supply chains are far from shock-resistant. Volatile commodity prices, particularly for parts destined for EVs, also require new competencies in modern purchasing organizations.

Building a robust supply chain now means striking a balance between cost, resilience and flexibility. OEMs and suppliers need to actively manage supply chain risk, assessing where the next problem is likely to arise, as well as actively managing suppliers. Potential solutions and approaches include:

  • Active sourcing such as buying local components for local factories, or switching to direct purchasing for critical components, for example OEMs buying semiconductors rather than leaving it to technology suppliers
  • Developing relationships with new suppliers to diversify the portfolio and increase negotiation power
  • Selecting suppliers based on performance, location and the ability to meet requirements such as holding a minimum level of stock, as well as on price
  • Supply chain collaboration with other entities, including other internal business units as well as suppliers and customers, for mutual benefits
  • Duplicating supplier capacity/capabilities for key components and materials, and in the worst case being ready to do an ad-hoc relocation
  • Think in modularization and platforms from the beginning
  • Being ready and able to substitute materials or components due to higher costs

3. Industrialization excellence

Despite working as hard as they can to keep production timelines on schedule and within budget, we estimate car manufacturers lose more than €4bn a year due to poorly managed launches. The biggest challenges in the auto industry today arise from industrializing new technologies, as software increasingly becomes the key differentiator between vehicles. Suppliers and OEMs are mastering new production technologies, and shorter product lifecycles with increasing development complexity. Integrating customer requirements throughout the industrialization phase is another challenge.

Against this backdrop, the key success factors when industrializing new programs are:

  • Setting up strong, central industrialization program management. From the outset, products should be designed with the optimum manufacturing and assembly process in mind. Automotive companies also need to actively monitor and steer new product launches and be transparent about the level of product maturity.
  • Finding the right production location through full cost accounting, including quantified flexibility costs and quantified risks.

4. People and talent

Digital twins are now commonly used in production and the first production-relevant AI use cases are coming through, but the automotive industry still relies heavily on the skills of the people working in it. However, the skills that are needed are changing as greater automation and digitization in factories replaces or changes roles. OEMs and suppliers also find themselves competing with other industries for the best-qualified employees. There is an urgent need for companies to both ensure their current workforce is trained with the right skills and hire new people to supplement existing resources as technology advances and the way cars are made changes.

To help overcome workforce hurdles, COOs should:

  • Carry out an impact analysis to understand future job profiles and the work environment
  • Model and implement flexibility in the organizational setup – for example through workforce pooling so employees are able to work on multiple lines or stations, or forming expert teams which can work across sites in a variety of roles
  • Invest in defining target culture, values and required behaviors, clarify and coach leadership principles, and build capability through training of all staff in order to increase their attractiveness as an employer in the war for talent
  • Anchor a continuous improvement program culture in production, including skills training to keep pace with changes

5. Sustainability

Environmental, social and governance (ESG) performance is increasingly important for key stakeholders, as well as a regulatory requirement. Carbon emissions are now a leading consideration when it comes to supplier selection, drivers increasingly want products that can be reused or recycled which means the automotive industry has to deliver these, and strong environmental performance is one of the elements of corporate culture that really matters to current and prospective employees. Make ESG an economic KPI to be measured and to gain benefits on the P&L and cash flow statements.

COOs must guide the production organization to play its part by:

  • Creating transparency around the ESG performance of value chain elements and organizational units; this will help suppliers to qualify for future selection by OEMs
  • Consider the ESG factors in their own supplier and manufacturing footprint selections
  • Include the “4Rs” of a product – the ability to refurbish, remanufacture, reuse and recycle – from the development stage onwards, and aim to develop the company’s own business in one or more of these areas. A refurbishing process, for example, can pick up some factory overcapacity resulting from the EV transformation
  • Active energy management and adjusting the production schedule to use a greater share of renewables

Assess your Operations network now

COOs and production organizations that actively address the challenges described above by managing their operations as a network can really make a positive difference to profitability.

Berylls and AlixPartners have extensive global project experience in managing production networks and has gathered data that has been invaluable to our work with clients in recent years. If you are interested in finding out more, complete our self-assessment (see below) on the key differentiators in order to:

  • Determine the current position of your own production network and benchmark it against peers
  • Identify initial fields of action and priorities for COOs to increase profitability

 

As soon as you provide your data we will assess the input and provide you with insights into your network profitability benchmark and ambition levels within two weeks.

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Authors
Fritz Metzger

Partner

Dr. Xing Zhou

Partner & MD

Felix Scheb

Project Manager

Fritz Metzger

Fritz Metzger (1986) joined Berylls by AlixPartners (formerly Berylls Strategy Advisors), an international strategy consultancy specializing in the automotive industry, in February 2021. He is an expert on automotive operations.

Since 2011, his focus has been on strategic alignment and operational efficiency improvement of automotive manufacturers and suppliers. He also advises top management in critical situations, including R&D and industrialization task forces and relocation and restructuring initiatives of plants and complete suppliers. The challenges of e-mobility are always in focus.

Before joining Berylls, he was a director at international strategy consultants PwC Strategy&, as well as a sales and project manager at a medium-sized supplier and mechanical engineering company.

Fritz Metzger is a trained industrial engineer with a degree from ESB Business School Reutlingen. He also holds an MBA from the University of Salzburg.

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