We share our perspective on 5 effective solutions.
Periodically, Seraph surveys key members of the automotive industry to determine the ‘real’ challenges that the industry faces on a regular basis. In our most recent survey, cost management rose prominently to the top as the primary concern for Suppliers and 2nd only behind the EV transition for OEMs.
Given inflation pressures in labor, material, and energy, it’s no surprise that companies are facing a stronger squeeze between price and cost. Continuing to address that margin gap has been a challenge for decades but is increasingly difficult. With Seraph’s work in the automotive sector and the clients we serve, we have a unique perspective on what the common and effective solutions are.
Source: Seraph Automotive Trends report
Although the rate at which average vehicle pricing increases has slowed down, it has increased approximately 20% over the past 5 years. Along with those price increases, inventory of salable vehicles has increased 48% in the past year suggesting that pricing pressures limit the ability to expect car buyers to continue to absorb the full burden of inflation pressures.
Source: Seraph Automotive Trends report
The automotive industry isn’t alone in the requirement to reduce costs in the face of inflation pressures and cost reduction and management are normal courses of business for OEMs and Suppliers alike. In Seraph’s experience, we’ve experienced a few proven practices to combat the squeeze between cost and price.
1. Back to basics
It’s always most important to rally around processes, standardization, and lean practices in crisis situations, but interestingly we find that as the situation gets more difficult, companies and teams have a habit of abandoning practices that are known to work. Working through a value-steam map exercise to improve process efficiency, maintaining good process discipline, problem-solving disciplines, and rallying around good leadership and employee empowerment processes are very strong solutions to preventing cost variances and ensuring cost avoidance in difficult times. Difficult times can not equate to excuses to abandon basic practices that allow for improvement.
2. Operational efficiency improvement
Most facilities have a never-ending pursuit of improved efficiency. Seraph is asked by clients to complete assessments of their facilities using our assessment tools and we are continually surprised at the level of inefficiency in them. Our data tells us that facilities, on average, are less efficient than they were prior to the pandemic. In many cases, facility OEE is far below expectations and there are limited actions to improve it. In most cases, team members in facilities know how to improve the OEE but lose momentum to doing so as they focus on the cost reduction activities of the day prioritized by leadership. But operational efficiency will typically result in a much greater cost save for labor, material, and energy, than micromanagement of a travel budget or an overtime approval process. Certainly, those actions should be considered part of watching a company’s costs, but it can’t stop there, and priority must be put on improvement the operations for a much better return.
3. Relocation and consolidation of footprint
As markets have changed and the squeeze has made it more and more difficult to maintain margins, it’s ever more important to review manufacturing footprints for duplicate or underutilized capacity and labor market costs. In Europe, most companies have discussed, and some are putting actions in place to move capacity to Northern Africa to reduce their labor costs. LCC labor typically has been in Eastern European countries but as they experience labor inflation rates significantly higher than countries in Western Europe, Northern Africa has become more and more attractive. While Eastern Europe remains labor cost advantaged, Northern Africa seems to provide a longer-term opportunity for investment.
4. Increased use of automation
Investment in automation has been increasing in the industry for some time. We see many countries leading the way in the investment in automation and that investment is providing for strong returns in Europe. Improving costs through labor elimination or redeploying labor to other productive areas is a sound strategy for managing costs as it reduces the marginal cost of each additional unit produced.
5. De-risking the China-Europe supply chain
China has been a region for decades that companies have sourced for lower costs, so it seems counterintuitive to discuss re-shoring from China as a potential cost management strategy. However, tariffs, geopolitical events, and the like have shown us recently that while China can provide cost improvement in the short term, there are longer term effects that must be considered in the risk analysis of sourcing in there.
About Seraph
A global enterprise consulting firm that partners with business leaders to handle their most complex problems in areas such as supply chain, operations, and manufacturing challenges while delivering long-term operational and leadership improvements. Seraph has extensive on-site industry experience in the automotive, private equity, defense, medical device, electronics, energy infrastructure, and engineering sectors. The Seraph leadership team brings vast expertise across; crisis management, mergers, acquisitions, due diligence, restructuring, turn-around services, product launches, and logistics. Our four-phase process has been proven to provide quick payback and positive ROI, which is measured throughout customer engagement. Learn more at www.seraph.com and follow Seraph on LinkedIn.
