Automakers downshift: suppliers brace for more engineering responsibilities.

Downshifting a car racing downhill reduces rpms and helps to slow the vehicle. Car manufacturers are hoping that downshifting certain engineering responsibilities to suppliers will reduce cost and speed up vehicle development.The industry is clearly heading toward the day when automakers assemble, market and distribute vehicles, delegating nearly all except core technologies such as transmissions,

Tim Keenan

March 1, 1995

6 Min Read
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Downshifting a car racing downhill reduces rpms and helps to slow the vehicle. Car manufacturers are hoping that downshifting certain engineering responsibilities to suppliers will reduce cost and speed up vehicle development.

The industry is clearly heading toward the day when automakers assemble, market and distribute vehicles, delegating nearly all except core technologies such as transmissions, engines, axles, major stampings, plastics, climate control, electronics and proprietary in-house technology to major systems suppliers.

Chrysler Corp. leads the league in giving suppliers system design and engineering responsibility. Ford Motor Co. is right behind. Carlos E. Mazzorin, Ford vice president for production purchasing, says his plan under the Ford 2000 strategic initiative is for suppliers to do much of the technical and engineering work, testing, customer clinics and work with dealers concerning their products and to take responsibility for how their suppliers perform.

"We will be responsible for the system, suppliers will deliver what satisfies the systems," says Mr. Mazzorin. "We will not give up systems responsibility, but the suppliers will design it."

General Motors Corp. is behind the two other domestic automakers, but farther along than the Japanese, who fear losing too much control, in-house expertise and longterm competitiveness.

"The shift will take time, but it's happening," says Lyle Otremba, vice president and general manager of AUTTOCOM, a joint venture between Freudenberg-NOK and French molder Mecaplast.

Most suppliers welcome such responsibility but are wary about how this will affect their profit margins and how much recall and warranty onus wil fall on them. They see the opportunity presented by increasing their design and engineering responsibilities, and they understand the added investment involved. Training, hardware, software, people, new process equipment and tooling must be obtained and paid for. Yet the automakers aren't about to relax their stand on supplier prices.

"(Giving suppliers more engineering responsibility) makes so much sense it's scary," says Sam Licavoli, president of AO Smith Automotive. "The experts in the field should have a greater impact on the vehicle."

Mr. Licavoli and many of his contemporaries in the supplier community agree that giving vendors more engineering input will take cost out of vehicle development, eliminate redundancy and improve manufacturability and efficiency.

"The whole concept is lean development, pioneered by Chrysler and quite successfully," says Mike Boutin, former president of Walker Manufacturing Co. "They are very cost-effective with what they do with platform teams."

As much as suppliers appreciate the concept of shifting engineering responsibility, they are concemed about how much it will cost them and if they'll ever be able to recoup the investment.

"With opportunities also come risk," warns Bill Churchill, vice president of engineering at Monroe Equipment Co. "There is higher up-front investment, and you're more exposed to the economic cycling of the auto industry."

"Clearly customers are expecting to get all of this for nothing," says Mr. Boutin. "It's only worth doing if it'll save money to the overall system, but the savings should be shared."

From the OEM perspective, reward for the engineering investment will come from increased business and higher volumes as components become standardized on global platforms.

"One of our best assets is our volume base," says GM President and CEO John (Jack) Smith. "Not to take advantage of that would be a serious mistake. We must use our volume to try to lower our prices."

Higher volumes, however, won't be enough to ease the pressure on supplier bottom lines. "The dilemma is lowering the target price while still recovering the investment in engineering," explains Dan Jannette, vice president of engineering at Automotive Industries Inc. "There is a business formula to recover cost through piece price, but that keeps coming down."

Apparently suppliers will have to continue to aggressively pursue lean systems activities. "Engineering expenses have to be covered somehow," says Mr. Churchill. "If it's not in the piece price it'll have to come from cutting cycle time, doing it right the first time, driving waste out and better engineering and manufacturing processes."

"As much pressure as the OEMs put on prices, we have to put pressure on ourselves to reduce cost," says Mr. Licavoli.

One supplier believes some Tier 1 vendors will "swallow" the cost of engineering to keep OEM business over the long haul. Mr. Licavoli disagrees. "Clearly suppliers ahve to be paid for the investment," he states. "I don't think you'll have a lot of suppliers signing up for (swallowing costs). I can't afford to give things away."

In addition to the increased cost and the continual pressure on prices, suppliers who take on more engineering and design work likely will face increased warranty liability. Most don't have a problem with paying for something that's their fault, but when systems and multiple entities are involved, the gray areas appear.

"If it's clearly a manufacturing defect, no argument, it's our own fault, shouldn't have happened and we pay for it," says Mr. Bountin, whose company's exhaust-systems performance is affected by other vehicle component. "But if something on the engine-management system changed and we weren't told about it, we'd have to dispute it."

Robert S. Oswald, president of Robert Bosch Corp.'s Automotive Group, says when suppliers are involved in the design process early many causes for recalls and warranty work are eliminated. Yet these issues continue to arise.

"If we have design an engineering responsibility, we should be responsible for warranty," says Mr. Bountin. "Unfortunately the information you get from the field is scant, and it's difficult to exact responsibility."

Most suppliers questioned agree that it's difficult to get parts from dealers for investigation and that very often the process of assigning blame is at the mercy of the dealer technician who works on the vehicle.

Usually when warranty costs are in question interested parties gather to discuss what went wrong and who should pay what percentage. "It will ultimately be a joint responsibility," says Mr. Licavoli. "I don't think the auto companies can walk away from responsibility, but suppliers have to step up."

Mr. Oswald says one surprise element of assuming engineering responsibility is an increase in his company's supply base, 20% over the last two years. Which leads to the second tier's role in warranty and recall liability: Indications are that Tier 2 and other sub-suppliers also will be expected to share in these costs as well.

"We work with our suppliers as partners and our partners help if it's their responsibility. Partners share risk and reward," says Joseph R. Corace, president and CEO of Inalfa Hollandia Inc.

"You've got to put sub-suppliers through the lean systems training first; otherwise they won't have the ability to shoulder the responsibility," says Mr. Churchill.

There is an underlying fear in the supplier community that if a major recall is traced to a small component made by a small company, that entity could be put out of business. Mr. Licavoli says no to worry. "History hasn't shown that (sub-suppliers will get stuck with huge warranty bills)," he syas. "The car companies realize the financial situation of the supply base. What have you accomplished by putting them out of business? But they still have to share in the responsibility. Small suppliers are responsible for the parts they make."

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