Cut Costs & Eliminate Warranty, Freudenberg-NOK Chairman Tells Suppliers

Autoparts Report,  Dec 15, 2000  

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To protect market share and compete with Japanese automakers in both quality and cost, domestic automakers should mandate that their suppliers adopt lean systems, according to Joseph C. Day, chairman & CEO of Freudenberg-NOK. Day, who also serves as the second-term chairman of the Original Equipment Suppliers Association, made his comments at the recent Economic Club of Detroit's 35th Annual Economic Outlook Luncheon.

"Warranty offers domestic automakers the biggest opportunity for total cost reduction. Currently the Big 3 (domestic) automakers spend about $6 billion a year on warranty repairs ... or an average of $500 per new car sold," Day said. "The Japanese vehicle industry has significant advantage, as their warranty costs per new car sold are perhaps less than $75 per car." The difference, Day said, is that the Japanese vehicle manufacturers demand that their suppliers practice the lean business principles commonly known as the Toyota Production System.

"With the Japanese automakers, either you learn and practice lean ... or you're kicked out of their supply base," Day said. "Many of us in the supply base have been preaching the same thing to the U.S. vehicle and supply community, but to little avail. Until the U.S. automotive community mandates lean processes from their suppliers, the costs won't come out, the quality won't go up and the overall competitiveness of the U.S. auto community will suffer."

Lean systems have proven to be the single most powerful and effective tool an automotive supplier can use to improve productivity, quality and responsiveness, according to Day. The Society of Automotive Engineers (SAE) has developed a lean self- certification process that carmakers are now beginning to consider as a prerequisite to being a supplier, and Day encourages the carmakers to utilize the SAE certification process as an important first step in the adoption of lean systems across the supply base.

In his remarks, Day also said that lower U.S. vehicle sales volumes predicted for 2001 (between 15.8 million and 16.5 million units versus 17.5 million for 2000) could create turmoil for many suppliers, especially those who allowed significant cost to creep into their operations as they scrambled to serve the unprecedented vehicle production rates of 1999 and 2000. "Extracting those costs now will be complex ... it will generate added pressure and instability within the majority of component suppliers, and it will create uncertainty in the continuity of supply, as too many companies today only have EBIT (earnings before interest and taxes) levels modestly above their debt service cost," he said.

Compounding the plight of automotive suppliers, Day said, is that they're also being asked to assume more responsibility in terms of global supply, engineering and development; to share in warranty responsibility; to adopt new e-commerce technologies; to absorb skyrocketing health care costs and higher labor rates; and to certify their plants to ISO 14001 environmental standards.

Still, Day said he feels the challenges that the U.S. auto industry faces in 2001 are manageable, and that stronger industry partnerships and closer cooperation in attacking warranty costs through mandated certification of lean systems can help to create a positive outcome. "I am hopeful that automakers and their suppliers will be able to work together in 2001 to arrive at a solution which will allow the industry to cut costs while still protecting each other's margins," Day said.

COPYRIGHT 2000 Ron DeMarines
COPYRIGHT 2008 Gale, Cengage Learning