Brain power: investing in intellectual capital in the auto supplier industry—the one asset where there isn't excess capacity

Automotive Industries, Jan, 2003 by Jason C. Brewer

OEMs and suppliers alike have over 25 percent more capacity than they can presently use. The process-oriented suppliers such as metal stampers and plastic molders are especially plagued by underutilized equipment capacity. As a result, these suppliers are competing against each other using "variable cost plus margin" pricing to fill some of the capacity, but lowering the market pricing for all participants in the process. Even the suppliers that are not process-oriented face similar challenges due to the "commoditization" of components, assemblies and systems by their customers.

If physical equipment capabilities are no longer a means to differentiate a company, then how can a supplier compete? A recent automotive supplier survey conducted by Plante & Moran and the Original Equipment Suppliers Association (OESA) concluded that a driver for superior financial performance was the development, commercial leveraging and protection of intellectual capital. These top performers invest in intellectual capital and use this value stream to support and reinforce their differentiation preposition. However, investing in intellectual capital means more than simply knowing what a company is good at. It means spending money on getting the right talent and spending time and resources to formalize the knowledge into repeatable processes and systems throughout the company.

In a series of articles in Fortune magazine in 1991, Thomas Stewart defined intellectual capital as "the intellectual material that has been formalized, captured and leveraged to produce a higher-valued asset." For this article, intellectual capital will refer to knowledge that can be repeatedly leveraged to create value for the customer and the supplier company. A high profile example is the supplier Gentex that generates continuous streams of innovative new product ideas, including patented products.

Types of supplier intellectual capital

Not all types of intellectual capital involve patents. Knowledge can be leveraged in different ways to create value. Suppliers can develop intellectual capital in at least three areas: product knowledge, process knowledge or customer knowledge.

Product knowledge. Deep knowledge of the products a supplier manufactures can be leveraged to create value for the customer and company. A common example is the black or gray box supplier that possesses the knowledge to design the product to meet customer specifications. Product design is not the only way to leverage product knowledge. Experience gained on cost effective manufacture of a particular part can also differentiate a supplier. Suppliers that understand the manufacturing process parameters that impact the product performance or product warranty better than the customer and competitors can also deliver value.

Process knowledge. A common process knowledge strategy is pursuit of the low-cost producer status for a particular process technology. Unfortunately, there are so many competitors pursuing this model that it is nearly impossible to sustain differentiation with this intellectual capital approach. There are alternative and more compelling ways to leverage process knowledge. A skilled manufacturer may be able to displace one process technology for another, such as converting a traditionally cast iron part to a steel stamping at a lower piece cost. A manufacturer skilled in process design may eliminate operations to lower the overall manufacturing cost. versus competitors. For example, staking parts within a stamping die to eliminate a secondary operation, or selecting a different lubricant to eliminate washing, can reduce the overall manufacturing costs.

Customer knowledge. Understanding the customer's needs and problems even better than the customers themselves, and using innovative problem solving can also be a very powerful differentiator. Even without innovative problem solving, understanding how to work with a difficult customer or a customer with poor internal communication or systems can entrench a supplier and keep competitors out. Some customers value the convenience of working with suppliers who have close and multiple contacts within the customer's organization, use the customer's own systems and forms, and can get things done quickly without hassle.

Building intellectual capital

The first step is to identify the core competencies of the company today. Leveraging intellectual capital is more feasible if it is built on the existing strengths of the company. Clues to core competencies may be found in the successful jobs and what made them successful. Asking additional questions, such as "what do the customers really need now and what will they need in the future" and how do the customers make money, and for what are they willing to pay" also may reveal opportunities for capturing value with intellectual capital.

Once potential channels for intellectual capital are identified, validate those opportunities by investigating the competitive landscape and explore the notions with customers. If one or more competitors are well established and recognized for a particular value stream, then that approach may not differentiate your company. The customer is less likely to view an expertise as differentiated if they already possess that knowledge, or don't recognize they need it. Often, however, larger customers' product engineers and program managers are distant from manufacturing and therefore lack the knowledge to optimize the design and processing to achieve highest performance at the lowest overall cost.