Supply Chain Metrics That Matter:

A Focus on the Automotive Industry

Using Financial Data from Corporate Annual Reports to

Better Understand the Automotive Supply Chain

10/7/2013

By Abby Mayer Research Associate

Supply Chain Insights LLC

Contents Research ................................................................................................................................... 2

Disclosure .................................................................................................................................. 2

Research Methodology .............................................................................................................. 2

Executive Overview ................................................................................................................... 4

Has the Auto Industry Learned a Lesson? .................................................................................. 6

Growth: Boom & Bust ................................................................................................................. 6

Profitability: Domestic & International ......................................................................................... 8

Cycle: Zero-Sum ........................................................................................................................ 8

Complexity: Global Footprint ..................................................................................................... 11

Not Business as Usual .............................................................................................................. 11

Recommendations ....................................................................................................................12

Conclusion ................................................................................................................................12

Appendix ...................................................................................................................................13

Company Profiles ..................................................................................................................13

Other Reports in This Series:.................................................................................................13

About Supply Chain Insights LLC ..............................................................................................14

About Abby Mayer .....................................................................................................................14

Copyright © 2013 Supply Chain Insights LLC Page 1

Research Supply Chain Metrics That Matter is a series of reports published throughout the year by Supply

Chain Insights LLC. They are a deep focus on a specific industry.

These reports are based on data collected from financial balance sheets and income

statements over the period of 2000-2012. In these reports, we analyze how companies made

trade-offs over the course of the last decade in balancing growth, profitability, cycles and

complexity.

Within the world of Supply Chain Management (SCM), each industry is unique. We believe that

it is dangerous to list all industries in a spreadsheet and declare a supply chain leader. Instead,

we believe that we have to evaluate change over time by peer group. In this series of reports,

we analyze the potential of each supply chain peer group, share insights from leaders within

each industry, and give recommendations based on general market trends.

Disclosure Your trust is important to us. As such, we are open and transparent about our financial

relationships and our research process. This independent research is 100% funded by Supply

Chain Insights.

These reports are intended for you to read, share and use to improve your supply chain

decisions. Please share this data freely within your company and across your industry. All we

ask for in return is attribution when you use the materials in this report. We publish under the

Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and you

will find our citation policy here.

Research Methodology The basis of this report is publicly available information from corporate annual reports from the

period of 2000-2012 for publicly-owned companies involved in auto manufacturing activities.

In picking companies for the Supply Chain Metrics That Matter report, we traditionally rely on

companies recently listed in the Fortune Global 500. For the automotive industry, we identified

six companies ranked on the Fortune Global 500 for 2013. In addition, we used the Morningstar

Auto Manufacturers peer group to inform our decision.

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The financial ratios used enable supply chain leaders to better understand where the industry is

on the Supply Chain Effective Frontier. In this report, we share a framework for supply chain

excellence that balances growth, profitability, cycles and complexity metrics. In each Supply

Chain Metrics That Matter report, we share insights from each of these metrics categories. Due

to the fact that the supply chain is a complex system that must be managed holistically, we

share the trends on each of these dimensions over the course of the last decade.

We use the financial data to help readers learn from past trends, to better understand current

operating environments, and we provide recommendations for the future. We augment the

financial data analysis with information from our quantitative and qualitative research studies as

well as our work with clients operating within the industry.

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Executive Overview The automotive industry is a low margin and concentrated industry with few players. It is a

complex business.

Unlike other industries with low margins, the automotive industry has not yet developed supply

chain resiliency to weather fluctuations in demand. Over the last decade plus—while other low

margin industries have refined processes and technologies to improve profitability and manage

cycles and complexity—the automotive industry remains stuck in backwards thinking and old

paradigms. This is especially true of the North American automotive companies.

Table 1. A Review of Industry Progress from 2000-2012

Figure 1. The Effective Frontier

The challenge for all supply chains, but especially for those companies with thin operating

margins, is to balance competing priorities quickly and effectively. Supply chain leaders balance

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growth, costs, cycles and complexity. As represented in figure 1, we term this The Effective

Frontier.

The automotive industry has not yet mastered the act of balancing growth, profitability, cycles

and complexity while also remaining resilient in the face of fluctuating demand. Here we share

their story.

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Has the Auto Industry Learned a Lesson? The auto industry is back. Demand is strong and increasing. In August 2013, the Detroit 3

(Chrysler, Ford and General Motors) sold 662,669 vehicles domestically. Total U.S. auto sales

were estimated at 1.47 million units. The industry is on track to match or exceed 2007 annual

sales (16.1 million units) by the end of 2014.1 Let the good times roll, right?

Not quite. Our research indicates that the auto industry remains vulnerable and has not learned

and enacted the lessons of the past decade. The shortcomings in auto supply chain

management remain and could become problematic sooner rather than later.

The current situation is one of high demand. The supply chain is ramping up. Companies

throughout the supply chain, from manufacturers to third-tier suppliers are struggling to meet

high demand levels. In fact, many domestic auto plants shortened summer shutdowns in 2013

in an effort to meet demand levels. The traditional two-week break at the beginning of July, to

perform maintenance tasks and retool for the upcoming model year, was shortened or

completely eliminated for many plants including some run by Ford and Chrysler.2

Business is good. Demand is high. But, is the rebounding automotive supply chain flexible, agile

and resilient? Furthermore, is it ready to withstand the inevitable downturns in the economy

moving forward? They may not occur tomorrow, but they will happen. The results of our analysis

of supply chain financial ratios indicate that the boom and bust cycle of the automotive industry

remains the dangerous status quo.

Growth: Boom & Bust

After the bust of the Great Recession, the automotive industry, both domestically and

internationally, is on the rebound. Even in the face of lackluster economic growth on a global

level, car sales are up as outlined by Daimler AG in their 2012 annual report.

1 Young, Angelo. “August 2013 US Auto Sales: Detroit Three Sold 662,669 Vehicles in US Last Month; General Motors (GM) up 15%, Ford (F) And Chrysler Both Up 12%” International Business Times. 4 September 2013. http://www.ibtimes.com/august-2013-us-auto-sales-detroit-three-sold-662669-vehicles-us-last-month-general-motors-gm-15-ford Accessed 26 September 2013. 2 Isidore, Chris. “Auto plants skipping summer shutdowns.” CNN Money. 22 May 2013. http://money.cnn.com/2013/05/22/news/companies/auto-plants-summer/index.html Accessed 26 September 2013.

“Despite relatively unfavorable economic conditions, the worldwide demand for automobiles grew by almost 7% in 2012, reaching a new record level.”

• Daimler AG 2012 annual report (10K), page 88

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As seen in table 2, the swings in growth vary by company. There are clear winners and losers in

regards to stable growth. Compare the trajectory of Ford Motor Company with Volkswagen AG. In addition, the oscillations in growth for Toyota Motor Corporation are striking and create

a challenging operating environment. These cycles are not only detreminetal to the

manufacturer, but can be amplified and prove fatal for downstream suppliers trying to weather

the ups and downs.

Table 2. Year-over-Year Sales Growth (2000-2012)

Again and again, in our analysis of recent annual reports, automotive companies mentioned

emerging markets as the solution for unstable growth in more developed countries. This is an

exciting and promising opportunity. However, expansion to emerging markets and changing

growth patterns add to the complexity.

Profitability: Domestic & International

“Disproportionately high increases in unit sales and revenues in Asia and the NAFTA region are evidence of a consistent regional strategy and reduce

Daimler’s dependence on developments in Western Europe.”

•Daimler AG 2012 annual report (10K), page 18

“Like other manufacturers, we are increasing our participation in newly developed and emerging markets, such as Brazil, Russia, India, and China, in

which vehicle sales are expected to increase at a faster rate than in most mature markets."

•Ford Motor Company 2012 annual report (10K), page 12

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Profitability: Domestic & International Margins in the automotive industry are small, averaging just 3% from 2000-2012 for the six

companies. Toyota Motor Corporation with its legacy of lean thinking leads profitability, but no

automotive company has it easy. Table 3 illustrates the volatility in operating margin for the six

major companies.

The companies can be segmented into two groups. While all automotive companies profiled in

this report operate on a global basis, profitability, as measured by operating margin, presents a

stark contrast for domestic U.S. corporations versus companies headquartered in Europe or

Asia. The U.S. automotive industry is in recovery mode now, but has historically not been

designed or managed as well as the supply chains of European and Asian competitors.

Table 3. Operating Margin (2000-2012)

Success in today’s fast-paced world requires aligning supply chain strategy with business

strategy while making conscious choices. The automotive industry lags many other industries in

making trade-offs in strategy and supply chain decisions. The result is low enterprise resiliency.

Cycle: Zero-Sum Cycle management, whether it is inventory, the cash-to-cash cycle or other cycle metrics, has

been a zero-sum game in the automotive industry. Any improvement in inventory management,

for example at the manufacturer level, is usually matched with an equal setback somewhere

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farther down the supply chain. Table 4 illustrates the trend in Days of Inventory (DOI) over the

past 13 years.

Table 4. Days of Inventory (2000-2012)

We find that total inventory reduction in the value chain is not the reality. Instead, it is being

shuffled between various tiers of the supply chain. Figure 2 illustrates the average performance

of auto manufacturers and auto parts industry peer groups. Notice that increasing inventory

turns (good) for the auto parts industry from 2002 to 2005 is shadowed by decreasing inventory

turns (bad) for the auto manufacturers in the same time period. As a result, there are no

winners. The tier one manufacturers have pushed costs and waste backwards in the supply

chain to companies that are generally more vulnerable. As a result, the gains are simply traded

back and forth from one tier to the next.

The industry is not moving forward. The top-tier automotive companies are not owning their

value network. Note that during the Great Recession, while other industries improved payment

terms and relationships with suppliers to ensure resiliency throughout the supply chain, the auto

industry did the opposite. They were able to push an increase in inventory turns from 2007-2009

only by hurting inventory management performance at the auto parts level.

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Figure 2. Inventory Turns (Auto Manufacturers & Auto Parts Industry Averages) (2000-2012)

“In addition, our move to global vehicle platforms increases our ability to source to common suppliers for the total global volume of vehicle components

resulting in a smaller number of suppliers receiving a greater volume of purchases to support our global vehicle platforms and allowing us to gain

greater economies of scale.”

•Ford Motor Company 2012 annual report (10K), page 14

“From the twin perspectives of quality assurance and improving international competitiveness, parts standardization must be conducted jointly with

suppliers. Parts standardization also leads to increases in the production volume of each part, making it possible to diversify suppliers and production

sites without losing efficiency. This enables stable supplies even during emergencies, thereby strengthening the supply chain.”

•Toyota Motor Corporation 2012 annual report (10K), page 12

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Complexity: Global Footprint Rising complexity is compounding the problem. Cross-industry analysis of revenue per

employee performance, as shown in table 5, illustrates that automotive manufacturers are

squarely in the middle of the pack when it comes to improving revenue per employee

performance over the past 13 years.

Table 5: Revenue per Employee Across 8 Industries (2000-2012)

Not Business as Usual Today, the automotive industry is soaring on the boom portion of a repeating boom and bust

cycle. However, several factors indicate that this is not the time for business as usual. The

depths of the financial crisis, seen most severely in the bankruptcy of General Motors Company, indicate that the industry requires serious changes.

Reasons to change are endless, and the list of ongoing and potential shifts in the industry is

significant. Driverless vehicles and electric cars are two of the looming disruptors. Google is

developing technology for self-driving cars. Tesla is not only reinvigorating the possibilities of

electric cars; they are also disrupting the traditional franchise model by selling directly to

consumers. Hybrid and electric options are proliferating as companies and consumers get

serious about Corporate Social Responsibility and a greener planet.

In order to survive and prosper, the more traditional auto manufacturers profiled in this report

must rise to the challenge.

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Recommendations In this concentrated industry, automotive companies need to become more resilient and own

their entire value network. There is no strong leader to learn from. As a result, to break the

boom and bust cycle currently occurring in the automotive industry, companies need to look

outside their industry to consider alternatives. Here are our recommendations.

• Redesign Outside-In. Many industries are more advanced in their journey to supply

chain excellence than the automotive industry. Instead of reinventing the wheel, supply

chain leaders should consider coopting best practices from other industries that have

gone before. In addition to the processes and technologies that can be implemented,

consider the people aspect as well in hiring outside of the sometimes insular automotive

industry.

• Establish Mutually, Beneficial Relationships with Suppliers. Improved inventory

management, or decreased cash-to-cash cycles, should not be a zero-sum game. By

treating suppliers as critical to success, as opposed to cultivating an antagonistic

relationship, automotive manufacturers could raise the performance of the entire value

chain.

• Invest in the Digital Supply Chain. The integration of 3-D printing with sophisticated

CAD/CAM can enable a new design of the supply chain. It is one where parts for

automotive service can be made locally as needed. It is also a world where supplier

productivity and outside-in design networks can accelerate to bring new car designs to

market quicker. No longer does the car have to be made the Henry Ford way of “they

can have it in any color as long as it is black.”

• Embrace the Disruptors. It’s not only about doing what we’ve done better. It is about

doing new better. Advances are being made every day in the development of new

technologies to revolutionize the automotive industry, and large manufacturers should

consider the long view in designing the supply chain now to produce the automobiles of

the future.

Conclusion The automotive industry has been through a lot in the past decade, but is not learning how to

become more resilient. The industry is insular with limited learning from other value networks.

This is an opportunity. The design for a more stable supply chain needs to happen now in the

boom times to reduce the crash of the looming downturn. Now is the time to focus on building

resilient supply chains to prepare for the future.

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Appendix

Company Profiles

Other Reports in This Series: Supply Chain Metrics That Matter: A Focus on Retail Published by Supply Chain Insights in August 2012. Supply Chain Metrics That Matter: A Focus on Consumer Products Published by Supply Chain Insights in September 2012. Supply Chain Metrics That Matter: A Focus on the Chemical Industry Published by Supply Chain Insights in November 2012. Supply Chain Metrics That Matter: The Cash-to-Cash Cycle Published by Supply Chain Insights in November 2012. Supply Chain Metrics That Matter: A Focus on the Pharmaceutical Industry Published by Supply Chain Insights in December 2012. Supply Chain Metrics That Matter: Driving Reliability in Margins Published by Supply Chain Insights in January 2013. Supply Chain Metrics That Matter: A Focus on Hospitals Published by Supply Chain Insights in January 2013.

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Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail Published by Supply Chain Insights in February 2013. Supply Chain Metrics That Matter: A Focus on Medical Device Manufacturers Published by Supply Chain Insights in February 2013. Supply Chain Metrics That Matter: A Focus on Consumer Electronics Published by Supply Chain Insights in April 2013. Supply Chain Metrics That Matter: A Focus on Apparel Published by Supply Chain Insights in May 2013 Supply Chain Metrics That Matter: A Focus on Contract Manufacturing Published by Supply Chain Insights in August 2013

About Supply Chain Insights LLC Supply Chain Insights LLC is a research and advisory firm focused on reinventing the analyst

model. The services of the company are designed to help supply chain teams improve value-

based outcomes through research-based Advisory Services, a dedicated Supply Chain

Community and public/in-house training. Supply Chain Insights is focused on delivering

independent, actionable and objective advice for supply chain leaders. A company

dedicated to research, turn to us when you want the latest insights on supply chain trends,

technologies to know and metrics that matter.

About Abby Mayer

Abby Mayer (twitter ID @indexgirl), Research Associate, is one of the

original members of the Supply Chain Insights LLC team. She is also the

author of the newly-founded blog, Supply Chain Index. Her supply chain

interests include connecting financial performance and supply chain

excellence, as well as talent management issues and emerging markets.

Abby has a B.A. in International Politics and Economics from Middlebury

College and an M.S. in International Supply Chain Management from

Plymouth University in the United Kingdom. She has also completed a

thru-hike of Vermont’s 280 mile Long Trail, the oldest long distance hiking trail in the United

States. As part of the planning and food prep process, she became interested in supply chain

management when she was asked to predict hunger pangs for the entire three-week trip before

departure. If that isn’t advanced demand planning, what is?!?!

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