Common parts cut car costs By Michelle Krebs MOTOR MATTERS Published October 27, 2006
Detroit automakers suffer a $2,400-per-vehicle profit disadvantage compared to Japan's top automakers, according to a new study, but contrary to what company officials say, it isn't solely the result of uncontrollable health care costs. Laurie Harbour-Felax, president of the newly formed Detroit-based consulting firm Harbour-Felax Group, and her father, Jim Harbour, were frustrated hearing that health care costs were to blame for Detroit's woes. What they found was, indeed, skyrocketing health care costs accounted for the bulk -- $1,500 -- of the $2,400 profit gap. But the remainder was made up of some items that the automakers could control. They found the controllable portion falls into three major areas: revenue per vehicle, labor issues, and product design and parts commonality. "Revenue per vehicle is a huge issue," said Mrs. Harbour-Felax in an interview. "In 2005, Detroit automakers instituted employee pricing programs and huge incentives that killed them." She notes that when GM dropped employee pricing, lowered incentives and shifted to value pricing, the profit picture turned around dramatically. The study examined labor issues, such as absenteeism, relief time of workers, the number of job classifications, and quantified what those factors cost automakers. It was several hundred dollars per vehicle, depending on the manufacturer. The information in the study certainly will be used by automakers to negotiate their national contracts with the UAW, which expire in September 2007. The third part of the profit gap is in product design and product commonality, or the lack of commonality. "I believe that's the biggest area of opportunity," said Mrs. Harbour-Felax, who visited 50 supplier plants to get a sense of how well manufacturers are doing in commonizing parts -- or not. Detroit automakers have talked the commonizing game for 20 years, but, she said, organizational structures, corporate cultures and executive reward systems have restricted its expansion. The companies have restructured and could enjoy significant savings. She said GM has done the best job of commonizing globally. But one Detroit automaker that she wouldn't name still has 81 different side-view mirrors. Some are used in tiny quantities, whereas 10 different mirrors are used on
80 percent of the vehicles the manufacturer sells. "We estimated $1,000 to $1,500 a car can be saved by Detroit manufacturers. That's billions of dollars. And I actually think that's conservative," Mrs. Harbour-Felax said. By comparison, Mrs. Harbour-Felax learned by visiting supplier plants for the study that Toyota saved $1,000 per car in the past five years by commonizing platforms globally and commonizing parts that the customer doesn't see. For instance, Toyota has only seven different firewalls -- the insulation in the engine compartment that lines the wall to the passenger compartment. They are identical in shape, all of them. The only difference is in size. That means, the parts that hang to the firewall are common as well. "The savings through the supply chain can be exponential by commonizing." She said. Can Detroit ever close the gap with the Japanese? "I'm cautiously optimistic," she said. "They've all put strategies in place -- now they need to execute the strategy. They can't falter in that or they'll struggle. And they've got to do it faster." However, she added, the gap will never be closed entirely as long as the U.S. government stays out of health care and exchange rates. "The Big Three can do everything known to man, but the yen will still drive the gap," she said. In September alone, she noted, the exchange rate went from 113 yen to 118 yen to the U.S. dollar. "That five-point change created $4 billion that went back to Japanese automakers. It was money in their pocket that can go into new product." Meanwhile, Mrs. Harbour-Felax's consulting firm will focus on transforming small-to-middle-size suppliers and prepare them for the future. "I see the next five to 10 years being make-or-break for the supply base. I want to help them gain perspective and understanding on how the automakers think, breathe and do things so they are prepared," she said.