Navigating the Cost of Increased Government Regulations for Automotive Manufacturers – Part 1: Roadblocks to Profitability
New laws enacted in recent years in both North America and Europe require automotive manufacturers to meet increasingly stringent standards for fuel efficiency, vehicle emissions and vehicle weight on many new models. These rules and regulations are different in every major economy, but to date, they have been instrumental in reducing regulated emissions – and that is very positive. At the same time, though, they have added new cost burdens at a time when automotive profits are already under significant pressure.
This is the first in a series of blog posts discussing the impact of these new regulations and how automotive manufacturers can navigate their effect on costs.
Impact Across the Product Lifecycle
The new regulations are not limited to product design. They have a big impact across the entire product lifecycle – forcing manufacturers to revisit design concepts, re-tool manufacturing processes, find new suppliers that can meet the new requirements, insert checkpoints to ensure compliance and manage a whole new set of factors that threaten to drive the cost of their products up and profits down. For example:
- Manufacturers are now evaluating and funding multiple product design alternatives to find the best, most cost-effective solution to meet new requirements. These decisions are often made with limited cost data available at the front-end of the design process and do not take into account resource availability, design cost and supply chain capacity.
- Many of the required adjustments to vehicles involve additional electromechanical systems and computer software that are harder to prototype and QC than mechanical systems. This often means integrating information from a wide variety of design tools such as MCAD, ECAD, Software, Tech Pubs, etc.
- The capital investments associated with retrofitting and re-tooling existing facilities to meet new requirements are significant. And they vary by geographic market adding further cost and complexity.
- Coordinating product development and manufacturing efforts between internal teams from different cultures, languages, time zones, and information technology infrastructures is also extremely challenging and can negatively impact time to market and result in costly rework in engineering or excessive scrap costs in manufacturing.
- Most OEMs and Top Tier suppliers are outsourcing more of their detailed design and manufacturing to partners located in geographies far from their own. Managing engineering changes and costs across these extended supply chains adds additional levels of complexity and difficulty.
- For Tier 1 suppliers, negotiating price and product cost on a complex mix of products flowing through the supply chain is also extremely challenging. This makes it more difficult to provide timely and accurate response to RFQs from OEM customers.
For most major automotive OEMs and large Tier 1 suppliers, cost data is scattered across the entire organization in PLM, ERP, SCM and MES systems making it very difficult to get a single consistent view of product cost. Different departments and product groups each have their own, often conflicting, cost goals and agendas. As a result, manufacturers often discover too far along the product lifecycle that they are already unprofitable.
These companies typically have dedicated cost engineering teams; however, these teams only have the bandwidth to analyze a small percentage of the new parts designed by engineering teams. And most design/engineering teams don’t understand the real cost consequences of the design tradeoff decisions they make each and every day.
They focus on form, fit and function, and are at best peripherally concerned with cost implications. As a result, engineering changes are discovered late in the design process causing expensive rework. Likewise, failure to involve suppliers early in the design phase results in sub-optimal product design and increased costs as well.
All of these circumstances make it even more difficult for automotive manufacturers to respond to these new requirements in an effective and cost efficient manner. In my next installment, Selecting the Best Route to Cost Reduction, I’ll look at some ways these new challenges can be offset – both directly and indirectly across different points in the product development lifecycle.
Want to learn more about these issues and strategies to offset their impact?
Download the whitepaper, How Automotive Manufacturers Can Navigate the Cost of Increased Government Regulation.