Panel Discussion: How to Drive Profitability in Uncertain Times

Chris Jeznach: I’m Chris Jeznach. I lead the product marketing team here at aPriori. And I’m really excited to get things kicked off here. We chose this track. We’ll give a little bit more of how we chose the different tracks we have here. But first off here, a little bit of background. I’ve been here about two and a half years. And my experience before joining aPriori, I’ve been to a couple of different manufacturers. One was Spiral International, an engineered, faster manufacturer. And then Sensata Technologies, where I actually learned that I overlapped with one of our panelists here, Ramelle. So Ramelle Gilliland is Executive Vice President, Supply Chain and Logistics at Lightning eMotors. Welcome, Ramelle.

We’re also joined here on stage by Craig Melrose. Welcome, Craig. Executive Vice President, Digital Transformation Solutions at PTC. And John Pilla. John is a former engineering executive at Spirit AeroSystems. Welcome, John. So we’ll give each of them a moment here to introduce themselves and go through a little bit more in their background and history with aPriori.

72% of CEOs Prioritize Cost Reduction Strategies

But to kick things off, how I wanted to start here is give a little bit background on the top priorities in manufacturing and what we’re seeing. And really, this track aligns with the first one that we see here, tackling inflation and margin pressure. There was a survey that one of the top major management consultants did this year. And when they interviewed the C-suite, it was 72% of CEOs were seeking out cost reduction initiatives, right?

It’s not surprising. And so that’s really what we’re going to focus on here. How do we do that? How do we help give new ideas how to think about this and put it in perspective for business growth and the bottom line? So there’s two other tracks that are happening, but we’re going to tie in these concepts throughout the panel here. So the middle here is mitigating supply chain and manufacturing risk. We’ll definitely be hitting on that a bit here as well. And then how do you bring carbon and cost together? All right. So we’ll be talking about that as well. Now, profit margin. We take a look and look at how do we define what profit margin is? It’s a relatively simple formula, but we all know it’s very complicated to deliver on.

Defining Profit Margins

And when we take a look at this, margin is price minus cost, right? But when we look at the cost side, to do this is very challenging. All of us, we’ve been involved in the business strategy of cost benchmarking, cost modeling, Should Costing, cost management, and pricing strategies. There’s so many ways that a lot of us are looking at costs. And to really hit our targets can be incredibly challenging. Now, we actually have a mic. We want to make this interactive. How many here had some sort of goal, either for yourself or your department, related to cost in the past year, either now or in the past year by show of hands? Okay, let’s keep those up. Let’s just keep seeing them here. How many have met all of your goals that you had around costs. Let’s keep keep them up. Okay, we’ve got some in the front. We’ve actually got a microphone. Olivia, could you? We would love to hear like, What have you done to achieve those goals, tell us maybe something you’ve done lesson learned that might be interesting for the team for us to reflect on.

Meeting Cost Goals: Customer Examples

Umakant Katu: Couple of things we do differently. One thing is the functional analysis. We do the DFV approach, which is design for value approach, which is one set of, to build the strong cost pipeline on that one. The second area, which is most important, is to do the competitive analysis, gaining the tear downs, as well as doing some of the should costing. And then we started doing the aPriori pipeline as well. We do that one as well. I think those are the couple of areas where we try to build a strong pipeline for the cost and then drive those goals towards the achievement. That’s, I think, key one, to do that.

CJ: Excellent. Thanks for sharing. Sorry, and so your name?

UK: Yeah, my name is Umakant Katu, and I’m an Engineering Director.

CJ: Great. Thanks so much. How about a round of applause? Thanks for sharing.

CJ: So we’d love to hear we’re going to have some Q&A to answer any questions you might have here in a moment, but we’re going to go ahead and dive in. Now I’m going to pass it over to the panelists here and we’ll start with Ramelle. Ramelle, I would love for you to just introduce yourself a bit more, your background experience with aPriori to kind of give the audience here perspective.

Creating a Cost Estimating Group as Part of a Business Model

Ramelle Gilliland: Okay. I’m Ramelle Gilliland and I’ve been in supply chain for over 20 years and I started out my career at Ford Motor Company and I worked for multiple automotive companies, Sensata Technologies included. And when I was at Sensata Technologies, we didn’t have a cost estimating group and we didn’t have the concept of new program sourcing. And it was kind of disparate and how we manage that and introduce products with costs. So I was tasked with coming up with their new program, introduction sourcing process and developing our cost estimating group for Sensata. And so that was my first introduction to aPriori. And we were very successful in implementing aPriori and that organization is still growing today.

My second round with aPriori was at GE Appliances. You heard Jill Snyder speak earlier. So when I first came into GE Appliances, I was tasked with identifying the software that we were going to use to build cost estimating. So again, we went with aPriori and then Jill led that group and still leads that group today. So I’ve done two aPriori implementations, a lot of experience around cost management and sourcing and now at Lightning eMotors, I manage the full supply chain and logistics group. So it’s a little bit of a different structure. When we look at aPriori, it’s more of a design for cost and maybe more of a make versus buy analysis for us to use the tool.

Great, thanks Ramelle. Welcome. Craig, what for you to introduce yourself.

Digital Transformation is Key to Streamlining Processes

Craig Melrose: Afternoon and welcome everyone. As Chris mentioned, my name is Craig Melrose. I work with PTC and think about digital transformation solutions, but also the digital thread from the standpoint of engineering, manufacturing, even field service. But for today, we’ll talk about manufacturing and engineering. Think of me as a 30-year operations digital transformation person. As I just mentioned, the last five years have been at PTC embedding the previous 25 years of experience in the software to help companies around the globe. Just prior to PTC, I spent over 20 years with McKinsey & Company and their operations practice. I was responsible for product development, manufacturing, supply chain, procurement, capital productivity. So all the different functional areas as McKinsey organized it. I also had the opportunity to work with multiple customers in every vertical industry. About half of the Fortune 500, again, all of those problems, operational improvements were around product development, manufacturing, supply chain, procurement.

CM: So a broad view of the globe, a broad view of operations, which was extremely valuable to me. The reason McKinsey thought I was decently intelligent to try to help all those customers was prior to McKinsey, I spent five years with Toyota North America where I was responsible for new product introduction for all the North American manufacturing sites in their weld shops. So I was between product development and manufacturing, taking designs, building equipment, building processes, installing those equipment and processes, training the plants on how to operate that equipment to hit cost quality delivery targets, and then supporting plans for launch to full volume. And again, that was for all of North America. So think of me as kind of a varied career that is literally and figuratively sitting between these two panelists and their careers.

CJ: Great. Thanks, Craig. John?

John Pilla: Hey, good afternoon. I’m John Pilla. I’ve spent 42 years in the aerospace and defense business. I started when I was six.

JP: All right, somebody got it. I did a lot of program management work, started as an engineer, probably the only person in the world to have been program leader on the composite 787 and the A350 composite airplane in two different times. Last few years, I ran a couple different billion-dollar businesses within Spirit, and I closed my career as the chief technology officer a couple of years ago. So now I’m the dreaded consultant. I spend my time on advisory boards, such as the one with aPriori, which is why I’m really here this week.

CJ: Great. Thanks so much. And Welcome again. So you can see we’ve really got a wealth of knowledge here amongst our three panelists from a broad different age. So let’s go ahead and really get started here. So we’re going to go into the main panel discussion here. So Ramelle, I’d like to start with you here. Can you tell us a bit from your experience, really, what role does this procurement and supply teams play in driving profitability up? And so, it’s often, is profitability a goal that procurement supply chain teams are tasked with? Should they be? And what’s your perspective on that?

Strategic Planning: How Purchasing and Sourcing Play a Role in Profitability

RG: So I think purchasing or sourcing always has a goal of profitability, but it comes through costs. We control the cost piece. It’s our role to make sure the costs are reduced year over year from a negotiation standpoint with suppliers. We have to go out, we have to do discovery and find new suppliers, new technologies to bring back to the company to help drive out costs, improve revenue growth, and provide more value to the customers. So profitability for us comes through how we manage costs and how we bring technology into the company.

How Manufacturing and Engineering Fosters Profitability

CJ: Great, thanks. Craig, what’s your take on it with your experience in manufacturing and engineering? Is profitability and cost reduction a target for those teams? And what’s your thought there?

CM: Sure, sure. You mentioned we want to make this interactive. Maybe just a quick show of hands. Whose business is in business to make money? Is cash flow important? Okay, profitability matters. [laughter] Absolutely, profitability matters. I think from my standpoint in my career, I look at it simplistically to break it down to be able to really get your hands around it. I look at it as almost cost per unit. Where in the numerator, cost is gonna be mostly material and labor. And from a material standpoint, engineering and procurement, manage and improve that in a multitude of different ways, which we’ll get into today. From a labor standpoint, a majority of that labor is in manufacturing, and so you’re trying to optimize manufacturing, you’re trying to optimize engineering to tackle the numerator. Manufacturing and procurement have an opportunity to also manage the denominator, volume. Now that volume needs to be on time and in full. That’s procurement’s role.

CM: But at the same time, manufacturing can flex up and down on volume to kind of go through cycle, manage recessions (downturns), inflation, manage moving volume around the globe, high cost, low cost, new product launches, sustainable growth, all these different other variables. And so I think cost per unit is an easy KPI to start thinking about profitability. And then the hidden piece in all of that is timing, lead time and cycle time. Both are absolutely critical, again, dependent upon the business, but lead time and cycle time are critical KPIs in order to make that whole equation get to the customer at the right time, right quantity, right place, right quality level, et cetera, et cetera.

CJ: Great, thanks. And John, what’s your take on this? From your being Chief Technical Officer at Spirit, what were some of the goals that your team was responsible for? And if they weren’t maybe directly related to cost reduction or profitability, how did they relate? What’s your take there?

JP: Lots of times in engineering, in small and large companies, there’s a couple of different metrics. And while cost is one of them, often there are not good cost estimating tools. And so the engineers manage what they know how to manage, which is usually a performance metric like the weight of an airplane or in addition to the schedule. Schedule is king to customer satisfaction. So sometimes should be managed better, but it usually gets a little short shrift from the engineering team.

Margin Goals: To Share or Not to Share with Suppliers

CJ: Great. All right, I want to start this next one, Craig, with you. Margin goals. We all have suppliers, right? And there’s this thought around how open should we be with what margin targets should be? Should these be shared with suppliers between, let’s just say, tier one and tier two, as you think about the supply chain? How do you think about that? Should we have shared margin goals? And what are your thoughts on that?

CM: As I mentioned, I’m a recovering consultant, and so I’m going to come at this from a couple different angles, right? I think one is absolutely margin goals should be shared and co-owned across the supply chain. Super easy statement to make. The execution of that is really challenging, and the reason the execution of that is extremely challenging is the other angle on this. It is more a cultural issue than it is a financial and data share issue. So I go back clear to the beginning of my career, for those that may have heard or know the word keiretsu. This is the Japanese term of OEMs and suppliers working together and collaborating. Now, they don’t necessarily do it from a standpoint of love.

CM: But they do it from a standpoint of necessity, where they’re innovating together, they’re managing costs together and it even has morphed to the point that suppliers are building entire subsystems, not components, because a subsystem is more valuable. But each one is asking the other for their expertise in functional design, in meeting targets and parameters like weight or performance or whatever it might be. But also cost, and in having that cost conversation, they are sharing margin examples or even exact numbers to make sure that both sides of that equation are balanced, because if the supplier survives and thrives, the OEM will survive and thrive, and they both know it and realize it. Everything I just described is a cultural construct that then has operational and financial metrics inside of it, so absolutely margin should be shared. It’s challenging, and everybody should try to think through how to get there, but it is the right destination to strive for, my opinion.

CJ: Great. Ramelle, any comments there, more kind of from the manufacturing engineering perspective, from a procurement perspective, you’re dealing with them day to day. What’s your take on this?

RG: Well, I think there is a cultural issue in how you get there, but I also think there’s an understanding of what the value add is and the key factors that each party brings, right? Because it’s very different if you’re doing something that’s technology driven versus making a screw, right? You can’t expect to have equality of margins depending on what your value add is, and I think that’s where people will have a cultural difference and struggle because if you read a public company’s statements and they say, well, their margin is 20%, therefore my margin is 20%, it doesn’t work.

[laughter]

 

CM: Am I allowed to rebuttal?

CJ: Absolutely.

[laughter]

 

CM: All right. I don’t think equality of margin, it’s transparency of margin.

RG: Right.

CM: To share.

RG: And that’s where I think the cultural piece comes in, because people will expect equality.

CM: Fair, and so that has to be worked through, ’cause a commodity might be 5% margin, not a 20% margin, whatever it might be. Absolutely, absolutely.

CJ: John, any take here?

JP: I would just add two things. One, it’s important to talk about the individual cost of capital, and a lot of people don’t think of that, but many smaller companies have higher cost of capital than a big company, just because there’s more risk. It’s the same as a risk level for an individual. And then the second thing I would add is that, trying to share margins will go a lot further if there’s a partnership that says, let us talk about how to make this thing, and where can we shave costs together, and then share in that together. And that’s really tough. A lot of that together stuff doesn’t happen, but that’s the way to make this successful.

How Does Inflation Affect OEM and Supplier Relationships?

CJ: Great. So I want to tie in a little bit from the presentation Peter Zeihan this morning. We heard… I’m still thinking about some of the stats that were shown on there, but one was about inflation. We’ve all seen how inflation’s been going and seen this. So I want to actually ask this one, Ramelle, to you. During inflationary times, what are some things that you do to kind of offset that, working with suppliers? There’s only so much you can do, it seems like, but what are some things that maybe strategically you’ve done to help offset that, combat some of the inflationary arises that we’ve been seeing?

RG: So usually the inflation comes around raw materials or maybe labor costs. So it goes to working with the suppliers to understand what can we do to manage those costs. Is there opportunity to go to other materials maybe that have a lower cost, or different ways to look at the design to improve it so we’re not using as much of whatever is driving the inflation? And I would say the other thing is when you negotiate and you have to concede inflation to your suppliers, you need to put the tools in place to manage that over time, so you get the claw back when the material starts to deflate or what was driving the costs is starting to deflate. If you don’t have that discussion in the beginning, it’s very hard to come back two years later and say, well, we gave you a price increase and now we want that money back because they’ve already taken it, their small business is running off of that price. It’s very hard to get back without those tools in place when you actually concede and make a decision to accept whatever the inflationary terms are.

CJ: John any comments?

JP: I would agree with Ramelle, I would just say that again an open discussion depending on the length of the contract, if it’s one year contract it’s not that much risk, the buyer or the person receiving the things might want a longer contract to try and lock in their pricing. But then you just have to have a clear discussion of okay, how much of this new price is gonna be based on some inflation? My material costs will go up, my labor costs go up, I would say that most older contracts especially long-term ones, when we were in the zone of no inflation that Peter was talking about this morning, a lot of them don’t have inflation accounted for at all unless it’s some hyperinflation, and that’s makes it very difficult on smaller suppliers in these kind of markets we’re talking about if you’re stuck with a contract like that.

Tackling Profitability From Different Perspectives

CJ: Alright, got it. This next one though is for you Craig so you can’t say no here. I just wanna talk about your transition, when you made the transition kind of from McKinsey in consulting to now at PTC, like how has your view on companies challenges with tackling profitability meeting cost targets changed? Maybe even thinking about industry specifics like what have you seen kind of as you made that transition to now being at PTC?

CM: Sure, sure. So as a consultant in particular McKinsey, McKinsey’s not inexpensive. I always worked on what was a top three company agenda item, right? If it didn’t have something that looked like $100 million associated with the impact or greater, we weren’t involved, right? That’s fun, that’s daunting as well at times. But it’s fun because you know whatever it is that you’re working on is a top three agenda item, and when completed, it will absolutely make a difference for the company, it will truly be transformative. At the same time as a consultant, you see the beginning of those projects but you never see the middle or end of those projects, because you’re expensive. And so you’re there you get it solved, you get it underway, you get the boundaries put around it and then the organization takes off with it as it should.

CM: There was a saying that that I adopted, you can have something done to you, done for you, or done through you to and for are failure modes, right? So it has to be through an organization, and I enjoyed that as a consultant to be able to to set it up, it’s a top agenda item and it’s being done through the company. I also think there are 1000 medium-sized items that happen that are as big or bigger than those one two or three items that I was always involved in as a consultant. And for me that’s the large shift, the day-to-day is as critical as the large or it needs to be, right? And I don’t know that all organizations think about rolling that up and saying do we have a portfolio that’s as big as our top three?

And are these in balance so that we’re always working on the highest priority items the most critical items that are really gonna truly transform a company? Or is it just the flavor of the month the fire of the moment? And I don’t want that for anyone. So I think certainly size and frequency is something that’s radically different for me. The other piece I would say is timing, right? When I was involved in large projects it would be measured in months, always. Organizations operate in months but also years, right? That portfolio of many more items that may take one year two year three years to execute or the top agenda item may take 1, 2, 3 years just to permeate the organization and and truly come to fruition. And so I think there’s a timing issue that’s also radically different in industry versus consulting in addition to kind of the size and frequency of activity.

CJ: When you say you worked on top initiatives, was cost management, cost reduction usually up there? And if it wasn’t like how are the let’s say at the C-level deciding when this makes sense or not to be a top initiative?

CM: Sure, sure. So I’ll touch on the previous question and tie it into this one. As a consultant, I was always thinking through cycle, right? Whatever we do needs to be recession proof and inflation proof. We are thinking through cycle. The recession will last a period of time. The inflation will last a period of time does not matter. How do we build something that’s flexible enough to adapt into those environments but also how do we take cost out, so we have the degrees of freedom to manage those environments, right? So for example John and I were sharing war stories around the 787 aircraft. I happened to be involved in that program, was there and worked with a bunch of large suppliers. It was a little bit longer than a year that we were there. In the course of that at the beginning they were making seven planes a month, at the end of that they were making 14 planes a month. That’s a lot of freedom. They were doing it in two different locations. So one location was doing three and three, three and a half, three and a half for the seven. Now they’re doing seven and seven, if something were to happen you could shut down one site and still make seven.

You could take both sites and go to one shift and still make seven. So just the degrees of freedom and flexibility that if the market went back to only seven or if the market is at 14 and being able to adjust to that and flex to that at the same time, these airplanes are $250 million purchase price, so it’s easy to get a lot of zeros on the numbers. We took about $5 billion in cost out, we deferred about $5 billion in CapEx. And then if they’re sold at $250 million going from seven to 14 is several billion dollars a month. So just also a lot of degrees of freedom in the cost reduction to achieve the revenue and then flexibility in managing the revenue based on market conditions, just as an example. Those are the types of solutions I would urge everyone to think about, ’cause that makes it recession and inflation proof.

CJ: Great. Thank you. And Ramelle, I want to turn it to you. We talked about kind of perspective on this topic and as you maybe make a shift in your career it changes, right? Like you went from Sensata to GE Appliances now to Lightning eMotors, all very different companies. Like how has that your perspective on this maybe change as you’ve changed in your career?

RG: I think you get an appreciation of all of the different pieces that have to work together for manufacturing. And you work for a large company and a lot of times you’re working with larger companies and they’re sophisticated, they have tools like aPriori they have other tools that they use, and you have a similar framework for business. And as you change and go to smaller companies and the company I’m with now is very much a startup. It’s been around for a while but we’re working with a lot of companies where it’s their first product launch or we’re working in developing items with companies that are similar size. And you just appreciate and sometimes like not having the structure of a large company and being able to take risks and to be a little bit more free with innovation because you don’t have that bureaucracy and you also wanna go really fast.

RG: Your cycle time is a lot faster to what you wanna do as far as introducing new products. So it’s sometimes I really miss having the structure, ’cause you you want people to follow certain guidelines and make sure that we’re making the right financial decisions but on the other hand there’s a lot of it’s nice to have a lot of freedom to go out and take more risks and develop new technologies and it’s not the end of the world if they don’t work, you move on and you try something else. It’s a little bit… It’s a very different between the companies.

CJ: Great. Now John I know you spent a lot of your career at Spirit AeroSystems, but now as you’ve kind of transitioned more to consulting advising have you seen any big differences from what you’re seeing even recently and as you engage with clients and how they think about profitability what their challenges are?

JP: So one of the challenges we haven’t addressed is, a company’s ability to spend money on improving themselves literally including paying for the aPriori software. When you’re in the middle of inflationary pressures, cost push. Sometimes this stuff gets shoved off to the side, and it’s really important to engage the leaders of whatever those decision making bodies are whether it’s IT, supply chain, engineering and eventually the C-suite. Because you’re making an investment in the future and you expect to get paid back, right? I spend X dollars on this chunk of software I spend Y dollars on consultants to help train me and get me and my team really good at it, and then there’s gotta be a payoff. And being able to articulate that as we saw this morning, I was unfamiliar with the video that was gonna show the companies and I can’t remember any specifics but we saved 70% on such and such and 62% on this, those are really key for leaders that are here to be able to articulate back home and not only continue what they’re doing with a company like aPriori but but to actually subscribe to more, because the power in this thing is way in the deep parts like aP Generate etcetera, that’s what I think is really key.

How Digital Transformation Efforts Drive Profitability

CJ: Great, thank you. Now I wanna shift gears a little bit. We heard this morning from Stephanie’s presentation about digital transformation. Now this is definitely a buzzword, we all hear the term digital transformation, but I’d like to ask Craig here you know start off, how do you define digital transformation and how do we put this in perspective? Your title is Executive Vice President of Digital Transformation Solutions. And if you could please give a concrete example maybe for the audience of how do these large scale digital transformation solutions and projects help tie into meeting cost reduction goals profitability margin?

CM: Sure, sure absolutely. So this is a classic, you can ask 10 people for the definition, you’ll get 11 answers. So I’m gonna add my 11th answer to what digital transformation is, for me obviously there’s a component of run the business, I will always go back to run the business, right? The native language of business is the P&L. It has been for 1000 years it will be for 1000 more. So I always want to know what are the financial implications of what we’re trying to accomplish. Now that could be cost, that could also be revenue, that could be margin that could be lots of things. But cost tends to weigh in a lot of the time. So how do you run the business? How does digital help you to run the business better, faster whatever superlative you want to enter in, right?

That means data share, single sources of truth, things that we’ve been hearing about all morning and will like hear about for the rest of the day and tomorrow. And so there’s a data component that’s reinforcing how do you run the business. You also heard me mention a moment ago without people nothing it’s accomplished, it’s also the largest challenge for probably any and all of us, right? And so there is always going to be a cultural component, do I believe in the way that we’re doing it? Can I embrace a new way of doing it? These types of elements, right? Again there’s a saying that, I’ve adopted over the years, when the pain of change is less than the pain of staying the same change happens, but it’s always painful, it’s just less painful, right? So I think there’s a component in there that says okay culturally what is a less painful way of leveraging data and digital to run our business bigger, better, faster, right?

CM: And that to me is the definition of digital transformation, the challenges in that single silos and functions have data but they’re also missing data, they want to share that data, two people may be measuring the same thing differently, I’ll simplify it, one person says it’s not hot enough, the other person says it’s too cold, that looks like two independent data points but it’s really the same data point, right? And so then you’re trying to standardize definitions, you’re trying to standardize data systems, you’re trying to fill out data systems that are incomplete and then share and stack hands and then share goals. Share incentives rewards recognition all these which then brings it back over into a cultural change aspect of getting it right. And so there are a lot of challenges in there but I think it’s about bringing all the pieces together where one plus one truly equals three.

CM: An example of that when I was at McKinsey I worked with Volkswagen, We were working on the Passat global product, global platform. I wanna say maybe the highest volume vehicle for Volkswagen, at this time I think maybe the old beetle was high volume too. But regardless Passat, Passat from an engineering standpoint, we were working on the side mirror, everybody will leave this room and go and look at the side mirror now because the side mirror on a Passat mounts into the door most side mirrors on cars mount into the triangle, that’s right at the A pillar, right at the base of the door. Why in the world would you mount it into the door? Well because Volkswagen and most of the Volkswagen groups side mirrors has an aluminum bracket inside the arm of the mirror.

CM: They are likely the only manufacturer in the world that has an aluminum brace inside the side mirror. As a consumer and from a customer experience perspective, you don’t care, that’s added cost. Why does it have an aluminum bracket? Because a standard for that company who happens to be in Germany, is that it can not have any vibration while going 200 kilometers an hour on the Audubon. Who drives their Passat at 200 kilometers an hour except folks that are, in well maybe a lot of people do but legally, Germany can. So you have all these questionings of specifications to then go in and say is that a justifiable cost? And if so we need to take the cost out somewhere else or we need to eliminate this bracket. If we eliminate this bracket we may have to change the character and change the mounting point on the vehicle, right? So you have all of this engineering that you’re thinking about that relates back to cost and the ability to compete in the market. It happens to be mounted to the door, the door aligns with the fender, the fender aligns with the hood, and the fender and the hood align with the front headlight.

CM: The door has to be more reinforced to hold that mirror, so the door is pretty fixed and when it’s mounted to the car it’s mounted on datums that are master datums, they don’t move. The fender is not bolted to the car on master datums, there are a few places where it’s bolted, it’s not a master datum and those holes can float. So the fender gets bolted on, it’s correct to the door but it’s off to the hood. The hood gets mounted and it can only go on one way, you can adjust it a little bit. So now the gap between hood and fender can vary car to car, if that gap can vary the headlight gap is absolutely gonna vary. So now you have a massive rework problem based on the engineering design part of the contributing factor being the design of the mirror, and how it mounts to the door and therefore the door doesn’t have any flexibility.

CM: As a result they had a rework problem. We had to go back in and think about it from a manufacturing standpoint and labor and rework creating a jig not even a primary tool that operators could use that would mimic the other two parts. So when you mount the fender this jig acted as a artificial hood and artificial headlight. Then when you mount the hood you have something that’s mounted on the fender, that’s measuring the gap to the hood but also acting like an artificial headlight so that when you put the headlight in everything’s just perfect and it rolls right off the line, and you have zero rework problems. Now I just described a lot of different items that are both engineering and manufacturing that all relate back to a decision based on where a company was located, and how it grew up and what local driving conditions were like.

CM: It is exactly that complicated in the real world right? And so engineering’s having to solve a problem, manufacturing having to solve a problem. But what I just described was that is a cross-functional problem where you have a factory in Mexico that has to think about a new jig and fixture but you have engineering design that’s controlled in Wolfsburg, Germany that’s having to change. And everybody has to understand everybody else’s problem, which takes a willingness to listen and a willingness to understand the problem but also raise it above yourselves and say this is a company problem on the highest volume vehicle in the world and what are our degrees of freedom? And if we can take that bracket out we can save $5, $10 per vehicle on 10 million vehicles globally, that’s a healthy number, right? So again just the thinking about the problem in that way, I think is extremely helpful, and as has been mentioned procurement plays a role, engineering plays a role, IT plays a role, aPriori from a data standpoint to be even have the transparency to say here are the different degrees of freedom and trade-offs that I can make to bring all that together, and so then that to me is a an example of true digital transformation at work, even though half of that transformation was physical, it wouldn’t have been possible without digital.

CJ: But on that topic digital transformation. Now Ramelle you’ve brought aPriori in to a few different companies Sensata, and being instrumental at GE Appliance. What was the driving factor there? You weren’t sitting back and saying like I need to digitally transform, what were you thinking there? Like did you think about this like the process there and just give kind of give a little background of that decision process that you needed to make a change?

RG: Well, I think in both cases the desire for having a robust should process debating group was there. So culturally the companies were ready for it. But when you look at the traditional way of cost estimating where someone you have an engineer, he has models for how a stamping shop is run and there are maybe some really sophisticated excel models and there’s some other software out there that will give you a rough idea about the volumes of the parts and how much it may cost. But you have to look at it. Either you have to have a large group with a very specific skillset that can cost estimate multiple parts or you can look for a solution that helps you standardize work for how you do your estimates and has more capability than trying to hire a specific engineer for every type of product you’re going to make to to estimate. So when we looked at aPriori I think in both cases it was a very obvious choice because it took away a lot of the “I have to read this CAD I have to read this drawing, I have to understand what’s critical to the print.”

RG: It drove that very quickly versus having an individual do it and then let whoever that estimator is focus on where he or she thought the opportunities were and looking at the parts and understanding them in a much quicker timeframe. So for me, it was a lot about speed and not having to necessarily build an organization with looking for the perfect skillset, depending on what products we were wanting to estimate. It allowed us to start off with the platform and go quite fast.

Important Levers Companies Can Take to Drive Profitability

CJ: Great. I wanna transition tie in a little bit. John, I’m gonna direct this at you. Kind of like your take here on what do you see as some of the most important levers companies can take to cut costs, improve efficiency from a design engineering perspective? When we kind of had a conversation, you said you led some global initiatives that were focused on improving profitability. I’d like you to maybe expand on that. What was that project? How did you think about that? How did it help design engineering teams, product team improve profitability, reduce costs?

JP: Usually there’s two things that have to happen. One is Craig’s very articulately expressed as question requirements. So the rear view mirror businesses, those were requirements that were set in stone and nobody went to Germany to push on the people who said, well, we’ve done this since 1912, so that’s what we should do. And those things happen in big companies. If you don’t question requirements, there’s too much stuff fixed to change the cost. The second is, we tend not to give design teams time to do cost improvements or cost design until it’s over. There’s always, so the project I was talking about we had built at least the first seven airplanes, then we engaged some outside people with expertise in detailed cost management, part costing, sorry, and had them engage with our engineers because our engineers didn’t really have the enough of the tools and background. So a couple things, question requirements, get expert help, and let people focus on that is how I think you can get cost out of products.

CJ: Great. Thank you. Ramelle, this one’s for you. When we were talking as well, a different side of the coin here of costs is inventory costs, right? So let’s talk about that. How do you balance carrying enough inventory, maybe not having too much costs. And I know you’ve led some projects to work on that. So I’m kind of curious here, what are your takes on that? And what are, digitally digital tools? Have you used digital tools to help you in that? Or how do you balance inventory?

RG: I think it depends on the situation and the company. If you’re doing high volume manufacturing, you tend to probably err on the side of having a little bit more inventory to make sure that you’re protecting. ‘Cause you don’t want your plant to go down ’cause you’re sending couple 100 people home, right? But like where I’m at today, where it’s a very small company and we have a lot of change because we evolve the product quite quickly. Like we are on the side of not carrying inventory, because I don’t want to have a lot of obsolescence. And we change, we do an update probably every six months to the vehicles that we make. So I know I’m always gonna have that change. So for me, modeling what the supply chain looks like and what the risk is and the different segments of it, if it goes back to raw material, if it has like a fast technology curve where we know it’s gonna be obsolete, being able to model that would be a bigger benefit than trying to have to go through it manually or following.

RG: Like, I have 36 week lead time and I automatically order because I have a minimum inventory, right? That’s kind of the traditional approach is just minimums and maximums and lead time, right? So now it becomes more, what am I really gonna do? What is the cycle life of the part I’m buying or the system that I’m buying? And do I wanna carry inventory? How much risk does it have? And John mentioned earlier the cost of capital. It becomes very serious when you’re a smaller company. If you do have a higher cost of capital and you have suppliers that are smaller and they’re working a higher cost of capital. So if you err on the side of making sure you have inventory and you don’t consume it in a relatively quick way, you kind of mess up your entire supply chain because you end up idling your suppliers.

RG: And then you’re sitting on inventory that’s custom to you that you may not be able to use again because you needed to make a design change for the market. And for us, the market is still new. So we really have to monitor inventory and make sure we’re not overbuying and making sure that we understand the potential changes that are coming. And sometimes it’s driven by our customers. Sometimes it’s driven by legislation, but we have a really fast speed of when we change things over. So not having inventory is a benefit to us. And there’s always the risk of you run out of parts, but you have to look at the scale of how much am I gonna pay to expedite something versus, carry it in inventory and do the total cost of ownership. So I think more focus on the modeling, the total cost of ownership is very beneficial.

Q&A

CJ: Okay. Great. Now we’ve got, just to do a time check here, we’ve got about seven minutes left. We wanna have some Q&A as well. So I’m gonna do one last question with the panel and then we’re gonna open it up for Q&A. It’s kind of a, we’ll do this a lightning round kind of, and I wanna start with, go through the three. So John, with you, what’s your advice for the group here and the year ahead, putting all this in perspective? Any advice you’d give the team here? How to think about this? Like some of the challenges we’ve heard even tying in the presentation earlier this morning. What advice would you give the team kind of thinking about the outlook ahead and in kind of this uncertainty in the market and such?

JP: I would give you the advice to schedule enough time in your day that you’re thinking of the future and you’re planning on doing something different. If you look at a CEO’s calendar, it ought to be one-third on the future, one-third on today’s problems, and one-third on developing the team. And I’ll bet you a quarter, most of them are 95% on today’s problems and 5% on developing the team. And that gets worse as you go down through the levels of management. So what you’ve done this week is actually thinking about the future, right? You put your old job aside at least until nighttime comes and you’re trying to learn and figure out new ways of doing business. So just keep doing that, it’s really key to making a change.

CM: Three quick thoughts. Define where you want to go, right? In where you want to go, make sure that it’s truly transformative. I love the term double digit impact, right? Double digit percentages, double digit millions. Make sure that where you want to go is double digit because that’ll be truly transformative. In getting there, make sure you have 2000 people helping you get there, not 20, right? Open it up to the masses. Include everyone, everyone’s bringing something. What’s their something? Where does it fit and when does it fit? And go through the difficulty of figuring that out. ‘Cause you’re gonna get a much richer answer. You’re gonna get there better, right? There’s a saying if you wanna go far, go alone. Sorry. Yeah, if you wanna go fast, go alone. If you wanna go far, go together.

RG: I really like that comment because I think it’s both of the comments that you made. One, I think people do forget to spend time in developing their team and they just focus on what are we gonna get it done and what are we gonna do today, right? And why is this problem gonna go away, right? So looking at the long term is really important and making sure you cascade those goals to the team, vertically within maybe your organization and then across. And then how do you collaborate with your peers on making sure those goals are shared. And they’re interpreted the same way, because sometimes they’re not always interpreted the same way. Your CEO may say it and everybody leaves the room and has a different view of what that is. So I think it’s really important to have that cross collaboration with your peers to make sure you’re all, you’re going the same direction and you have buy-in and you work together to get there.

CJ: Thank you so much. And we are gonna have a brief Q&A, but how about a round of applause for our panelists here.

[applause]

CJ: Thank you. Okay. I would like to open it up. We’ve got a wealth of knowledge here between our panelists and would love an opportunity for you to ask questions as well. So we do have about five minutes. I think Olivia, you’ve got a mic here. So would love to just go around. And you raise your hand if you have a question you’d like to ask. Alright.

Speaker 6: So back to the topic of inflation. How do you go back to the supply chain and how do you structure the conversation other than, Hey, I gave you price increases the last two years, I want it back now? What do you suggest that we do?

RG: Well, I think when you have to look at the historical relationship with the supplier, right? And what you’ve bought over time and what their goals are for the future and how you’re aligned, right? It’s not having a discussion with a supplier isn’t about the data point of give me cost, give me money back, right? It’s making sure you’re aligned from an overall goal perspective. What do you wanna achieve with that supplier over the long term? Are you aligned from a technology perspective? And then going to what are their goals? Is their goal just to maintain margin? Is their goal to increase market share? And trying to get that alignment overall to where it’s not just a point of you owe me money ’cause I gave you a price increase two years ago, right? If you go in with that argument, you’re never gonna win, right?

RG: It has to be a relationship discussion. You may win, but you may never like each other again. But you have to go in with what’s the relationship gonna be and how are we gonna construct this so it’s more? It is better for us over time. And hopefully, there that drives the discussion of where they can start to return some of the inflation. And it’s hard right now, I’m gonna say this because of COVID, because there’s inflation that you see that’s driven by the market, but you forget everybody’s supply chain was broken. So you don’t always see the times where they were air freighting material where they had their trucks break down on the way to the factory and they didn’t get what they were supposed to do and their factory was shut down for a day because they didn’t have what they’re supposed to do.

RG: So there’s a lot of hidden costs with suppliers that you don’t necessarily see because you don’t see what happens in their everyday operations. So I think you really have to take a holistic approach because it’s really easy to go in with one data point and then go out with basically the tail between your legs because they just showed you how much money they spent to save your business. And some of that may be exaggerated, but it started from a place of truths, right? They had as many problems as you did during COVID. So it has to be a holistic discussion.

CJ: Okay. Any other questions? I see some in the back here. We’re gonna make you walk Olivia. I think we had two so we can maybe see… Yeah, start in the back.

CJ: Let me stand up. So hello everybody. I’m, my name is Jean Levera, I’m from Brazil, right? Sorry for this broken English. So my question is for you, Mr. Craig, when we talk about the margins and profit, right? What do you think if we get the data from our suppliers, because economy in Brazil is sometime crazy, but can we have a kind of average of the margins and profit, profit of the old suppliers and try to work on that list to make our estimations?

CM: Sure. I think there are several ways to execute, right? So I don’t think there’s just one answer. I think the critical piece is, are the companies and the supply chain working as 100 independent nodes or are they working as one machine, and the sharing of the data creates the opportunity for them to work as one machine. Now obviously challenges Ramelle and I think are still friends. We’ll find out after the panel about, there’s gonna be complexity around, does margin mean it’s the same for all of us or is there just, what’s a healthy margin based on your business and your offering? And it may not be the same across the net. There’s gonna be lots of details to work through, but I think it’s more about creating one entity that has a vested interest in the entire entity, always performing optimally. Most supply chains today are 100 independent. Each one’s solving for themselves and hoping the others make it. And it’s just, it’s more setting the extreme of the spectrum and trying to move to a better answer that’s closer to the end of we’re all vested and we’re all working to help each other because that’s gonna benefit ourselves.

Jean Levera: Okay, thank you sir.

CJ: I think we had one more right here.

Bruce Alger: Actually, I have two questions. My name’s Bruce Alger. I’m with Applied Materials. I’ve been a customer of aPriori for about six years now. I’m going to piggyback on his question a little bit. Do you guys do supplier specific digital factories or do you do a just one factory where you put it all together? And then the second question is, do you guys do automation? So are you using PMI or model-based definition in your tools? And did you have any challenges when you did that?

CJ: Does anyone wanna start? John, do you wanna start to take a part of that?

JP: Well, so we don’t just do one model fits all. The model at a supplier has to be based on that specific factory. And it’s more work, but it’s the only way to do it because otherwise you get funky answers. That’s part A, I’ll give you part B.

RG: Yeah, I think it’s been different. Like I would say when I was at GE, there was a lot of model-based definition. And where I’m at today, there’s a lot of model-based definition. But I think you do have to base it on the factory and what the supplier’s doing or versus what you’re doing because you may have totally different processes. And it may highlight what’s more efficient or inefficient if you compare those.

BA: Was there any challenges with the model-based definition? Did you guys have to change your strategy as far as CAD design or anything like that?

JP: I think the challenge is that often the suppliers don’t necessarily wanna give you that much information. It’s competitive sensitive. It’s…

JP: Yeah. Intellectual property. Not the actual software isn’t the issue. It’s how integrated can you get that that supplier, especially if you’re arguing over margins and what they should be. It’s no easy answer there for sure.

CM: The only thing I would add to what all has been said from a model-based standpoint, I think model-based for product is absolutely key, right? I mean, that’s how CAD works. That’s allows you to leverage that data, feed it into PLM, think about configuration management, have multiple products, have reuse all kinds of wonderful things. So model based on product, absolutely. Model based on factories and processes. Yes, to some extent, right? Because the degrees of freedom are so much larger. And if you try to model the factory to perfection, we will all be dead and our successors will be taking over the model and then their grandkids might be taking over the model, and what’s been accomplished, right? Versus what’s enough information to be able to make logical decisions around, but not so much information that you’re burdened by the model versus making decisions with the data that’s coming out of the model.

JP: Yeah. What are the top four things you wanna know about your supplier’s factory, right? Orders out, material in, some midpoint check and order’s complete. It’s gotta be simple. I agree with you.