Auto Suppliers Aligning Business, IT Initiatives in Bid to Survive

With U.S. automakers hurting, midmarket auto suppliers are under the gun to diversify.

This just in: The U.S. auto industry has seen better days. Uninspired new models, skyrocketing employee and retiree health care costs, and an overreliance on trucks and sport utility vehicles have pole-axed General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler unit.

In the first nine months of 2005, GM lost $3.8 billion, while Japanese rivals Toyota Motor Corp. and Honda Motor Co. watched market shares rise 5.6% and 6.4%, respectively. Gartner Inc. analyst Martin Piszczalski says one result of the U.S. auto giants' woes is a "stampede [by domestic auto parts manufacturers] toward the Korean and Japanese automakers. But getting a foot in the door there can take years."

Focus On: Auto Parts Manufacturing
Top business challenge: To survive as a supplier to one of the Big Three automakers, which are consolidating.
Solution: To leverage company expertise to diversify into stronger industries.
How IT can help: By implementing product lifecycle management and other systems and by ensuring that the computing infrastructure supports expansion into new industries.

These desultory numbers have midmarket automotive parts manufacturers scrambling to lessen their dependence on domestic automakers. It's a sucker's game to curry favor with a trading partner that is penny-pinching and shrinking. And needless to say, it doesn't give IT much to chew on. "Midmarket automotive companies generally see less than 1% of sales revenue committed to IT," says AMR Research analyst Kevin Mixer. "And since they're often providing components that are commoditized, it's a tough place to be, as revenue generated continues to decline." So what's a midmarket enterprise in the auto industry to do?

"We are diversifying as fast as humanly possible," says Mike Malone, IT director at Cascade Engineering Inc. Ten years ago, the $300-million Grand Rapids, Mich., plastics company derived more than 90% of its revenue from the automotive original equipment manufacturers (OEMs), supplying interior trim pieces, dashboard mats and other parts. Now Malone expresses frustration with the industry. "The OEMs won't give you a price increase for anything," he says. Meanwhile, Cascade has seen big price hikes in the foam and natural gas the company uses. "We're going out of business if we keep going down that path," Malone says. The company has leveraged its plastics expertise and now manufactures components for TV antennas, industrial flooring, waste containers and high-end chair backs.

Modine Manufacturing Co. is also rapidly diversifying. "We're in a state of change," says Butch Harper, CIO at the $1.5-billion Racine, Wis., company, which focuses on thermal management in applications such as auto radiators. Modine has never been a pure auto supplier, but after earnings flattened out in the mid-1990s, the company accelerated its diversification; today, only a third of revenues come from its automotive division, with the rest divided among the heavy equipment, heating/ventilation/air-conditioning (HVAC), electronics and fuel-cell markets. For years, Modine has been a player in heavy equipment and HVAC, but it's gotten into electronics and fuel cells only in the past five years.

With all this diversification, a key challenge for CIOs is anticipating forays into unfamiliar markets and ensuring that the company's technology can keep up. But even a logical expansion into a closely related industry presents new challenges. Cascade recently entered what Malone calls a "big-truck venture" (by expanding into huge haulers rather than mass-produced pickup trucks). For the first time, the company is responsible for a process known as color sequencing, which ensures that parts arriving downstream on an assembly line properly match vehicles. For example, when a truck with a green cab arrives at point X on the line, a signal is sent to the warehouse. A pair of matching green fenders is sent to point Z on the assembly line just in time for assembly.

In auto manufacturing, color sequencing is extremely complex. "The signaling is a little easier in the truck arena," Malone admits, which has fewer options. Nevertheless, it's new to Cascade, and "IT is the group responsible for making sure our business systems can handle it."

Focus on Alignment

Aligning the technology budget with business needs is also tricky when the roster of projects and markets served is constantly shifting. At Modine, Harper and his staff have developed an unusual alignment technique. At an annual off-site meeting for IT managers, senior business management is invited in for grueling interviews on upcoming priorities.

Before the off-site, business managers complete surveys. "[IT managers] pair off and each take a business manager," says Harper, who interviews Modine's CEO. "One does the interview, and one acts as scribe so the interviewer can concentrate on the questioning." IT learns which business initiatives are important to senior managers in order to prioritize and budget for technology initiatives.

As a result of these interviews, IT became aware of senior management's interest in what Harper calls "a powerful corporate social trend where the line between customer and supplier is blurring. They want to touch your data. Your systems must be available, your info has to be current, and the whole thing has to be secured." Modine implemented business-partner portals from which a customer like DaimlerChrysler can access all Modine-related data through one secure Web page.

Efficient Manufacturing

With suppliers "trying to wean themselves from dependence on the [Big Three]," as Gartner's Piszczalski says, Sonnax Industries is lucky, according to Jeff Loewer, VP of planning and IT at the Bellows Falls, Vt., auto transmission company. With annual revenue of roughly $50 million, Sonnax has always focused on the after-market: that is, replacement and performance parts, not parts for new vehicles. So while to some extent its fortunes rise and fall with the health of the auto industry, the company isn't joined at the hip with U.S. automakers and isn't pressed to diversify.

That doesn't exempt Sonnax from price pressure, though; the company uses a manufacturing process in which new products are developed by teams on three continents. Most early-stage manufacturing processes, such as the casting of steel parts, are performed in India and Singapore. Nearly all parts receive final assembly and inspection in the U.S. Until last year, the company relied on a stew of applications for data flow. "We used a lot of Excel, e-mail and telephone," Loewer says. "But it was hard to pull useful information from all these different applications, and our growth forced us to look at a unified system."

A year ago, Sonnax implemented product lifecycle management (PLM) software from Lawrence, Mass., vendor Aras Corp. The software has improved project management, according to Loewer, especially accountability. "Aras has a [quality control] module that's drastically improved the way we track quality from our overseas vendors," Loewer says.

Auto companies may be racing to diversify, but cars aren't out of the picture yet. Sonnax implemented PLM to make its manufacturing capabilities scalable in order to bid for business from -- that's right -- automakers.

An Insider View: For One Auto Supplier, Branching Out Brings Complexity
I've been with Cascade Engineering since August 1989, so I've witnessed the highs and lows of the automotive industry. Currently, the declining fortunes of U.S. automakers are behind our decision to ratchet up efforts to diversify our business and expand into non-automotive markets. These initiatives require that IT deliver solutions that are flexible and configurable yet still low cost and standardized.

One of our initiatives was to become more vertically integrated in the plastics industry by compounding our own resins. We've also begun selling specialty resins to other molders. Another upcoming venture is the conversion of recycled material into resin, which we intend to use internally and sell to a variety of industries. We've also decided to get involved in the automotive after-market. We'll provide electronic system assemblies directly to the Ford, GM and DaimlerChrysler dealer networks. Lastly, we just launched a medical device assembly business.

To varying degrees, all these initiatives are a departure from our traditional injection molding business and, accordingly, require changes in software system configuration. While from the user standpoint buying a point solution for each different business type is ideal, costs forced us to utilize existing software solutions. We've been able to achieve our three system objectives -- which are lower costs, standardization and configurability -- with a single system: MFG/PRO from QAD Inc.

Setting Standards
We haven't always been all about standardization. During my first three years on the job, I wrestled with getting everyone on the same page for a re-implementation of an enterprise resource planning (ERP) package that was purchased before I arrived. The package was acquired without getting buy-in from all business units, so the process of getting support across the company proved instructive. I learned that Cascade's small business units tend to be entrepreneurial and exercise a lot of creative license when it comes to solving everyday business problems. That tendency -- coupled with the auto industry's declining fortunes -- means that one of my biggest challenges is implementing standard technologies and functionality.

My IT staff of 14 supports about a dozen business units, and the department is not a traditional one in the sense that you might think. Several staff members are certified in the production and inventory management disciplines. They are trained to understand the theory behind and techniques for using standardized ERP systems. So one of our primary jobs is to educate ERP system users in the various business units. In this capacity, the IT group does a lot of business analysis. We also spend a lot of time working with power users to enlist their help in preparing documentation and in training other users.

The Reconfiguration Mandate
As the company diversifies, IT has to continually look for ways to reconfigure software systems rather than replace them. For example, supporting the after-market business required us to build new electronic data interchange (EDI) translations and maps as well as to create new order management functionality in our ERP system. That's because the standard EDI transactions for a production operation are different from the EDI transactions and processing we do for the after-market business.

Supporting the medical device business will also require significant changes. We must comply with U.S. Food and Drug Administration requirements for parts labeling and material lot control, so we need to reconfigure our bar-code system and several inventory and billing transactions.

In a nutshell, diversification has introduced a lot more complexity not just for IT but also for finance and shipping. Years ago, when the auto industry was healthy, it was desirable to be 100% in the automotive business. Profit margins were higher, as were order volumes.

But now that both have shrunk, we've diversified. So even though we're doing about the same amount of business overall, we have more orders spread over more business units and industries, which has complicated the IT picture considerably.

Mike Malone is the IT director at Cascade Engineering Inc., a manufacturer of engineered plastics and components based in Grand Rapids, Mich. Write to him at InsiderView@ciodecisions.com.

This was first published in February 2006

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