Exploring the Benefits of Collaborative OEM/Tier 1 Supplier Partnerships
Henry Ford found monumental success with vertical integration when he developed the assembly line strategy for mass car production in the early 1900s. In the early days of the automotive industry, manufacturers invested heavily in the development of their own manufacturing processes, technologies, equipment, and parts.
This approach made sense when vehicle portfolios were narrow and volumes were high. However, in today’s highly specialized marketplace with wider consumer preferences, lower volumes, and global supply chains, automakers are looking for collaborative partnerships with Tier 1 suppliers that spur the research, development, and delivery of innovative parts and technology.
We can see examples of this in the news every day. Ford Motor Company continues to partner with BorgWarner, a powertrain solutions company, in developing the EcoBoost engine with turbocharger technology. Chevrolet relies on Continental Structural Plastics, a light-weight composite solutions company, for about 60 percent of the exterior body panels used on the 2014 Corvette. Johnson Controls recently signed a collaboration agreement with Fraunhofer Gesellschaft, an application research organization, to improve cooling systems for vehicle batteries.
As OEMs face greater pressure to meet environmental requirements, improve engine efficiency, and expand globally, supplier relationships will continue to evolve. Open collaboration between automakers and Tier 1 suppliers results in mutually improved returns on investment, better working relationships, and ultimately, a better end product for customers.
Supplier Partnership Advantages
As the automotive market rebounds, OEMs are in no hurry to expand their operations. Instead, automakers are continuing to build long-term, collaborative partnerships with suppliers, which are proving to be more valuable than taking on the innovator role alone. There are three major benefits in working with Tier 1 suppliers for optimized product solutions:
Increased Profitability – Pursuing more collaborative partnerships can help OEMs reduce development costs and increase profitable growth through improved differentiation and speed. According to a 2014 A.T. Kearney study (Figure 1), collaborative supplier innovation can also reduce development time and cost of goods sold (COGS) while producing a price premium. OEMs no longer have to be bogged down by the development process saving time and resources that can be allocated elsewhere.
Reduced Equipment Investment – OEMs must invest in the latest engineering, research and development, testing, and production infrastructure to continue making innovative product solutions and to stay ahead of the competition. Partnering with Tier 1 suppliers takes that financial responsibility off of the OEM and provides a number of other benefits. In fact, the 2013 Annual North American Automotive OEM-Tier 1 Supplier Working Relations Index® study reports that automakers with “Good-Very Good” supplier relationships see increased supplier willingness to invest in new technologies for future OEM needs and extend support beyond contractual terms. Additionally, Tier 1 supplier parts are developed with advanced technology that OEMs may not have access to otherwise. Not only does this improve asset utilization, it also creates a mutually beneficial collaboration.
Improved Product Development – OEMs can avoid isolating end-users by working with Tier 1 suppliers to provide more product options. Government regulations, environmental requirements, and consumer demand all require customizable product solutions to meet increasingly segmented conditions. Two heads really are better than one and combining resources has proven very successful for some OEM/supplier partnerships. For example, Dana and Ford Motor Company won an Automotive New PACE Award for collaboration on a thermal-management technology that improves fuel economy. Additionally, cross market innovation gives OEMs the freedom to focus on their core business while a partner contributes outside expertise creating simultaneous investment in multiple areas.
Tough economic times forced OEMs to manage their operations more conservatively, and while the economy is on the rebound, automakers are not looking to expand product development capabilities alone. Instead, we’re seeing more collaborative efforts resulting in cost-effective partnerships that are mutually beneficial. Efficiency standards, environmental requirements, and customer needs will only get more demanding, so OEMs and Tier 1 supplier partnerships will become more valuable in developing innovative product solutions.
- What can Tier 1 suppliers do to bring OEMs more value?
- What other benefits come from OEM/supplier partnerships?
- How do you think the OEM/supplier relationship will evolve over the next five years?
Published by Seth Metzger