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AD&P; > October 2013 > TALK > Insights from IHS > Michael.Robinet@ihs.com How Suppliers Become Successful Michael Robinet, Managing Director, IHS Automotive Consulting It's been a difcult decade for those in the light vehicle industry. Amidst the shift to global platform structures and OEMs seeking to whittle down the number of active suppliers, major customer bankruptcies, a tsunami, a volcanic eruption, massive foods, and a chemical plant explosion all complicated matters. Meanwhile, a pressure of a diferent variety comes as the industry seeks supplier capacity in multiple sectors, prompting the question: Is there a norm or status quo anymore? Another revenue-based winning theme is "market-based optimization." Foresight as to what the industry will require in the form of product or process technology drives stronger margins. Early involvement in key programs also allows the suppliers to steer the development and necessary specifcations/processes to further solidify new technology. Being able to reduce cost or mass through a new innovation, or helping to integrate a feature valued by customers, will support margins over the long term. Throughout the next decade, suppliers will undoubtedly grapple with natural disasters, fnancial calamities, globalization pressures, and an unprecedented level of technological change driven by both legislation and consumer demand.. What, then, are the key characteristics of successful suppliers? What are the winning traits of companies that continue to prosper through both challenging and stable periods? Finally, diversifcation is defnitely a winning theme. Suppliers shouldn't focus too much on a core set of customers. They should also be careful not to stretch resources too thin. Risk should be spread within segments and geographies to ensure that the focus is on growing areas with some diversifcation. Suppliers need to spread resources evenly over time and not tress the organization with too many launches in any one period. A recently released IHS Automotive and Deloitte Consulting study examined the winning themes/core DNA of suppliers that reached above average shareholder returns throughout the last decade. More than 200 publically traded suppliers in the lightand heavy-vehicle sectors, as well as original equipment manufacturers and aftermarket suppliers were evaluated. Myriad factors, strategies and themes were researched to understand the key traits. Winning suppliers exhibited a capability to be more than adequate in at least six performance themes and were often above average in two or three of these themes. Performance themes can be classifed in three general sectors: Revenue, Cost and Capital. Cost: Two winning themes are cost-based. The ability to match capacity with demand allows for a highly efcient organization and the ability to react appropriately to new opportunities. Suppliers possessing a fexible and stable upstream supply base have proven themselves to be critical given recent supply interruptions. Strong asset efciency is also a core building block of a supplier. Expansion must be well thought out with an eye toward risk minimization and long-term asset fexibility if processes change. Smarter suppliers are sometimes not a leader in this area but a fast follower, working to perfect the approach initiated by others. Revenue: Revenue-based winning themes surround what, where and who a supplier's customers are. First is "portfolio optimization," the ability to identify and win business on leading-edge global platforms as well as premiumbrand vehicles. Proactive identifcation of vehicles that are the frst of a series of oferings launching over a two-to-three year period (usually on a global basis) allows for the ability to spread the component/system to a number of downstream oferings, thereby expanding economies of scale. Frequently, the supplier worked several years in advance to identify the right approach and technology to triangulate the opportunity and increase barriers to entry for others. Those frst to supply Volkswagen's MQB platform have gained a tremendous head start versus those gunning for a piece of the business now. 8 Capital: A supplier with a structured capital program is often ahead of its competitors. Debt minimization, refnancing when appropriate, and ensuring that capital risk is controlled is a winning theme. In the end, suppliers need to focus on the core traits that generate above average, long-term shareholder return. Enterprise stability and sustainable growth through various obstacles and opportunities is critical. The next decade is expected to be as challenging as the last, so having the right foundation to build on is the only starting point. Michael Robinet has been a managing director of IHS Automotive Consulting since 2011. Prior to that, he was the director of Global Production Forecasts for IHS Automotive. His areas of expertise include global vehicle production and capacity forecasting, future product program intelligence, platform consolidation and globalization trends, trade fow/sourcing strategies, and OEM footprint/logistics trends. INSIGHTS FROM IHS