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AD&P; > September 2013 > TALK > Insights from IHS > Michael.Robinet@ihs.com Supplier Strategies for the Recovering Industry Michael Robinet, Managing Director, IHS Automotive Consulting Parts suppliers active in North America are smiling these days— for the most part. The combination of a number of factors has unveiled a fertile ground for the supply community. Facing tremendous challenges during the 2008-10 period, the subsequent volume and technology rebound is a breath of fresh air which has dropped to the bottom line. A new nest of issues has arisen, though. These include the lack of required capacity eliminated during the 2009 downturn, the resource and capital impact of the recent surge in volumes, and the need for technology to answer a myriad of legislative and customer-driven requirements. This has built an unmatched trifecta as a basis for sustained proftability—a strange environment for many. The table has undoubtedly turned with respect to industry leverage and infuence. Once held by the OEMs, it is clear that suppliers have an increased capability to steer their own destiny. Clearly, this community should utilize its new-found infuence to steer its customer/vehicle portfolio toward enhanced and more-stable proftability. This exercise is dubbed "portfolio optimization." As suppliers are the substantive purveyors of tomorrow's technology, this leverage is important to groom the future portfolio of vehicles/powertrains. A strong mix of select OEMs, regional exposure, new technologies, vehicle/engine segments, production start dates, and cycle duration is important for long-term proftability. The surge of critical launches in North America for 2014 and beyond underscores the need for suppliers to properly staff for them. Many of these North American launches are integral cogs of global launches , which means they require intense coordination. Proper loading of resources to the right programs given the speed of development and global integration is a challenge—suppliers need to spread these resources. Constantly evaluating future opportunities is critical. Several suppliers have learned that being the incumbent source on a program does not mean that bidding on the replacement is the best idea. Each opportunity needs to be evaluated on its own merits and as part of a greater book of business. Successful suppliers have a number of key behaviors which keep ahead of the pack. These start with proactively seeking business early in the development process as a part of a targeting exercise. Early cooperation can strain resources though the ability to shift development of a component or process toward your solution enables an important barrier to entry for others and 8 barrier to exit for the OEM. Better suppliers can target business 4 to 5 years out—forming teams to gain relationships, understand development strategies and working the possibility from several angles. Similar to one's 401K portfolio, it is essential to balance a book of business with various growth and stable segments, customers that are aligned with your goals from a growth perspective, and development/resource requirements which are spread as evenly as possible over the time horizon to guard against spikes and troughs which can endanger quality, delivery or the bottom line. Regional suppliers also need to balance the requirement by their customers to support global programs from a local footprint from capital, human resource and risk perspectives. Seeking affliations and joint ventures can be a preferred mode to cover global requirements while reducing risk. Regimented research and development investment is a critical cog to long-term proftability in the supplier space. Given the heightened need for innovation to meet the looming emissions legislations in several major markets, end consumers which are constantly evolving, and the umbrella of offering these innovations at the lowest possible cost on a global basis means that a smart R&D; spend is essential. While there is no hardand-fast level that every supplier needs to devote to this area, certainly a level north of 3 to 4% of revenue may be required to support long-term margins with new innovations. The surge of program launches in 2014 and beyond underscores that smarter suppliers target business years in advance. A focus on product and process innovation, proactive customer involvement, global production and development capability, as well a regimented portfolio optimization plan are the key constructs for supplier success. Waiting for the RFQ (Request for Quote) to hit your desk as a starting point to seek new business is a bad approach. 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