Supply Chain Metrics That Matter-A Focus on the Automotive Industry-8 OCT 2013

Supply Chain Metrics That Matter:
A Focus on the Automotive Industry
Using Financial Data from Corporate Annual Reports to
Better Understand the Automotive Supply Chain
10/7/2013
By Abby Mayer
Research Associate
Supply Chain Insights LLC

Contents
Research ................................................................................................................................... 2
Disclosure.................................................................................................................................. 2
Research Methodology .............................................................................................................. 2
Executive Overview ................................................................................................................... 4
Has the Auto Industry Learned a Lesson?.................................................................................. 6
Growth: Boom & Bust................................................................................................................. 6
Profitability: Domestic & International......................................................................................... 8
Cycle: Zero-Sum........................................................................................................................ 8
Complexity: Global Footprint.....................................................................................................11
Not Business as Usual..............................................................................................................11
Recommendations....................................................................................................................12
Conclusion................................................................................................................................12
Appendix...................................................................................................................................13
Company Profiles ..................................................................................................................13
Other Reports in This Series:.................................................................................................13
About Supply Chain Insights LLC..............................................................................................14
About Abby Mayer.....................................................................................................................14
Copyright © 2013 Supply Chain Insights LLC Page 1

Research
Supply Chain Metrics That Matter is a series of reports published throughout the year by Supply
Chain Insights LLC. They are a deep focus on a specific industry.
These reports are based on data collected from financial balance sheets and income
statements over the period of 2000-2012. In these reports, we analyze how companies made
trade-offs over the course of the last decade in balancing growth, profitability, cycles and
complexity.
Within the world of Supply Chain Management (SCM), each industry is unique. We believe that
it is dangerous to list all industries in a spreadsheet and declare a supply chain leader. Instead,
we believe that we have to evaluate change over time by peer group. In this series of reports,
we analyze the potential of each supply chain peer group, share insights from leaders within
each industry, and give recommendations based on general market trends.
Disclosure
Your trust is important to us. As such, we are open and transparent about our financial
relationships and our research process. This independent research is 100% funded by Supply
Chain Insights.
These reports are intended for you to read, share and use to improve your supply chain
decisions. Please share this data freely within your company and across your industry. All we
ask for in return is attribution when you use the materials in this report. We publish under the
Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and you
will find our citation policy here.
Research Methodology
The basis of this report is publicly available information from corporate annual reports from the
period of 2000-2012 for publicly-owned companies involved in auto manufacturing activities.
In picking companies for the Supply Chain Metrics That Matter report, we traditionally rely on
companies recently listed in the Fortune Global 500. For the automotive industry, we identified
six companies ranked on the Fortune Global 500 for 2013. In addition, we used the Morningstar
Auto Manufacturers peer group to inform our decision.

The financial ratios used enable supply chain leaders to better understand where the industry is
on the Supply Chain Effective Frontier. In this report, we share a framework for supply chain
excellence that balances growth, profitability, cycles and complexity metrics. In each Supply
Chain Metrics That Matter report, we share insights from each of these metrics categories. Due
to the fact that the supply chain is a complex system that must be managed holistically, we
share the trends on each of these dimensions over the course of the last decade.
We use the financial data to help readers learn from past trends, to better understand current
operating environments, and we provide recommendations for the future. We augment the
financial data analysis with information from our quantitative and qualitative research studies as
well as our work with clients operating within the industry.

Executive Overview
The automotive industry is a low margin and concentrated industry with few players. It is a
complex business.
Unlike other industries with low margins, the automotive industry has not yet developed supply
chain resiliency to weather fluctuations in demand. Over the last decade plus—while other low
margin industries have refined processes and technologies to improve profitability and manage
cycles and complexity—the automotive industry remains stuck in backwards thinking and old
paradigms. This is especially true of the North American automotive companies.
Table 1. A Review of Industry Progress from 2000-2012
Figure 1. The Effective Frontier
The challenge for all supply chains, but especially for those companies with thin operating
margins, is to balance competing priorities quickly and effectively. Supply chain leaders balance

growth, costs, cycles and complexity. As represented in figure 1, we term this The Effective
Frontier.
The automotive industry has not yet mastered the act of balancing growth, profitability, cycles
and complexity while also remaining resilient in the face of fluctuating demand. Here we share
their story.

Has the Auto Industry Learned a Lesson?
The auto industry is back. Demand is strong and increasing. In August 2013, the Detroit 3
(Chrysler, Ford and General Motors) sold 662,669 vehicles domestically. Total U.S. auto sales
were estimated at 1.47 million units. The industry is on track to match or exceed 2007 annual
sales (16.1 million units) by the end of 2014.1
Let the good times roll, right?
Not quite. Our research indicates that the auto industry remains vulnerable and has not learned
and enacted the lessons of the past decade. The shortcomings in auto supply chain
management remain and could become problematic sooner rather than later.
The current situation is one of high demand. The supply chain is ramping up. Companies
throughout the supply chain, from manufacturers to third-tier suppliers are struggling to meet
high demand levels. In fact, many domestic auto plants shortened summer shutdowns in 2013
in an effort to meet demand levels. The traditional two-week break at the beginning of July, to
perform maintenance tasks and retool for the upcoming model year, was shortened or
completely eliminated for many plants including some run by Ford and Chrysler.2
Business is good. Demand is high. But, is the rebounding automotive supply chain flexible, agile
and resilient? Furthermore, is it ready to withstand the inevitable downturns in the economy
moving forward? They may not occur tomorrow, but they will happen. The results of our analysis
of supply chain financial ratios indicate that the boom and bust cycle of the automotive industry
remains the dangerous status quo.
Growth: Boom & Bust
After the bust of the Great Recession, the automotive industry, both domestically and
internationally, is on the rebound. Even in the face of lackluster economic growth on a global
level, car sales are up as outlined by Daimler AG in their 2012 annual report.
1
Young, Angelo. “August 2013 US Auto Sales: Detroit Three Sold 662,669 Vehicles in US Last Month;
General Motors (GM) up 15%, Ford (F) And Chrysler Both Up 12%” International Business Times. 4
September 2013. http://www.ibtimes.com/august-2013-us-auto-sales-detroit-three-sold-662669-vehicles-
us-last-month-general-motors-gm-15-ford Accessed 26 September 2013.
2
Isidore, Chris. “Auto plants skipping summer shutdowns.” CNN Money. 22 May 2013.
http://money.cnn.com/2013/05/22/news/companies/auto-plants-summer/index.html Accessed 26
September 2013.
“Despite relatively unfavorable economic conditions, the worldwide demand
for automobiles grew by almost 7% in 2012, reaching a new record level.”
• Daimler AG 2012 annual report (10K), page 88

As seen in table 2, the swings in growth vary by company. There are clear winners and losers in
regards to stable growth. Compare the trajectory of Ford Motor Company with Volkswagen
AG. In addition, the oscillations in growth for Toyota Motor Corporation are striking and create
a challenging operating environment. These cycles are not only detreminetal to the
manufacturer, but can be amplified and prove fatal for downstream suppliers trying to weather
the ups and downs.
Table 2. Year-over-Year Sales Growth (2000-2012)
Again and again, in our analysis of recent annual reports, automotive companies mentioned
emerging markets as the solution for unstable growth in more developed countries. This is an
exciting and promising opportunity. However, expansion to emerging markets and changing
growth patterns add to the complexity.
Profitability: Domestic & International
“Disproportionately high increases in unit sales and revenues in Asia and the
NAFTA region are evidence of a consistent regional strategy and reduce
Daimler’s dependence on developments in Western Europe.”
•Daimler AG 2012 annual report (10K), page 18
“Like other manufacturers, we are increasing our participation in newly
developed and emerging markets, such as Brazil, Russia, India, and China, in
which vehicle sales are expected to increase at a faster rate than in most
mature markets."
•Ford Motor Company 2012 annual report (10K), page 12

Profitability: Domestic & International
Margins in the automotive industry are small, averaging just 3% from 2000-2012 for the six
companies. Toyota Motor Corporation with its legacy of lean thinking leads profitability, but no
automotive company has it easy. Table 3 illustrates the volatility in operating margin for the six
major companies.
The companies can be segmented into two groups. While all automotive companies profiled in
this report operate on a global basis, profitability, as measured by operating margin, presents a
stark contrast for domestic U.S. corporations versus companies headquartered in Europe or
Asia. The U.S. automotive industry is in recovery mode now, but has historically not been
designed or managed as well as the supply chains of European and Asian competitors.
Table 3. Operating Margin (2000-2012)
Success in today’s fast-paced world requires aligning supply chain strategy with business
strategy while making conscious choices. The automotive industry lags many other industries in
making trade-offs in strategy and supply chain decisions. The result is low enterprise resiliency.
Cycle: Zero-Sum
Cycle management, whether it is inventory, the cash-to-cash cycle or other cycle metrics, has
been a zero-sum game in the automotive industry. Any improvement in inventory management,
for example at the manufacturer level, is usually matched with an equal setback somewhere

farther down the supply chain. Table 4 illustrates the trend in Days of Inventory (DOI) over the
past 13 years.
Table 4. Days of Inventory (2000-2012)
We find that total inventory reduction in the value chain is not the reality. Instead, it is being
shuffled between various tiers of the supply chain. Figure 2 illustrates the average performance
of auto manufacturers and auto parts industry peer groups. Notice that increasing inventory
turns (good) for the auto parts industry from 2002 to 2005 is shadowed by decreasing inventory
turns (bad) for the auto manufacturers in the same time period. As a result, there are no
winners. The tier one manufacturers have pushed costs and waste backwards in the supply
chain to companies that are generally more vulnerable. As a result, the gains are simply traded
back and forth from one tier to the next.
The industry is not moving forward. The top-tier automotive companies are not owning their
value network. Note that during the Great Recession, while other industries improved payment
terms and relationships with suppliers to ensure resiliency throughout the supply chain, the auto
industry did the opposite. They were able to push an increase in inventory turns from 2007-2009
only by hurting inventory management performance at the auto parts level.

Figure 2. Inventory Turns (Auto Manufacturers & Auto Parts Industry Averages) (2000-2012)
“In addition, our move to global vehicle platforms increases our ability to
source to common suppliers for the total global volume of vehicle components
resulting in a smaller number of suppliers receiving a greater volume of
purchases to support our global vehicle platforms and allowing us to gain
greater economies of scale.”
•Ford Motor Company 2012 annual report (10K), page 14
“From the twin perspectives of quality assurance and improving international
competitiveness, parts standardization must be conducted jointly with
suppliers. Parts standardization also leads to increases in the production
volume of each part, making it possible to diversify suppliers and production
sites without losing efficiency. This enables stable supplies even during
emergencies, thereby strengthening the supply chain.”
•Toyota Motor Corporation 2012 annual report (10K), page 12

Complexity: Global Footprint
Rising complexity is compounding the problem. Cross-industry analysis of revenue per
employee performance, as shown in table 5, illustrates that automotive manufacturers are
squarely in the middle of the pack when it comes to improving revenue per employee
performance over the past 13 years.
Table 5: Revenue per Employee Across 8 Industries (2000-2012)
Not Business as Usual
Today, the automotive industry is soaring on the boom portion of a repeating boom and bust
cycle. However, several factors indicate that this is not the time for business as usual. The
depths of the financial crisis, seen most severely in the bankruptcy of General Motors
Company, indicate that the industry requires serious changes.
Reasons to change are endless, and the list of ongoing and potential shifts in the industry is
significant. Driverless vehicles and electric cars are two of the looming disruptors. Google is
developing technology for self-driving cars. Tesla is not only reinvigorating the possibilities of
electric cars; they are also disrupting the traditional franchise model by selling directly to
consumers. Hybrid and electric options are proliferating as companies and consumers get
serious about Corporate Social Responsibility and a greener planet.
In order to survive and prosper, the more traditional auto manufacturers profiled in this report
must rise to the challenge.

Recommendations
In this concentrated industry, automotive companies need to become more resilient and own
their entire value network. There is no strong leader to learn from. As a result, to break the
boom and bust cycle currently occurring in the automotive industry, companies need to look
outside their industry to consider alternatives. Here are our recommendations.
• Redesign Outside-In. Many industries are more advanced in their journey to supply
chain excellence than the automotive industry. Instead of reinventing the wheel, supply
chain leaders should consider coopting best practices from other industries that have
gone before. In addition to the processes and technologies that can be implemented,
consider the people aspect as well in hiring outside of the sometimes insular automotive
industry.
• Establish Mutually, Beneficial Relationships with Suppliers. Improved inventory
management, or decreased cash-to-cash cycles, should not be a zero-sum game. By
treating suppliers as critical to success, as opposed to cultivating an antagonistic
relationship, automotive manufacturers could raise the performance of the entire value
chain.
• Invest in the Digital Supply Chain. The integration of 3-D printing with sophisticated
CAD/CAM can enable a new design of the supply chain. It is one where parts for
automotive service can be made locally as needed. It is also a world where supplier
productivity and outside-in design networks can accelerate to bring new car designs to
market quicker. No longer does the car have to be made the Henry Ford way of “they
can have it in any color as long as it is black.”
• Embrace the Disruptors. It’s not only about doing what we’ve done better. It is about
doing new better. Advances are being made every day in the development of new
technologies to revolutionize the automotive industry, and large manufacturers should
consider the long view in designing the supply chain now to produce the automobiles of
the future.
Conclusion
The automotive industry has been through a lot in the past decade, but is not learning how to
become more resilient. The industry is insular with limited learning from other value networks.
This is an opportunity. The design for a more stable supply chain needs to happen now in the
boom times to reduce the crash of the looming downturn. Now is the time to focus on building
resilient supply chains to prepare for the future.

Appendix
Company Profiles
Other Reports in This Series:
Supply Chain Metrics That Matter: A Focus on Retail
Published by Supply Chain Insights in August 2012.
Supply Chain Metrics That Matter: A Focus on Consumer Products
Published by Supply Chain Insights in September 2012.
Supply Chain Metrics That Matter: A Focus on the Chemical Industry
Published by Supply Chain Insights in November 2012.
Supply Chain Metrics That Matter: The Cash-to-Cash Cycle
Published by Supply Chain Insights in November 2012.
Supply Chain Metrics That Matter: A Focus on the Pharmaceutical Industry
Published by Supply Chain Insights in December 2012.
Supply Chain Metrics That Matter: Driving Reliability in Margins
Published by Supply Chain Insights in January 2013.
Supply Chain Metrics That Matter: A Focus on Hospitals
Published by Supply Chain Insights in January 2013.

Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail
Published by Supply Chain Insights in February 2013.
Supply Chain Metrics That Matter: A Focus on Medical Device Manufacturers
Published by Supply Chain Insights in February 2013.
Supply Chain Metrics That Matter: A Focus on Consumer Electronics
Published by Supply Chain Insights in April 2013.
Supply Chain Metrics That Matter: A Focus on Apparel
Published by Supply Chain Insights in May 2013
Supply Chain Metrics That Matter: A Focus on Contract Manufacturing
Published by Supply Chain Insights in August 2013
About Supply Chain Insights LLC
Supply Chain Insights LLC is a research and advisory firm focused on reinventing the analyst
model. The services of the company are designed to help supply chain teams improve value-
based outcomes through research-based Advisory Services, a dedicated Supply Chain
Community and public/in-house training. Supply Chain Insights is focused on delivering
independent, actionable and objective advice for supply chain leaders. A company
dedicated to research, turn to us when you want the latest insights on supply chain trends,
technologies to know and metrics that matter.
About Abby Mayer
Abby Mayer (twitter ID @indexgirl), Research Associate, is one of the
original members of the Supply Chain Insights LLC team. She is also the
author of the newly-founded blog, Supply Chain Index. Her supply chain
interests include connecting financial performance and supply chain
excellence, as well as talent management issues and emerging markets.
Abby has a B.A. in International Politics and Economics from Middlebury
College and an M.S. in International Supply Chain Management from
Plymouth University in the United Kingdom. She has also completed a
thru-hike of Vermont’s 280 mile Long Trail, the oldest long distance hiking trail in the United
States. As part of the planning and food prep process, she became interested in supply chain
management when she was asked to predict hunger pangs for the entire three-week trip before
departure. If that isn’t advanced demand planning, what is?!?!

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Supply Chain Metrics That Matter-A Focus on the Automotive Industry-8 OCT 2013