Standardization across the automotive sector: too much of a ‘good’ thing?

One of the ways in which OM is used in practice is to drive standardization in sub-systems and components. These are, more often than not, procured from suppliers as it has been estimated that in excess of 70% of the cost of a product is outside the OEM. Through the standardization of components, efficiency and economies of scale can be achieved that can (in theory), drive the profitability of an organization significantly. Great. But, what if it goes wrong?

Could recent large-scale automotive product recalls signify that we currently have too much of a ‘good’ thing? The automotive sector is an industry where component and platform sharing is prevalent, leading to the potential for a single component failure to necessitate a recall on a massive scale, as the component will be shared across a lot of models. Toyota in particular In September 2014, Toyota announced the recall of 690,000 Tacoma pickup trucks in the US because of a potential vulnerability in the vehicles’ suspension systems and in October another 1.75 million cars have been recalled linked to brake systems and potential fuel leaks. General Motors has reportedly recalled more than 30 million cars so far in 2014 alone. Whilst some argue that the current trend to recall large quantities of vehicles has helped auto-manufacturers stay in touch with the customer, showcase their superior customer service and (hopefully) entice customers to invest in the beautiful shiny new model that happens to be on display as the customer returns their car for ‘repair’, we might also ponder the not insignificant costs that must be attached to the recall process.

Standardization can significantly reduce the cost of producing vehicles, however, like all good things, we need to balance our desire to reduce costs with our need to ensure quality. Where supply chains are concerned, the predominance of a cost reduction strategy can escalate to the point that quality becomes overlooked. Consider these two core points:

  1. Cost based procurement creates fragility

Standardization of sub-systems and components allows purchasing to drive volume breaks and also creates competition between suppliers to offer the best price. These are then negotiated down. This creates two potential areas of fragility. The first of which is that the firm has created enormous exposure to risk by putting all it’s eggs in one basket. The second is that a supplier is really not going to take further short-cuts in order to eke out some profit from what was already probably a razor thin margin?

  1. Cost based procurement affects the wider system

There is the argument that the 2010 recalls that Toyota issued – and put forward by Akio Toyoda, the CEO of the firm – were due to them pursuing growth that was not sustainable according to the Toyota Production System (TPS). TPS (and Lean) is a socio-technical system; it’s people that implement processes and people need to learn. This takes time. When rapid growth is pursued, systems can be implemented but humans will take time to learn them and create other the implicit systems that allow Operations and Supply Chains to work. Thus, fragility in the system was created leading to recalls as systems were treated as technical whilst ignoring the social aspect of them.

OM prescriptions

So, what can be done to make organizations less exposed to recalls? We have three short prescriptions:

  • Don’t put all your eggs in one basket. Whilst dual sourcing can increase transaction costs (i.e. what it costs to complete the transactions) as a firm is essentially doubling up resources, it spreads risk. If the material and design of the sub-system or component is solid, then process failure is generally the root cause of a recall. Lightning is unlikely to strike twice.
  • Allow suppliers to make a profit. A slightly more expensive supplier with goodwill is likely to be less of a headache than a cheaper, disgruntled one. Disgruntled suppliers are costly, but because organizations tend not to have any understanding whatsoever of transaction costs (too difficult to measure), then piece part price is used to represent cost. Goodwill will allow some transparency into what is actually going on. After all, you’d rather have a thriving supply base than one on life support.
  • Consider the speed at which the system works and remember it’s technical AND social. Too often we consider TPS and Lean as just a tool-set but it took Toyota many decades to implement. That’s because they did it right and considered it as wide-scale cultural change. When firms become more reliant on supply chains (and 99.99% of firms are), then this wider system needs to learn the system. So that’s even wider-scale change then. The additional advantage is that treating the supply chain as a socio-technical network creates informal knowledge exchange (remember that?) allowing information to flow that can allow early problems to be recognized. In theory, recalls shouldn’t be as frequent because they would have been identified far earlier.

Too much of a good thing really can be a good thing. But only when done well.

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