(Das; Puri, 2003)
Innovation Management systems are also able to generate structured processes for evaluation and sharing ideas, such that decision makers are able to target those who possess the maximum potential. Nevertheless from the perspective of a manufacturing industry, the two costs which are important are material cost and processing costs which together accounts for 60% to 70% of the cost of goods sold. Material cost reduction in this perspective is defined as any attempt to lower the cost of bought-out components/raw materials through procedures like value engineering, part rationalization, competitive standardization, alteration in packaging, enhanced transportation etc. Normally, the suggestions emanate from several components in the value chain like customers, suppliers, staff in charge of procurement and designers of products as well as stores personnel. Productivity improvement signifies modifications of any processes which can be core manufacturing process or support processes like material handling. Various challenges can be surmounted through the implementing of innovation management solutions that has inbuilt features to handle the challenges. (Das; Puri, 2003)
An important development witnessed in the automotive sector has been that suppliers have been the drivers of innovation. The outsourcing pattern of the bygone few decades has remarkably raised the share of external value creation within the automotive industry. Presently majority of the OEMs create merely 30 to 35 of the value internally and the remaining are delegated to the suppliers. Besides, even though the industrys externalization of central processes seems to have slowed or even ceased, the reality that the major portions of automotive production takes place at the supplier point. Small wonder then, the suppliers also play a bigger role as innovators. (Maurer; Dietz, 2004)
Research suggests that particularly in the sphere of electronics and mechatronics, the supplier community will come to be the most important drivers of innovation in the industry. With the increasing dependence of the OEMs on the suppliers capacity, they will require to build even greater refined strategies for managing suppliers. For instance, they will be required to build a formal supplier inspection within their purchasing departments to find out and develop the pertinent technology leaders and include them in their supply base. Apart from that OEMs will require to provide an established and coordinated innovation process as also a virtual and physical innovation policy to make sure that the optimal integration of the suppliers is market-linked and product related know-how. Tier-one suppliers in their role will require building up their engineering competence, either by means of organic growth or through the acquirement of engineering firms. They will also require building innovation networks in tandem with their sub-suppliers to leverage the complete potential of their supply chains. (Maurer; Dietz, 2004)
The urgency for close cooperation between the OEMs and the suppliers through various partnership programs, BOT models, or other online partners is propelled in part by the remarkable shortening of innovation cycles. Since the last decade, the typical life period of a car model in the industrialized nations has minimized by nearly 50% i.e. from about eight years to nearly four years. Within approximately the same period, the average development time right from designing to the commencement of the production has lowered from nearly 48 months to approximately 30 months. This is expected to come down to about 18 months. Due to the spectacular acceleration of development and shrinking of the production cycles, OEMs and suppliers are starting to get involved in one anothers design and development processes much sooner than what was being done before. This has resulted in distorting the conventional handoff points between sophisticated development, concept definition and competition, series development, and ramp-up. (Maurer; Dietz, 2004)
This drift indicates that the OEMs are required to structure their development processes in such a manner that the R&D and the purchasing departments work in tandem from the initial stages onwards to define the critical parameters, guarantee product differentiation at competitive cost, and engage suppliers at the earliest possible to leverage their market and product expertise. Therefore in the forthcoming years, the purchasing function of OEMs will be required to contribute in a coordinating manner at the OEM-supplier interface. In the present automotive markets wherein product differentiation at competitive cost is important to sustainable growth, it is crucial that OEMs must strike a tactful balance between capturing the best possible innovation from their suppliers and maintaining costs within reasonable margins. (Maurer; Dietz, 2004)
Over the years it has been experienced that OEMs experience an intricate balancing act while dealing with their suppliers.
In order to ensure that product differentiation continues to be the mainstay of the automotive industry, OEMs should demand innovation from their suppliers. Concurrently, there is an expectation by the OEMs that their suppliers will contain costs within the best possible limits. It is a reality that since the bygone decade, OEMs have placed Tier I suppliers under severe and unabated cost pressure, compelling yearly cost reductions which have been averaging nearly 3%. This has resulted in a severe dent in the financial performance of the suppliers compelling some to consolidate while putting others into the brink of insolvency. (“Automotive Cost Reduction,” 2008)
Nevertheless, a clearly weakened supplier population does not augur well for the OEMs as in the ultimate analysis as they come to be most important source of breakthrough innovation within the automotive industry. Regardless of this, OEMs demand from the suppliers to reduce costs. In order to stay competitive suppliers have turned to mergers, acquisitions, JVs and low cost sourcing in an endeavor to grow top-line revenues, sustain market share, utilize assets in an effective manner and raise the leverage with the OEMs. Regrettably, the anticipated advantages linked with those objectives sometimes become unsuccessful in turning into reality, resulting in added margin as well as pressure on performance. Attaining persistent cost reduction and improvement in performance will be challenging task and an important focus for the automotive OEMs as well as suppliers. (“Automotive Cost Reduction,” 2008)
Well-known analyst Oliver Wyman has done an analysis regarding the innovation strategies of the industrys most successful automotive companies. The research on “Car Innovation 2015” recognizes the levers which car manufacturers and suppliers are required to pull to become the latest innovation leaders. Depending on the business design of the supplier as also the OEM, four dimensions are required to put into alignment. They are innovation proposition, competence focus and collaboration, innovation management, its organization and structure. The major suppliers in innovation management produce a 16% higher EBIT margin compared to their contemporaries, all the while putting through a distinct innovation strategy and balance along those four dimensions. The study entitled Oliver Wyman study “Car Innovation 2015” has given five recommendations for innovation management within the automotive industry. These are (i) raising customer orientation and marketing focus on R&D. (ii) generating a diverse innovation product & services portfolio (iii) improving R&D effectiveness and efficiency thereby lowering the risks involved innovation (iv) improve innovation culture and organization. (v) aligning the innovation strategy as per Oliver Wymans Innovation Strategy Framework. (“2015 Car Innovation,” n. d.)
Keeping the above in view, cost reduction has been and continues to be the most important targets for the automotive industry in Europe. Whereas cost reduction is an outcome of rising competition and international markets, the weight reduction has partly been put on the OEMs by lower fleet consumption targets. Nevertheless, competition has even propelled an unprecedented number of accessories and vehicle electronics. Their added weight has been the drive for lowering the weight of the standard body and drive train compartments. The ever-increasing number of new model releases and the urgency for faster technical innovation has shown several weaknesses in the industry which is required to be surmounted. (Bollig, 2002)
According to a survey the most identified are as follows: (i) Right First Time: Top class component quality and readiness in production from the beginning of a new model. (ii) Speedier technical innovation (iii) Systems integration (iv) development of latest on-board electronics. Product and component callbacks as also delayed product launches are presently casing acute problems for the automotive industry. OEMs are demanding that their suppliers enhance performance and build flawless supplies on time from the very beginning. While readiness in supply is mainly an issue of organization and communication, systems integration and electronics networks continue to be matters of rapid research and development in high technology areas. (Bollig, 2002)
Ever since the restructuring of the U.S. auto, steel and consumer electronics industries of the 1980s, automotive manufacturers have been experiencing competitive pressures and economic burnouts. Material cost, labor, healthcare, production, equipment, fuel as well as other items have risen. Nevertheless with acute competitive retail pricing and OEM-dictated price reductions, it is impossible for the suppliers to pass their own cost increases on to the OEMs. Apart from that, fast growing OEMs those based in Asia persist in their effort to drive their independent strict quality, cost and timing standards. Automotive suppliers.