Case Western survey reveals good side and ugly side of automotive supply chain
By Susan R. Helper and Tim Krueger
America’s automotive supply chain is a vital organ of our country’s economic engine, employing about 578,500 workers. The lower tiers of the supply chain alone account for 30% of U.S. auto industry employment.
In 2008 and 2009, when fear of an auto industry collapse was palpable, the fate of the supply chain was a major concern both because of the number of American jobs it supports and because a problem in one small part of the supply chain can send disastrous ripple effects through the entire industry. Given its importance, our team of researchers at Case Western Reserve University set out to study the health of America’s automotive supply chain. We sought to gain a better understanding of the industry’s problems, and their solutions.
Our study was funded by the federal Department of Labor, and we are grateful to MAGNET, the Manufacturing Advocacy & Growth Network, for their collaboration as well.
In a nutshell, the results of our study show that not all automotive suppliers are equal. In fact, even firms with similar core competencies, supplying similar products for similar prices, adopt entirely different business strategies. What’s more, it turns out that different practices produce vastly different results. Some segments of America’s highly diverse supply chain enjoy high value added from each worker, benefit from flexible production methods, and anticipate new technology that will allow them to profit from new markets.
As the accompanying graphs show, these “high road” firms experience over three times the productivity of their low-road counterparts.
As the first graph shows, firm with the highest wages and productivity enjoy an average value added per worker of $99,000 per year, while workers at low-wage, low-productivity firms produce only $30,000 of output. High-road practices also translate into higher sales and more insulation against economic downturn – the second graph shows that when the recession hit, firms engaging in quality circles and preventative maintenance performed far better than their peers who didn’t engage in these practices.
The advantages of high-road production don’t just apply to stampers. A 2010 survey of manufacturers conducted by the Michigan Manufacturing Technology Center found that productivity in the highest-productivity metal heat treating plant in the survey was 10.4 times that in the lowest-productivity plant. This ratio was 5.2 in printed circuit assembly manufacturing, 4.7 in industrial mold manufacturing, and 1.5 in metal stamping
Yet overall, a fairly small share of all automotive suppliers (56% of stampers perform preventative maintenance as scheduled, and 31% conduct quality circles) institute practices such as quality circles and preventative maintenance that can help them access new levels of productivity and competitiveness. This raises the obvious question of why so many suppliers pass up the chance to increase profits, wages, and competitiveness, if the solutions are well within reach.
The answer may have to do with the prevailing mentality of the American auto industry – a mentality that assumes suppliers should cut costs, and customers should squeeze their supply chains instead of helping them to succeed. This assumption drives the logic that says customers that aren’t seeing at least some of their suppliers fail each year are leaving money on the table. Ironically, our results indicate that a very different story is true – customers and suppliers who do not think critically about productivity-enhancing techniques, good HR practices, and competitive wages are actually both leaving money on the table in the long term.
Thankfully, there are signs that the old mentality may be starting to change, and that automakers are beginning to pay close attention to their supply chains, with an eye toward keeping key suppliers healthy. 2008 and 2009 even saw a revolutionary turn of events in which Ford, Honda, and Toyota collaborated to keep important, shared suppliers in business, thereby preserving the delicate eco-system of suppliers on which all automakers depend. But building on this trend and re-structuring our automotive supply chain so that more firms can be good firms will not simply happen in Ford’s board room- it will depend on initiative and creativity from all levels.
Related publication on this topic:
Bringing back America’s manufacturing sector, by The Brookings Institution, Policy Matters Ohio, February 24, 2012
Cleveland—In February The Brookings Institution published “Why Does Manufacturing Matter? Which Manufacturing Matters?” “Manufacturing makes significant contributions to our nation’s economic goals,” said Susan Helper, Professor of Economics at Case Western Reserve University and an author of the report, “and smart policies could increase those contributions.”
Susan Helper is AT&T Professor of Economics at Case Western Reserve University in Cleveland, Ohio. She is also a Research Associate of the National Bureau of Economic Research (NBER) and the MIT International Motor Vehicle Program (IMVP). Her research focuses on the impacts of collaborative relationships, between suppliers and customers and management and labor. Currently she is studying how globalization of supply chains affects development and innovation in the US, Mexico, and India. She has published in journals such as American Economic Review, Sloan Management Review, and Journal of Economics and Management Strategy. She has a Ph.D. from Harvard University and a BA from Oberlin College. In 2005-06 she was a visiting scholar at the University of California, Berkeley, and the University of Oxford.
Tim Kruger is a research assistant at Policy Matters Ohio specializing in manufacturing and energy policy.
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