Compromise instead of strangling: The survival kit for SMEs

While many are still on holiday or have just returned nicely refreshed, the buyers of the large car manufacturers and their "opponents", the sales professionals of the suppliers, have long been warming up for the upcoming price negotiations. This year, the talks are likely to be particularly difficult because many small and medium-sized enterprises (SMEs) are in deep water.

However, giving up is not an option. Those who are open to change now have a good chance of tapping into new potential, according to enomyc author Wolfram Hackbarth.

Mr Müller is the managing director of a medium-sized automotive supplier. His company, now in its third generation, specialises in machining, the assembly of smaller subassemblies, as well as the surface finishing and coating of individual components and, generates an annual turnover in the mid-double-digit millions.

When his phone rings, the head buyer of his anchor customer is on the line. She works for one of the large Tier 1 companies in Germany. Without further ado, she gets to the point: She inquires about key figures for her products and commodities. And, of course, she wants to talk about price reductions and savings, as well as refunds for 2022.

Mr Müller is dismissive. He argues that there have been price increases for energy and raw materials in production, refers to cost increases for packaging, additional expenditure in internal logistics and exorbitantly increased freight costs.

The conversation becomes increasingly uncomfortable. Both sides have good arguments for their position. Continuing a meaningful conversation is impossible, however, unless both focus on figures, data and facts without emotion. But this is where small and medium-sized companies often struggle: Current and relevant data on costs, product contribution margins or optimisation potential within their value-added stages and processes are often not available. This results in: Negotiation partners not acting on an equal footing; many suppliers feel they've been “pulled over the barrel” in the end.

In such situations, tried-and-true practical tools and recommendations for action make an important contribution to being able to carry out active risk management based on facts, creating trust and sustainably strengthening one’s own customer relationships.

Component and parts suppliers have a particularly hard time

This is all the more important as the supplier industry has faced a growing number of requirements in recent years. Balanced Burden, Advanced Supplier Development Management, sustainable and energy-conscious supply relationships, fair system partnerships and strategic customer-supplier relationships are just some of the buzzwords in the current discussion between OEMs (Original Equipment Manufacturers) and Tier 1 suppliers towards their sub-suppliers and technology partners.

Ambitious purchasing goals of OEMs and Tier 1 system/module suppliers put Tier 2 and Tier 3 suppliers, who primarily supply components and parts, under massive cost pressure. While the past few months have been characterised primarily by reduced lot sizes, even more product variance, extreme fluctuations in customer call-offs, and high investments due to the switch to electromobility, galloping energy costs and increasing inflation are also making life difficult for companies. Other topics on the management agenda: structural changes in the mobility sector, product changes and required component weight reductions due to new types of drive, winding down the "low-cost country strategy", which involved relocating high-wage production to Eastern Europe. In addition to the operational challenges of day-to-day business, companies must also master all of these tasks. However, many medium-sized suppliers have long overstretched the performance of their economic existence.

Ruthless transparency creates prospects for the future

How can companies regain economic “legroom” in this situation and be perceived again as partners on an equal footing? The following measures and the corresponding tools have proven their worth in our projects and will pay off in upcoming negotiations:

The most important short-term action areas and recommendations:

• Costs and investments:

  Many companies do not have real cost transparency with regard to the current and future product portfolio based on product classes, product families and subassemblies. A potential expansion of services should also be considered as an add-on approach to expand value creation and increase performance management processes.
  

  Supporting practical tools: Technology core competence analysis, product reference analysis, MoB analyses, brief assessment of the development and technology roadmap as well as standardised sourcing strategy review.

  Companies should now also critically scrutinise their investment strategy. The major investments for production machines and assembly systems, in particular, are under scrutiny. Can these be fully utilised in the next few years or is it possible to implement targeted, comprehensive refurbishment of existing machines, systems and facilities and focus on optimising capacity utilisation?
  Practical tools: Plant structure plan, production system analysis, manufacturing/assembly technology benchmark, investment calculations and ROI analyses.

• Personnel development and motivation:

  In many SMEs, the issues of motivation, employee development and the targeted (further) development of key personnel live in the shadows. The mobility transition also plays a central role here: Which production processes and assembly concepts will be used in the future? Can these be covered with on-board resources and existing employee know-how or will new resources be required for future production, service and performance? Companies must scrutinise both their technical and organisational skills with regard to upcoming changes and necessary transformation management.
  Practical tools: Plant structure plan, production system analysis as well as management model and management analysis.

• Supplier management:

  It is particularly important for small and medium-sized automotive suppliers to keep an eye on their supply chains and core suppliers and to sustainably stabilise relationships through cooperation and appropriate communication.
  Practical tools: Value stream mapping key suppliers and extended workbenches.

• Cost management:

  Active cost management in the performance areas and value streams minimises risks. Bottlenecks and losses in production and interfaces must be identified and eliminated. Practical tools: Value stream mapping, production system assessment, active time management and simulation of savings potentials when using a flexible performance-based salary system in the operational areas.

• Liquidity protection:

  Many SMEs also have a lot of catching up to do in the areas of liquidity protection and accounts receivable management.
  Practical tools: Integrated liquidity planning and accounts receivable management tool.

  The most important tips for a successful future in the medium and long term.

• Reduce costs:

  In particular, this involves streamlining non-value-adding functions, reducing staffing units and unnecessary interfaces, as well as reducing overcapacity in production.
  Practical tools: Overhead analysis & personnel deployment planning vs. production capacity charts based on product families and segments, product classes and partial value streams.

• Analyse product portfolio:

  The product portfolio should be actively evaluated on an ongoing basis, especially with regard to volumes fixed in customer contracts, order and call-off fluctuations, as these can increase the organisational and scheduling effort and reduce the contribution margin of individual products and product families. Consistent loss-makers belonging to the customer must be discontinued. Alternatively, an economic compensation on a full-cost basis can often be generated using a balanced-burden strategy.
  Practical tools: Tracking of ladder certificates and product controlling.

• Sharpen profile:

  Companies must know, sharpen and deepen their core and standard capabilities in terms of value-creation processes in production and manufacturing technology as well as their assembly expertise. A clear technology strategy is also essential.
  Practical tools: KSS analysis, development and technology roadmap.

• Improve performance:

  Process losses must be radically eliminated and throughput times accelerated through consistent value stream orientation.
  Practical tools: Production System Analysis, Value Stream Mapping, Block, Bubble, Spaghetti, Cycle-Time Diagrams.

• Monitor trends and requirements:

  Current technological developments must be actively screened in order to keep production competitive. Changing customer and market requirements and industrial trends such as I4.0 should also be monitored and reviewed with regard to relevance for new business and service models for one's own company. The aim is to create a constantly learning and agile organisation.
  Practical tools: Plant structure plan & development and technology roadmap, Technology benchmarks.

• Establishing an ecosystem:

  Others can do many things better – sometimes even cheaper. Small and medium-sized companies should therefore seek organisational and technical relief, for example by using shared services in the area of payroll, personnel management (recruiting, on-boarding & off-boarding), technical building and energy management or the maintenance and repair of machines, systems and facilities. External partners can also provide valuable support in the further development of applications, prototypes and pre-series, for example in the form of a digital twin strategy in cooperation with machine manufacturers and contract manufacturers.
  Practical tools: Cost driver analysis of material and service costs, development and technology roadmap, time management and work plan analysis.

  Trite, but true: A crisis always brings opportunities

  No doubt about it: Small automotive suppliers are not currently in an easy position. In addition to the many issues already mentioned, further risks such as the extreme rise in the price of energy, raw materials and other production factors, fragile supply chains and a chronic shortage of skilled workers also arose as a result of the war in Ukraine and the tense economic situation. At the same time, the tense situation offers agile and change-ready companies good opportunities to align themselves now for a successful future: whether through new business models, new partners or a complete reorganisation of the value-creation stages within their operational industry.