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Automotive&AssemblyEXTRANETWinninginHardTimes:BoostingAutoSupplierMarginsSharpeningtheirmarginmanagementskillscanhelpsupplierssurvivetheeconomicdownturnanddelivervaluetotheirOEMcustomers.byDieterKiewell,MaxSammartano,andAnneKretschmerFewsignsoflightappearonthehorizonforautomotivesuppliers,whofaceperhapstheworsteconomicenvironmentingenerations.Despitethisperiloussituation,suppliersandtheirOEMcustomersareoftennotabletocaptureallofthevaluetheirrelationshipscanprovide,duelargelytofrictionthatoccursattheinterfaceswherethetwopartnersworktogether.Thisfrictioncausesmiscommunication,lateengineeringchanges,delays,anddeadlinecreep,andcanmakeitdifficultforsupplierstopricetheirproductsandservicesfairly.IntroducingaMoreIntegratedMarginManagementApproachSuppliersshouldtakeamuchmoreintegratedapproachtomarginmanagement.Typically,theymanagedpricingasaseparateactivityfromproductdevelopmentandcustomeraccountmanagement,andusuallypursuingacost-plusapproach–addingupallthecostsinvolvedindeliveringacomponentandthenincludingareasonableprofitmarginontop.Andonceayear,theywouldundertakeafinance-drivenbudgetexercisetodefinethelevelofproductivitygainsthattheyshouldpassontotheOEMcustomer.Theseapproachesstandlittlechanceagainstthechallengessuppliersnowface,rangingfromOEMin-sourcingandhigherproductivitydemandstotheentryofnewplayersinBRIC(Brazil,Russia,India,andChina)countries.Instead,state-of-the-artpricingplanstodayshouldtakeintoaccountfactorssuchasglobalization,theuseofvariousbusinessmodels,lifecyclestrategies,andproductdevelopment/manufacturingapproaches.McKinsey&Companyfindsthatsuppliersdon'talwayssystematicallyresolvesomeofthekeyquestionsthatexistregardingpricing.Thesequestionscoverarangeofissues–fromstrategicpricing(Howdowemanagepricingacrossaglobalnetwork?)toinfrastructurechallenges(Howdoweshiftoursalesforce'smindsetawayfromequatinglowerpricingwithahigherprobabilityofwinningtheorder?).Thisarticlewillconcentrateonthecentraltransactionalpricingissuesreflectedinthequestions:HowdoIreachsatisfactoryprofitlevelsforallOEMs1/5:PocketmarginoptimizationforTier1supplierSource:McKinseyILLUSTRATIVE41.010.07.03.00.10.30.20.70.20.10.50.20.20.23.02.04.0LaborInvoicedpriceDiscountbasedonproductivityMaterialcost100.096.0BasepriceOtherfixedcosts37.3G&A39.8ContracttermsandconditionsVolumevariance/toolingcostamortizationFinalnetmarginafterfixedcostdistributionPocketmarginPocketmarginbeforecost-to-serve27.3FreightcostExpeditefreightcostsAdd.materialcostduetoscrap,etc.Returns/warrantycostManufacturingsupport/ramp-upcostCashdiscountTechnicalsupportengineeringDistributioncost(fixed/variableincl.packaging)Customersupport/residentengineerInventorycostProject1–product1,OEM1Project2–product1,OEM2…Identifydeviationofproductmarginbyproduct/project/customer,etc.1Analyzedeviationofelementsfromaveragebycustomerand/orproject3IdentifyprofitabilitybyOEM,inrelationtosizeofbusiness2ABCEDFGHPercent…andidentifywaystoreducewasteandcreatevalueSuppliersshouldrevieweverycostelementinthisanalysistoidentifynewwaystoreducewasteandcreatevalue.Stepsincludeexaminingmarginsacrossproducts,projects,andcustomersinordertospotdeviations,assessingthecompany'sper-OEMprofitabilitycomparedtothevolumeofbusinessitreceivesandreviewingthepocketpriceanalysistobetterunderstanddifferencesfromtheaveragebycustomerand/orproject.2/5–byOEM–andthus,neverfullyunderstandwhyoneprojectgeneratesprofitswhileanothercauseslosses.Arobustpocketmarginanalysis–whilenotatrivialundertaking–canquicklyliftthecurtainonprojectandproductprofitabilityissuesandhelpcompaniesbeginturningaroundmoney-losingprojects.Moreover,theabilitytooptimizeaproject'spocketmarginshasbecomemorerelevantthaneverinthecurrentfinancialenvironment.Withallautomotiveplayersunderextraordinaryprofitpressure,beingabletobringaconvincing,fact-basedargumenttothenegotiatingtablecanhelpsupplierswintheirfairshareofvalue.OEMs,facingtheirowndifficulttimes,willbemore