The domestic automotive industry has been on a tear since bottoming out during the great recession. Volumes have exceeded the previous peak, and there are plenty of indicators that a growing economy will continue to drive vehicle purchases. But there are plenty of reasons why growth will stall, ranging from weaknesses in global demand to declines in consumer confidence to a potential interest rate increase.
The mixed message for the US economy is leading forecasters to vary their predictions for US light vehicle sales considerably. IHS and LMC foresee a continued rise in sales through 2019, while Alix Partners expects a pretty severe drop. PWC is in the middle, anticipating a drop in 2017 and 2018, with a bounce back in 2019. It’s fair to say that the U.S. auto market is at risk of decreasing demand.
When demand drops, manufacturers can expect competitive price pressures, customer prices pressures as customers seek to protect their margins, and margin compression due to loss of economies of scale.
Manufacturing companies should prepare:
Establish an early warning system. Ensure all customer facing staff have their ears to the ground to get the earliest possible warnings for any softening of demand from the direct customers as far in advance as possible, before it hits the order books.
Look at structuring your company to take advantage of your operations in low cost countries. Look at moving repeatable, tactical work to offshore service centers.
Develop a rapid response plan to activate when the need arises:
- Keep a tight rein on any additional hiring unless absolutely necessary
- Keep a tight rein on days of supply of inventory
- Review all discretionary spending and have a plan for cutting it when necessary
Make the most of new product launches. The number of programs and the frequency of change have added SG&A cost in the industry. Manufacturers need to ensure that new programs are coming in at higher margins.
Steps to prepare your purchasing organization:
Assess the financial health of your supply base. Many supplier balance sheets have not fully recovered from the severity of the last downturn and could quickly affect your supply chain.
Assess team capabilities and fill critical roles before the hiring freeze. Many may not have been in their current functions the last time the company had to deal with significant declines and volatility of this magnitude.
Ensure the purchased bill of material on new programs is cost competitive. Implement should-be cost models to ensure sourcing decisions are based on competitive benchmarks.
Implement a supplier consolidation plan. Pair those with experience in managing in a downturn with those who do not have that experience to mentor them and be their go-to person when dealing with this new experience.