Cost containment strategies for auto parts supplier CFOs
- In an era of tariffs and labor shortages, auto parts suppliers are dealing with cost pressures from both materials and labor and need new strategies to protect profitability.
- Focusing on your business’s value-add can help you drill down on which costs you can take action to contain, which typically include labor, processes and SG&A.
- Leverage an effective ERP and advisory support to evaluate your current expenses, identify efficiencies and find areas where new technologies like automation or AI can reduce spend or increase value.
CFOs in the automotive manufacturing industry face the twin-headed dragon of limited consumer demand and rising costs. But while auto parts suppliers in particular can’t do anything to boost car sales, what about containing costs?
By thoughtfully reexamining your current expenses, leveraging data from your ERP and deploying automation, you can typically find efficiencies to help your business move forward during an otherwise difficult moment for the auto industry. Keep reading to learn more.
What are the major cost containment challenges that auto parts manufacturing businesses face today?
CFOs at Tier 1, Tier 2 and Tier 3 auto parts suppliers are trying to navigate rising costs for both materials and labor. An increase in both has cut into margins and profitability, leaving parts suppliers looking for solutions to stabilize their balance sheets.
Here are some more details on key cost challenges for automotive CFOs:
- Materials: Driven by tariffs and supply chain challenges, material spend has gone up significantly. Everything costs more than it used to, but without a corresponding willingness on the part of consumers to embrace higher prices.
- Overstocking material inventory: Some suppliers are also overstocking on material inventory to mask operational inefficiencies. This ties up working capital, which risks creating a cash crunch and limits maneuvering room.
- Labor: Higher wages have also pushed labor costs north, eating into margins. But to make the dynamic more complicated, wage pressures have also been combined with labor shortages, leaving businesses stymied in both directions.
Some of these are more containable than others. To know which, consider your value-add.
What is value-add?
To control costs, auto parts suppliers should think in terms of value-add. This is your revenue minus your materials (and outsourced processing) costs, and it’s a key benchmark for understanding which of your costs you can actually bring down.
For example, your material costs, like plastics, coloring, metals and additives, are controlled by the market. Assuming you’re paying market rates and scrap levels are under control, there’s nothing else you can do to reduce those costs. You need the raw materials you need, and in most cases, you have to take the prevailing market price.
This is where your value-add comes in. If you make a $1.00 auto part that requires 55 cents of materials, then your value-add is 45 cents, which is the additional value of your work to transform those materials into a finished part.
That 45 cents is essentially where you’ll have to find efficiencies to strengthen your profitability.
How can automotive CFOs bring down costs?
Focusing on your value-add points you toward the limited number of costs you can take action to lower. You’ve still got plenty to work with here, as these typically include manufacturing labor, supplies, primary processes, secondary processes and SG&A, all of which can potentially be fruitful ground to evaluate and experiment with creative solutions.
Here’s how to start:
1. Lean on real-time data
You need to understand the state of your business so you can more effectively control costs. That starts with giving your team access to real-time operational data and analytics.
The best way to accomplish this is typically by implementing an integrated, cloud-based ERP that pulls information from all of your systems so you can view real-time analytics, track KPIs and get answers to critical organizational questions. But if you can’t budget for an integrated ERP, there are also less costly and more flexible options for machine monitoring and real-time data source collection to consider that simply link your existing systems with dashboards.
Leverage an advisor here to help you decide on an approach, upgrade your current systems and use the data you gather to strategically address your costs. The right advisory firm will understand both tech and the automotive supply business and the nuances of how to use the former to drive results in the latter.
2. Build your market knowledge through industry benchmarks
To assess your labor costs, don’t look directly at your labor costs. Instead, calculate your value-add divided by your number of full-time equivalents, then compare that figure to industry benchmarks.
This can help you get a handle on whether your headcount makes sense for your existing value add. The total dollar amounts do matter here, but more important is whether the structure of your business is sound.
3. Evaluate your direct and indirect labor
Evaluate both your direct and indirect labor costs in light of industry benchmarks. How many of each role do you have, and is that labor skilled, unskilled or semiskilled?
In boom times, businesses tend to stock up on specialists, whereas lean times call for more utility players. Do you have too many specialists, and if so, can you convert them into utility players to rebalance your labor force?
Consider whether you can use new training or tools to get more value from your existing labor pool, or if there are areas where automation could help you save on labor costs.
4. Assess SG&A costs
Don’t forget your back-office costs. These include sales, admin and other expenses not included in your direct and indirect labor costs.
One major area to evaluate is your marketing and sales process. Specifically, think about whether you’re actively going after the sales opportunities that make the most sense for your business. Are you moving the needle, or wasting money on tactics that don’t drive financial performance?
Assess where you have spent money in the past and evaluate whether it has translated into real results.
5. Think about automation in terms of ROI
Automation is a major tool for bringing down labor costs or making your existing processes more efficient, but automation means lots of different things. It can include robotics — fully automating elements of your production processes — but can also involve integrating automation tools more fully into your business operations, like using AI to track machine service schedules for smoother servicing.
Think about what makes the most sense for your specific business needs. Rather than chasing the latest shiny tools, focus on identifying particular business problems that automation could help you solve, and then prioritize problems and solutions that will deliver meaningful ROI.
6. Look both backwards and forwards
As you assess your costs, as well as consider if or how you want to make changes, do this in light of both your historical expense trends and your projections of where your business is headed in the future.
For your costs, you need to understand not just today, but what’s probably coming down the pipeline over the next 3, 6, 9 or 12 months. Use forecasting tools to help you create more accurate models on which you can base decisions.
Likewise, you should also assess your expenses over the past 12-24 months, both in percentage changes and dollar amounts, to understand your past trends and whether you’re trending in the right direction (for example, if you’ve been growing, your percentages should be going down due to efficiencies of scale).
How Wipfli can help
We help Tier 2 and Tier 3 auto parts suppliers improve performance, navigate change and grow. Let’s talk about your goals and how we can help you achieve them. Start a conversation.
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