(Six Trends Impacting Commercial Vehicle Suppliers) If you ask anyone at the “water cooler” of the automotive industry about the future, they will probably recite these top two trends right away: autonomous driving vehicles and advanced manufacturing (a.k.a. Industry 4.0). The experts will possibly add three more changes to take effect in the next 15 to 20 years: electrification of vehicles, connectivity and advanced materials. These five trends are driven by global tendencies, but mainly macro economic ones, such as slowing growth, environmental distress (creating stricter rules), demographic shifts and growing urbanization. While it’s reassuring that everyone shares a similar vision, it’s not exactly clear how these changes are going to impact vehicle OEMs and their auto parts suppliers. More specifically, how they will change the commercial vehicle (CV) manufacturers and their suppliers. And the reason why we should think about the CV industry first, is the high probability that the next autonomous car might be a truck. Trucks have very compelling reasons to receive autonomous driving capabilities before passenger cars do, especially long-haul trucks in US and Europe. The economic benefits of ALHTs (autonomous long-haul trucks) are undisputable: fuel economy, safety, emissions, delivery efficiencies, tackling driver shortage and so on. On top of economic reasons, closed-loop transportation systems will be first to market, since they are easier to maintain control, versus passenger cars. Trucks already have a semi-open architecture for power and drive train systems, using a network of electronic control units (ECUs) over standard data-links. Many of the ALHT’s enabling technologies are in place today and new ones are being tested as we speak. The sensor arrays and number of ECUs continue to grow. Suppliers such as Knorr-Bremse and Wabco offer full stability control systems, lane departure and radar-based anti-collision systems, to mention a few. Trucks were the first adopters of telematics back in the 90’s, becoming a showcase for Qualcomm and for how connectivity can improve overall transportation efficiency. In fact, major suppliers piggyback on telematics to communicate with their products on the go. Many in the industry believe that we are only one or two design cycles away from having convoys of ALHTs going down some highways in US and Europe, in the next 10 to 15 years. Unlike cars, autonomous driving trucks will not require radical changes to their power/drive train technologies to get there. The changes are likely to be less than revolutionary. The modern diesel engine and transmission, for example, are fully capable and very likely to power the ALHTs with some enhancements. Diesel fuel will continue to be cheap for the foreseeable future, even though we might see some electrification as hybrid and power storage technologies develop. So change is coming for the trucking industry and so far all we hear is discussion about product and manufacturing hardware technologies. And although these technologies are important and disruptive, the central question for suppliers is how will these changes impact their business in the next 10 to 15 years. Or how can an existing supplier capitalize on these trends? Based on my observations, I believe there are at least six specific areas that CV suppliers must look at, in order to succeed in a changing CV industry: (1) move up in the supply-chain (tier 0.5 supplier), (2) increase lean and agility, (3) glocalization, (4) new service business model, (5) analytics capability and (6) the millennial generation. Become a Tier 0.5 Supplier Commercial Vehicle OEMs are pressured to meet both the growing need for automation features and cost reductions for competitive and regulatory purposes. The cost of non-compliance is growing bigger every day (remember the recent debacles around International Trucks and VW diesel cars). OEMs are adding new models and features while reducing the number of vehicle architectures and suppliers. This complexity will inevitably influence ALHT’s architecture to become more modular, through more subsystems (modules) designed with interfaces that form similar structures, from which a number of derivative vehicles can be developed, while preserving the identity of each OEM. While OEMs will continue to be the system integrators, Tier 0.5 suppliers will be a step ahead of the Tier Ones in the supply chain, working in close cooperation with OEMs and component suppliers, offering modules with common interfaces and technologies that are aligned with ALHT’s architecture. The design characteristics of the best modules will include simpler interfaces to the truck, energy conservation capabilities, remanufacture ability, data-gathering intelligence, network connectivity, above average reliability and competitive cost. It will take smart and integrative design by the supplier, beyond and above the addition of more ECUs to the product. A module will be more than today’s conventional subsystem assembly, where labor is the main value added to isolated components. Take for example the rear drive axle assembly; composed of an axle, brakes, wheel ends with tires and ABS/EBS controls. Today, these components are sourced separately from different suppliers, by most OEMs, with little integration amongst them. This is the result of an evolutionary design and sourcing mindset created by a multitude of unique interfaces and functionalities, in the absence of modular system architectures for trucks. When you boil down the functionality for this subsystem, the rear end is primarily trying to manage torque between the vehicle and the asphalt, in the most efficient way possible. As the ALHT architecture evolves, it is not difficult to envision that all of these mechanical and electronic components could be optimized to provide higher levels of performance. Smart tires and axle differentials, for example, could share the intelligence embedded in the ABS/EBS controls. Mechanical integration between axle, brake and wheel-end using new materials, could save a lot of weight and cost. Tire pressures could be controlled to optimize tire wear in conjunction with traction and torque control. The rear end module should be capable of adjusting its torque characteristics on the fly, based on road conditions and duty-cycles. It should also be able to ask for help when it senses a problem and requires service, based on usage patterns and prognostics. The possibilities are endless, but I know many people will bring up the commercial barriers for suppliers, to climb up to tier 0.5. And that is true, until the new architecture emerges and the interfaces are better defined for each functional vehicle element. The best example we can relate to is the personal computer. Once the architecture became stable and the interfaces well defined, a whole new industry emerged. Some component suppliers were able to climb up the ladder and evolve into complete subsystem providers, while others were acquired or disappeared altogether in the process. Who is going to be best positioned to supply high-value modules under the new architecture, remains to be seen. There is also the question about how vertically integrated truck OEMs will deal with this change. Are they going to collaborate more with suppliers or are they going to try to become modular suppliers themselves to other OEMs? Would someone like a Google or a Tesla become intelligent modules supplier in the future? Some suppliers are better prepared than others. Eaton, for example, had a good start developing and supplying hybrid power packages to bus truck manufacturers. Cummins did the same in the natural gas space, with engines and fuel systems. They eventually became a supplier of fuel and emissions systems to other engine makers. The important thing is to consider this disruptive change in the horizon and start developing your company’s strategic choices and desired position in the new supply chain. Increase Lean and Agility Lean manufacturing has been around for 50 years now. Still, not every manufacturer has transformed itself with lean. Many have not managed to apply it beyond the shop floor. Suppliers will need one or two more gears, in order to cope with squeezing margins, if they want to grow profitably. Becoming leaner, beyond the shop floor, and increasing agility are imperatives to survive and thrive. And to gain agility, suppliers must reduce internal complexity and keep it under control. It means simplifying supply-chains, de-proliferating product portfolios, optimizing sales and distribution practices and streamlining business processes. Getting leaner beyond the shop floor requires a compelling economic benefit, for most suppliers. Most see the power of lean to eliminate waste in manufacturing, but when it comes to other areas, the enthusiasm is not the same. This is why I believe suppliers need 80/20 or “lean on steroids”. As I’ve written before, lean and 80/20 are “sisters” and they need to work in tandem, if you want to cut waste and become more agile at the same time. Lean is primarily an “inside-out” methodology, while 80/20 is an “outside-in” process. 80/20 starts with the customer and the market. Lean starts with a strategic intent or purpose from within the company and eventually becomes a transformation tool, which impacts the way people think and the way the processes work. Combining lean and 80/20 will increase focus, profitability and reduce complexity. It will sharpen your company’s focus on the market’s sweet spot, simplify your offering and drive complexity out of the critical business processes. It will also create a more decentralized and autonomous organization, capable of faster organic growth. Lean and 80/20 will also lead you to a sensible automation approach for your manufacturing processes, for maximum productiveness and lowest cost, and not just automation and connectivity for the sake of staying in tune with the latest buzzword (Industry 4.0?). Let the market demand drive the need for 3D printers and robots in your high volume production lines and not the other way around. Ease of connectivity on the shop floor is happening anyway! But that is the hardware, while lean and 80/20 represent the software. Adopt Glocalization There are no surprises about the global nature of the CV industry and the need for suppliers to support their OEM customers around the world. But there are different approaches to helping your customers globally. Glocalization can be thought of as another buzzword, but it has a role in our industry. Some times, you must offer different versions of the same product for different markets, but you don’t necessarily need to become more complex and proliferate your product lines to do that. You also have to create product availability close to the customer site, but you don’t necessarily have to own all the means of production yourself. To use another jargon, glocalization means that you think globally (product architecture, supply chain, partnerships) and act locally (product features, cost and service needs). A good example of a company that does this very well is Cummins. While the same mid-range engine platforms (ISB and ISC) are used all over the world, the final products get customized in different markets to meet local competitive requirements and service needs. And production is not carried-on directly by Cummins in every region either. In China, for example, Cummins has a joint venture with OEM customers, such as Foton Trucks. Cummins has “glocalized” production in China, in order to produce the ISB four cylinder engines, with different fuel systems and accessories, which are more adequate for local emissions, cost and service practices. In other markets, Cummins uses a combination of its own plants, JVs and licensees to create availability of “glocalized” products. Normally glocalization happens in two fronts: manufacturing footprint and products. But there is more to it, such as localizing design and maintenance of global product platforms for major developing markets. The growing number of technical centers in India and China are good examples. Engineers work in collaborative manner with their peers in US and Europe, to create new designs and tweak existing platforms. The product design, for a high volume emerging market truck component, should ideally be done in the region. OEMs are quickly learning the lesson and turning more often to suppliers in region, capable of true localization, based on global platforms. Think of BharatBenz in India and Foton Trucks in China, as companies that are adopting a glocalized sourcing strategy. Change the Service Business Model The concepts of vehicle uptime and TCO (total cost of ownership or life-cycle cost) will be top priorities for fleet customers, since they can now operate their transportation system 24 hours a day, seven days a week. Nevertheless, the fact that ALHTs are connected all the time to the network creates a major business opportunity for suppliers willing to innovate on their service business model. Customers will continue to demand a seamless purchase experience for parts and service. They will also want to monitor the health of their vehicles online, using predictors to decide when its time to pull the truck for service, and select strategically located service shops to minimize downtime. Loyalty to the channel (OE or independent) and to the brand of the parts on the box will diminish, as customers pay a lot more attention to TCO and uptime. In fact, end users will care less and less if the parts are new or remanufactured, as long as they get the job done from cost and availability angles. There is a major opportunity in remanufacturing of components, in the broader sense. It is not only more economical but it also makes a lot of sense from an environmental standpoint. And the biggest revolution in remanufacturing has to do with the supplier’s expertise in the areas of electronic salvage technology and reverse logistics. Remanufacturing of electronic components will go way up. The ability to reprogram the hardware with new or upgraded code, and delivering the new software via de network, will be huge differentiators. We are now talking about real-time remanufacturing of products, in some cases. But suppliers will have to dedicate engineering resources to developing new salvage techniques for hardware and software, so they can change fewer parts and have better margins. Develop In-house Analytics Capability The key reasons to be good at analytics are two fold: first, customers will demand that your products and services offer predictive capabilities and two, you will want to use the abundance of information to develop market foresight and optimize your product portfolio. Your products will become a node in the ALHT’s data network. Capturing only miles and hours of operation are OK, but not sufficient to create predictors that you can act upon. Usage and duty-cycle data, operating environment information, product health and performance, maintenance interventions and a host of additional data will become available. Being capable of making sense of the data, to predict the future and to make it happen for you and for the customer will be a huge differentiator in the market. Predictive analytics capability will allow you to get closer to customers and derive usage practices that you can apply for multiple purposes. Predictors will help with early problem detection and service prognostics, which is critical for the operation of ALHTs. No one will want a disabling failure to happen without previous warning, when it comes to autonomous driving. The risk is too high. Suppliers will have to learn these new skills, since most of what they have today is warranty information analysis and service diagnostics, which is only capable of telling “what happened” and “why it did happen”. Current analysis is not geared to point to “what will happen” and “how you can make it happen”. Once these new analytical skills are developed, you will be able to use them to improve performance of your own sales and product portfolio. Suppliers will use analytics to continuously optimize offerings, as product mix will vary even more, for different OEMs and regions. The customer pain points and usage patterns will feed right into the supplier’s product plans and service strategies. There will be less guessing and subjectivity. And without active and objective management of the product portfolio to sustain momentum, suppliers will likely suffer from slow growth and sub-optimal contribution margins. Empower the Millennial Generation Last but not least, CV suppliers need to have their experienced leaders focused on developing and empowering the next generation, before it’s too late. An industry that has traditionally thrived on experience and people’s networking abilities must learn to succeed with tech-savvy and connected people, who don’t necessarily want to stay in the same company for all of their lives. Suppliers will have to adjust to the fact that the Gen Y workers are more inclined to be “employed consultants” who want better flexibility and recognition. The good news is that the new generation is a lot more global and in tune with the trends affecting the commercial vehicle industry. They are likely to see the advent of autonomous vehicles as a natural and needed evolution in the entire transportation matrix. They will want to be challenged and recognized, working in focused business units, with clear KPIs, as opposed to the overly functional global matrix organizations. They will be more like the ALHTs themselves, where the network creates the strength and not any specific node in isolation. Surely there are other things that CV suppliers have to worry about in the next 20 years. And you don’t have to be good at all of these areas to be successful either. But some of these can have a perverse effect, if you don’t pay attention to them. Case in point is the arrival of the millennial generation in the work force. Failure to bridge between baby boomers and the millennials can create disruptive shock waves throughout the culture and distract the organization. Other areas such as glocalization, if poorly executed, can create cost and limit growth in a global CV industry. Lack of innovation to your service business model can cost you a lot of money in customer support and reputation.
Other areas like lean 80/20 and analytics are performance differentiators. The suppliers who excel in these attributes will pull ahead of the pack and make more profits. And Tier 0.5 is the ultimate aspiration and a delighter to customers. If you are able to deliver innovation and value that is aligned with the new truck design architecture, you will have an edge. But only a few of the basic areas are attributes to becoming a Tier 0.5 supplier. Other competencies are required and not all of them are present in our industry today.
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Top-line growth is essential for the long-term viability of any business. There is evidence showing that companies that do not grow over a certain number of economic cycles are destined to go out of business or be assimilated. Growing below the industry or the GDP rates can be a significant drawback for companies and leaders. But you can’t just add revenues at any cost. If growth is not executed in a lean and profitable manner, the additional revenues can bring along extra complexity and more overhead. Low quality growth can increase financial leverage and reduce cash flow, compromising performance and long-term viability. I was recently invited to participate in a discussion panel, at the SelectUSA 2016 Summit in Washington DC, regarding my experience with our company. More than 2,500 participants from 70 countries listened to speeches and experiences from international companies doing business in the US, on how to enter and grow in the largest consumer market in the world. The questions I kept hearing were certainly related to entering the US market but mainly about sustaining profitable growth afterwards. In other words, how to balance the need for growth with the risk of entering an extremely competitive market? A lot of complexity that goes unmeasured and unmanaged in organizations is created when companies embark on revenue growth at any cost. In many cases, when they try to grow their product and customer portfolios in mature, developed markets without a plan to keep complexity at bay. Trying to gain market share in established markets or growing on too many fronts, can create a lot of transactional complexity and increase overhead faster than revenues and profits. In fact, there is the misconception that, when entering a new market, the growth options are limited to taking market share from existing competitors and merging or acquiring an existing business (M&A). I know by experience there is a third option that should be explored, which is most effective and often neglected. 80/20’s approach to quality growth calls for a sharp focus on select few market segments, coupled with portfolio optimization, in order to specialize your offering and maximize growth. When you specialize your value proposition in select niches, using segment-focused business units (often decentralized), market share gain comes naturally and not at a higher cost. M&A initiatives can then be used to gain portfolio momentum, focusing first on new product lines and bolt-on acquisitions and second on growth via new business platforms. In their book The Granularity of Growth[i], the authors from McKinsey & Co. split a company’s growth into three main components they call “growth cylinders”:
In their study of 416 US companies over two economic cycles, they show data that portfolio momentum or market growth explains 46% of the difference in growth performance between large companies. Only 21% came from share gain. Furthermore, regardless of which growth cylinders you choose, the top three success factors are the same ones touted by real estate agent’s everywhere: “location, location and location”. Granularity is king and I was not surprised to hear similar reports from almost every successful investor at the SelectUSA Summit. What they mean is, in order to succeed, you need to be very selective and dive deeper into industry segments and niches (and regions and cities) that you wish to target. You need depth and granularity in your growth strategy when deciding where to focus your efforts to compete and grow.
Picking the most attractive segments to compete is just as (or even more) important than knowing how to compete. There are better market sweet spots or niches, where you can sustain a higher level of organic growth for your specific product or service offering. And to find out where these niches are, just like in the real estate business, you need to do more than understand the market fundamentals, such as the competitive structure, cyclicality and regulations. You need to use primary research coupled with analytics, to find uncommon knowledge such as the average contribution margins practiced in the segment and how operating cash is used, in the form of working capital (receivables, payables and inventory), for example. Once you’ve selected the market and defined the initial composition of your portfolio, there are only three ways to improve momentum. The first one is to reallocate the resources and the efforts from the “twenty” areas (sour spots) to the “eighty” area of the portfolio (sweet spot). The second way is to change the structure of your portfolio by changing commercial policies (pricing, rechanneling) and reducing complexity (consolidating SKUs), for example. The third way to grow momentum is to actually grow your markets, by expanding your portfolio, via bolt-on or product line acquisitions, and to expand into new customer pockets or niches (a new region or a new level of granularity in your segmentation). You can find out how much portfolio momentum you have by looking at top line growth and quality of sales in each segment, determining how your business stacks versus the market and the competition. 80/20 analytics can give you a very good idea about the “fitness level” of your portfolio, focusing on sales efficiency, productivity, revenues and margins. Here’s a list of indicators to look at:
Growing top line in a new region is obviously less risky and more profitable, if you have a track record of successfully entering new markets. Some companies have developed this capability really well, like many in the pharmaceutical industry. But even then, you can’t just assume that you will grow by taking market share from competitors in a market like the US for example, just because you are the leader someplace else. If taking share is your only strategy, you might struggle with margins and sustainable growth. You need more than a single growth option and a higher level of specificity in relation to where you play (location, segment, niche) and how you play. You need to be firing on more cylinders than just market share. The questions above should help you rethink your target segments and adjust your growth plans. Doing your “location” homework and fine-tuning your portfolio to acquire momentum are the best strategies to enter a market like the US. An acquisition helps if it’s done in support of your portfolio customization strategy, but you need to be careful not to add too much complexity from day one, and not to inherit a skewed portfolio. The best lessons from companies that succeeded in entering and growing in mature markets have more to do with outstanding niche selection and portfolio acclimatization and less to do with fighting for market share and doing mergers and acquisitions upfront. [i] The Granularity of Growth (How to Identify the Sources of Growth and Drive Enduring Company Performance) – Patrick Viguerie, Sven Smit, Mehrdad Baghai. Published by John Wiley & Sons, Inc., Hoboken, New Jersey (United States 2008). In previous writings I’ve talked about the importance of 80/20 data analytics. Here I want to give you an application example and hopefully explain how effective this process can be, when you apply sales analytics in conjunction with 80/20 thinking and tolls in search of profitable growth. Sales analytics tools are used to compile data from different sources, but mainly related to customers and products, transforming the records into useful information and insight that sales leaders use to understand their business and develop improvement actions. Data can come from databanks and pipelines such as CRM (customer relationship management), commercial transaction files, product cost databases and so on. This multiple interfacing capability is called MDS for Multi-Data Source integration. Tools with MDS capability literally mine the data from different archives, cluster it together and enable visualization through dashboards and reports. The level of refinement is growing rapidly and most tools now offer predictive analysis, which looks for leading indicators. At a first glance, these indicators may not look like they are directly connected to sales events, however through further correlational analysis and multiple associations in the data, a connection can be established and the indicator becomes a viable predictor of sales. As an example, the number of visitors to certain websites might be a good predictor of future sales of products related to those specific websites. Marketing organizations are constantly mining data to look for hidden relationships and trends that can provide clues about customer’s wants and sales trends. Perhaps the most widely used sales analytics tool for ecommerce is Google Analytics. It is a service from Google that provides statistics and basic analytical tools for search engine optimization (SEO) and marketing purposes. Geared towards small and medium-sized retail websites, Google Analytics has many features such as data visualization (dashboards and scorecards), motion charts, segmentation analysis, as well as custom reports. In spite of this growing level of sophistication, the vast majority of these tools are multi-purpose, or designed to organize the output in generic ways that are easy to understand and track. Then it’s up to managers to create strategies and extract conclusions from the many dashboards and predictors. And since these are primarily off-the-shelf tools and every business is unique, customization not only costs a lot of money, but customization also puts a cast around the company’s analytical capability. Having said that, almost all basic software products offer interesting tools such as sales dashboards, order pipeline and territorial management, sales planning and productivity metrics. The more advanced products offer additional features like predictive analysis, sales forecasting, customer data segmentation and product profitability analysis, Off-the-shelf analytic tools are great to track the performance of the sales team, but they are not meant to be transformational tools on their own. Managers obtain useful information and clues about productivity issues and market penetration, for example, but they do not provide a roadmap to growth or increased profitability. It’s when you couple these tools with 80/20 analytics and mindset that you can develop a strategic plan to optimize the portfolio, increase profitability and grow. Below I make an attempt to stack these tools from the tactical or day-to-day dimension (level 1) to the most strategic dimension (level 5). The first two levels are what I call “performance” levels and the other three can be considered “transformational” levels. The higher you go, the more impactful and lasting the results will be. Level 3 or 80/20 analytics, allow us to use the data from levels 1 and 2 to execute on the notion that “some customers and products are more equal than others”, and apply a super high focus on a select group of customers within the existing market segment. The customers in this select group are the ones that are likely to pay more for your unique value proposition (UVP), compared to the trivial many, or the “twenty” customers. Tools such as quad analysis help you fine-tune the portfolio by reducing overhead and SKU count, better aligning them with the needs of the “eighty” customers. The misaligned overhead and the low-volume and low-margin products are only creating complexity (read cost) and these are the tools that help you simplify your sales processes and optimize your offering. But once you are happy (for a while) with the optimization and the simplification then comes growth.
Top-line growth is essential for the long-term viability of any business. Segmentation (level 4) is the best and the safest way to generate new revenue streams. You start by looking inside your current markets to find new growth avenues, before you branch out into unknown areas. You should first exhaust adjacent or incremental revenues, near the core business, and then look beyond the core for new markets and selective acquisitions as growth catalysts. Preferably focusing on new product lines that will enhance your UVP to existing and prospective “eighty” customers. Tools such as cluster analysis and marketing mix planning or 5 P’s (price, product, promotion, place and people) help validate the ideas or segmentation hypotheses that might have surfaced through sales analytics tools in level 2. But segmentation is not just about finding niches, but it’s mainly about the way you run the business, redirecting and specializing your sales and marketing organizations and eventually splitting them into new, expert business units. By using segment-focused business units, the expansion costs are kept closely coupled with the unit’s ability to deliver growth and to charge for the value of their UVP. Segmentation will lead to de-commoditization of your business, while empowering your best people to succeed in the refocused business units. But how do you sustain growth and profitability overtime? Innovation (level 5) is how businesses sustain market share and create moats, to defend against competitive attacks. You need to defend your market share and explore incremental opportunities, but you also need to be capable of developing new strategies that can lead to transformational growth. The key to new strategies is innovation, which is the driving force behind adaptability and the skill that yields direct change. Peter Drucker has a simple, elegant definition for innovation: “change that creates a new dimension of performance.” Sales innovation needs to go beyond products. It needs to solve problems for customers and markets. It starts with the analytics and requires an understanding of the problems or pain points faced by the “eighty” customers, within a specific market segment. Using ideation tools and techniques and problem solving methodologies, the pain points are converted into ideas and solutions. Market-segment-focused business units are better prepared than any other type of organization to find the pain points and deliver innovative solutions to known and unknown customer problems. Specialized sales organizations are closer to end users, hence they are best positioned to create a unique view of the market segment, using analytics as a microscope to slice and dice the customer base. This is where the majority of product and service innovation comes from—discovering pain points that customers might not even know they have and figuring out how to solve them in a collaborative way. Companies like General Electric and ITW have used this formula over and over to deliver outstanding performance. In summary, it takes more than sales analytics to grow and sustain profitable revenues. The data needs to be part of a framework that contains other strategic elements, such as those found in the 80/20 Business Process. An off-the-shelf software package will help you manage the effectiveness of your sales force and provide you with ideas, but it will not create a higher level of performance alone. To attain transformational growth, you need to combine sales analytics with a selective mindset and a sharp niche focus, provided by specialized sales teams and business units that are constantly trying to innovate beyond products. This combination represents a virtuous cycle that will create a strong moat and differentiate your company in the market over time. |
AuthorPedro Ferro Archives
August 2016
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