previously posted at Michigan Messenger
Cheaper isn't necessarily cheaper when it comes to auto industry outsourcing.
In a monumental case of penny wise and pound foolish, the Detroit Three are enamored of cheap foreign labor, even as total costs frequently wipe out those savings.
"People think they buy things so cheaply. They say, `We only paid $75,000 for the part this time.' But it doesn't get accounted for that they paid another $100,000 to fix it," said a tool and die company owner who spoke on condition of anonymity. The company's clients include the Detroit Three and Tier One suppliers. In any given week, remediation of bad tooling from abroad can make up 80 percent of this company's work.
This practice is not unusual in the tool and die industry, according to Brian Sullivan, director of communications for the Tooling, Manufacturing & Technologies Association.
The Detroit Three and Tier One suppliers complain that U.S. labor costs are not competitive with cheap foreign labor and use this premise to keep supplier bids low and drive down wages for U.S. workers. Yet, the industry routinely accrues additional hidden costs doing business with China, say small manufacturers. Transportation, inventory and rectifying poor quality create additional costs that eat away at profits and make the domestic auto industry less competitive.
A dramatic case described by the tool and die company owner involved airlifting parts to an assembly plant just in the nick of time. A mere 35 minutes before an assembly line would run out of a critical part, a helicopter landed on the assembly plant's front lawn with enough parts to keep production going until a truck arrived with more.
Four days earlier, a die made in China broke in production at a stamping plant, jeopardizing the plant's ability to deliver promised parts to the auto company. The die was made from inferior materials. A Michigan-based tool and die shop saved the day by patching together the die and producing parts at very slow speed on their own presses.
The stamping company thought it had saved $35,000 by procuring the die from China, but in the end, the misadventure cost an additional $400,000 to fix the die, stay on schedule and fly parts to the auto manufacturer. The stamping company took these extraordinary measures to avoid paying the auto company $100,000 per day in the event of a shutdown. Although rectifying this situation cost the supplier, similar events also happen at the expense the Detroit Three.
"In the tooling industry, they'll say, `In China this mold costs $15,000 and in the U.S. it costs $40,000, so you need to meet the price.' They don't add in the other costs as far as shipping and quality," said Lori Schmald Moncrieff, owner of Schmald Tool and Die.
In some cases "the transportation cost and inventory cost - weeks of inventory sitting in cartons on boats and so on - that cost is greater than the labor savings even if the labor cost is zero," said David Cole, director of the Center for Automotive Research.
"We aren't competing against private entrepreneurial companies; we are competing against the Chinese government," said the company owner. Chinese companies can proffer vastly lower bids than U.S. companies because of state subsidies. U.S. manufacturers must include capital investment in their bids, while subsidized Chinese companies do not, and this results in artificially low bids.
Interestingly, Japanese manufacturers in the U.S. typically seek local, not foreign, sourcing. "The Japanese don't believe that sourcing to China is the better business model. Honda is a perfect model of a company in the tooling industry that buys tooling cheaper than any other automaker in the United States," Moncrieff said. "They believe in partnering and co-management with U.S. local domestic sources. They're doing the opposite of what the U.S. automakers are doing."
The tool and die company owner says the Japanese engage in systems-based costing while the Detroit Three practice "opportunistic buying." "There is a complete disconnect between the price and the cost because of the way our companies are fragmented. You don't see Honda and Toyota doing this. They are not interested in doing this, because they are focused on total cost."
So while the Detroit Three keep bargain hunting and driving down prices in the supplier community, they do so at the expense of developing quality. "A consistent supply chain allows you to sustain and improve quality tremendously. If you are always changing suppliers, how can you establish quality?" asked the owner.
The company owner says that Honda values continuity in its supply chain and expects that suppliers need to be profitable. In what suppliers see as a collaboration, "They want you to reduce your cost but maintain profit. They don't want to reduce their cost by decreasing our profit."
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