Production flexibility and tires

So apparently America has a tire shortage — or at least a specialty tire shortage. And according to Automotive News, this has been going on for a while (Pirelli plant in Ga. masters small-batch, premium tires, Oct 11).

Over the last decade or so, the number of tire sizes used in the United States has nearly doubled, according to the consumer Web site TireRack.com.

Tom Gravalos, vice president of marketing for Pirelli & C. S.p.A., says: “All the carmakers want more variety and performance, particularly for performance vehicles. They are trying to make cars more unique, and consumers seem to like them.”

Cool tires would seem an easy way to make a vehicle distinctive — if only because their production is outsourced. Any complexity that comes with manufacturing low volume items is an issue for the tire maker, not for the car maker. But producing a wide variety in low volume could create problems in an industry accustomed to banging out hundreds of thousands of identical tires. That gets us to Pirelli’s Rome, Georgia, plant.

Pirelli, which has considerable experience producing specialty tires in Europe, has developed a tire production system meant for low-volume runs — which is where the Rome plant comes in.

A traditional plant typically might produce tires in batches of 80,000 to 100,000 units. By contrast, the Rome plant can comfortably produce tires in batches of 10,000 or so units, Gravalos said.

That’s perfect if you’re producing, say, an optional dealership-installed 21-inch tire for the Chevrolet Camaro.

The factory uses what Pirelli calls a “modular integrated robotized system,” or MIRS, to switch production quickly between different types of tires.

As long as the tires’ reinforcing belts and rubber compounds are the same, Pirelli’s factory can switch production back and forth quickly among different types of tires.

With only 250 employees, the Rome plant has a relatively small staff. It produces only 400,000 tires a year, according to Gravalos, while a typical mass-production tire plant might produce more than 5 million tires a year.

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A leaner Toyota and a refocused GM

As Gady recently posted, Toyota has run into a rough stretch.  Not exactly Chrysler-rough but still a lot of folks in Toyota City must be working long hours.  The latest wrinkle on this is that Toyota is turning to suppliers to help cut costs (Toyota Accelerates Its Cost-Cutting Efforts, Wall Street Journal, Dec 23).

The world’s biggest car maker by volume told suppliers at a meeting Monday that it wanted them to help the company reach its goal of slashing the cost of auto parts by 30% in the next three years, a person familiar with the matter said.

The Japanese company has set more aggressive cost-cutting targets under a program called RRCI, which combines two cost-reduction initiatives currently under way, the person said. RRCI stands for “Ryohin (quality), Renka (low-price), Costs and Innovation.”

First, one has to admit that it makes a lot of sense that a car manufacturer would look to its cost of buying parts as a way to save money.  The figures one usually hears put the cost of purchased parts well north of 50% of the cost of building a car.  So while eking out a little labor savings is nice, the real money is in reducing the cost of parts. Second, this starts to sound like a Big 3 move.  As I mentioned in an earlier post, GM tried a big squeeze on its suppliers back in the early 90s with mixed results at  best.  They saved some money in the near term but they certainly antagonized many suppliers in the process.  I’ve got to think that Toyota will manage this better.  They have traditionally had much tighter relationships with their suppliers.  They also have a long track record on working with their suppliers on design and cost reduction so there is reason to believe that they can pull this off fairly smoothly.

At the same time, GM is making some big changes to their purchasing processes (GM purchasing gets a re-engineering, Automotive News, Dec 14) in part by changing where purchasing sits in their org chart:

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General Motors and product development

Let’s start with a chart.  The Economist recently ran this spiffy graphic based on European Commission data showing which companies spend the most on research and development (Research and development Hey, big spender, Nov 20th 2009):

In some ways, the list contains some likely suspects.  Pharmaceutical firms and large technology companies are well represented.  I, however, was a little surprised to see Toyota atop the list by a non-trivial amount.  Further, many other automakers up there as well.  In some ways, this makes some sense.  Developing a new vehicle is very expensive and all of the big car makers are now trying to expand globally.  That means developing a car for [Name Your Favorite BRIC Country] while still tending to home markets.  On the other hand, the last few years have been tough on auto makers.  And look: General Motors is 5th!  How did that happen?  How did a firm that is basically a ward of the state end up investing so much in R&D?

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Updates on Indian labor issues and managing product allocation

Two quick updates on earlier posts.  The first is on the impact Indian labor strife on manufacturing.  I posted about that a few weeks ago.   Today’s Wall Street Journal has an article that discusses how labor unrest has impacted a number of firms (Deadly Labor Wars Hinder India’s Rise, Nov 20).  It makes a number of points, including that many factory workers haven’t seen much benefit from the rapid growth in the Indian economy over the last decade or so.  It also notes that India’s labor laws have been lagging the development of the economy.

“We can’t be a capitalist country that has socialist labor laws,” says Jayant Davar, president of the Automotive Component Manufacturers Association of India.

The other update relates to rationing products.  NPR had a story this morning on Call of Duty: Modern Warfare 2, a video game that has set a new record for sales in its first week (‘Call of Duty: Modern Warfare 2′ Breaks Record, November 20).  One the points mentioned in the article is that the game’s publisher ActiVision intimated to retailers that it just might not be able to make enough copies of the game and that retailers should therefore get their orders in early.  That then led to a big push to land customer pre-orders from from Amazon and Wal-Mart.  This drives home what I have said before (here and here) that allocation schemes are an underappreciated part of the market mix.

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How a strike in India closed a factory in Chicago

All politics may be local (as Tip O’Neill famously asserted) but a local labor action can now have ramifications around the globe.  In late September, workers at a plant of Rico Auto Industries near New Delhi, India,  went on strike.  That has led to assembly plants across the Midwest shutting plants shutting down.  Note that that’s India, not Indiana.

This has reflects a strange set of circumstances in part because both Ford and GM are affected.  As Automotive News reported (Transmission sharing exposes Ford, GM, Oct 30), the two firms co-developed a transmission and also opted to share suppliers.

The co-development by Ford and GM of a new six-speed transmission was heralded as a money-saver when it was announced in 2002. Instead of each company racing to develop the fuel-saving technology separately, they decided to share the nearly $720 million investment and even use the same suppliers. But that collaboration has left them equally susceptible to a parts shortage by a single supplier in India.

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Auto suppliers and finance

More from the continuing saga of the auto industry coming out of the recession. In particular, it appears that auto suppliers (especially smaller ones) are having a hard time lining up financing to expand as the industry recovers (Parts makers face plenty of peril in industry’s recovery, Automotive News, Sep 28). Here is the issue in a nutshell:

“More companies fail in an expansion, especially an expansion after a downturn,” [David Tull, CEO of Crestmark Bank] said. “In a downturn, they’re collecting on receivables, but they’re not buying new inventory. So their need for cash goes down. Now? Their cash needs are up.”

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