Looking Outside The Box -- One Industry’s Strength Is Another’s Potential

By Neil Steinkamp, CCIFP, and Tom Dionne, Stout Risius Ross, Inc.With uncertain economic times ahead, many industries are seeking opportunities to increase revenue, decrease cost, and limit risk. As different as the construction and automotive industries may seem, each can build strengths from the other’s weaknesses.

As technology continues to contribute to an increasingly global and collaborative economy, opportunities for advancement abound. Product inventions, process improvement, and environmental sustainability represent advancements many industries are recognizing as opportunities.

To keep pace with global advances every industry must assess its strengths and weaknesses and seek the necessary methods to develop new or improved paradigms. While any industry may have identifiable strengths, that same industry is almost equally identifiable for the characteristics that are viewed as overall weaknesses.

Seeking and identifying strengths of non-related industries can be a method used to increase the quality and efficiency of business within other industries. The automotive industry and construction industry share in this opportunity today. Both industries have characteristics they specialize in and have over many years developed as strengths.  However, both also have clear weaknesses and challenges to overcome.

Automotive Industry Strengths

The automotive industry has long been known for its development and promulgation of the assembly-line. Since the era of Henry Ford and his creation of the assembly line, the industry has made great strides in refining how the entire automotive supply chain operates. The operational functionality of the automotive industry has evolved from Fords Model T assembly line to a highly-technical, well developed supply chain producing automobiles using parts designed and produced from all over the world.

Some of the greatest developments in the automotive supply chain lie in the development of Just-In-Time (JIT) inventory methods. JIT inventory management was developed in Japan by Toyota Motor Company in the 1950’s and has evolved into a supply chain system allowing for tens of thousands of parts needed for the production of an automobile to arrive at the production facility at nearly the exact time the part is needed to be placed into the automobile during the assembly process.

This method of supply chain management within the automobile industry allows for automobiles to roll off of the assembly line at a rate of nearly one car per minute (depending on the model being produced) with few stoppages.  Consequently, significant savings have been achieved throughout the supply chain as the industry has focused on limiting the costs of holding inventory.

Through the use of advanced technologies, assembly line manufacturing, and JIT inventory management, the automotive industry has been able to achieve significant gains in productivity.  There is a consistent effort to improve financial margins and challenge the entire supply chain to identify ways to improve processes and limit costs.  This emphasis has led to an assortment of advances and greater productivity throughout the industry.

Construction Industry Strengths

The construction industry has developed strengths of its own related to the manner in which contractual and operational issues are managed. The industry is widely known for the strength of its standard industry contracts, many of which have been in use for nearly 100 years, with many revisions and refinements. 

While these standard contracts are typically modified by the parties to meet the specific needs of the project, the collaboration that led to the development of the standard contracts illustrates the industry-wide need for consistency.  Consequently, the construction industry has made significant progress in limiting disputes in an environment with a great number of unknowns.  Standard industry contracts have also helped in defining a fragmented supply chain where many parties provide both labor and materials.

Several construction industry organizations have made it a point of emphasis to develop standard processes for dispute resolution allowing for minimal project delays when issues arise.  These industry standards also reduce the costs of litigation by encouraging alternative forms of dispute resolution and encouraging communication between the parties involved in the dispute. This is exemplified in the recent development of the ConsensusDOCS, developed by a collaborative group of construction owners, contractors and suppliers.  In addition, the American Institute of Architects (AIA) has refined and updated its processes and recommendations for dispute resolution.

Opportunities for Inter-Industry Advancements

In a time when the automotive industry is challenged by dwindling profit margins, increased production costs, and intense competition there are many opportunities for collaborative dispute resolution. 

As the construction industry has illustrated, this begins with the contracts between the parties.  These contracts form the basis for the relationships throughout the supply chain and not only set the tone of the relationship, but they also define the mechanisms for dispute resolution. Each of the automotive OEM’s has different standards for the terms and conditions for suppliers. The terms of the contracts leave little room for suppliers to adjust for potential changes in raw material costs and reductions in the quantity of parts ordered. When disputes arise from such problems, the systems used to resolve the issues are often prolonged and expensive.

Consequently, the relationships of the automotive supply chain are frequently strained, leading to a lack of cooperation and collaboration. This presents a unique opportunity for the automotive industry to achieve the benefits recognized by the construction industry through standard contracts that can be easily modified to meet the needs of specific arrangements. Similar to that of the construction industry, collaboration amongst the supply chain could result in significant financial gains in both the short and long term for the automotive industry.

One of the construction industry’s greatest challenges is improving productivity.  While construction productivity measures are not widely reported, it has been commented that the construction industry in the United States has not seen an increase in productivity over the past 40 years.  Provided the size and scope of the industry, the opportunities presented by an increase in productivity are dramatic -- for the industry and the nation. 

The automotive industry has seen over 100 percent gains in productivity over the last 20 years.  While many factors have contributed to this, the advanced technology utilized in the production process is a significant factor.  The use of 3-Dimensional and 4-Dimensional modeling of products prior to development, advanced design and engineering teams, a focus on JIT inventory management, and rigorous product testing have all contributed to the productivity gains of the automotive supply chain.  These tools have enabled the labor force to work more efficiently with fewer errors in the production process.

The construction industry has recently begun to realize the benefits of focusing on productivity. The use of Building Information Modeling with 3D and 4D building models, as well as emphasis on collaborative building and contracting methods are beginning to develop momentum in the industry.  While there are certainly notable differences between the automotive industry and construction industry, clearly the lessons learned in the automotive industry could pay dividends for the stakeholders of the construction industry and vice versa.

Conclusion

With uncertain economic times ahead, many industries are seeking opportunities to increase revenue, decrease cost, and limit risk. While many opportunities to do so may come from in-depth research of the economy, customer behavior, and industry dynamics, there are many opportunities to learn from the wisdom gathered by other industries. In particular, the construction and automotive industry appear to have significant challenges that could benefit from strong leadership, collaboration, and an effort to learn from each others strengths.

Stout Risius Ross is a financial advisory firm specializing in investment banking, valuation & financial opinions, and dispute advisory & forensic services. For more information, visit http://www.srr.com

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