Buyers for many automotive OEMs–and, in fact for other large companies beyond that industry–are focused on getting the lowest price for their tool, die, and mold (TDM) purchases. The frequent message to TDM sources is that they must meet or beat the —world price“ for tools or risk losing their bids to suppliers who can provide TDM at this lower price. Winning bids often include tools made in —low-cost countries“ (LCCs). LCCs are thought to be lower cost because they employ a lower-wage workforce, do not pay benefits, have fewer worker health and safety protections, and sometimes utilize inferior engineering and sub-standard materials. When you combine LCC cost advantages with state-of-the-art engineering systems and manufacturing resources, the potential for significant cost savings is obvious. There are other critical factors affecting overall costs, however, especially those that pertain to technical capabilities and logistical costs for managing offshore sources. This paper examines how the cost advantages and systemic disadvantages affect a domestic TDM.
TDM builders, especially the smaller shops among them, are unsure how to comply with their customers‘ demands for lower-cost tooling. The use of LCC shops offers one alternative. However, developing TDM relationships with LCCs poses new challenges. TDMs are still run, in many cases, by journeyman toolmakers rather than finance- oriented dealmakers; utilizing LCC tool sources would force these companies to move out of their comfort zone into potentially risky ventures that could put the fate of their family businesses on the line. In addition, LCC sourcing may not be the only (or even the best) way to satisfy their customers‘ desires for lower-cost tools.
In our survey of forty-three Michigan TDM shops, we found that most are heavily dependent on the automotive industry, and most serve suppliers rather than the OEMs directly. The shops‘ report that their primary customer values price above all else, followed by delivery performance (on-time), lead-time performance (order-to-delivery), and quality/durability. A large proportion of shops surveyed is seeking to grow the processes related to building complex tooling, which suggests a move toward specialization. Shops in the survey report that, in addition to falling prices for tooling, tolerances are getting tighter, lead times are shrinking, and engineering changes are becoming fewer. Finally, over half of our respondents report that their customers only pay for tooling once it is in production, which stands in marked contrast to the more immediate payment terms offered to many offshore suppliers.
Customers recognize the technical capabilities of domestic TDM shops as superior, especially in relation to many foreign sources. If foreign tools arrive in the United States requiring significant rework, who will repair them, implement recent engineering changes, and support them in production? The international business model, encouraged by many U.S. customers, must recognize cost advantages versus system disadvantages, which include:
- Engineering design feedback to the customers‘ product design engineers
- Technical learning curve of offshore shops (engineering, manufacturing and tryout)
- Logistics of managing and tracking offshore tools
- Cost disadvantages for shipping and import duties
- Management of the implementation of engineering changes
- Domestic tryout and maintenance of tools once in production
We do not know for certain if LCCs are actually the lowest-cost producers. The tooling industry–both in the United States and in LCCs–employs quoting strategies that often bear little resemblance to the true cost of the tool itself. It is not unusual to see a 100 percent spread from the lowest to the highest bidder on tools from TDMs with similar cost structures. So called mood“ factors affect prices based on shop utilization, customer reputation, and long-term relationship potential. Suppliers may significantly underbid on TDM jobs–focused instead on landing the work, filling their capacity, making up their margin on engineering changes, or (in the case of many LCC TDM shops) learning how to make the tools, and building their own internal capabilities. Our research shows that (on paper) the price advantage of outsourcing tools can be in the often-reported range of 20 to 35 percent lower than prices offered by Michigan tool shops.
Recently, a Tier 1 customer commented, —I know I can buy cheap tools from LCCs. I just don‘t know where to buy cheap tools that work.“ One aspect of the international business modelis for the domestic shops to help make sure that the offshore TDMs work before sending them to the customer. Several large domestic TDMs and an emerging group of international tooling —integrators“ have developed service networks that can support smaller shops working internationally, thus mitigating economic and technical risk. Smaller, simpler tools can be sent offshore, and by managing these for a customer, a domestic shop might obtain additional higher-value-added work (complex tools) for domestic construction. Small shops might also benefit by offshoring only tool details that can be machined abroad at lower cost and then sent back for assembly into a larger tool, thus resulting in overall lower tool cost.
The conclusion of this paper is that every TDM shop needs to consider the role that it wishes to play in the international business model. There are clearly cost-saving opportunities in working internationally, but these savings require new business skills and entail additional risks. Risks include program management (e.g., late tools), inferior quality, unusual business practices and loss of intellectual property that can lead to future work loss. There are degrees of offshoring that may include program management, engineering, construction, assembly, and tryout. In addition, there are a number of cost-savings actions that can complement international advantages, or even offset the international benefits. These include lean manufacturing methods, developing advanced engineering (better CAD/CAE design), developing niche capabilities into areas that are not well known (e.g., tools for high strength steels, or targeting low volume manufacturing applications), and maintaining close customer relationships via high levels of customer service. There is a stronger argument for larger, more complex tools staying domestic because of the need for communication between the customer and supplier. Smaller, simpler tools are more prone to be competitively produced offshore. The near-term future result will likely be a hybrid international business model with a great proportion of large, complex tools remaining domestic, smaller and simple tools being sent offshore, and certain specialty niche tools (or tooling services) staying domestic. The principal issue is the distribution of offshore versus domestic market share. If the domestic TDMs are able to introduce cost-saving methods, a greater proportion of TDM supply will remain domestic.
Contents
Executive Summary
Introduction
Background
Methodology
Tooling Customer Perceptions
Tooling Supplier Survey
Supplier Demographics
Customer Expectations
Sourcing
Growth Plans
Technology, Design and Engineering
Finances
Modeling Domestic Tooling Shops‘ Costs
Assessing Offshore Benefits and Costs
Implications for Tool Shop Sourcing and Strategy
Strategies
Conclusion
References
Appendix I: Additional Survey Findings
Appendix II: World Class Tool Shop Supplier Survey
Appendix III: Model Results
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