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Automotive’s “Opportunity Costs Of Goods Sold” During COVID-19

Explorer Roald Amundsen said “adventure is just bad planning,” and there are quite a few adventures going on within automotive these days, especially with respect to personnel during this COVID-19 crisis. In just the past couple of weeks, we have seen the following announcements:

March 17th: Volkswagen announces 7,000 jobs slashed

March 25th: FCA lays off 2,000 contract workers

March 26th: Ford partially defers executive pay, foretells of possible job cuts

March 26th: General Motors
GM defers 20% of pay for 69,000 salaried workers, furloughs 6,500

March 29th: Penske announces executive pay cuts and looming layoffs

March 30th: FCA temporarily cuts salaries from 20% (salaried) to 50% (CEO)

So the question becomes: Have these personnel plans been designed around meeting future commitments, or are these near-term actions “a wing and a prayer” simply to slash costs and live another day? In all probably, the latter. These are likely drastic measures to drop Operating Costs without understanding what future work would define success, the critical personnel required, and the metrics to achieve this. Even in the best of times, Standish Group (2009) found that only 34% of projects succeeded, and a later study by St. Cloud University (Kamuni, 2015) found even lower numbers ranging from 9% (large companies) to 28% (small companies) with an overall, underwhelming 12% stating the project was delivered on time. And as autonomous and/or mobility projects supposedly increase in frequency and complexity with some predicting a climb to one billion lines of code, the likelihood of project and resource management failing increases and, oh by the way, a worldwide pandemic makes that exponential.

So what are the effects of this? What are the opportunity costs? Good questions. Some are plainly understood, but many are not well quantified or comprehended. In the end, there are effects to both Cost of Goods Sold (COGS) and Opportunity Cost of Goods Sold (OCOGS):

Predictable Margins: Ideally any business’s price is set by “what the market will bear” and then margin is calculated by knowing the costs. Even in 2019, most OEMs did not have a good grasp on what the market will bear for any given, embedded system (a.k.a. “incremental value”), let alone the margins. Such calculations, though, are greatly affected by poor project management since COGS is not well understood (e.g. poor Explorer launch cost Ford somewhere in the billions of dollars, which assuredly was not planned upfront) and actual volumes decrease (e.g. customer dissatisfaction and/or loss of confidence to deliver). A Harvard Business Review study showed missing on near-term margins has a 30-40% influence on stock prices (versus long-term growth) and, therein, cash flow. Without that cash flow, other opportunities are paused or canceled, hence the Opportunity Costs of Goods Sold. COVID-19 has compounded issues with stock prices, cash flow, customer confidence, etc. so the effects of unpredictable margins are amplified.

No Premium Pricing: The difference between a Rolex and a Timex is three letters and $10,000. For an automotive brand, a luxury brand can garner a $4,000 markup. If a brand is perceived as having gone the extra mile, the markup can be tremendous. Some think in the cutthroat world of automotive suppliers and global crises, Premium Pricing does not exist; fierce competition equals slashed margins. They’d be wrong. There are a few enjoying a 5-10% markup with over a 50% marketshare for the associated product, mostly based upon the customer experience of their engineering services. If, however, you’ve cut to the bone to survive this crisis, it will be hard to emerge with Premium Pricing.

Quality: Studies have shown that 85% of quality issues exist in a project due to negligence of the team and senior management. Avoiding scope creep and emergency, pre-release work improves the likelihood of quality, improves trust of the customer, and decreases costs. Yes, the customer will want Change Requests and instant reaction on the tail end of this pandemic, but they should be mutually approved based upon the velocity of the development team and time remaining. Otherwise, there are immediate and long-term costs to the bottom line.

Turnover Due to Working Conditions: Does the loss of 20% of wages cause a critical engineer living paycheck-to-paycheck to find another position? If so, what’s that opportunity cost? Direct financial impacts can add-up quickly, e.g. hiring, onboarding, development, unfilled time, etc. According to the Huffington Post, losing a strategic employee can result in a whopping 213% loss of his/her annual salary with another study showing upwards of a $1.3M expense. Add that to a 2018 study by Mercer showing 33% of all employees plan to quit in the next 12 months (with 43% looking) with upwards of 50% of those resigning due to “burnout” caused by work/life unbalance. Huge costs. All of these costs and statistics, however, do not consider the opportunity costs of lost employees resulting in late deliveries of this project, inefficiencies from organizational stability, and product enhancements with future revenue.

Account Manager Distraction: With late delivery comes lots of “help” from the customer, which must involve the Account Manager for damage control. [S]he is no longer selling, but rather applying lip gloss to the swine by getting the updated plan and making more poorly-supported promises. According to a 2017 DreamForce study, “… 64.8% of [a salesperson’s] time is spent on non-revenue-generating activities leaving only 35.2% for functions related to selling.” If that salesperson was actually out selling more widgets, [s]he might improve revenue and/or margins by indefinable amounts.

“A lack of vision today costs credibility tomorrow.” – John C. Maxwell

Planning for Success

But enough doom and gloom. As is always true, there’s a chance for a happy ending. The relevant cliché is “Failure to plan is a plan for failure”, so our suggestion is plan to succeed by doing the following:

Truly Embrace Agility: To understand how many people are required, there needs to be a quantification of the work (“estimated Backlog”), the work team(s) can plow through in a period of time (“velocity”) and if the progress shall meet those future commitments (“Release Burndown”). These are all elements of Agile Development project management, and have lived mostly as buzzwords rather than a culture at OEMs. Studies have shown a 1872% Return on Investment (ROI) using Agile, and that doesn’t include how many fewer employees you’ll lose. Get effective planning and know what you need.

Staff to 105%: Yes, yes … that seems like heresy during a pandemic, but there’s some strategy here. The average turnover rate across all industries is 10.9% based upon LinkedIn’s data of half-a-billion professionals with technology being the highest turnover (13.2%). If your project plan (and budget) assumes 100% staffing, you’ll quickly be under-delivering. Hiring to 105% means finishing just slightly under-budget but delivery results will be closer to projections.  

Don’t Say Yes or No, Say “When”: The very typical excuse for lousy deliveries is “The customer always is coming with last second changes.” In that same St. Cloud study, the greatest agreement among respondents was that nearly half considered Changing Requirements and Specifications as responsible “to a great extent” for the project overrun. The customer states “This MUST happen” and so Change Requests are approved even within months of launch. Imagine, though, the conversation went differently: “I want to provide you this, but here’s data showing how much we can finish. So which feature would you prefer on time and which would you like as a running change?”

I have no doubts that some executives are reading this and saying, “You’re living in Dreamland.” But imagine the premium pricing and market share that they could demand if they came out of this crisis and were among the 9% that delivered on time.

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