Steve Hanley, Director, Modules and Systems, Dana Corporation

Thank you very much for having me here this morning. I’m very glad to be speaking to you about an important topic for all of us here today – getting more value out of the supply chain.

The automotive industry has seen a number of trends in this area recently – including Tier 1 suppliers accepting responsibility for integration on a global level. Talk about a tug on the supply chain.

What I’d like to do this morning is take a look at how modularity and systems integration has impacted supply chain value. I’d like to begin with some remarks about what the supply chain already has to offer. Then, I’ll give you a little self-serving commercial about Dana Corporation and how we’ve made systems integration a major focus, and talk about how the Rolling Chassis module and some other recent modules and systems programs have added value to the supply chain . Next, I’ll talk about how we – and other suppliers – will need to take our systems integration efforts to the next level in order to meet the needs of our OEM customers and end consumers.

Finally, I’ll discuss the role new technology – particularly e-technology – will play in the future of a value-added supply chain. And, although I've been given plenty of time to talk with you this morning about our industry’s value chain practices, I'd like to keep my comments brief to give us time to hear your opinions, questions and comments.

When we talk about how we can all add value to the supply chain, I’d like to take note that there’s already a great deal of value there. Automotive suppliers have made a tremendous amount of progress over the last few years in squeezing out the waste, increasing productivity and improving quality, all of which have paid big dividends in terms of value.

In fact, it’s my theory that this is one of the reasons the stock prices of suppliers hasn’t fared as well as those in some other industries recently. This chart, for example, compares the value of Russell 1000 Growth stocks (which are mainly technology stocks), and Russell 1000 Value stocks (which are mainly industrial). They have maintained similar value levels as far back as 1950, but suddenly diverged starting in about 1996. Some investors seem to think that we’ve wrung out about as much value as is possible, and now we’re destined for stagnation.

Obviously, I don’t agree with them. While we’ve come a long way, there’s still more mountains to climb – a lot of value we can add. The pressure is on suppliers to prove it – to continue to increase operating performance profitably. And I have to say I think Dana is right in the forefront of pushing the envelope in terms of increasing the worth of the supply chain.

Before we jump into a discussion of the strategies Dana has employed to better manage, and add value to, the supply line, let me give a brief overview of Dana.

Dana began in 1904 as the Spicer Manufacturing Company. Clarence Spicer, our founder, invented the first practical universal joint for automotive applications.

Before that, cars and trucks used chains to transfer power from the transmission to the wheels.

Today, 96 years later, Dana Corporation is one of the world’s largest independent suppliers of vehicle components - both for original equipment manufacturers and the aftermarket. Over the years, Dana has evolved into a truly global Fortune 500 company. Last year, we reported sales of $13.2 billion. We have more than 82,000 people at some 320 manufacturing facilities and 100 distribution points in 33 countries.

We have 10 product areas that we consider "core" to Dana. Most of what we manufacture falls in the category of "under the vehicle" products - such as axles, brakes, driveshafts, and structural products - or "under the hood" products, like fluid systems, sealing products, filtration products, and internal engine products.

Our core products are delivered to the customer through seven market-focused strategic business units, which have worldwide operational responsibilities.

With this organizational structure, we are more aligned with our customers and more agile in responding to their needs.

Equally important, though, is the fact that our business units can combine our core products in order to provide our customers with complete modules and systems, as opposed to single components. Now, let me explain to you how we define the difference at Dana. Whereas a component is a single part, it can be expanded upon – it’s the basic building block for a module or system. Our definition of a module is an assembly of components that can be placed into a vehicle as one unit. A system may or may not be delivered as a module. It is simply the totality of components, interfaces and software that provides one of the key functions of the vehicle.

The movement to modules and systems is even more apparent now than ever throughout the industry and around the globe. As many of you may know, modular subassembly is not a new phenomenon, in fact it’s a practice nearly as old as the auto industry itself. What is relatively new is the outsourcing of module design, engineering and manufacture to suppliers – and consequently, the modules and systems expertise that OEMs are requiring of their Tier 1 suppliers is rapidly becoming a more critical element of the customer/supplier relationship. We now see fully dressed axle modules, dashboard modules, seating systems, suspension and driving Faster times to market, improved quality, easier and more efficient assembly, lower overall cost and investment, cooperative efforts with our customers to reduce NVH, and the need for just-in-time delivery are just a few of the reasons for the migration.

It is our experience that engineered modules and systems can satisfy the industry's demands for quality, cost competitiveness and faster response. However, as demand changes, our approach to systems integration needs to evolve as well, which I’ll discuss in a few moments.

Dana Corporation applied its modules and systems approach in the development of its innovative Rolling Chassis module. Incorporating more than 200 components from 68 suppliers, mostly North America-based, the Rolling Chassis module 16 includes the frame, front and rear axles, driveshaft, suspension, steering gear, brakes, fuel tank, wiring harness, fluid lines, wheels and tires.

This unique subassembly – which some have called the ultimate module – is literally rolled on its own wheels to the assembly line, where the engine, transmission, body and other pieces are assembled.

This module was created to help DaimlerChrysler reduce its number of suppliers and lower its inventory and investment in its Campo Largo, Brazil, plant to manufacture the Dodge Dakota pickup truck. The Rolling Chassis module, which accounts for more than 25 percent of the Dodge Dakota and about 30 percent of its final cost before DaimlerChrysler receives it, is built in sequence by Dana in 17 variations, then delivered just moments before being mated with the engine and the truck body.

By taking on this larger-than-normal role, Dana helped DaimlerChrysler reduce investments in plant and inventory, and helped leverage local content requirements.

We also helped get the product to the market quicker – the whole project took less than a year and a half from approval.

One of the reasons we were able to do this is because of our presence in South America. While many automotive suppliers are now getting into such markets, Dana has been in places like Brazil, Argentina and Venezuela for 30 and 40 years. And, having a local modules and systems supplier has many advantages for our OEM customers.

Along with increasing speed-to-market, it allows our customers to have a sense of security. When the South American market went through a dramatic downturn last year, Dana was there to share the burden with our South American customers, thereby decreasing their risk.

Along with understanding the local marketplace, Dana’s electronic data interchange system helped to make the Rolling Chassis program a success for DaimlerChrysler. Our system allows us to internally track this module’s many components so there is never a question as to status. Each component is scanned into the system as it is readied for subassembly.

The part coding is matched up with the Rolling Chassis coding, which in this case is DaimlerChrysler’s own Vehicle Identification Number, already assigned to the module. This system provides instant access to where the module is during the assembly process – whenever Dana or DaimlerChrysler needs it. And it makes component traceability very accurate and very fast.

Another example of Dana’s modules and systems approach can be seen in the front corner modules we supply to General Motor’s subsidiary in Australia. Dana utilized the knowledge it gained in developing the unique Rolling Chassis module </automotive/5600.html> for the Dodge Dakota and numerous corner modules in South America.

GM’s subsidiary in Australia, Holden Limited, was seeking assistance from its suppliers, including Dana, in reducing costly assembly steps while improving the overall quality of the Holden Commodore. We’re addressing these needs by coordinating all sub-suppliers and managing inventories for our front corner modules. These modules include the knuckle, hub, strut, spring, control arm and brake components.

Dana is employing its modules and systems concept to provide the Holden plant with 100,000 independent rear suspension modules and 200,000 front corner modules annually.

The modules are being assembled at Dana's facility in Adelaide, Australia, to provide just-in-time delivery to the Holden assembly plant. Additionally, by using our approach, Holden can increase its manufacturing efficiency while improving the Commodore’s quality.

We also have expanded our presence in Australia and increased our business with other OEMs there. For example, Dana is supplying independent rear suspension drive systems for a future Ford vehicle that will be manufactured in Australia. We have taken our relationship with Ford to the next level by helping them to develop this module.

In addition, Dana also will be responsible for managing the supply chain in areas such as supplier selection, logistics, engineering, testing, and validation. This project truly allows us to expand our capabilities and add value throughout the process.

When you think about our industry just a few years ago, it’s hard to believe that Dana would ever be involved in such programs. But, our OEM customers see a lot of value in utilizing the expertise of top suppliers to engineer and deliver completed modules such as I’ve mentioned, all ready for just-in-time installation. They are looking for partners that can bring those advantages to the table, and that’s driving us to think differently about how we provide value.

We’re working with our customers on more and more of these engineered modules and integrated systems. You’ll notice, by the way, that the programs I’ve mentioned are all new. This really makes sense for OEMs to begin utilizing their supplier’s modules and systems expertise on new platforms – platforms in which they haven’t already invested in capital expenses, people and training. They can begin fresh with a new platform. 29Also, the programs I mentioned all are international. Here in the U.S., as you know, carmakers have somewhat unique labor issues that so far have discouraged widespread modular assembly.

However, I believe the near future will see certain niche vehicles take advantage of all that modules and systems suppliers can offer, and this may lead the way for other platforms to follow. As we all know, while platforms used to last some seven or eight years or longer, that isn’t the case today. Most platforms are only around four or five years now, and OEMs have to work even harder to recoup the costs involved in new model development. I believe this will lead us to see more suppliers offering systems integration, which I’ll talk about further in a few moments.

With all this said, I’d like to take a closer look at what’s next for modules and systems suppliers. The auto industry is evolving at a rapid pace, and it won’t be easy for everyone to keep up. In fact, everyone won’t. While today Dana is one of over 9,000 Tier I suppliers, we expect to be one of only 150 Tier I suppliers by 2010. It takes a great deal of money to survive in this industry – and consolidation is eating up most of the smaller suppliers. As the OEMs increasingly look to reduce time-to-market by compressing the design and manufacturing processes, many are asking suppliers to assume an even larger role as systems integrators.

While supplying modules has been an increased responsibility for suppliers, I can tell you that those of us who supply automakers with modules and systems ain’t seen nothin’ yet.

Let me stop here and say that while increased systems responsibility seems to be a trend for the future, not all carmakers have "seen the light," so to speak. Some are perfectly content utilizing suppliers as just that – suppliers, not integrators. I was reminded of this on a recent visit to a Korean carmaker. They told me they really could not understand why they should want a supplier to provide them with integrated modules. They couldn’t grasp the concept of why a supplier should do this.

As a company that’s dedicated to lean manufacturing, this particular company sees outsourcing complete systems as a step backward. When they look at Dana, what they see is product, when what we’re really offering in the area of modules and systems is a service.

Many automotive suppliers, like Dana, are now acting more as service providers, rather than manufacturers of commodity automotive parts. Despite what the carmaker I just described thought about us, our customers aren’t giving up lean manufacturing techniques so that we can solve their internal manufacturing and assembly problems.

What Dana’s offering is innovation – engineering solutions, new technologies, and cost savings – in our areas of expertise, under-the-vehicle and under-the-hood. At least we’d better be if we want to stay ahead of the game.

At Dana, we’re continuously sharing technologies across our divisions to come up with new solutions for our customers. One example is our unique magnetic-pulse welding process, which gives us an edge in providing new flexibility for customers in design and choice of materials.

Magnetic-pulse welding was developed for a driveshaft application, but the technology was shared with our structures division, and now, by combining this process with our proprietary hydroforming techniques, we can create a tubular space frame, a series of structural members assembled to create a skeletal system that supports the interior systems as well as the exterior skin and driveline components of a vehicle. By applying what we’ve learned with the Dodge Dakota to this future design, one day I’m sure I’ll be announcing that Dana has developed the first Rolling Space Frame.

Innovation -- in terms of new technologies -- is important, but in the second automotive century suppliers will need to be even more forward-thinking. We will need to take modular manufacturing a few steps further and be involved much earlier in the process, working in partnership with the customer to create new solutions, and add new value, for each project we work on. We’ll need to be at the forefront of systems integration, working in design, development, testing and analysis.

And, we already are headed in that direction. One example is a recent agreement with a major OEM that allows us to be involved up front at the very beginning of a new vehicle design.

We’re not being told what parameters to meet – we’re helping to set them. This new partnership is allowing us to be strategic in our global supply chain management practices. This is a true partnership with our customer – we aren’t restricted by previous drawings, preordained costs or preconceived notions. This is true program and modular management. We’re simply charged with providing the best solution for this new vehicle. What a concept.

I believe more and more OEMs will ask their suppliers to get involved in this way, as a means of seeking a completely optimized design.

According to a recent report by McKinsey & Company, the increasing delegation of functional and physical integration is creating a new role for suppliers, that of an Integrated Partner. I’m talking about integration with a capital "I" here.

According McKinsey & Company there are three paths to profitable growth for suppliers – all paths leading toward becoming an integrated partner. First, successful suppliers will need to expand their roles and take on more work from their OEM customers. The second path is one of innovation. Today’s sophisticated cars, and tomorrow’s, require more sophisticated technology.

And, finally, suppliers will need to be global – not just by their distribution networks. The suppliers that are left after all of the consolidations in our industry will be multinational.

According to the report, to survive automotive suppliers will need to take on an expanded role to serve their customers’ needs, and they must do so on a global level. Excellence in operations is no longer enough. Suppliers must have expertise in how to improve the performance of their products, in the assembly of parts into modules, and in the integration of components into total solutions.

The three paths described by McKinsey & Company – role expansion, innovation and globalization – can be best demonstrated by a conceptual cube. The three dimensions represent potential value-adding activities of suppliers in product development, assembly, and overall integration. Suppliers slow to grow are in the lower right corner at the front of the cube, while faster-growing players achieve high performance on all three levels.

These suppliers – like Dana – are focusing heavily in all three areas. 41 In the area of product development, we are focused on innovation – bringing new technologies and new applications to bear in all of our core product lines.

Of course, assembly contribution is a big factor and Dana has taken on an active role in establishing plants in close proximity to automakers’ facilities for this purpose.

Finally, and importantly, the integration of components into modules and systems puts us into a new competitive arena – one that exhibits a supplier’s level of competence in a number of areas.

Depending on a supplier’s involvement on each of the three levels, they assume different strategic positions. These positions range from commodity supplier and component specialist to system developer and integrated partner.

To be a true integrator with a capital "I," you must offer the most extensive spectrum of services. Integrated partners must be experts in both physical and functional integration, and also in assembly and logistics. We’re talking about international forces that provide sound supply chain management, a superb feel for the consumer and a solid knowledge of the entire vehicle. These are the suppliers that will be involved from the very beginning of a vehicle’s conception. They’ll take out as much cost as possible for the OEM by providing the design, prototyping, vehicle dynamics testing, and fine tuning. So far, I’ve talked about Dana in terms of two very important ways of adding to the value chain – being international and becoming an integrator.

I’d like to talk about a third "I" that helps us to do both of these things – the Internet. Every company represented here today uses the Internet for something other than e-mail. One of the more useful tools we’re working to develop at Dana is an extranet connection with our customers and supply base. Currently dedicated connections, like the EDI system for the Dakota Rolling Chassis I described earlier, enables us – and our customers – to track shipments, inventories, and orders. However, to continue to be a true integrated partner we’ll need to do this in real time, 24 hours a day using the Internet.

We are continuing to develop this connection so that one day, our customers can "look inside our plants" – in a manner of speaking – to see exactly where their programs and products are at any time, day or night. It will be just a point and click for the customer to follow modular subassembly from subsupplier to integrator to carmaker. The technology is there to do it, and if the world is moving in the direction of the "five-day car," we will have to do it.

E-commerce also will continue to have a tremendous impact on our business, and on all business in coming years. I believe that most of these developments will help us to increase the speed at which business is conducted. At Dana, we recently announced an initiative to develop our own unique global e-procurement system. This new web-enabled system will allow Dana to manage our $8 billion in annual worldwide purchases more efficiently. In fact, we plan on saving quite a bit through this.

And, it's easy to see where the savings will come from. A normal transaction might cost in the neighborhood of $100 to complete once you figure in paperwork and other time-consuming activities. Compare that with a transaction made electronically that might cost less than $10 to complete, and you can see how valuable this initiative will be. In addition to significantly reduced transaction expenses, we anticipate other benefits.

These include better relationships with preferred suppliers, consolidated information on supplier performance, and reduced inventory requirements.

Dana was one of the first suppliers to undertake this e-commerce initiative. Still, to help us expand in this area, we’ve partnered with five other major suppliers to conduct a joint study of business-to-business Internet-enabled technologies. Through these efforts, we each hope to improve supply-chain management, support the e-business efforts of our customers through collaborative solutions, and reduce costs at all levels of our value chains.

Delphi, Eaton, Motorola, TRW, and Valeo (VAL-e-o) are working with us to address technology issues facing the industry and identify business-to-business technology solutions.

Our customers are also looking at these issues, but we’re not in this to compete with our own customers – we’re just getting ourselves up to speed to allow for easier integration with our customers. We hope to identify and implement technology solutions at lower costs, resulting in greater benefits and easier integration for everyone involved.

It’s true – use of computer-based technology, as well as the Internet, is increasing at speeds never before seen in industry. And everyone is trying to get on board before they are left in the dust.

Now, if you’re sitting here today and your company isn’t e-selling or buying – don’t panic. While those in the forefront of e-commerce have paved the way, those who think they are playing catch-up will be able to reap the benefits of the successes – and also learn from the failures. It reminds me of the Y2K scare. When nothing happened at the stroke of midnight, Chicken Little learned the sky wasn’t really falling. I think the same can be said for e-technology. While it’s a crucial area for profitable suppliers, I don’t believe your business will vanish if you’re not up and running tomorrow. There’s a lot yet to be developed and as long as suppliers are willing to make the change to an electronically run business in most every aspect, they still have time to get on the boat before it leaves the pier.

Of course, there are still some things that can’t be e-auctioned away. While e-commerce is growing rapidly, and both OEMs and their suppliers are scurrying to get up to speed, there are certain aspects of the OEM-supplier relationship that just can’t be bid online. It’s things like engineering, integration, validation and technology that will distinguish value-added suppliers in our industry. These are the items that will separate the commodity suppliers from the integrated partners. And, I don’t think I have to tell you at which end of the spectrum Dana wants to be.

As I said, I believe automotive suppliers have already added a great deal of value to the supply chain. However, our challenge for the future will be to grow and adapt to our changing marketplace, where speed-to-market will become even more crucial. Dana already has made some serious changes in the way we do business with our customers – just look at how our modules and systems supply continues to grow. This is really helping us to further develop partnerships with our customers. Our Rolling Chassis module for DaimlerChrysler and independent rear suspension module for GM are only the beginning. I also talked about true integration beginning with a capital "I." I believe this is where the major players will need to be to survive in the future, to truly add the most value to the supply line.

A true Integrated Partner will utilize a wide range of competencies – including being Internet savvy – to meet its customers needs. Being international, a true Integrator, and on the Internet – these three I’s are how suppliers will ultimately further increase the worth of the supply chain.

I'd like to thank you for joining me this morning to discuss what I believe to be an important change in the way we add value to the supply chain for our customers. I can't think of a better or more critical topic to discuss in a forum such as this, which is focused on the 2nd century of the automotive industry.

I truly appreciate your time, and now I'd really like to open up the discussion to hear your opinions and answer any questions.