TOTAL COST MODELING AT DELPHI Refer back to the Delphi case in Chapter 12 to answer the following questions. 1. Why was developing a total cost model so important at Delphi? TOTAL COST MODELING AT DELPHI s to approach things 7 Even before the 2008 financial automotive industry, was in far different company A company that knows it is in serious financial tre differently than a company that is awash in cash.? Even befor meltdown, Delphi, a major tier-one supplier to the automotive in survival mode after filing for bankruptcy protection in 2005. From a financial and operating perspective, Delphi is a far different today than it was a decade ago. After shedding assets and costs, the com return on invested capital (ROIC) now stands at an impressive 34% compared with an 18% industry average. And, profits are now the expectation rather than the exception. (Chapter 1 discussed ROIC.) Delphi's CEO says that the company now monitors every piece of new busi- ness to certify it is equal to or better financially than what it has today. The com- pany focuses on higher margin, innovative products, particularly in a product segment called "active safety." If the order doesn't raise Delphi's ROIC, then the company may decline that order. You know that times are better when you can pick and choose your orders. As part of its reinvention, Delphi has focused extensively on total cos ing. Delphi's Cost Management group (a function within Supply Man developed a desktop tool that is user friendly, requires few manual i reduced the time required to estimate the total cost of buying a part ual inputs, and has to several minutes. Perhaps best of all, the training required to takes about 40 minutes. Ease of use helps ensure internal cust Delphi's Cost Management group worked with logistics, neering, and research and development to develop the mou lecting data about transportation and logistics costs, capital buying a part from five days equired to use the tool only ternal customer acceptance. 1 logistics, manufacturing, eng the model. This entailed.com capital costs, and currency Worldwide Sourcing-the Financial Perspective 201 and risk issues. A critical part of developing any cost or financial model is the identification of the cost elements that populate the model. The development team took almost 18 months to validate the model's accuracy by subjecting it to actual sourcing scenarios. This tool is accepted internally because it replaced a much more cumbersome system. And, it has also demonstrated itself to be reli- able. The risk of a near-death experience resulted in dramatic changes at Delphi. One of these changes is reflected in how the company thinks about managing supply chain costs. Like many companies that require new tools and applications, Delphi realized that managing costs sometimes means developing your own tools. Waiting for third parties to develop commercial applications just might take too long. evaluate its business? Why 2. Why do you think Delphi developed its own total cost 3. What performance metric does Delphi use to evaluate its h is this measure important? 4. How advanced is your company in terms of making purchase de based on total cost? If your company is not advanced, what steps be taken to enhance your company's total cost capabilities