Will Tier 2 Suppliers Be the 'New Pinchpoint' for the Auto Industry?

Some Tier 2 suppliers lack the modern, efficient production systems and continuous-improvement focus needed to keep pace with the projected growth in vehicle sales, according to BBK's Guy Morgan. If vehicle demand continues to grow as expected, there's concern that these suppliers could be overwhelmed.

The feel-good story of the auto industry's comeback could take a dark turn if the OEMs don't take a hard look at their suppliers' abilities to ramp up in lockstep with demand.

That was the message from two speakers at the Center for Automotive Research's Management Briefing Seminars in Traverse City, Mich., where analysts projected that U.S. vehicle sales will exceed 14 million units this year -- up from 13 million in 2011 -- and will hit 16 million units by mid-decade.

If demand continues to grow as expected, there's concern that Tier 2 suppliers could be overwhelmed.

"The capacity that went offline in the last few years -- in some cases sitting idle or scrapped -- and the capacity that's going to have to come back online to support the continued growth is going to be the new pinchpoint in the industry," said Larry Jutte, president and COO of Ernie Green Industries Inc., a Dayton, Ohio-based automotive-parts supplier.

Guy Morgan, managing director and global operations advisory group lead for the consulting firm BBK, was even more emphatic, sounding the alarm that Tier 2 suppliers could "prevent, from a capacity standpoint, the move from 13 [million] to 15 million units."

"These people need to be improved," Morgan said during a panel discussion at the CAR seminars. "It just needs to happen."

Behind the Times

In his visits to suppliers' factories, Morgan has found that many Tier 2s are getting by with crude, outdated production systems -- or, in some cases, no production systems at all.

Morgan presented two case studies of smaller suppliers "that are indicative of the kinds of people that can shut [OEMs] down on a regular basis."

One example was a stamping company that "barely survived the downturn" and was struggling to keep up with uptick in demand.

"What we found when we got there was a tired factory," Morgan said. "Processes had not been improved at all in several years. There was no single-minute exchange of dies. There was no evidence of continuous improvement. And they certainly had capital issues.

"This was a very unsophisticated management team. And there was no evidence of a production system."

Likewise, at a die-casting supplier, Morgan said he found "absolutely no evidence of a production system," although he acknowledged that the firm had a dedicated workforce and a hard-working management team.

But he also found a devil-may-care attitude about quality.

"Rework in this factory was incredible," Morgan said. "On a typical day -- any day that ends in a 'Y' -- about 10% of sales was scrap or rework."

To turn things around at the two factories, BBK emphasized continuous-improvement fundamentals such as value-stream mapping, right part/right time/right quantity, standard work and single-minute exchange of dies.

The bottom line, Morgan said, is that many Tier 2 and lower Tier 1 suppliers are not nearly as sophisticated in their manufacturing processes as OEMs would expect them to be.

"They charge off going into a direction when they might not really understand that the light at the end of the tunnel is a train," he said.

Risk Assessment Needed

If Morgan's examples are at all representative, automakers have good reason to be concerned. Forecasting firm R.L. Polk & Co. projects that there will be 121 new-vehicle launches in 2013, and that U.S. sales will hit 15.2 million units.

Morgan urged the OEMs to conduct layered audits of smaller suppliers, "because frankly if they're struggling at 13 million [units], we can only imagine what it's going to be like if it gets to 15 million."

"Do you have an assessment process?" Morgan asked attendees. "A small die-cast item as big as my hand can shut down a car factory."

Jutte, meanwhile, called for the OEMs to step up their efforts to collaborate and build strong relationships with suppliers.

"Collaborating, and being able to recognize [supplier risk] long before it hits us in the face, is going to be very, very important," Jutte said. "If you have a Tier 1 or Tier 2 that's working six or seven days a week supporting their customers, and suddenly they have to work eight or nine days a week, there's going to be a pinchpoint."

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