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The Auto Industry’s Next Bottleneck?

Sept. 11, 2012
As vehicle demand pushes toward pre-recession levels, there’s growing concern that suppliers could struggle to keep up.

If 2011 was the year of the "black swans," then 2012 is shaping up to be the year of the launch.

Automakers this year will roll out 133 new vehicles, according to global projections from IHS Automotive Consulting. That's a huge jump from 85 launches in 2011, and it even tops the industry's halcyon days of 2006, when automakers unveiled 122 new vehicles.

See Also: Lean Supply Chain Logistics Best Practices

"We're launching a tremendous amount of vehicles right now, and it's not going to stop," said Michael Robinet, managing director of IHS Automotive Consulting, during the Center for Automotive Research's Management Briefing Seminars in Traverse City, Mich. "It's going to be a very active next couple of years for the supply base and for the OEMs."

It's hard to argue that the robust new-product pipeline is anything but a positive sign for an industry that was brought to its knees by the global recession just a few years ago. And projections that global light-vehicle sales in 2012 will surpass last year's record of 75.5 million units certainly point to a comeback that's in full swing.

But as demand bounces back from the recession, there's growing concern that the embattled automotive supply chain will struggle to keep pace.

"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," asserted 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. Morgan devoted an entire presentation to his concerns that many Tier 2 suppliers lack the modern production systems and continuous-improvement acumen needed to keep pace with the projected growth in vehicle sales.

"My concern right now is that the Tier 2 level of the industry is going to prevent, from a capacity standpoint, the move from 13 million to 15 million units," Morgan said, referring to short-term projections for light-vehicle sales in the United States.

"These [suppliers] need to be improved. It just needs to happen."

In his visits to automotive suppliers' factories, Morgan has found that many Tier 2s are getting by with crude, outdated production systems—or, in some cases, with 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.

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, though, according to Morgan, 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.

"A lot of the [suppliers] that are at 13 million right now aren't going to get to 15 million," he said.

'New Norm'?

To be sure, the automotive supply chain has been through the ringer over the past five years.

More than 40 automotive-parts suppliers filed for Chapter 11 bankruptcy protection in 2008, according to the U.S. Department of Commerce. The next year, the toll was even higher as more than 50 auto-parts suppliers filed for bankruptcy.

Citing reports from analysts, the Commerce Department noted that some 200 automotive suppliers were wiped off the map in 2009, when the economy—and the industry—hit rock bottom.

"Suppliers managed to survived 2009 and 2010 by rationalizing capacity and production," the Commerce Department's Office of Transportation and Machinery noted in an annual assessment of the automotive-parts industry.

Then came 2011, when calamities of biblical proportions—the so-called black swans in Japan and Thailand—exposed the fragility and complexity of a supply chain already straining to meet resurgent demand.

As BBK's Morgan put it: "A small die-cast item as big as my hand can shut down a car factory."

While the inventory shortages caused by last year's natural disasters are in the industry's rearview mirror, the year of black swans and "supply chain disruptions" has served as a wakeup call.

"We're hearing now more and more from automotive executives that the disrupted supply chain is the new norm," said Bernard Swiecki, assistant director of CAR's Automotive Communities Partnership. "So there's the real question of how to deal with that.

"These issues have really exposed some of our shortcomings in knowing where exactly our materials and our components are coming from. So if that is the new norm, clearly the industry needs to make some adjustments."

It's a wakeup call that Tier 1 supplier Dana Holding Corp. (IW 500/136) is taking seriously.

"It's going to be a very active next couple of years for the supply base."
-Michael Robinet, managing director of IHS Automotive Consulting

In the "ever-changing environment" left behind by the global financial crisis, Maumee, Ohio-based Dana is making a concerted effort to manage risk within its supply chain and build constructive relationships with its suppliers, explained Dana purchasing executive Gary Baugh.

"Our success as a company is dependent upon having a strong and viable supply base," said Baugh, who is senior director of purchasing for Dana's Power Technologies Group.

In trying to become more "predictive and proactive when it comes to managing risk," the company has taken measures designed to provide enough actionable "information and indicators to prevent a situation from becoming a crisis," Baugh said.

"The more we can plan, the better cost control we can have, and the better we can mitigate impact to our plants, and most importantly, mitigate impact to our customers," Baugh added.

As part of its process of evaluating and managing supplier risk, Dana conducts a financial-risk analysis of new suppliers. For suppliers deemed to be a medium or high risk, Dana buyers are required to develop risk-mitigation plans.

Dana looks at its established supplier relationships as well. All public companies are on a credit-risk watch list, Baugh noted, and over 90% of Dana's supply base is under a Dun & Bradstreet risk watch.

"We have a small analytics group that reviews this information and disperses it to our purchasing teams throughout the world so they can act on it where it's prudent," Baugh said.

Among the other fronts on which Dana is working to manage supplier risk, the company is:

  •     Developing a master database that will detail "risk attributes" for each supplier.
  •     Developing analytics and reporting capabilities to determine supplier risk beyond financial factors.
  •     Working with its OEM customers and suppliers to establish dual validation of critical raw materials and components.

While Dana has made progress in establishing risk-management protocols, Baugh emphasized that the company still has room to improve.

"We have a lot of work ahead of us, but we certainly have a roadmap on how we're going to get there," he said.

Relationships Matter

BBK's Morgan agreed that it's critical for the OEMs and Tier 1s to have risk-assessment protocols in place, and he urged purchasing personnel to conduct layered audits of suppliers.

But Baugh and others also emphasize the importance of focusing on supplier-relationship management—something that hasn't always been the industry's strong suit.

"A small die-cast item as big as my hand can shut down a factory."
-Guy Morgan, managing director and global operations advisory group lead for BBK

Dana has undertaken a number of measures to bolster relations with its suppliers, Baugh explained, including regional supplier conferences, supplier surveys and supplier tech-day events. Just this year, Dana began arranging executive visits to suppliers' facilities.

"The days of just sending out three quotes, getting them back, going with the lowest one and making the decision are long over," Baugh said.

That's something that John Henke has been preaching for years. Henke, president of Birmingham, Mich.-based Planning Perspectives Inc., which tracks suppliers' perceptions of their working relationships with the major automotive OEMs, noted that the automakers are making strides in areas such as communication.

"Certainly one thing that has taken place, particularly on the domestic side, is that they are forecasting their schedules with much more accuracy," Henke said. "And if not accuracy, they're at least saying that the schedule is fixed, and that they're not going to change things within a two- or four-week period, depending on who the OEM is.

"And so suppliers don't have to be concerned that Monday morning they may get a call saying that by the end of Friday they have to double their production by 20%.

With the natural disasters in Japan and Thailand crimping supply, the automakers pulled back on new-vehicle launches in 2011.  But the new-product pipeline, "came roaring back in 2012, and that's the pressure we're feeling right now," said Michael Robinet, managing director of IHS Automotive Consulting.

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