IndustryWeek supply chain advisor Paul Ericksen shares his weekly review of the news.
A recent article in IndustryWeek, “Laid-off GM workers and their supporters gather for a vigil—and vow to fight,” focused on the 1,400 GM employees in Ohio losing their jobs under the company’s announced cutbacks. While layoffs are always difficult, I applaud General Motors for being proactive rather than reactive in addressing current—and what they perceive will be future—changes in the automobile market. I realize my opinion may seem a bit heartless.
Although 1,400 is a large number, the greater number of jobs lost with the closing of this plant will be with Lordstown’s suppliers. I don’t have any recent data to draw upon, but back in 2008 when General Motors was on the verge of bankruptcy, the U.S. Department of Commerce estimated that for every job GM would lose—and they would experience significant job losses going through bankruptcy—three supplier jobs would be lost. I suspect this ratio is still in the ballpark, and the Lordstown plant closing will have a much greater impact than just the General Motor’s jobs.
The biggest difference between then and now is that instead of a corporate bankruptcy, we’re talking about a single plant closing down. Does this lessen the impact on Lordstown’s supply chain? I doubt it. In fact, in my experience, the bulk of suppliers to large Original Equipment Manufacturers tend to be small- to medium-size enterprises that—for better or for worse—have a large part of their overall business with that primary OEM customer. Consequently, there are probably a fair number of such suppliers that will be greatly impacted by the closing of Lordstown.
It is usually a bad strategy for a company to rely on one customer. In fact, during my days as a purchasing manager, I had a rule of thumb that our factory’s purchases from any particular supplier would not make up more than 20% or so of their overall business. This was so that if and/or when market demand would drop precipitously for our products, the suppliers wouldn’t be put out of business. Did this make me a “good guy”? Not necessarily. We set this threshold because it was in our plant’s best interests to have a ready and willing supply chain with the ability to supply us the parts we would need when our business rebounded.
The point here, is, however that it is likely that at least some of Lordstown’s supply base will be economically devastated by that plant’s closure to a point where they will go out of business. But you sure don’t hear about this job loss on the national news like you did of Lordstown, do you?
What can be done to mediate such situations? I’ve already alluded to the primary one, i.e., don’t become too dependent on any one customer. I know, I know, turning down any business is difficult, but in the long run it’s the right strategy to follow. This strategy would put the onus on a supplier’s marketing function to drum up business with other customers. Did I mention that many small- to medium-sized suppliers don’t have a marketing department? Those that don’t have an effective marketing strategy in place should probably rethink their approach.
Other than the above, however, I don’t have any secret formula for addressing this situation other than applying good business practices. And this includes being as lean as possible.
If you are in a supplier to a large OEM I would be interested in hearing what you’ve done to avoid this dependency trap. Feel free to share your thoughts in the comments section at the bottom of this article.
“The so-called jackscrew, used to set the trim that raises and lowers the plane’s nose, indicates the jet was configured to dive.”
The March 15 article, “Boeing Part Found at Crash Site Hints at Same Cause as Lion Air,” is one of many written about possible design flaws in Boeing’s 737 Max 8 auto-pilot electronics. If such flaws do indeed exist and contributed to the recent crashes/loss of life, the blame (and financial liability) will surely by shared by a supplier since Boeing purchases most of their control-related electronic assemblies on the outside and their design is through a collaborative effort.
On top of this, remember, suppliers of other 737 Max 8 parts not related to the crashes will be negatively impacted, since Boeing has discontinued their production until the problem is solved. All-in-all, this is a major snafu that will have ongoing consequences
In other aerospace manufacturing nightmares, check out Passenger Jet Parts Not Properly Checked By Japan Engine Maker: “IHI Corp. has admitted unqualified workers were inspecting jet engine parts at the factory.”
Paul Ericksen, IndustryWeek’s supply management advisor, will be a featured speaker at the Manufacturing Technology Conference in Pittsburgh. On April 2, he will lead a session in the Supply Chain track called “It Takes Two to Tango: How to Keep Both Suppliers and Customers Satisfied.” On April 3, Ericksen will conduct the workshop “Build-to-Demand: The Lean End Game.”