U.S. Automotive Suppliers Survive the Perfect Storm but Important Supply Chain Challenges Remain

In previous Supply Chain Matters commentary related to what’s on the mind of senior supply chain executives, we noted that an important management practice that was adopted from the previous challenge of global economic recession was a philosophy to ‘never waste a crisis’ to bring about required structural changes in supply chain structures and needed capabilities.

During 2008/2009, the U.S. automotive industry faced a significant crisis involving the largest OEM’s, and there were legitimate concerns that many key suppliers within the U.S. automotive supply chain would also be the collateral damage to a flawed industry business model.  A lot has changed, and the outcomes remain positive.

Today’s Wall Street Journal notes (paid subscription required) that the current upturn within the U.S. automotive industry is providing more positive outcomes for the industry’s parts suppliers, but more importantly, re-structuring has led to capabilities that can sustain profitability at lower industry output levels.  Suppliers such as BorgWarner Inc., Dana Holding Corp., Federal-Mogul Corp.Johnson Controls Inc. and Lear Corp. have each reported booming third quarter profits.  Lear tripled its profit level on an 11% sales gain, BorgWarner’s profit increased sixfold on a 37% sales gain, and Federal-Mogul’s profit also increased sixfold.

We should point out that a lot of cost cutting, plant closures and other structural changes were required to attain these current profitability levels.  Many of these suppliers have reduced capacity and operate on a lean just-in-time operational model utilizing temporary labor or overtime to respond to upside production needs. The overall U.S. automotive industry is expected to produce close to 12 million in shipments this year vs. a historic industry output average of 16 million units.  Obviously, many suppliers have lowered their break-even points.

Moving forward, however, these same automotive suppliers, that are in a better financial position need to loosen the purse strings and invest in some select supply chain analytical and business intelligence capabilities. The industry storm clouds have not abated.  U.S. consumers, on the whole, remain cautious in spending.  Suppliers can benefit from increased industry sales, but consumers are also holding on to their aging vehicles, which in-turn will require more replacement parts.  These two channels are significantly different and require differing supply chain fulfillment, inventory management and demand intelligence capabilities. Companies operating in such a lean and resource-constrained focus require the ability to better sense and respond to changes in customer or channel needs, along with smarter utilization of inventory and capacity.

We believe that a keener focus on how to better leverage overall inventory management and supply chain analytical and scenario analysis capabilities would be a wise investment for industry suppliers.

Bob Ferrari

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