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Reflections on a Recent Report- U.S. Automotive Supply Chains at a Crossroad

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In a recent study, The U.S. Auto Supply Chain at a Crossroads, sponsored by the Labor Market Information Offices of the states of Indiana, Michigan and Ohio, researchers from Case Western Reserve University outline two possible futures for America’s automotive industry supply chains.  One is optimistically characterized by collaborative relationships between firms at all tiers of the supply chain.  The other path speculates that fickle relationships and fear of investment will prevent progress at each tier of the supply chain. This study was conducted between July 2010 and June 2011 and came about from funding generated from the recent American Recovery and Reinvestment Act or so-termed stimulus bill.

What is most interesting about this study is its focus on the smaller “tier two” and “tier three” suppliers that comprise U.S. automotive supply chains, firms that suffered from the effects of industry upheaval and dramatic demand declines bought about from the last global recession. According to this study, these firms account for 30 percent of current employment in the supply chain, and have been previously rather difficult to target and study.

The study points to some good news, namely that there is evidence that supplier relationships are indeed becoming more collaborative. Yet, other evidence points to the continued presence of short-term cost-cutting with larger OEM’s and suppliers passing the burden of cost cutting down to lower-tier suppliers. An interesting finding of a noted interview of a representative of a tier one supplier states the following:  “At (this company), everything is short-term Today is everything. That mentality drives the behavior: Get it now, and don’t worry about the out years…  Focus on today; worry about tomorrow tomorrow.” The report goes on to cite findings related to firms that adopt “high road” practices, namely higher wage, worker training, process investing in product and production process capabilities faring much better in the wake of recession than those that did not. Noted was that two-thirds of firms surveyed chose to postpone investment in equipment and process improvements.  The reasons cited were twofold:

Customer purchasing strategies in many cases did not allow suppliers the financial or organizational resources they would need to implement such practices, and

Public policies (that) do not do enough to pave “the high road” and block the “low road”.”

Supply Chain Matters happened to read of this Case Western Study while also reading a recent article, Dan Akerson is Not a Car Guy, appearing in the August 29 edition of Bloomberg BusinessWeek. For readers unfamiliar with Daniel Akerson, he is the recent chairman and CEO of General Motors whose background originates primarily from the telecom industry and private equity.  He follows several other CEO’s who have led GM since the beginning of the bankruptcy crisis.  The BusinessWeek article makes note that Akerson has moved GM out of survival mode and is purposefully challenging the previous management culture of GM. The article cites a particular example.  Teams presented a plan to build 45,000 of the new hybrid Chevrolet Volt in 2012, after supplier contracts were already in place to support that volume. According to the article, Akerson challenged his management team to put together a plan to support a more profitable build plan of 120,000 Volts in 2012, a significant threefold increase. GM’s engineering team was concerned not only for the radical change of ramp-up, but also the effect on quality if GM pressured suppliers to nearly triple output volumes of newer high tech parts. After four months of fact finding, Akerson had to back off his plan because suppliers would not take on the risk of building enough lithium-ion batteries unless GM guaranteed to pay their capital investment, should sales fall short of the build number. In the end, GM settled on a build number of 60,000.

That article along with the Case Western study caused us to ponder about yet another industry supply chain at the crossroads.  On the one hand, smaller suppliers continue to seek broader collaboration and support from their upper tier customers, avoiding the trickle –down “you get the burden of cost’’ or “our way or the highway” procurement behavior.  On the other hand, change agents with non-industry biases such as GM’s Akerson attack the culture, but lack sensitivity and attention to the overall cascading impacts to the overall supply chain. The jury is still out regarding Chrysler’s new infusion of Fiat’s management influence which seems grounded in operational management.

It would seem that the U.S. automotive industry needs to foster senior management that is willing to challenge the old norms of trickle-down impact among OEM’s and tier-one players, while having an operational and supply chain grounding to the cascading effects of build plan changes across the entire value-chain.

In 2009, this author, along with others, opined that the U.S. automotive industry’s greatest risk was a collapse from the bottom vs. the top.  Two years later, the U.S. government through its stimulus funding programs, brought both GM and Chrysler out of bankruptcy. However, this latest study from Case Western provides qualitative and quantitative reminders that the industry still remains at a crossroad.

We are again interested in hearing from U.S. auto industry readers.  Has supplier collaboration practices on the whole really changed?  Do you believe that the U.S. auto industry is more sensitive to supplier collaboration and investment?

Bob Ferrari

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