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Evidence of Business as Usual in North America Automotive Supplier Relationships

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In the week that the purchasing and supply management community is meeting at the Institute for Supply Management (ISM) annual conference being held here in Indianapolis, is a disappointing report of business as usual supplier relationship management challenges across the U.S. automotive industry.

The Wall Street Journal reports Lukewarm Supplier Ties Hamper Auto Makers (Paid subscription required), reflecting a recent survey involving many suppliers to the U.S. automotive industry. The report concludes that: “top U.S. and Japanese auto makers are losing out on hundreds of millions of dollars in potential cost savings because of lackluster relationships with their parts suppliers.” This 16th annual survey, conducted by Planning Perspectives Inc. polled 647 salespeople from 492 top suppliers.

According to the survey results, four out of the six auto makers operating manufacturing plants in North America experienced erosion in their supplier rapport over the past year, a year in which auto sales have been booming in North America.

Among the top five ranked automakers in supplier relationships were brands such as Toyota, Honda and Ford Motor.

Noted as having the largest erosion in supplier relationships was Nissan Motors, which intensified pressures on suppliers to reduce costs. Cited as most improved in supplier relationships was General Motors which reportedly resulted in suppliers contributing more than $3,000 to the profit GM realized on every vehicle manufactured and sold in North America last year. However, GM was ranked just 25 points above Nissan. The report notes that GM hired a new procurement chief in 2014 with previous executive experience at parts supplier Delphi Automotive, who asked suppliers for input as to what GM was doing that, was not contributing to a win-win relationship.

Coming in with the lowest supplier ranking was Fiat Chrysler which reportedly has improved many of its internal processes but those processes still lag behind those of its competitors. The automaker has recently reorganized its quality and purchasing management teams including recruiting a new chief purchasing officer.

From our lens, the takeaway seems to be that for U.S. automotive OEM’s, when it comes to fostering more positive supplier relationships, the trend remains one of business as usual, namely singular cost reduction pressures flowing down the tiers of North America automotive supply chains. The more times change, the more behaviors remain the same, despite learning to the contrary including unprecedented industry product recall incidents


Major Earthquake Occurences Remain Multi-Industry Supply Chain Concerns

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It has been two days since our Supply Chain Matters breaking news alert published on Friday on the occurrence of multiple severe earthquakes impacting southern Japan. While the major focus continues toward tending to the injured and missing, along with the assessment of the impacted region’s major infrastructure, the supply chain disruption implications are indeed evident and potentially include multi-industry dimensions.

Numerous incidents of aftershocks continue to impact the area which is hampering efforts by companies to assess damage to facilities and supply chain operations. Reports that we are monitoring indicate that Toyota will gradually halt automobile production across Japan because of a shortage of components. The Toyota Lexus production plant in Fukuoka prefecture remains in production halt for the remainder of this week. The Tustsumi plant which produces the Toyota Prius will halt production from Tuesday thru Saturday of this week.

Toyota supplier Aisin Seiki has acknowledged the discovery of broken walls, windows and assembly equipment at its facilities in the quake area but has indicated that plans are underway to shift the production of door and engine parts to other owned facilities located in other parts of Japan as well as other external plants. The open question is how much additional time will be required to implement this shifting of production.

Other automakers such as Honda and Nissan have also halted operations within factories within the impacted region. Honda has a motorcycle manufacturing plant near the city of Kumamoto.

Sony is assessing damage to its smartphone image sensor plant in Kumamoto indicating that that plant operations are unlikely to re-start soon. Sony’s camera image sensors are included in the Apple iPhone but the supplier has indicated that full operations remain at its plants in Nagasaki and Oita which also produce sensors used in smartphone cameras.

Semiconductor producer Renesas Electronics confirms it has sustained damage to equipment at its plant in Kumamoto which produces microcontroller chips for automobiles. Further assessment of damage remains to be completed before deciding when to resume production at this particular facility.

In addition, on Saturday, a more powerful magnitude 7.8 quake struck Ecuador, about 17 miles from the northwestern coastal city of Muisne, near the border with Colombia. What makes this incident so concerning is that this earthquake lies on the same geological “Ring of Fire” plates that surround the Pacific Ocean. Thus far, more than 200 deaths have been confirmed and there are reports of significant damage to the region’s infrastructure.

The top exports of Ecuador are crude petroleum, bananas, crustaceans, processed fish  and cut flowers.

Such considerable natural disaster events occurring over a short period of time should cause ongoing concern for multi-industry supply chain professionals since there is a lot of strategic component, commodity and finished goods production located in various regions along the “Ring of Fire.”  These incidents continue to remind all that the North America west coast region including California, Washington State and Oregon remain vulnerable to a major earthquake.  As geologists constantly remind regarding the U.S. west coast region, it is not a matter of possibilities, but rather a matter of when a rather significant seismic event occurs.

Another aspect already being raised by business media has been what learning came from the 2011 major earthquake and subsequent divesting tsunami that struck northern Japan regarding supply chain disruption and business continuity planning, and how that will come into play over the coming days and weeks.

Our thoughts and prayers remain with the numerous victims of these disasters along with the impacted families. These tragic natural disaster events provide constant reminders that are planet remains fragile to devastating seismic and climate related events.

Bob Ferrari


Breaking News: New and Earlier Earthquakes in Japan Have Supply Chain Implications

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As we pen this Supply Chain Matters posting it is just past daybreak in Japan and early evening in the U.S. eastern time zone.  Breaking news indicates that a magnitude 7.0 earthquake has struck early Saturday on Kyushu Island, the same region hit by a 6.2 quake two days ago.  The U.S. Geological Society reports that this latest quake struck just west-southwest of Kumamoto-shi and about 8 miles south-southeast of Ueki, the epicenter of the late Thursday tremor that left nine dead.

While it is still early, one geologist is indicating that this latest quake has “severe, serious implications in terms of damage and human losses.”

An earlier report published by Automotive News regarding the effects of Wednesday’s quake had indicated that Toyota and Nissan had earlier suspended production at two automobile assembly plants because of damage incurred at two factories of a key supplier. The report indicates that a body factory and a die-casting plant, both operated by Aisin Seiki Co., and located in Kumamoto region, were damaged and both facilities have been shut down.  These plants produce sunroofs, door frames, door handles and other associated automotive body parts. Workers were not able to enter these factories to assess damage because of the occurrence of frequent aftershocks.

Toyota had suspended output for both Friday and Saturday shifts at its main Lexus assembly plant in southwestern Japan, as well as nearby engine and transaxle factories. Nissan on the other hand continued production at its Fukuoka assembly plant in the Kumamoto region but also elected to suspend weekend shifts because of supplier shutdown.

With the report of the latest major, and far stronger magnitude 7.0 earthquake occurring in the same region of Japan, chances are that there will likely be other industry supply chain disruption rippling through Japan in the coming days.

Obviously it is rather early to speculate and first priority must be directed towards protecting human life and maintaining safety in the region.

With the ongoing threat for subsequent added aftershocks, industry supply chain ecosystems that extend to this region should be under alert to monitor ongoing events. Teams need to be ready to assess any added supply chain disruption over the coming hours and days.

Bob Ferrari


Not a Good Week and Time for Automotive Service Management Supply Chains

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For service facing and aftermarket automotive related supply chains, news developments this week have undoubtedly bordered on the surreal or even bizarre.

The ongoing product recall crisis involving airbag inflators’ producer by Takata took on even broader dimensions. The National Highway Traffic Safety Administration (NHTSA) indicated this week that as many as 85 million potentially defective airbag inflators are still inside cars and trucks now being driven across the United States. That number is supposedly in addition to the nearly 29 million inflators that have already been designated for replacement in the ongoing massive product recall campaign.  Reports indicate that thus far, at least 11 people have died and over 400 have been injured by defective airbag inflators.

There are many facets compounding this overall logistical challenge. NHTSA itself indicates that because of inadequate reporting information from automotive producers, the agency does not exactly know how many vehicles are exposed to potentially defective airbag inflators that were produced by Takata. There are also multiple inflators installed in every vehicle. Add to this, that previous replaced inflators were not properly designed, causing a second recall.

As Supply Chain Matters has noted in our previous commentaries regarding this industry recall challenge, the problem of premature explosion of the inflators has been linked to long-term exposure to high humidity.  Thus the failure profile can be linked to specific U.S. states whose climate matches such humidity, such as Florida and the U.S. Gulf Coast states. One potential fix to the problem has been the addition of dessicant drying agent material to the inflator to lessen the moisture caused by high humidity.  That obviously implies a separate part identity.

The far broader problem is the sheer scope of the potential campaign. The government is not even sure it has the authority to mandate a recall of such volume and with such monetary implications. With a potential of over 100 million inflators having to be eventually replaced, the recall campaign would obviously exceed current capacity for producing replacement parts, implying multiple years of effort.  The sheer volume is of the magnitude of supporting the redesign of multiple new models of automobiles and trucks and would have to involve many more airbag inflator suppliers.  As Supply Chain Matters noted earlier week, suppliers such as Autoliv have already benefited from the crisis, and with such massive numbers, other suppliers will benefit as well. And then there is the biggest question of all, who will pay for all of the replacement parts and installation costs.

The Donald Trump analogy of: “This is a HUGE problem” is an appropriate descriptor.

This saga and its implications will obviously test the limits of automotive service supply chains and dealers for many months to come.

Then the industry has the diesel engine emissions crisis involving certain Volkswagen produced models. Since our prior commentaries in late 2015, we have refrained from other updates because of the sheer kaleidoscope of bizarre actions by Volkswagen.  First there was the sacking of senior corporate product design and quality executives.  Then came the sacking of the top U.S. executive Michael Horn, who was revered by U.S. dealers, after Horn supposedly proposed monetary gestures to affected vehicle owners.

While the global auto maker has initiated a product recall plan for affected vehicles in Europe, the deadline for a plan to address polluting vehicles in the U.S. has come and gone and remains somewhat a work-in-progress.  According to industry reports, VW continues to face upwards of $20 billion in potential fines as well as class-action lawsuits, not to mention a rather tense ongoing relationships with U.S. regulators and legislative bodies as well as its U.S. dealers.

Meanwhile VW senior executives had the shear nerve to position themselves for management bonuses. That had drawn the ire of executives of the IG Metall trade union who are influential members of the company’s Supervisory Board. The news this week is that executive bonuses have now been squashed by that board.  Details related to future actions that VW will take related to a recall plan for the U.S. are not expected until VW’s board of directors meets later this month to review various investigative reports related to the U.S. emissions scandal.

The VW service management supply chain remains with lots of pending challenges and unknowns. Thousands of in-service diesel-powered vehicles may be subject to costly vehicle hardware and software fixes that potentially will involve significant labor hours per vehicle. Unsold diesel-powered vehicles remain in dealer lots awaiting a disposition as well. If a vehicle recall is initiated, individual owners are likely to very intolerant to repair times that extend over many, many months. Then again, what-if VW elects to buy-back certain models? That’s a reverse supply chain challenge in the making.

Overall, automotive service management supply chains remain stressed and face unprecedented process and execution challenges in the coming months and years. There is obvious learning that will come from this ongoing multi-brand crisis, involving product-design, supplier quality and supplier management dimensions. Many consumers will be impacted and will get first-hand knowledge of the effects.

Bob Ferrari

 


Major Automotive Supplier Component Safety Snafu is Another Supplier’s Strategic Gain

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As far back as 2014, Supply Chain Matters provided commentaries relative to the defective air bag inflator crisis that was impacting multiple global automotive brands. Even then, the product recalls involving airbag inflators supplied by Takata Corp. of Japan were estimated to be in the millions.

In an October 2014 posting, Supply Chain Matters echoed business media reports that brands such as Honda, were undertaking steps to seek out alternative suppliers, not only to provide augmented supplies of air bag inflators required to retrofit millions of recalled vehicles, but also to become a replacement supplier for current and future production needs. We noted that rival air bag suppliers that could benefit from the ongoing crisis included Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which at the time was being acquired by German based ZF Friedrichshafen. We further pointed out that switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.

Flash forward to today and specifically a recent Bloomberg Businessweek report titled: The Company That Came out on Top After Takata’s Air Bag Mess. The report indicates that largest automotive-safety parts company in the world has successfully been able to step in and respond to the Takata focused crisis. This supplier actually began supplying air bags as far back as 1980. Amid the current wave of product recalls, Autoliv produced inflators are noted as emerging relatively unscathed in the crisis.

The overall scope of the defective air bag inflators is massive, with upwards of 60 million recalled vehicles on a worldwide basis. Noted is that about 28 million Takata air bag inflators have been recalled in the U.S. alone.

Autoliv expects to produce 20 million replacement inflators since alternate production began in 2015, and extends through 2017. Once more, the supplier indicated to Bloomberg that it had won about half of all frontal air bag orders for newer cars last year. This supplier is forecasting sales growth of 7 percent annually, a fairly healthy rate for a lower-tiered automotive supplier.

Once more, Bloomberg points to Autoliv’s newer focus on the supply of more sophisticated safety components for autonomous vehicles such as radar, vision sensors and other crash avoidance safety systems ranging from standard sedans to luxury vehicles.  According to a recent Boston Consulting Group study, within the next decade, one in eight cars sold around the world will have autonomous features. Bloomberg reports that Autoliv components are contributing to autonomy features in cars like Daimler’s new Mercedes-Benz E-Class, which can steer itself in auto-pilot mode, brake in emergencies and evade obstructions. The company is also reportedly partnering with Volvo AB in a project called Drive Me that aims to have 100 self-driving cars on the roads in Gothenburg, Sweden next year.

In essence, this alternative supplier is not only benefitting from its abilities to step-up and respond to an immediate industry defective component crisis, but indeed, positioning from a product design strategy perspective to be a preferred supplier for future safety systems in multiple branded global vehicle platforms.

We have called reader attention to the ongoing Autoliv case study because it provides an ongoing example of how a major supply crisis and safety snafu can indeed lead to another supplier’s opportunistic gain. More importantly, thinking beyond the tactical crisis window at-hand with a focus on what will be the alternative technology.


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