A highly significant supply chain related news story comes this week from Honda Motor Co., one that has the potential to bring significant change to North America based manufacturing.  As the Christmas holidays approach, Honda’s North American and supply chain partner employees will certainly have some cheer.

According to an article published in the Wall Street Journal (paid subscription or free metered view restriction), Honda plans to shift a major portion of its production capacity into North America over the next few years.

The implication for Honda’s current North American production facilities and supporting supply chains are highly significant since the numbers indicate as much as a 40 percent increase in production and the positioning of Honda North America as both a producer for both domestic and global export markets.  If the full plans are implemented, North America would represent more than 50 percent of Honda’s global production capability, with export volumes in the range of 200,000 to 300,000 vehicles annually.

The reasons for this major announcement are fairly obvious and far reaching.  With the continued stubborn strength of the Japanese yen making manufacturing exports highly unprofitable, many Japanese based manufacturers can no longer afford to have the bulk of export oriented manufacturing based in Japan.  This has led to many difficult decisions, not only for Japan’s automotive producers, but high tech and consumer electronics manufacturers as well.  The one high visibility exception has been Toyota, with its chairmen continuing to believe that the company has a commitment to continue to have some export production based in Japan. But even Toyota has begun planning for shifting increased capacity and output to North America and other global based facilities.

The other motivation points to global supply chain risk mitigation. The major disruptions concerning the devastating earthquake and tsunami that struck northern Japan and the monsoon-related floods that impacted numerous manufacturing facilities within Thailand have exposed certain risk vulnerabilities. At the height of the tsunami crisis that impacted Japan, Nissan exported V6 engines from its North America plants to Japan in order to keep its southern Japan plants operating. That action, along with others, caused Nissan to overcome the crisis much quicker than some of its Japan based competitors.

As noted in our 2012 Predictions series, 2011 events have been a wake-up call for globally sourced manufacturers, and global insurance and reinsurance carriers are in the process of re-evaluating high risk geographies, which could result in higher insurance premiums for regions more vulnerable to catastrophic natural disaster.

The prospects for increased manufacturing and automotive supply chain related jobs for the U.S. are obvious.  Supply Chain Matters, however, would add a note of caution.  For North America to become a new source of global export capability there will need to be major investments in supply chain and skills infrastructure.  In the case of Honda, the concentration of North American production and supply chain facilities lies in the U.S. Midwest region (Ohio, Indiana, Ontario Canada), and vehicles will have to be transported to export ports on either the U.S. west or east coasts.  If other Japanese and foreign owned manufacturers also expand, current facilities in the U.S. Southern region would add transportation segments to export-related ports.  With the pending opening of an expanded Panama Canal, U.S. ports could experience a dramatic increase in operations. Air freight hubs such as Huntsville and Nashville would be impacted with increased operational volumes.  With inter-modal trucking and rail capacity currently constrained, port authorities as well as rail, third party logistics and trucking carriers will need to invest in added infrastructure, equipment and productivity tools.  In the area of skills, many U.S. manufacturers complain that they cannot fill existing needs because of a lack of technically skilled people.

Our readers in North America should have one significant takeaway from the implications of this latest Honda announcement.  Now is the time to hold politicians and industry accountable for actively supporting and shepherding the required investments in world class transportation, logistics and skills infrastructure that can sustain North America as a global manufacturing hub and a generator of jobs.

The current Congressional gridlock must move beyond partisan politics and focus on what generating jobs really implies.  Recent opinion polls indicate that the U.S. electorate holds their Congressional legislators in the lowest regards.  News commentators now joke that criminals have higher public opinion ratings.

Supply Chain Matters continues to believe that the U.S. Presidential Commission on Jobs and Competitiveness must include in its recommendations both assessment and specific action plans for needed changes in U.S. supply chain and logistics infrastructure, and Congress and industry should immediately act in concert for active implementation of needs.

As the saying goes, when opportunity strikes, take action!

Job growth is on the doorstep, but it comes with a resolve to action. Get involved and have your voice heard.

Bob Ferrari

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

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

Readers of this blog are well aware that unlike other blogs, I tend to limit specific rants to just a few; specifically issues or concerns that I feel may well be critical and important to industry and their supporting supply chains.  One of those rants has been an ongoing concern relative to what I feel is a lack of awareness and concerted action by U.S. legislative and executive leaders on identifying and fostering a strategic manufacturing and supply chain strategy for U.S. based industry. This week, I have a bit more optimism that the Obama Administration has finally “got-it”,  acknowledging the importance of a vibrant and competitive U.S. based supply chain network.

I was pleasantly surprised to read a Huffington Post featured commentary penned by Jared Bernstein, who serves as chief economist and economic policy advisor to Vice President Joseph Biden.  Bernstein utilizes the Vice President’s recent trip to a Chrysler assembly plant in Toledo, Ohio to take note of how important a role supply chain plays in employment and value-chain strategy.  Bernstein begins: “When it comes to auto companies, we often focus more on the lake than the streams and rivers. ..Much of the attention to how this critical is faring focuses on the end-of-the-line assembly plants, and less on the suppliers that provide the parts to be assembled… But in fact, for every worker in the assembly plant, there are three workers in the supply chain.”

He further notes that in the year before the Obama Administration took office, the U.S. auto industry shed 431,300 jobs, but in the 13 months since Chrysler and GM emerged from bankruptcy, auto industry employment has increased by 76,300 jobs, of which 40,000 is estimated to come from suppliers.

Since the beginning of the global recession, I have been penning my view that to save a key industry one needs to have focus on all the strategic elements of its value-chain.  Contrary to some journalists and bloggers, I advocated for the financial rescue of both Chrysler and General Motors for the sole purpose of saving jobs and capabilities among the industry supplier base.  Earlier this year, in the posting What Really Threatens the U.S. Auto Industry?, I further noted that while very uplifting news was coming out of Detroit’s Big Three, industry observers were noting that U.S. automotive suppliers were suffering from too much financial instability and too much capacity.  The Obama Administration, specifically Ron Bloom, The President’s advisor for manufacturing made it clear that industry consolidation, as much as 30 percent, needed to happen. I suppose we should phrase that as a “thin the herd” strategy.

Eight months later, the picture among the automotive supplier community seems far more optimistic.  Surviving suppliers are now expanding their presence within growth-oriented emerging markets, and many tier one suppliers are experiencing operating profitability. Some are branching out to other growth industry, and all together this is positive news.

Bernstein notes that the story is not over, that the auto industry is moving in the right direction, but there is still a ways to go.  That’s stating the obvious.  Beyond the political rhetoric, the effort has to addrss more than the automotive industry, to include alternative energy, aerospace, high technology and others. This also cannot be a political process, but rather a joint government and industry process.

The political system indicates that they “get-it”, supply chains do matter.  If the Vice President and the President are inclined to take input from this blogger, here’s another suggestion on direction.  Appoint more experienced operational and supply chain professionals to your advisory and policy teams addressing a world class manufacturing and supply chain strategy framework for the U.S., and include some of the country’s top manufacturing firms in that effort.  My frustration has been that Wall Street related executives have had too large a voice in strategy thus far, and while thinning the herd might have been appropriate, supporting and fostering world-class capabilities are the real goal.  The fact that GM’s largest shareholder, namely the U.S. government, seems content to have another former private equity and Wall Street executive now lead GM into its renewal and growth phase is a troubling sign.  Let’s make the growth and renewal phrase about world class value-chain capabilities and operational excellence.

Bob Ferrari

In early 2009, during the darkest days of global recession and economic crisis in the U.S., there was quite a raging debate on the merits of corporate bailouts, particularly those related to major brand owners in the U.S. automotive industry such as Chrysler and General Motors.  The political debate got intense, especially on the merits of government bailouts of private corporations. We at Supply Chain Matters argued that the more important concern for the industry was the overall supplier base, and the concern for the cascading effects to that supply chain if one or more OEM’s went out of business.  In a later commentary, Prescriptions for Detroit’s Supply Chain Crisis, we again pleaded that more money to bailout the OEM’s would be a waste unless there was a way to insure more viable integrity of key component suppliers, which at that time, provided a more precarious scenario of multiple failures. That was then.

Yesterday, The Wall Street Journal featured an article, Smoother Ride for Auto-Parts Makers (paid subscription or free sign-up account may be required), which noted that in just a year, the surviving supplier network has begun turning the corner towards profitability with new forms of restructured businesses.  Examples noted include ArvinMeritor Inc., American Axle & Manufacturing Holdings Inc, Lear and TRW Automotive Holdings Corp.. The formulas focus on divesting of non-core businesses and further investing in emerging growth businesses and higher growth emerging markets such as Brazil, China. India and Russia.  ArvinMeritor will become more specialized in commercial truck components. Lear now has its focus on car seats and electronics.  Dana divested of frames and suspensions to focus on axles.  American Axle and ArvinMeritor opened new plants in China and India.  The takeaway for readers of the article is that many of these suppliers are now in a much better financial position, but the longer-term scenario is dependent on a rebound of the U.S. consumer in buying more autos.

We would dare say that there were other factors as well.  The OEM’s realize more than ever that a viable and functioning supplier network is in their best interests. Supplier viability is just as important as contract performance. Supplier viability may not have translated to a holding company structure on the part of the OEM. The dual coupling of the strategic interests of suppliers as well as the OEM’s has also occurred.  OEM’s may have desired more of a one-stop destination of component supply but that may have caused suppliers to have an unwieldy cost vs. revenue structure. Restructuring of costs and health benefits reform certainly played a role as well.

Let’s return to the original debate regarding the existence of a viable and vibrant U.S. automotive supply chain network.  The signs of turning the corner are obviously far more positive.  The government bailouts of Chrysler and General Motors probably saved the bulk of the industry by allowing key suppliers the time and motivation to independently restructure their business models. It has also opened the door for new or different supplier entrants or parts distribution models. The open question moving forward, however, is whether it is a U.S. supplier network or a global-based network of parts suppliers that emerges.

What is your view?  Was de-coupling of OEM and supplier interests a factor?

Bob Ferrari