Supply Chain Constraints Present a Three-Part Challenge to Automotive Suppliers

Anyone in the business of manufacturing automobiles, trucks and automotive components back in the tumultuous years of 2008 and 2009 might be tempted to put their metaphorical transmission into neutral, reveling just a little bit in the success that surrounds an industry that is experiencing something akin to a rebirth. As sweet as that might seem in the short term, there are significant challenges facing automotive suppliers despite the improving production outlook. Whereas lack of volume in the dark days of 2008 and 2009 created stress on the supply chain, the lack of capability is now creating a new level of stress. While virtually every viable supplier has returned to profitability, that does not mean they are performing in a manner that will be sustainable in the long term.

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Although the significant industry volume increase is great news for everyone in the business, coming on the heels of the recent downturn, volume ramp up brings significant new concerns. Make no mistake: A lack of sustainability in three key elements of the automotive supply chain -- talent, capacity and liquidity -- represents significant challenges that can have disastrous consequences for those operating within the automotive industry if such concerns are not adequately addressed, especially since parts production ultimately leads to the doorstep of the major global automotive manufacturers (OEMs). Deficiencies in any one or more of those areas can spell trouble, something that should and can be avoided with appropriate planning and execution. The future success of the automotive business, especially within the automotive supply chain, continues to mean hard work. More to the point, it's going to require a laser-like focus on these three areas -- starting with talent.

Talent

Having the right people in place is perhaps the most challenging issue facing the automotive industry, largely because the fallout has been so severe. The lack of talented, experienced workforce at all levels, executive through hourly, creates issues in a multitude of areas from management to operations.

During the euphemistic "bottoming out" of the industry in 2009, it seemed a logical and necessary step for suppliers to cut fixed costs, and much of the achievement came at the expense of costly -- and talented -- manpower.

Many displaced workers took to the beach in early retirement while others left for new locales and alternative industries. The resulting problem is that now those same experienced people -- retired, relocated or repositioned in non-automotive areas -- are needed to effectively meet the challenges of the ensuing volume increase, the challenge escalating proportionately to the growth rate.

Compounding the problem is that not only have many ex-automotive personnel become newly entrenched outside that industry, but also oftentimes they actively recruit colleagues from the automotive ranks through informal networking links.

Exacerbating the workforce shortage is employee fatigue among the ranks of the remaining workers brought about through a troubling scenario.

It is all too common in today's growth in the automotive market for suppliers to run their operations on a 24/7 basis.

Parallel to machinery and operational strain where preventive maintenance falls behind schedule, there is a "people side" of the equation that suffers as well. Eventually, such a grinding pace generates significant pushback from employees who rightfully may experience physical and mental burnout.

In response to the insufficient talent challenge and related operating issues, many automotive supplier clients look to BBK with its deep history of financial, strategic and operational advisory service to provide the resource bridge and to facilitate rebuilding their teams from internal development as well as from outside sources.

As BBK provides a variable cost solution, it is imperative that a clear strategy is developed to entice the "best and brightest" people that have stopped looking at manufacturing in general and automotive in particular, as a worthwhile career choice.

In order for the automotive industry to stabilize and be positioned to grow, the above holds true at all levels, from executive to management and skilled trades. Devising and putting in place success initiatives may incentivize workforce growth in the manufacturing arena.

Additionally, there is a need to develop and communicate a much broader and more positive perspective on why we're here -- in Michigan.

BBK is headquartered in Southfield, Mich., and certainly our governor is promoting (in connection with the State's 2012 promotional theme "Pure Michigan") the vast resources, trained workforce, infrastructure and manufacturing "DNA."

Michigan should be considered a venue of choice where manufacturing leaders want to be located. Proximity to major Detroit-based automotive OEMs is being promoted and marketed as highly positive when selecting a production location.

However, there are many other states that are promoting their attributes and also vying for the same manufacturing facilities. These promotional efforts need to continue and to include the recruitment of more talent back to the automotive sector.

Capacity

Insufficient capacity is an easy problem to identify for which no rearview mirror is required.

When volumes decreased by significant double-digit percentage points, the suppliers who survived cut loose excess equipment, used parts from idle machines as repair parts for operating equipment, sold or shuttered plants and did everything possible to right-size operations.

Now that the industry is enjoying significant growth, those once-necessary actions have created problems.

Cutting capacity is relatively easy, certainly a lot easier than bringing new capacity online. Today, the auto industry is struggling to do so at the rate commensurate with demand.

In fact, at least one OEM chief executive has said publicly that they're managing their growth as a result of the restrained capacity of their supply base, not because they can't sell what they're making.

At the most basic level, growth in capacity will come from either injecting equity capital into the organization, or through borrowed funds.

However, the supply chain is reluctant to invest as they have in the past because they remember the difficulty of making payments on equipment that is sitting idle.

This is completely understandable when facing uncertainties that include the possibility of repeating what suppliers so recently experienced in terms of volume volatility.

Liquidity

On the surface, it would be logical to surmise that liquidity issues would disappear with growing volumes.

To a certain degree, that may be true for the stronger automotive suppliers. These suppliers survived 2008 and 2009 and have been able to maintain credit lines and to some degree, access to long-term capital.

But what about those suppliers that just barely made it through those dark days? These suppliers are experiencing challenges on several fronts.

Increasing business may place a strain on liquidity due to caps on revolving lines of credit or collateral levels being restricted. Lending institutions, though beginning to "loosen the purse strings," have long memories as well. They need to be convinced that the supplier's volumes are sustainable before they extend additional credit.

Gaining liquidity through asset based lending is a staple in the automotive industry. However, currently there are very few lenders that have an interest in lending against long-term collateral such as real estate, equipment or tooling.

Tiered suppliers are finding it difficult to arrange term financing with reasonable terms and conditions.

Of course, there are the suppliers with strong balance sheets that are able to obtain both short-term and long-term financing arrangements.

However, as stated previously, the lending sources are ready and willing to lend, but the suppliers are unwilling to commit to more indebtedness. They see a great short-term outlook, but fear a reverse of fortunes that can occur so quickly in the automotive sector.

So we have identified the constraints. That's great, but when is there time to properly address these issues?

One of the tricky things is that when we're talking about the things that impact a business, it might be the business that's causing the problem. The issues are compounded by the lack of resources available to do what's needed and the fact that these days, executives are generally overloaded.

Executives often find themselves doing two, three or more jobs, which can delay the execution side of things. This has become so acute that in some cases BBK provides interim management resources, as do other firms, to help the executives break the logjams and get the projects moving. The benefits outweigh the costs many times over in a majority of the situations.

In conclusion, the automotive industry as a whole is in much better shape than it was 36 months ago; indeed, a complete transformation would not be an overstatement.

Is it perfect? Hardly. The challenges being faced -- talent, capacity and liquidity -- are significant.

But the difference is that the automotive industry is not dealing with the kind of near-implosion scenario that it faced in the past. Now, both the challenges AND solutions are clear.

Suppliers need to step up and face the constraints with action plans and focused use of resources (internal and external). Be cautious, but not too cautious, and always remember that taking no action may well be the action that may well turn a rosy outlook into a thorny demise.

Keith Updike is a BBK managing director and has more than 27 years of experience in the automotive industry. He provides BBK clients with extensive expertise in world-class manufacturing practices and continuous-improvement methodology, targeting improvement in the areas of manufacturing, quality, supply chain and materials management. He is an experienced operations executive, having managed multiple facilities, union and non-union workforces, and in public and private companies.