I was talking with the head of a global sourcing program for a major tier one automotive company last week and he painted a doom and gloom forecast for the automotive supply chain. In his view, as many as 40% of automotive suppliers will be forced out of business in the coming decade (and perhaps far sooner). The fundamental economics of how the Big 3 (especially Ford and GM) treat their suppliers has created a downward spiral where many manufacturers are barely making a profit, and in many cases are actually losing money from unprofitable relationships. The latest news from Delphi and GM is not helping matters, either. Perhaps most important, if this top-down unraveling of the industry occurs, it will have tremendous ramifications on supplier viability across manufacturing.
Unfortunately, the impacts of cascading supplier bankruptcies within automotive will have drastic implications across the manufacturing supply chain. Why? On the tier two and three levels within manufacturing, there's significant overlap in the supply community within the automotive, A&D, and diversified manufacturing sectors. So there's a good chance that a supplier of forgings or wire harnesses to the automotive industry is also providing the same types of materials to A&D or other industrial organizations. Even for manufacturers who think they’re completely out of the automotive supply chain, it's the indirect ties from lower tier suppliers who also supply to the GMs and Delphis of the world that present significant risk profiles. As I've heard Jim Lawton of Open Ratings say constantly, when it comes to supply risk, it's what you don’t know -- even if it's two or three tiers down -- that can hurt you.
This further reinforces the need for all manufacturers to invest in supply risk management capabilities that provide sufficient warning of impending supplier financial and operational challenges before it's too late to act. The good news is that manufacturers can turn to vendors like Open Ratings (now part of D&B) or can create their own systems (a path Honda took years ago) to address this challenge. But whether you look externally or piece together something in-house, there's not much time to put in place an early warning system for supply risk. This is especially true given what automotive industry insiders are expecting. If I were a Wall Street analyst writing about the financial health and stability of a publicly traded manufacturer in today’s environment -- or if I were a private equity investor looking to purchase stakes in privately held companies -- one of my first pieces of due diligence would be to understand an organization's supply risk management approach and early warning systems. Studying the balance sheet and modeling cash flows is no longer enough to gain a full understanding of the downside risks that manufacturers have in today's unstable environment.