Out With Suppliers! Vertical Integration Rises Again in Detroit …

While I'm certainly not the first to pick up on the topic of vertical (re)integration of the supply chain in Detroit, I find the subject fascinating indeed. Last week, Tim Minahan penned a post on the subject over on Supply Excellence. Tim reports that "Beginning this spring, Ford Motor Company -- the birthplace of Henry Ford's vertical integration manufacturing model -- will be the first to take back assembly work, starting with the instrument panels for its Ford Taurus and Lincoln MKS sedans. General Motors and Chrysler also plan to in-source select sub-assembly work, although neither automaker has revealed definitive plans yet."

If you read between the lines of Tim's analysis and a news write-up in the Detroit Free Press, it becomes clear that there are a couple of reasons on the surface for such a move. The first, clearly, is to add and preserve union jobs. A new wage structure for union workers who are new to the job allows the Big 3 to pay roughly the same labor rates to employees in certain areas as their suppliers pay. The second reason which Tim and others opine is to reduce supply risk. After all, if you believe that somewhere close to 50% of the US automotive supply base is destined for insolvency -- as a handful of turnaround and analyst reports have pointed out -- then it does make sense to bring at least some production in-house as a hedge against supply disruptions.

But despite these benefits, I'd argue that in the long-run, vertical integration could in fact come back to bite Ford and its Detroit OEM brethren. Why? Because the Japanese know that much of the innovation in the automotive industry comes from outside -- in other words, it comes from your supply base. Do you really think that those parts suppliers providing components and piece parts to both the domestic and Japanese OEMs will be likely to share their ideas with their Detroit customers when they risk not only losing a potential platform contract to another supplier, but now their own customer as well? It's unlikely, especially considering the Japanese are more than willing to pay for innovation in the form of long-term, stable relationships and profitable relationships (for suppliers).

This is further proof in my book that Detroit is digging itself into a digger and deeper hole. And Spend Management -- or a misinterpretation of Spend Management practices -- is front and center in picking up the shovel.

- Jason Busch

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