Why is the Automotive Supply Chain Failing?

The Detroit Free Press recently ran a story that captures the two essential reasons why more automotive suppliers will fail in 2010, despite a forecasted upswing in the market. According to the story, the fundamental challenges are twofold: First (and perhaps most important over the near term), as the number of new orders increases, suppliers are having difficulty obtaining the financing required to meet demand. If they can't finance production requirements, they're as good as out of business. The second challenge will manifest over time, and will be the result of procurement-led supplier-rationalization strategies. The article notes that in this scenario "automakers also are consolidating their design into fewer global platforms and jockeying for high-volume contracts on those platforms." In other words, OEMs and tier ones are playing the volume-leverage game in hopes of reducing costs further.

I'd be willing to bet that in the long term, current supplier challenges will ultimately hurt their customers. As the options available to them diminish while supplier lists shrink and volume-leverage strategies become the norm, OEMs and tier ones will ultimately increase their own supply risk and reduce future savings potential. The notion of "too big to fail" in the automotive supply base just doesn't hold true -- ask Delphi or Visteon if you have any doubts. Moreover, if you look at where the real innovation in procurement cost reduction is coming from these days within the automotive sector, you see that it's in tapping the creativity of suppliers. In this regard, U.S. OEMs could learn quite a bit from Indian upstarts such as Tata, which creatively engaged its supply base to not only hit aggressive pricing targets, but to come up with their own specifications and designs to further reduce costs before they're locked into the platform specification.

I fear that if the automotive market continues down its current supplier-rationalization path and does not invest in those suppliers still standing after the nuclear automotive winter of 2008, they'll ultimately shoot themselves in the tire -- without a spare or run-flat technology to get moving again. This cycle, of course, is nothing new; after all, this is the sector that pioneered tactics such as arbitrarily extending payment terms and paying invoices at a discount without supplier permission.

Which is perhaps why, despite the new faces running the purchasing scenes in Detroit in recent years, not much has really changed. Perhaps the banks are the ones that see this the most, and rather than throw good money after bad with new lending, would prefer to cut their losses now.

Jason Busch

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