Industry Announces 15 Percent Reduction in Supplier Headcount

Automotive Industries, August, 2001 by David Andrea

New CAR survey identifies concerns and problems in the supply chain.

Did the headline catch your attention? Headlines like this typically follow corporate layoff announcements and grab the lead of newspaper and TV stories. While the auto industry could not formally make such an announcement, current pressures within the industry and supply base could make this headline a reality. Just like personnel layoffs, however, the real issue with a supply base reduction is whether the right suppliers are being taken out. The selection process must be by choice, not by default.

Too often the layoff headline is the result of pressures to respond to cost cutting and earnings pressures or outsourcing and business strategy trends. And all too often the intended results do not follow, as companies find employees are their greatest asset and that a dedicated employee rather than a contract worker better delivers critical aspects of a business. Thus, as so often happens, the announced layoff numbers do not match with the actual layoff count.

Excessive costs relating to vehicle launches, warranty costs and recalls are all interrelated to how well integrated the supply base is into the product development process -- market share and premium pricing is interrelated to how freely innovation is flowing from supply base resources. It is these market realities that will force the current tensions between the suppliers and manufacturers back in check.

Where did the 15 percent used in the factious supplier layoff headline come from? It is inferred in the preliminary results of a survey the Center for Automotive Research (CAR) is conducting on the financial health of the Michigan automotive supply base and whether the supply base has the financial wherewithal to adapt and prosper in the industry's new operating environment.

While CAR is still collecting data, early responses from the surveys raise many red flags for the supply base, and several yellow flags for the vehicle manufacturers and systems integrators they support.

Looking at specific operating performance and investment constraint responses, the current state of the industry is putting some 12 to 17 percent of the supply base at risk (hence the 15-percent average). Certainly some of this is the natural process of business creation and destruction, where certain suppliers cannot (or will not) make the transition to new market demands. However, vehicle manufacturers must make sure that suppliers pressured to sell out or get out are not those providing critical capacity, technology, or innovation.

While the survey focuses on six critical areas -- company performance and expectations, prices and procurement processes, cost pressures, investment, barriers to investment and investment policies -- some interesting results are showing up in the prices and procurement processes section.

Of the respondents, 25 percent answered that on most or all of their programs the price they received covered all costs but provided no return (see chart A). Confirming this fact, 43 percent of the supplier respondents answered that the price they received never or rarely covered re-capitalization costs. Just 12 percent of the respondents believe their pricing only covers variable or operating costs on most or all of their programs. Without coverage of fixed costs, no conglomerate is going to allocate the needed capital to automotive operations, and no pure-play auto supplier is going to keep pace in increasing quality, productivity and innovation demands.

While everyone agrees the auto industry is not for those who are weak or timid, the industry does not need to make the business worse by being its own enemy. Looking at procurement policies, 48 percent -- the largest single response -- of the suppliers identify delayed payments by customers as a significant barrier to reinvesting for improved competitiveness (see chart B). Another issue, clearly in the control of the industry, is the treatment of intellectual property. A full 78 percent of the respondents believe current intellectual property treatment is a potential investment barrier. And 28 percent see customer price-down programs as an insurmountable barrier to channeling investment into their business. These identified purchasing practices barriers will eventually come back to harm the industry in the form of "you get what you pay for."

Perhaps the biggest looming issue is the emerging treatment of warranty and liability matters. While a broad sample base median shows this issue as only being a "moderate" barrier, beneath the surface there is a different story. Seventeen percent identified this issue as very significant Whether by financial collapse after litigation or a strategy to exit the business to reduce business risk, this issue has the potential of significantly forcing suppliers from the business -- both those that should exit and those that could be critical to a vehicle manufacturer or a systems integrator.

Of each of the investment categories required by customers, the suppliers overwhelming will support customer requirements -- specifically for advanced design technology, quality improvement systems and information and e-business systems (see chart C). Although 17 percent of our respondents indicate that while advanced equipment and tools and information and e-business systems are required by their customers, they cannot meet the investment requirements. These suppliers have a high probability of being added to the supplier attrition pool.