Chrysler, General Motors, and 55 suppliers took the bankruptcy reorganization route as some 200 suppliers liquidated their business or simply left the automotive industry in the past two years. The ripple effect is still creating waves.
As banks continue to evaluate the current state of automotive providers' business operations, numerous suppliers will realize a greatly reduced line of credit or find they have no credit at all.
"The radar is absolutely at peak from a liquidity crisis point of view," said Mike Thibideau, Vice President of Purchasing, Logistics, and Information Services at Webasto Roof Systems Inc. and a participant on the "Chief Purchasing Officers" panel at the April 12-15 SAE 2010 World Congress in Detroit.
For at-risk suppliers, Thibideau said, the potential loss of a line of credit is akin to "the bank standing in the shadow with the hood on—waiting to make it maybe a little worse."
Gene Tabor, General Manager for Purchasing at Toyota Motor Engineering & Manufacturing North America, said a credit crunch is indeed worrisome. "We may not see it as dramatically as we once did because it's not as visible to us. But you go down below the Tier 1s to the Tier 2s and 3s, and a credit crunch can still have a dramatic effect on the ability to recover, or recapitalize, or to do some of the things that suppliers will need to do."
Ford officials have been tracking the supply base's financial health for months. "We still see a significant number of suppliers out there that are currently at risk," said Michael Taylor, Ford Global Interior Purchasing Director.
Automakers have interrupted production numerous times in the past two years. That on-again-off-again process is problematic to suppliers. "It hurts the Tier 1, Tier 2, and Tier 3 suppliers perhaps more than it does us when we stop and start—trying to level the inventory," said Taylor.
Some suppliers are not prepared to produce parts in large volumes after trimming their workforce and making other cuts to stay afloat in recent months.
Dan Knott, Senior Vice President of Purchasing for Chrysler, said, "We've had a lot of skepticism in the supply base, but we've been very transparent—showing key suppliers why our volume forecasts are the way they are."
In the third and fourth quarter of 2010, Chrysler will release eight refreshened vehicles (Chrysler Sebring and Town & Country; Dodge Avenger and Grand Caravan; and the Jeep Journey, Compass, Patriot, and Wrangler). Later this year, the automaker is slated to launch all-new versions of the Dodge Charger sports car and Chrysler 300 sedan, as well as an all-new Dodge utility vehicle and the Fiat 500 subcompact car.
Staying on schedule with parts sourcing is vital to Chrysler.
"Every time that I source a program late to the supply base, I put the supply base at risk of failure because I've taken weeks—and possibly months—out of their program. We will not do that. At every staff meeting we look at: 'Did we source our purchase orders on time?'" said Knott.
How to help the supply chain is on the minds of many industry insiders.
Toyota has a flex-payment option for tooling "to better support supplier cash flow needs. We're also offering our support to suppliers through risk-management education activities," said Tabor.
Bob McConahy, Vice President of Purchasing at Fluid Routing Solutions, said many sub-tier suppliers think adding equipment is the sole option for addressing large-volume production forecasts. But other options, such as getting additional throughput with existing equipment or buying used equipment, can make financial sense for suppliers.
"There are alternatives to putting down hundreds of thousands of dollars to buy a new machine," said McConahy.
Ford netted substantial savings from parts simplification, shared components, and a revision of its global product development system. "Our engineering costs for a typical new vehicle program have been reduced by 60% since 2005. And we will make even further efficiency improvements over time," said Taylor, who pointed out that the changes mean "more consistent volumes for our suppliers."
More consistent communication can be invaluable to suppliers and automakers.
"The dramatic changes taking place in the industry will require a much closer working relationship throughout the value chain—from the OEMs and the Tier 1, 2, and 3 suppliers to the raw material suppliers," said Neil De Koker, President and CEO of the Original Equipment Suppliers Association.
Toyota officials are committed to strengthening the communication bond with suppliers. "Listening to suppliers allows us to understand what negative impacts we're having on our supply base. And we do recognize that [there are] negative impacts when we do certain things inside our company. So it's important for us to listen to our suppliers," said Tabor.
Since its bankruptcy reorganization, Chrysler is re-engaging its supply base. "We respond to them. We're transparent. We explain our decisions. But it's not always a love-in," said Knott, adding, "It's a collaborative business. If we collaborate, we find opportunities to mitigate the risks."