Parts Suppliers: How To Avoid The Fate Of The U.S. Steel Industry

How prepared are suppliers to respond to the continued falling demand? And what is the way out of this continued decline?

The future state of the automotive industry remains unpredictable, with little end to the volatility in sight. The escalation of gas prices (save for a timely pre-election roll back) have made a larger than expected impact on consumer buying behaviors, affecting both large automakers and every segment of the automotive supply chain.

At the same time, the “buy American” slogan that helped provide a boost to U.S. automakers in the early half of this decade is waning. The result? Americans are buying less expensive cars that are reliable, aesthetically pleasing, and manufactured by non-American companies.

Just last month, trade credit insurer Euler Hermes ACI published a report focused on the industry outlook for U.S. auto manufacturing. The report predicts a bleak future for auto suppliers aligned with U.S. manufacturers, as they are being hit hard from both sides by the rising cost of raw materials and the continued production cutbacks of the Big Three.

How prepared are suppliers to respond to the continued falling demand? And what is the way out of this continued decline?

Some areas of opportunity are made evident by this painful situation:

     A supply chain is only as strong as its weakest link. Agility can be defined as achieving rapid manufacturing cycle and lead times and having the flexibility to change volume, not only up but also down, as well as change product mix rapidly while maintaining the consistency to deliver fast and flexibly – on-time each and every time. Suppliers play a key role in creating the agility necessary to be a strong link in the supply chain. 

Lean manufacturing strategies provide clear methods to drive with agility and at a profitable cost. Broadly deployed lean technologies such as electronic kanban management allow companies to make the break from push scheduling methods that react slowly to demand changes to pull-production and replenishment techniques that make agility a reality. Companies that truly employ a pull-based methodology at their core, benefit from shorter cycle times and increased ability for customization resulting in faster customer response times and happier customers.

Many companies have deployed pull techniques and tools over the years, but they are not the primary methodology that permeates through all of the automotive supply chain. This is a fundamental problem, and it creates weak links in the supply chain.

     Suppliers do their best to keep up with the demand communicated via the methods driven by the OEMs. Putting more flexibility into the final assembly plants enables the OEMs to drive the supply chain with more agility. Completing the drive to flexibility will require strong leadership to make the right decisions, even during tough times, to carry those decisions forward. 

It also requires a team effort from management, employees and suppliers in order to:

          • continue investing in tooling and quick-changeover flexibility to enable more flexible model mix
change labor contracts to enable production rate and work classification flexibility
 
          • embrace the use of temporary job classifications to manage seasonal or high demand spikes without having to retain those jobs during times of lower volumes
 
          • reward suppliers who invest in agility with a greater share of business and margins
 
          • use purchase contract guarantees to repair the broken trust of past short-term thinking and decisions that damaged the health of suppliers worthy of rewards and loyalty
 
          • move to shorter fixed production horizons to drive flexibility across the supply chain and respond pro-actively to changing customer demands.

The conventional wisdom of today argues that it is easier to shut plants down periodically than to vary the production rates, along with key resources, as demand and supply change. Changing that mindset, along with implementing concrete methods of greater flexibility, are absolutely critical steps for the OEMs to take in order to engineer a brighter future.

     With production rates currently reduced, now is the time to invest in reasonable projects to improve agility. It is exactly the wrong time to re-trench and put innovation on hold. Corporate management should drive plant and local managers to begin deploying programs that can improve production flexibility to change options and models on the fly, increase the velocity of material through the factory, and accelerate the ability to communicate and implement changes with suppliers.

Lean agility is a strong prescription for success. The suppliers that have the highest flexibility and lean inventory management practices in place today, will weather this downturn better than those suppliers without that capability. 

But no one can weather 10-to-20 percent cuts in volume without significant pain. The OEMs need to drive real flexibility – starting on their own shop floors first and then across the whole supply chain – if they hope to avoid the fate of the U.S. steel industry.
 
Even amidst financial and industry analysts such as Euler Hermes stating otherwise, the North American automotive industry remains a strong manufacturing sector with significant opportunities for growth and a prosperous future. However, success moving forward requires greater, more coordinated attention toward the various lean initiatives in motion. By focusing on establishing a more demand-driven supply chain with lean agility, U.S. automakers can create a more cost-effective and competitive manufacturing model that benefits everyone involved, including consumers.  

For manufacturers struggling to stay responsive and profitable, this is the only way forward.

Contact the author at dave.gleditsch@pelionsystems.com.

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