Soaring raw material costs and an unprecedented number of supplier bankruptcies are challenging the automotive supply chain like never before. Auto maker purchasing departments have become pivotal to the success, and survival of both suppliers and the customers they serve.

Ward’s 7-part series stems from interviews with the purchasing chiefs of GM, Honda, Chrysler, Nissan, Ford and Toyota. This is Part 3.

RAYMOND, OH – Every purchasing executive has metrics for evaluating suppliers. But in a scary new era of supplier bankruptcies, Honda of America Mfg. Inc.’s Bob Nelson has taken supplier monitoring to a new level.

He has a U.S. government patent on one of his methods.

Nelson, assistant vice president-North American Purchasing at HAM, along with two other co-inventors, were issued a patent May 16 on an early warning system for identifying troubled suppliers.

In an interview at Honda’s North American Purchasing offices here, near HAM’s sprawling Marysville manufacturing complex, Nelson agrees you don’t always need a fancy system to find a troubled supplier these days.

Giants such as Delphi Corp. and Dana Corp. are in the headlines. Even innovative smaller companies such as Meridian Automotive Inc., which supplies the award-winning composite in-bed trunk for the Honda Ridgeline, is reorganizing under Chapter 11.

And despite being one of North America’s healthiest vehicle producers, building 940,000 vehicles and 1.5 million engines in the U.S., HAM had 18 suppliers in 2005 that were in some stage of bankruptcy.

Many suppliers have run into trouble because of soaring raw material prices or because they took on too much debt trying to expand. Those are not the kind of problems his system is designed to detect, Nelson says.

Instead, his system is aimed at flagging more subtle early warning signs that will allow HAM to intervene early and hopefully guide the supplier back to stability before it gets too deep into financial difficulties.

In the computerized system, indicator values are based on supplier data related to management, quality, delivery, cost, profitability and other information. Even a slight change in one area, such as a higher employee turnover rate, will throw up a red flag because a loss of institutional experience might cause problems down the road in other interrelated areas of quality, delivery, cost and, ultimately, profitability.

“We have a model where we try to watch the operational stability of our suppliers, and when we see something beginning to spiral out of control, or if their deliveries are becoming later or their problem rate is going up, then we try to address that issue early enough so we can prevent (bigger problems),” Nelson says.

“If we can catch it early, we usually can go in and give them some suggestions and help them resolve it. But if it’s a problem from highly leveraged debt…then there’s not much we can do.” One of Nelson’s biggest concerns this year is HAM’s launch of an unusually large number of new products in a relatively short period: the Acura RDX cross/utility vehicle at the Marysville, OH, plant, the CR-V CUV at Honda’s East Liberty plant in the fall and a completely redesigned MDX CUV in Alliston, Ont., Canada, this fall as well.

Even though each new product is being built in a different plant, which should minimize HAM’s launch problems, many suppliers likely will be delivering components to all sites from single points, which could create production bottlenecks.

For those suppliers that have parts on all those different models, “We want to make sure they are properly prepared,” Nelson says.

Whether or not that turns into a problem, Nelson says to check back next year.

Another issue that has caught Nelson’s attention is the recently released Planning Perspectives Inc. study of OEM/Supplier Working Relations. HAM registered a significant drop on a question regarding supplier trust of OEMs compared with the last two years.

Nelson says he’s not sure why suppliers ranked HAM lower, but he says the auto maker will be looking internally to understand the issue, and “see what we can do to improve it,” he says.

“I think the relationship is important. Honest and open communications with suppliers having difficulty is crucial, but I think that same level of communication is necessary for talking about future business and what their expectations are.”

dwinter@wardsauto.com