Shipments Stable

In the U.S. today, the potential for supply disruptions is high as major Tier 1 suppliers endure painful restructuring and labor unrest — some of it under the watchful eye of bankruptcy judges.

Despite the turmoil, purchasing executives for North America's top six auto makers tell Ward's they are confident suppliers will ship the parts necessary, despite internal reorganizations and the sale or closure of component facilities.

“Many of the suppliers who are going through restructuring, clearly they are managing a very well thought-out restructuring process, with their primary goal of securing the ongoing value at the entity they are managing,” says Andrew Hinkly, executive director-Americas production purchasing operations for Ford Motor Co.

“To do that, they recognize that a continuous supply of products now — and the ability to fulfill their commitments on new-product development — is absolutely critical to coming out the other side of a restructuring as a viable entity,” Hinkly says.

Like other auto makers, Ford has steady interaction with bankrupt suppliers and receives updates from the management of those companies. For the most part, that includes a pledge to maintain a steady flow of parts.

“Absolutely, there is that level of commitment from the well-organized, well-managed entities,” Hinkly says, adding that occasional problems have surfaced.

“There are one or two, unfortunately, that perhaps the restructuring came up on them in a disorganized manner, and they have struggled to ensure supply,” he says. “With those, we've managed to work through the issues, and we haven't experienced any supply disruptions as a result of supplier restructuring.”

Chrysler Group says it seeks similar assurances from suppliers in bankruptcy. More than two dozen such filings have occurred among U.S. suppliers in recent years.

The point of bankruptcy court is to allow a company with excessive debt to maintain its operations while protecting it from creditors during the recovery period.

“There's a whole set of people who are involved in getting that assurance,” including the judge and restructuring officer, says Peter Rosenfeld, Chrysler executive vice president-procurement and supply.

“Typically, suppliers will do everything they can in bankruptcy to ensure we have continued supply,” he says. “One of the reasons why companies go into Chapter 11, as opposed to Chapter 7, is they want to prove to be a supplier that emerges as a going concern.”

As Delphi Corp., the No.1 auto supplier in North America, prepares to close or sell 25 of its 33 U.S. plants and attempts to scrap its union contracts with hourly workers, General Motors Corp. admits to stockpiling several weeks' worth of parts in the event workers go on strike in protest.

The United Auto Workers union has been threatening a strike since Delphi's Oct. 8 bankruptcy filing, but negotiations toward an agreeable settlement, including employee buyouts, are continuing between the union, Delphi and former parent GM.

Rosenfeld admits Chrysler also stockpiles parts routinely as suppliers face impending expiration of particular labor contracts.

“We keep track of all those contracts. And as the date approaches, and we don't see a resolution, we begin a process of banking components,” he says. “It's pretty well known, and suppliers know it is part of our requirements.”

Whether or not a supplier is in Chapter 11, Rosenfeld says Chrysler attempts to “protect ourselves” when a supplier labor contract is unresolved. “It's easier in some cases than in others,” he says. “It's a lot easier to bank fasteners than it is larger components.”

But Chrysler is not banking components simply because suppliers are bankrupt. “We try to be very involved in the Chapter 11 workout process with our suppliers,” Rosenfeld says. “We try not to run from suppliers (in bankruptcy). In fact, we try to be part of the support structure.”

Beyond labor contracts, Rosenfeld admits there could be potential for supply disruptions as component producers downsize and sell off plants. But those sales do not occur overnight.

“Typically, there is a worked-out plan on how we will move forward,” he says. “In almost every case, these suppliers want to continue to be suppliers to us. It behooves them to work with us and us with them. Why would they shut the lights off overnight and leave us hanging? It's not really in the concept of being a going concern.”

Occasionally, supply-chain problems surface that have nothing to do with bankruptcy.

At an April town hall meeting of the Original Equipment Suppliers Assn., a crowd of about 600 people was flabbergasted by a comment from GM's purchasing chief, Bo Andersson.

A supplier in the audience asked how he should deal with a problem at GM if the matter has not been addressed by his primary contact within the auto maker. Andersson invited the supplier to bring the problem directly to him or to his senior management.

And if the problem still has not been resolved, Andersson told the crowd, the supplier would be justified to stop shipping parts. The nervous energy in a room full of GM suppliers was palpable.

In a recent interview with Ward's, Andersson stood by that statement, saying a supplier is justified to stop shipping parts — but only as a last resort.

“If you feel you need to use the lever to get attention, I think it is OK to use it,” he says. “I don't recommend people do it as a first resort.”

Asked if he could recall cases in the last two years in which suppliers have stopped shipment, Andersson says, “Not really.” Since becoming head of global purchasing in December 2001, Andersson says GM never has missed a production day.

“Some days we have been very close,” he admits.

GM suppliers are encouraged to put a deadline on resolution of a problem and not allow problems to fester.

“If there are issues open for a year, it cannot be that important to you,” Andersson says. “Either you deal with it, or you say, ‘I've done this now for six months. I would love to continue, but I cannot do it. You are forcing me to do something different. I give you two more weeks. After that, I cannot continue to deliver these parts at this price.’”

Too often, people are “way too sensitive too long, and then maybe they are too impatient in the end,” Andersson says, adding problems that age usually are harder to solve. “If you catch it early, you can typically fix it much faster.”

Andersson says he is not concerned that supplier restructuring will cause disruptions at GM. “We have situations where we get surprised,” he says. “I can think of at least two companies…waking up very suddenly and needing to restructure. A month before, everything was fine.”

Ford's Hinkly says there is no reason why a supplier should consider stopping parts shipment, and that any problem can be resolved without resorting to such tactics.

“I think if a supplier feels they have to stop shipping to a customer, then it's symptomatic of some deep-rooted issue,” Hinkly says. “If an OEM customer feels that is their way to signal there is an issue, then I think, again, it is symptomatic of a deep-rooted issue.”

Hinkly says Ford has not had to deal with any suppliers stopping shipment because of a dispute with the auto maker.

“We have an open-door policy both internally and externally,” he says. “If suppliers feel they are not getting the resolution they need, there are many other approaches that need to be exhausted before we ever get into a situation where product isn't being shipped.”

Hinkly is “absolutely convinced” Ford suppliers feel the same way. “The last thing they want to do is threaten production as a way of getting attention,” he says. “It's not something we'd ever want to see in any of our relationships with our supply base.”

Toyota Motor Engineering and Mfg. North America also says its suppliers in bankruptcy have provided assurances part shipments will not be disrupted.

“Most of my suppliers in Chapter 11, like Delphi, Collins & Aikman (Corp.) and Dana (Corp.), are doing a great job to ensure continued supply to Toyota,” says Osamu “Simon” Nagata, vice president-purchasing.

“We appreciate these companies' efforts to secure our production,” he says. “Dana has been doing a very good job to manage their Tier 2 suppliers and their equipment suppliers to avoid production disruptions.”

Likewise, Nissan North America Inc. says there have been no plant shutdowns or disruptions to date, but the concern is valid.

“What scares me the most is the Tier 2 and 3 suppliers, because they are not as visible,” says John Miller, vice president-purchasing. “Sometimes those problems are hidden until the last moment — then it hits you.”

Nissan constantly monitors the overall health of its suppliers and is generally willing to assist those asking for help, Miller says.

“We have made duplicate tools when some things were not clear,” he says. “Then the issue becomes the relationship. It's not always comfortable. The worst thing you can do is surprise us. Give me a fighting chance to help you do something about it.”

In the end, the rash of bankruptcies could yield a pool of more stable suppliers. GM's Andersson already has praised Cadence Innovation (formerly Venture Industries) of Sterling Heights, MI, for emerging from the process a much stronger entity.

But Chrysler's Rosenfeld hesitates at the suggestion this newfound stability is tantamount to a silver lining in the bankruptcy process.

“I hate to call it a silver lining,” he says. “Is a supplier in bankruptcy better than one that is not? No, because there are certain restrictions on the way we operate. There are all sorts of lawyers involved and financial consultants and creditors, and a whole bunch of other people involved in a relationship that should just be between a company and us.”

Suppliers choose bankruptcy, Rosenfeld says, because they want to be healthier in the future.

“I'll leave it to you to decide if ‘healthier in the future’ means a silver lining,” he says. “That's our law. It's supposed to make things better in the future.”