Weak links: what's holding the supply chain together

By now, the 17-day strike last March at the Delphi brake plant in Dayton, OH, the resulting shut-down of 26 General Motors Corp. assembly plants and the nearly $1 billion hit in the company's first quarter earnings are old news. The lessons to the industry, however, are still being revealed.

For some, the Delphi incident emphasized the importance of maintaining healthy labor relations. For others, it merely underscored the critical need for a coherent component sourcing strategy. While both of those issues are important, there is a larger issue at stake concerning the very robustness of the overall automotive supply chain.

Supply-chain management strategy has advanced substantially over the past 10 years. The Big Three have pared down their direct supplier list, working with only those best equipped to design, prototype, develop, test, and manufacture components, assemblies, modules and systems.

Their goal is a tightly linked network of suppliers able to deliver zero-defect parts to OEM assembly and component plants, just in time, at the lowest possible cost. OEMs expect effective supply-chain management to drive total systems costs to the lowest possible level. Let's examine the extent to which they have achieved these goals.

To their credit, ties between OEMs and Tier 1 suppliers certainly have tightened. During the past 30 years, OEMs have never been more closely integrated with their suppliers than they are today. Suppliers provide ever-growing design and system integration services. Fewer suppliers are responsible for more value-added. Supply chain linkages are tight, and getting tighter.

By doing business with only the most proficient suppliers and assigning them design responsibility, OEMs have improved part quality. Average supplier parts-per-million defects (PPMs) have been trending downward. And many of today's PPMs are for packaging and labeling problems, rather than more critical dimensional or appearance rejections. Part quality is certainly better than ever before.

Although premium freight remains a fact of life, Tier 1 suppliers continue to improve their performance in delivering parts reliably on a just-in-time basis. The number and complexity of potential "failure modes" for late part shipments into assembly and component plants are immense. Considering the number of parts going into an automobile, it's surprising that plant shutdowns due to part shortages aren't commonplace.

At least three key forces have contributed to the reduction of supply-chain costs for purchased components, modules, and systems. These include Big Three pricing practices, institutionalization of continuous improvement (CI) processes within supplier organizations, and the assignment of design responsibility to suppliers (i.e., the most effective way to enable true cost reduction). So while additional cost-reduction opportunities are plentiful, substantial progress already has been achieved.

The supplier industry appears to be more lean than ever before. Can we conclude the supply chain is therefore robust? I'm not sure.

One measure of supply-chain robustness is the probability of a Tier 1 supplier disrupting production at multiple or many OEM component or assembly plants because of a parts supply interruption (e.g., the Delphi strike). Although most OEM executives don't care to think about this much, the probability of this happening is greater than is generally perceived.

All of us know which supplier companies are critical to their OEM customers. These are frequently plants manufacturing sole-sourced parts -- selling to many customer plants. Extensive assembly-plant automation (and its tight tolerancing) and custom-engineered components make the part-substitution issue even more difficult. Typical applications include stampings, fasteners, electrical and electronics parts, powertrain components and engine-management components, to name just a few.

Concentration of a family of parts in a single facility exposes the supplier and its customer to substantial business risks. They aren't large when viewed from the perspective of a single specific supplier, but when you tally up these risks for an OEM or the entire industry they can be huge. Just ask GM.

Ford Motor Co. and Chrysler Corp. aren't exempt, either. They may even be more susceptible because of their more heavily concentrated and compact supply bases.

OEMs should strive to obtain an appropriate balance between reducing the risk of supply interruption and the desire to have a few and only the most competent part suppliers. This balance won't come easily or quickly, but the Delphi incident and its cost to GM should serve as a warning: A chain is only as strong as its weakest link.