Risk-averse suppliers become bottlenecks, pinch automakers

By David Sedgwick
AUTOMOTIVE NEWS

Published: April 15, 2013 10:40 am ET
Updated: April 15, 2013 10:43 am ET

Related to this story

Topics Automotive

DETROIT — As automakers in North America crank up production, suppliers that chopped capacity during the recession have become a critical bottleneck.

Automakers and suppliers are suffering glitches:

  • Hyundai Motor Co. is leery of adding assembly plants globally because its suppliers are unprepared for higher production.
  • Toyota's North American purchasing chief says his company has a watch list of 40 suppliers that are struggling to fill orders, twice as many as last summer. Honda's North American purchasing boss says he is closely watching about a dozen suppliers.
  • Ford Motor Co. is struggling to recover from a rocky production launch for its Mexico-built Lincoln MKZ sedan. Ford sources, who spoke on condition of anonymity, said two suppliers contributed to the problem.
  • Sixty-two percent of North American suppliers that responded to a survey have adopted extended production hours, such as triple shifts, to maintain around-the-clock output, according to the Original Equipment Suppliers Association.

The recession is to blame. Scores of suppliers landed in bankruptcy court, closed plants or cut capacity to stay afloat. Now, as production orders rebound, many suppliers are reluctant to splurge on plant expansions.

Suppliers are trying to keep up with North American light-vehicle production that is expected to reach 15.9 million units this year, says consulting firm IHS Automotive. It was 12.0 million in 2010.

Asked to boost production, many suppliers say they finally are making money again and are loath to take risks.

The most serious production bottlenecks could occur in 2014, when 43 launches are scheduled in North America, up from 20 this year, according to IHS Automotive.

"We do run the risk of more sporadic interruptions," says IHS analyst Mike Wall. "It tends to happen at the Tier 2 and Tier 3 level. I'm not nearly as concerned about the big Tier 1 companies, which have a lot of cash."

To prevent problems, automakers are looking for signs of stress among suppliers, and around-the-clock operations are one indicator of possible future trouble because few options remain to boost plant capacity.

Toyota Motor Corp., for example, expanded its watch list after announcing plans in August to boost production of vehicles, engines and transmissions.

And the automaker had scheduled four North American production launches this year for the redesigned RAV4, Corolla, Tundra and Highlander -- a heavy workload for Toyota and its suppliers.

If a supplier responded with plans to expand production to 6 1/2 days or 7 days a week, Toyota typically assessed the supplier's operations, says Bob Young, Toyota's North American purchasing chief.

Around-the-clock production "immediately throws up a flag," Young says. "It means we have to visit them to understand their true condition."

Honda Motor Co. maintains a watch list of 10 to 12 suppliers that might suffer production bottlenecks, says Tom Lake, Honda's North American purchasing chief.

That's a relatively small portion of Honda's 632 North American suppliers, and the list has shrunk since the recession.

But just one failure by a key supplier could shut down an assembly plant. This year, Honda dispatched a crisis team to a couple of suppliers, and Lake says the company averted disruptions.

Most of the companies on Honda's watch list are Tier 1 suppliers, Lake says. Still, Honda has checked its Tier 2 and Tier 3 suppliers to identify potential bottlenecks.

Lower-tier suppliers "tend to be smaller companies, and the effect of one or two bad decisions can be devastating," Lake says. "Second, they tend to be juggling demand from more customers."

Last year Honda produced a record 1.7 million vehicles in North America, and the company may top that this year. But Lake says he recognizes that suppliers may be unable to accommodate every customer's demand for more parts.

"We understand that we can't always say more, more, more," Lake says. "Because so many automakers are increasing production, suppliers have to pick and choose where to make an investment."

Many suppliers appear reluctant to build plants in the wake of the recession, when they had to close factories, lay off workers and eliminate marginal products.

Instead, they are squeezing more productivity out of existing assembly lines.

In its factory in Findlay, Ohio, Freudenberg NOK became more efficient at producing engine seals by simplifying assembly.

The company is replacing its injection molds, which produce four to six seals at a time, with smaller machines that make just one seal at a time.

The switch improved quality -- bad parts are down from 50 per million to three -- and productivity. Previously, one worker tended two machines. Now one employee can handle three or four.

"The idea is to make our production simpler," says Ted Duclos, vice president of Freudenberg's fluid power division. "We are making things smaller and simpler."

The Findlay plant now produces 750,000 parts per day -- 5 percent more than before the change -- but with eight work cells, instead of 10.

And the Findlay plant continues to seek productivity gains. Says Duclos: "If you stand still, you fall behind."


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Risk-averse suppliers become bottlenecks, pinch automakers

By David Sedgwick
AUTOMOTIVE NEWS

Published: April 15, 2013 10:40 am ET
Updated: April 15, 2013 10:43 am ET

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