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6/30/2009
05:53 PM
Bob Evans
Bob Evans
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30% Of Auto-Industy Supply Chain Will Die, Expert Says

With bankrupt Chrysler about to resume production and as both it and General Motors struggle with huge losses and drastic new ownership structures, at least 30% and perhaps even 40% of the suppliers that feed the U.S. automobile industry will not be able to survive, says a restructuring expert.

With bankrupt Chrysler about to resume production and as both it and General Motors struggle with huge losses and drastic new ownership structures, at least 30% and perhaps even 40% of the suppliers that feed the U.S. automobile industry will not be able to survive, says a restructuring expert.While it is theoretically possible that the new owners of those companies - the autoworkers' unions, the federal government, and embattled Italian car maker Fiat - will be able to synchronize the deaths of hundreds of companies across the massive and complex automotive supply chain so that no critical shortages emerge during these difficult times, that's not an outcome you'd want to bet your paycheck on.

For CIOs across all industries, this potential disaster can serve as an early warning about the need to constantly reassess the resilience of their own supply chains and reestablish standards for operational viability and financial health. Shakespeare told the story of how for want of a nail a shoe was lost, and how that small and at the time insignificant supply-chain glitch ultimately turned the tide of an entire battle.

But this isn't fiction, and Chrysler and GM are not in positions that can tolerate additional excessive stress on their operations. So if it is true that, as USA Today reports, "smaller suppliers may begin buckling because they don't have the cash to start making parts," then we're all going to learn first-hand just how resilient and nimble those two car makers can be under the most demanding circumstances.

But given the new reality in that once-proud business, Chrysler and GM would seem to have very little choice but to plunge ahead and make the best of what could be a very bad situation. Most big suppliers are expected to be able to meet demand, according to USA Today,, but smaller suppliers that didn't get cut in on a $5 billion aid package from the federal government might not be able to make it:

But it doesn't help the smaller suppliers that make parts for components the big suppliers assemble and ship to automakers. A rear-view mirror missing its glass could stall an assembly line.

Laura Marcero, a restructuring expert at Grant Thornton, says the supply base needs consolidation, even if it means liquidations. The auto industry needs 30% to 40% fewer suppliers, she says.

But those closings need to be orderly, she says. "If they go down without much notice, it's going to impact back up the chain," she says.

"Orderly closings" - that seems like a strange requirement to hang on a small business that's struggling to stay alive even as the inevitable happens. And if I were GM and Chrysler, I would wonder long and hard about whether those 30% or 40% of small suppliers will find it in their best interests to go down gently, ensuring an orderly closing regardless of whether that's in their best financial interest. "Orderly closings" is an idea that might sound nice in term papers, but that concept doesn't exactly cut a whole lotta ice in the real world when businesses, jobs, careers, and perhaps even lifetime savings are on the line.

So, CIOs, time to take a long hard look up and down your own supply chains to get a sense of what the likely survival rates appear to be in your industry for the next 12-18 months. Do you have that type of visibility? Do you have transparent access to key indicators for your key suppliers? Do you have redundant sourcing ready to jump online? Are you actively preparing to be ready for these types of unpleasant outcomes, or are you deciding instead to say that you just don't have the budget to do so?

I think it's certainly worth a second, third, and even fourth look. Because while "orderly closings" are merely nuisances when they happen several steps away in the supply chain, they're downright painful as they get close - even too close - to home.

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