2012 Dykema Automotive Institute Survey uncovers industry supplier challenges2012 Dykema Automotive Institute Survey uncovers industry supplier challenges

   
In fact, the recovery of the automotive industry over the past two years now has resulted in 93% of the respondents—most of them OEMs—seeing an increase in demand for their vehicles, parts, and services over the past year. That’s the good news. 

The bad news is that many OEMs are concerned over the financial condition of their suppliers and their ability to obtain financing to keep up with their customers’ demands.
   
In fact, while raw material cost increases came in at number one on the list of concerns (38.9%), the second-biggest concern was “limited financial lending from banks to automotive companies” (21.0%), which goes hand-in-hand with the third-largest concern: financially troubled suppliers (18.9%).
   
In fact there have been a number of molders and moldmakers who have reported that after looking at their accounts receivable and seeing the list of automotive customers that owed money, denied them extensions on the lines of credit that would have been directed toward the need to take on more work.
   
Sheryl L. Toby, an attorney specializing in bankruptcy and restructuring who advises manufacturing entities in day-to-day supply chain legal issues for the firm Dykema Gossett PLLC in Detroit, told PlasticsToday that this situation is “worrisome” to the OEMs because it is critical to their production output. “Any component part you can’t get will interrupt production,” Toby said. “This has always been a concern to OEMs and why they’re watching the financial situation of their suppliers so closely.”
   
It was no surprise to Toby that limited financial lending and troubled suppliers came in so close as concerns in the survey. “What happened in last few years is that a lot of banks didn’t go out of pocket to lend more because they had financially troubled customers. And not only do those two factors go hand in hand but particularly when you look at the next question regarding increases in demand—and everyone was facing this—a significant increase in demand means you need additional capital in the form of lending or capital contributions—cash—to be able to meet that increased demand.”

What Toby described and the survey revealed is the perfect storm that could push more Tier 1 or Tier 2 suppliers to, or over, the brink. “If you have a supplier company that is financially troubled, you have a lender not willing to expand the lending,” she stated. ”And when OEMs are searching for more capacity you have a seller’s market if the competitors have capacity.”
 
Combined, these factors indicates why these things are important again to OEMs and the Tier 1 suppliers, who depend on their Tier 2 suppliers, such as molders and moldmakers, for molds and components.

“This explains to me why there’s a refocus on these issues,” said Toby. “It becomes a greater challenge to the industry. We’ve never had a situation where we’ve dealt with financially strained companies operating at capacity.”

Toby noted that the old model of how OEMs address financially troubled suppliers—the traditional methods—isn’t utilized in the same respect. “Putting all that together, companies don’t want to deal with financially troubled suppliers operating at capacity,” she said. “There’s a new focus on making sure you can identify those circumstances and deal with them before they become a problem.”

Toby sees continued consolidation among the supply base, which can put the OEM at greater risk as more parts are spread among fewer suppliers. But at the same time, this situation can give the OEM more power as a customer. “If you’ve got more parts coming from a troubled supplier you have a bigger problem, but you also have a greater influence on the outcome,” Toby added.

These concerns that the Dykema Automotive Institute survey revealed are also why OEMs switch suppliers when suppliers can’t or won’t increase capacity. “Some suppliers aren’t willing to invest to meet capacity,” said Toby. “Certainly a tension is created and that’s the response cue, too—76.8% of the respondents made changes internally to help meet production demands. But whether those are sufficient enough remains to be seen.”