We got asked via twitter about the article entitled Bankruptcy fears grip auto-parts suppliers (at the Wall Street Journal – registered required).  The question was, “what would you tell the auto industry suppliers?”

There are deep structural issues in the US  and European automotive industry that are beyond the capabilities of any software solution to address.  Without addressing these the industry is doomed to a slow death.  The additional stress of the current economic environment only exacerbates these structural issues and leads to the situation as described in the article.

As long ago as the mid-1990’s the return on working capital for the auto suppliers was the lowest for any industry.  The OEM’s were only slightly better.  Visteon has had a precarious existence ever since it was spun off from Ford, largely because Ford saddled it with very large retirement and healthcare obligations.  A search of OneSource shows that Visteon has not made a profit in any of the years since 2003, and likely for many years before that too.  Visteon’s operating margin was only positive in 2006.  Lear is slightly better off having returned a profit in 2007, 2004, and 2003.  A quick analysis of most of the auto suppliers will show a strong similarity.  Some data for Visteon is shown below. A key indicator is the Quick Ratio (QR) which is a measure of company’s short-term liquidity and therefore of keen interest to any lending institution.  As a quick comparison, Apple’s QR is 2.43, Google’s is 8.08,  and Cisco’s is 2.54. , meaning they are far more able to service short-term debt.  Admittedly these companies operate in different industries.  Nevertheless the QR difference shows why the auto suppliers are finding it difficult to raise cash and the systemic issues with the industry.

Kinaxis RapidResponse can, and does, assist companies in reducing their need for working capital, by reducing inventory, while maintaining or improving customer service.  While this may not be sufficient to overcome the industry’s structural issues, these capabilities are key to reducing a company’s reliance on borrowed capital, which in turn is the major obstacle to their survival.  It must be recognized that these companies are in dire financial circumstances and therefore it may be too late to prevent them from going bankrupt.  Deploying RapidResponse during Chapter 11 would be a key element in ensuring that they emerge from Chapter 11 quickly and in a sustainable manner, assuming that the structural issues have been reduced if not eliminated.

The key capabilities that RapidResponse provides are:

• Visibility – across multiple tiers of a multi-enterprise business network
• Alerting – to unexpected events, the consequences to these events throughout the supply chain, and the identification of the people responsible for the addressing the consequences
• Collaboration – between the relevant stack holders to discuss and agree to alternatives for addressing the issues
• Evaluation – of the alternative scenarios in a balanced scorecard that includes the financial and operational key performance indicators side-by-side
• Resolution – through a collaborative environment that allows all stake holders to understand the benefit to the organization of adopting a particular resolution

These capabilities speed up the transmission of demand or supply changes throughout the supply chain meaning that companies can not only reduce or eliminate the inventory that they are keeping “just in case”, but they can also capture what demand they are seeing in a rapid and effective manner.  Many companies in the High-Tech and Electronics arena, leaders in outsourcing and contract manufacturing, have deployed RapidResponse to maintain control of the supply chain even though they have outsourced their manufacturing.  With the continued adoption of off-shoring and outsourcing in the auto supplier space, these are key capabilities to reduce working capital requirements while maintaining operations performance, just what the auto suppliers need.

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Tags: Inventory, Supply chain
Posted in Supply chain management
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