On September 25, production lines at Tier-1 engine block supplier Gusswerke Saarbruecken GmbH were suspended temporarily, merely five days after a district court opened insolvency proceedings for the troubled company. This presumably marks the latest chapter of two erratic years, which included a factory strike that disrupted just-in-time supply chains across the automotive and machinery sectors in 2018. Customers including engine maker Deutz reportedly lost millions of dollars due to the strike alone.
Gusswerke Saabruecken GmbH faced various issues that could have served as warning signs, but were overlooked by its customers. The company first filed for insolvency proceedings as early as 2009. Since then, it has changed ownership several times, started a legal dispute with its biggest customer Volkswagen, and faced a six-week walkout by its employees over plans to lay off workers. Failing to register such events forced some of its customers to adjust or entirely stop production which ultimately caused financial losses. Supply chain risk professionals from manufacturing industries in particular should take away several lessons from Gusswerke Saarbruecken GmbH.
Proactively monitor issues affecting your supplier base
Organizations should proactively monitor key suppliers to gain available insights into their operational or financial difficulties before these can turn into serious supply chain disruptions. This can help companies reduce response times, avoid costly supply shortages, and eventually build a more resilient supply chain.
Since 2009, multiple yet separate problems have been recorded at Gusswerke Saarbruecken GmbH that could have been interpreted as alarm signals and potentially served as the basis to activate mitigation strategies. These included a previous insolvency filing in 2009 and a walkout by 2,000 workers for six weeks following the announcement of a plant closure.
It is often a combination of individual events – an ownership change, canceled customer orders, or a factory strike – that can result in a major supply chain disruption at a later stage. Both foundries, which were operating as Neue Halberg Guss (NHG) until December 2018, were initially acquired by Prevent DEV GmbH, triggering a series of events that would intensify the company’s financial struggles between 2018 and 2019.
Before buying NHG, Prevent had a history of customer disputes due to a management approach that involved drastic price increases for components and deliberate supply stoppages as bargaining tools. These tactics resulted in a year-long conflict with Volkswagen, the foundry’s biggest customer, which reduced orders in reaction to the price increases. NHG’s financial situation then deteriorated further when it lost more customers due to a factory strike at both plants in Saarbruecken and Leipzig, from which it was unable to recover.
Implement dual-sourcing strategies for key suppliers
The disruptions faced by some of the foundry’s customers during this period emphasize the benefits of diversifying one’s supplier base and implementing dual-sourcing strategies for key components. This could help to avoid supply shortages and production downtimes, should the main supplier be unable to deliver.
During the strike action in June and July 2018 at NHG, Deutz had to adjust its production schedules and temporarily lay off workers on short notice, while Swedish truck manufacturer Scania had to suspend sales for its engines, which increased its inventory and negatively impacted its cash flow. Car maker Opel even had to halt production lines at its German plant in Eisenach.
Being alerted to early warning signs allows organizations to initiate the search for an alternative supplier and kick-off a 12-18 months-long certification process before the disruption reaches production lines.
Explore ultima ratio legal and financial options
Last but not least, being aware of distress at your key suppliers can give organizations more time to explore complex, unorthodox financial and legal options. These could include providing financial support or even acquiring the supplier.
When the situation of Gusswerke Saarbruecken GmbH reached an impasse at the end of 2018, Deutz partly financed the acquisition through the new investor to resolve the deadlock, while Renault currently keeps its soon-to-be-liquidated supplier Sintertech alive through financial payments to avoid temporary layoffs at its plants. Similarly, Ford provided financial support to its troubled supplier Meridian in 2018 to move production equipment from the US to the supplier’s other facility in the United Kingdom to resume production.
Instead of financial support, General Motors has in the past used a restraining order against its insolvent supplier of interior trim products Clark-Cutler-McDermott to prevent it from shutting down and later struck a deal to purchase their equipment and inventory. In an even more extreme case, Tier-1 auto parts supplier Robert Bosch acquired all shares of its insolvent Tier-2 supplier Albertini Cesare to end a partial production halt at its customer BMW in Munich and other locations which prompted the car maker to claim more than EUR 30 million (USD 33.4 million) in compensation payments.
In summary, the case of Gusswerke Saabruecken GmbH underlines the need for greater transparency in global multi-tier supply chain setups to acquire more actionable intelligence that companies can use in the event of a disruption at a sub-tier supplier. Organizations investing in visibility solutions and mitigation strategies for key suppliers can thus gain a competitive advantage by avoiding supply shortages and costly production downtimes.