• Lessons in supplier risk management: how a fire and a strike lost the auto industry USD 500 million

    31 August 2018

    With powerful hurricanes, earthquakes and wildfires threatening business operations and logistics, supply chain risk professionals across manufacturing industries usually have their hands full when it comes to mitigating disruptions during the summer season. Whilst the focus is usually on extreme weather events, two operational disruptions at a supplier level in May and June 2018 revealed once again the full diversity of supply chain risks that can impact industrial production lines. In total, both events caused automotive and machinery supply chains more than USD 500 million in financial losses.

    The first disruption occurred when a large fire broke out on May 2 at a site in Eaton Rapids owned by the US-based Meridian Lightweight Technologies (MLT), a supplier of die-cast parts for automotive customers. With several of the supplier’s production lines destroyed, major car makers were forced to stop production at various US plants for up to 2 weeks. Extensive reconstruction efforts are reportedly still underway and it may take MLT up to 4 months to resume pre-fire production levels.

    A second and unrelated disruption took place on June 14, when 2,000 employees of the engine block manufacturer Neue Halberg Guss (NHG) walked out on their jobs at German factories in Leipzig and Saarbruecken due to a labor dispute with the company’s management. With the strike dragging on for a full six weeks until July 30, major customers including a car maker and an engine manufacturer from Germany were forced to adjust production schedules and temporarily lay-off workers. Similarly, a Swedish truck manufacturer had to stop sales of its engines due to the strike, which increased its inventory and negatively impacted its cash flow.

    These events are a stark reminder of how a disruption at a single sub-tier supplier that produces highly specialized parts can cause ripple effects across manufacturing supply chains, impacting both upstream (sales) and downstream (production) operations. MLT and NHG both supply parts which are not easily replaceable, as there are few alternative suppliers that can ramp up production at short notice. And even if alternative sources are available after a disruption occurs, certifying parts from a new supplier can take more than 1 year.

    In both cases, other firms, which were not overly dependent on either supplier, had business continuity plans in place that included three options to avoid a complete production shutdown: securing alternative parts from another certified supplier, modifying production schedules or moving production to other plants. In the US, car makers with less exposure to MLT either sourced parts from an alternative supplier in Germany or temporarily shifted production schedules at affected plants, for instance, by producing other car models first. In Europe, affected companies adjusted production schedules by scrapping overtime work due to depleted supplies from NHG.

    While it is crucial to have business continuity plans in place in case disaster hits, organizations should also proactively monitor evolving risks to reduce their strategic exposure to such threats. Organizations can, for example, use risk monitoring tools to track events such as labor issues and industrial fires in near real-time in order minimize the response time needed to activate mitigation measures. This can help leverage time as a competitive advantage when deciding to secure alternative sources and/or increase inventory levels. At the same time, organizations should be mindful of using dual-sourcing strategies for key production components. Reducing the number of suppliers has become a norm to allow for more strategic relationships with a handful of key suppliers. However, given the expanding nature of supply chain risks, firms should consider undertaking a strategic cost-benefit analysis to assess if the added cost of sourcing from different geographical locations and alternative suppliers can be worthwhile to prevent future shutdowns.

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