This week marks a sad milestone for an 80-year-old automobile components supplier with deep history.

Japan based Takata Corp., the company that has made unprecedented product recall headlines has filed for bankruptcy protection both in Japan and the United States. The move comes after the supplier faced reported claims and liabilities estimated to be in the billions of dollars owed to auto makers who were forced to shoulder the burden of unprecedented numbers of product recalls and associated costs.

Under the bankruptcy agreement, much of the supplier’s business interests will pass to rival Key Safety Systems for an estimated $1.6 billion. However, a reorganized Takata will have to assume liabilities not contracted in the bankruptcy sale, which includes continued production of replacement air bag inflators to complete outstanding repair parts requirements for many more months to come.

In January, a U.S. federal grand jury indicted three former Takata Corp. executives, overseeing air bag product management and engineering. charging them with conspiring to provide auto makers with misleading test reports on rupture-prone air bag inflators.  Takata separately pleaded guilty to criminal wire fraud and agreed to pay $1 billion to resolve a two-year long U.S. Justice Department probe of the supplier’s handling of rupture-prone air bags. Thus far, faulty air bag inflators from the supplier have been linked to 16 deaths and upwards of 180 injury reports globally.

According to estimates from The Wall Street Journal, there are currently 54 million defective air bags that still need replacement in the U.S. alone. These recalls affect roughly 16 percent of the 260 million vehicles still operating on U.S. roads, or roughly one in five vehicles. In some cases, replacement parts are required in lieu of other replacement parts. The supplier’s first and most trusted customer, Honda Motor, elected to drop the supplier in 2015, no longer willing to tolerate a supplier with such a track record of product design snafus and cover-ups.

As we opined in earlier Supply Chain Matters commentaries, replacement parts supply is expected to extend for several more years, making some vehicles even more susceptible to premature airbag inflation explosions that injure drivers and passengers. Auto makers thus remain dependent on a financially smaller and hobbled Takata to meet global demand of replacement inflators.

We noted in January that product and quality management incidents across the automotive industry have taken on more difficult dimensions that expose corporate cultures that favor cover-ups. In addition to Takata, there were the unprecedented numbers of Volkswagen diesel-powered vehicles that were secretly outfitted with emissions altering software. In a plea agreement, VW admitted that its supervisors and employees agreed to deceive regulators and customers regarding actual emissions. Estimates of VW’s ultimate liabilities range in the $15 -$20 billion range when the recall process completes itself over subsequent months. Fortunate for VW is that increased global vehicle sales and profits have helped to buffer the overall financial impact.

With each passing year, the scope and implications of product design and quality incidents have grown to unprecedented dimensions. Product and quality management professionals are placed in precarious roles to make problems go-way during intense pressures that business goals and performance bonuses are met. Doing the right thing for the ultimate customer seems to be a fading requirement. And now, corporations, executives and individuals are collectively being held criminally accountable for their specific actions.

The Learnings- If Any

If there is one of many takeaway learnings from these incidents is that in this digital age, product and process specifications and management actions are stored in digital files available for internal and external review. Transparency has new meaning along with resolve to do the right thing for customers and employees.

In many cases, employees often believe in doing the right things for customers, but sadly, management and business pressures overcome such zeal, and reward mechanisms value those who are creative in gaming the process. All of this, in the end, has a quantified cost, far exceeding the cost to have fixed a defect in the first place.

Bob Ferrari

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