There was a rather interesting article penned by Timothy Aeppel in today’s Wall Street Journal titled Auto Suppliers Attempt Reinvention.  The article points to a select group of existing suppliers to the U.S. automotive industry who are trying to offset the effects of a severe downturn in the auto industry by current attempts toward diversification into other markets.  The examples include an industrial tools maker now making tools for artificial knees, a battery maker diversifying into residential energy systems, and a metal stamper trying to cater to the supply needs of the medical device industry.  This article makes the astute point that many of these suppliers may not succeed in this transition.

From my view, diversification has to be evaluated from a perspective of overall supply chain competency, current or future.  Your company may well have the design and production capabilities related to product technology, but the other open question is whether you have the supply chain business process capabilities to compete with other existing players in your new industry venture.  High volume, make-to-stock is quite different than low-volume, make-to-specification.  Packaging for high volume, just-in-time assembly lines is far different than packaging for a variety of different channels.  If your demand forecast or replenishment signals come from but a few large OEM’s, it can be far different when your demand signals are buffered by other upstream players in the value-chain, the classic “bullwhip” effect. If you about to compete with existing players who have invested in more flexible supply chain fulfillment capabilities as well as value-chain visibility, than be realistic as to what your company needs to work on in addition to new products. Don’t get me wrong- I encourage organizations to evaluate diversification, but do take a broader view of what is required. 

Fellow supply chain blogger Jason Busch over on Spend Matters also commented on this trend and adopted the sourcing view.  He advised the non-automotive procurement sourcing community to engage potential new suppliers on terms other than pure pricing, and more toward building new relationships. 

And that is the prescription for diversification, a broader, more holistic view of overall capabilities, what gaps your organization needs to build, and what new relationships that needs to be nurtured.

What about your view? Do you believe most of these companies can successfully make this transition?

Bob Ferrari