In supply chain and procurement communities, there is somewhat of a known axiom that any lower-tiered component supplier, even smaller in scope, can cause a significant supply chain and production disruption. That lesson was reaffirmed in the 2011 devastating earthquakes and tsunami that struck Japan when automotive and high tech manufacturers discovered later in the aftermath that important component suppliers suffered major damage in production facilities.
This week, automotive supply chains have yet another reminder.
General Motors indicates that a contract dispute and bankruptcy filing from a key supplier could force it to close all North American assembly plants, potentially causing millions of dollars in losses per day. Clark-Cutler-McDermott Co. is a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America.
According to a published report from The Detroit News, the supplier stopped producing parts for GM after shifts on Friday and laid off its workforce. Clark-Cutler-McDermott previously had shut down business operations June 17 and laid off workers until GM was granted a temporary restraining order last month by a U.S. District judge in Detroit, forcing the supplier to temporarily resume production. That order expired Monday. According to a published report by The Wall Street Journal, GM has accused the supplier of using the bankruptcy process and its position as a critical parts supplier to protect personal interests rather than honor contracts.
The Franklin Massachusetts-based supplier filed for Chapter 11 bankruptcy last week, and is seeking to sell its business assets because of what it calls unprofitable contracts with GM that have led it to lose $12 million since 2013. Further indicated was that the loss rate of loss had recently accelerated to more than $30,000 a day. The company, which also filed bankruptcy for its subsidiary CCM Automotive Lafayette LLC, says in court records that more than 80 percent of its revenue comes from GM. That is a significant risk for any supplier, especially a smaller one in the nature of a global automotive producer.
A report indicates that GM loaned the supplier millions of dollars to continue operating and also increased prices paid for parts. GM, in court filings, said it told the supplier it would completely fund the sale of the business to another entity.
A U.S. Bankruptcy Court hearing is scheduled to discuss several requests from the supplier and GM. The judge may rule on motions from the supplier to reject GM contracts, give it the authority to pay wages and benefits and obligations, use of collateral cash or GM’s motions that would require the company to deliver inventory to GM and turn over GM tools and equipment or honor its contracts with GM.
Obviously this is a situation that no procurement and supply chain operations team looks forward to and obviously has a lot of GM teams scrambling in back-up contingency planning. The subsequent weeks will be critical in producing back-up supply plans.
Supply Chain Matters recently highlighted a WSJ report of a different focus by GM’s procurement teams, one that allowed 400 U.S. and Canada based component suppliers for GM vehicles being produced in Brazil and Mexico to be able to periodically renegotiate their supply contracts. These suppliers are currently challenged with the effects of a volatile foreign currency environment causing rising material and labor costs. This development was newsworthy because among long time automotive industry watchers, GM developed somewhat of a past reputation as a strict negotiator with what the WSJ describes as “ironclad” contracts with suppliers. Unfortunately, this latest news, coupled what eventually transpires regarding this one supplier, will either add or distract from previous perceptions regarding GM as a customer.