US auto supply chain at crossroads: study

CLEVELAND: A troubled automotive supply chain in the US can become stronger if a more collaborative strategy gains wider acceptance, according to a research team at Case Western Reserve University. The team’s report, “The US Auto Supply Chain at a Crossroads”, includes findings of the National Survey of Automotive Suppliers, conducted by researchers at Case Western Reserve as part of the Driving Change consortium.

Suppliers in tiers serve the nation’s automotive industry, the survey says. The industry, facing intense global competition in recent decades, was also hit hard by the recession of 2008-2009 and auto sales fell  40 percent.

Studies of the auto industry have tended to focus on original equipment manufacturers (OEMs), and their large tier 1 direct suppliers. Susan Helper, Weatherhead School of Management Carlton professor of economics, led a research team concentrating on smaller firms (those with fewer than 500 employees). These firms typically don’t supply automakers directly; they’re usually tier 2 or tier 3 suppliers. These smaller firms account for 30 percent of employment in the auto supply chain, but are sometimes difficult to identify as auto suppliers.

“Throughout our research, we find evidence of two possible futures for America’s automotive industry,” Helper said. “One future is characterized by collaborative relationships between firms at all tiers of the supply chain, wherein firms share cost savings from identifying and eradicating inefficiencies that they might not have been able to address on their own.”

Still, adversarial relationships within the supply chain could impede the industry’s progress, the study notes. “In this future, instead of developing better products and thinking critically about how to remove inefficiencies from processes that span multiple firms, firms at each level of the supply chain generate profits by squeezing margins of firms in the tier under them—this path is a recipe for industry-wide stagnation,” Helper said.

The study finds large segments of the automotive supply chain are characterized by each of these two scenarios, demonstrating elements of both. The research report notes many first-tier firms continue to protect their profit margins by cutting the margins of their suppliers, rather than by trying to build positive relationships. In response, many suppliers focus on short-term cost-cutting and are reluctant to invest in modernizing their operations. For example, barely a third of survey respondents have adopted practices such as involving workers in problem-solving groups, despite widespread evidence that such practices improve performance.

However, the study also found evidence that relationships are becoming more collaborative, as many firms report their main customers are more likely now to work with them to reduce costs than they were in 2007 before the recession. In addition, about 20 percent of suppliers have adopted “high road” practices, which include high wages, worker training and investment, and empowerment at all job levels. Such firms experienced 10.9-percent less sales loss during the recession than firms that least exhibited these high road characteristics. The study concludes by arguing that the high road scenario has significant social benefits, and proposes public policies that would help firms realize this potential.