Publisher's Statement - October 2012
Talent, capacity, and liquidity present a three-part challenge
Compared to the difficulties resulting from the 2008-2009 economic downturn, automotive vehicle and supply chain manufacturers are enjoying a relative rebirth with sales surging and plants running at full or near-full capacity. However, difficult challenges remain woven in the fabric of renewal and return to the volume that preceded the need to compress operations and survive a sinking economy.
In the Aug. 16 issue of Industry Week, Keith Updike, managing director of BBK, addresses new obstacles in his article, “Supply chain constraints present a three-part challenge to automotive suppliers.”
Where lack of volume created stress in 2009, a lack of capability is now creating a new stress. Despite a return to profitability for many or most, that does not mean manufacturers are operating in ways that can be sustained long term, Updike writes. The increase in volume, while good news compared to three years ago, brings significant new concerns.
Updike asserts there is a lack of sustainability in three key elements of the supply chain — talent, capacity, and liquidity — which represent significant challenges that can have devastating consequences for those operating within the automotive industry if such concerns are not adequately addressed.
During 2009, cost cuts were achieved by eliminating costly, but talented, employees. Now, during expansion, they are needed but sometimes unavailable. Exacerbating the situation, remaining employees are fatigued from overwork and stress throughout the troubled times. Not unlike machinery and equipment that is not maintained or upgraded, employee burnout is real.
When sales volume dropped significantly, companies did everything possible, and necessary, to right-size operations. Now that volume has returned, those once-necessary actions have created problems. Cutting capacity is relatively easy compared to bringing new capacity on-line. Basically, capacity will come from injecting equity capital or from borrowed funds. However, the supply chain is reluctant to invest to expand capacity, remembering the difficulty experienced during the downturn to pay for idle equipment during volume volatility.
It would seem that with increased volume, liquidity issues would diminish. For the stronger companies, this is true. But liquidity is difficult when lending sources are reluctant or if terms are unrealistic. For those qualified to obtain borrowed funds, reluctance remains because of uncertainty.
Timing, clear action plans, and resource reallocation can make expansion of capacity realistic, but challenges remain. Executives and management took on extra burden during the downturn and relative recovery. Those responsibilities cannot be shed overnight and thus slows the renewal of capacity. Yet, action plans to restore capacity to meet growing demand and opportunity are immediate concerns.
For owners of small business, it’s much the same, only in spades. For local shop owners, distributors, and rebuilders, the expansion of capacity after compression is daunting. Skilled labor is hard to find, costly to train and still requires supervision by managers encumbered with multiple duties and residual burnout. Expansion of capacity is expensive and risky in an uncertain economic climate. And liquidity, equity or borrowed, is a difficult proposition.
The supply chain constraints are challenging. For small businesses, repositioning from compression to expansion, especially without secure liquidity, requires more than hard work. Stay nimble, execute your plan, and realign resources to opportunities and priorities.