Smaller number of suppliers with fewer facilities struggling to handle auto rebound.

DETROIT — A combination of rebounding sales and an unprecedented number of new models in the works has stretched the auto parts supply chain so taut that the entire industry is holding its collective breath that it does not snap and jeopardize the recovery.

New car sales are on pace to exceed 15 million in the U.S. this year and as many as 85 million globally. A record 500 vehicle launches are expected by 2016.
"Everyone has parts shortages," said Carla Bailo, who heads Nissan Americas' research and development in Farmington Hills. "The supply chain is one of our biggest threats. Everyone cut back and is now ramping up. We can't get up to speed as quickly as in the past."
During the downturn, suppliers consolidated operations — closing plants, laying off workers and reducing capacity by as much as 30%, said Kim Korth, president of IRN, a consulting firm that works with suppliers. Now a smaller number of suppliers with fewer facilities and bodies is struggling to handle a 22% rebound in the auto industry.
"We're not seeing lines shut down, but programs are being delayed," Korth said. "We anticipate periodic disruptions due to material shortages, quality issues and troubled suppliers."
Suppliers have always been cautious about increasing capacity in the boom-and-bust auto industry. This time, however, there's reluctance from companies to reinvest that have achieved a lower break-even and are now enjoying profits.
"It's tough to increase bottom lines," said Roland Zitt, president of Mahle Industries in Novi, which closed powertrain components plants during the recession and reduced costs. "We won't be a bottleneck but also don't have to be at the leading edge increasing capacity."

Automotive suppliers are in better shape today, but are stretched thin.(Photo: David Pierce, Detroit Free Press)
Automotive suppliers are in better shape today, but are stretched thin.(Photo: David Pierce, Detroit Free Press)
Today's supply base is healthier "because the weaker ones have been bought out or gone out of business," said John Henke, CEO of Planning Perspectives, which studies supplier relations.
But the survivors have been running full tilt for two years and are tired. And a healthy bottom line doesn't mean they can meet the demands automakers are putting on them — with an additional 2 million units of capacity to be added by 2018 — and that is an industry-wide concern.
"We're meeting weekly," Joe Hinrichs, Ford president of the Americas, said of his purchasing staff that works with suppliers. Ford has been adding shifts at plants, increasing capacity by 400,000 vehicles last year and preparing to add another 200,000 this year because sales are hot.

Much in the works
There are a lot of new vehicles in the works that suppliers are bidding on now.
The annual "Car Wars" report by Bank of America Merrill Lynch says automakers are launching new models faster. After a decade of averaging 37 vehicle launches a year in the U.S., the rate is forecast to accelerate to 44 a year for the next four model years.
Globally, Michael Robinet, managing director for IHS Automotive Consulting, forecasts 500 vehicle launches from 2012 to 2016, or about 135 a year compared with 100 a year in the past and only 85 a year in 2010 and 2011.
"There's a lot of pressure on a supply base that's already strained," he said. "If suppliers can't handle the pace, launches could start slipping."
There have already been a couple of high-profile examples. The Lincoln MKZ had parts and quality issues that left customers waiting months for cars to be fixed and delivered. The launch of the new Jeep Cherokee has been delayed by a month.
"I think we've been pretty public there is quite a bit of stress on the supply base in terms of its ability to meet demand," said Mark Chernoby, senior vice president of engineering for Chrysler. "And certainly we have to manage week-to-week, month-to-month and day-to-day around some of those problems."

Little slack in system
The Japanese tsunami showed how loss of production from a couple of critical suppliers can shut down the industry. It also demonstrated the vulnerability that comes from too much consolidation, when there are only single sources or locations for certain parts.
"Bricks and mortar are going to happen over the next four to five years because the current state is not sustainable," Korth said.
With 40% of vehicles in North America being built in plants running with three crews or shifts, there are limited options if there is a problem, Robinet said. "There is not a lot of slack in the system."
Robinet advises suppliers to look at their portfolios and drop the products that are not doing well.
Ken Kaiser, vice president of engineering for global electronics at TRW, said the supplier is taking on new programs in line with its resources to keep up without too much investment.
"The bright side to the downturn is we made ourselves a healthier company," Kaiser said. "We want to respond without returning to bad practices."
Jeena Patel, a lawyer with Warner, Norcross & Judd of Southfield, said suppliers are trying to meet contracts with minimum volumes at a time when no one thought to negotiate maximum volumes or other terms to protect them against the demands they now face.
Korth knows of suppliers being asked to increase volume by 20,000 units a month, and they are unable to do it.
She advises suppliers to only add capacity when there is no alternative. "It is more fun to be a supplier when you're making money than when you're not."
Ford's Hinrichs sees the whole situation as an opportunity for the auto industry to collectively become more competitive and manage cost with the increased volumes. "Let's take advantage of it together."