UAW Strike and the Automotive Industry: Supply Chain Insights

[Transcript]

Jan Griffiths: 00:00

This is a special bonus episode of the Automotive Leaders Podcast. Today is Friday, September the 15th, 2023. And the world is waking up this morning to the news that UAW President Shawn Fain has called out his members on strike at three assembly plants. This is an unprecedented moment in time in our history in the automotive industry. General Motors Wentzville, Missouri, assembly is out on strike. Ford, Michigan assembly, out on strike. Stellantis, Toledo assembly, out on strike. Shawn Fain has been dominating global headlines lately with his daily Facebook live broadcasts. But there's a more significant and increasingly precarious aspect of our industry that demands our attention right now. And that is the Tier One, Tier Two, and Tier Three supply base. This is a defining moment for our leadership, how we step up and manage through this situation, this unprecedented situation.

Jan Griffiths: 01:11

The question is: What does this mean for the CEOs of Tier-ones, Tier-twos, the CEOs of all the companies in the automotive supply chain? What do they need to do to better prepare for this type of situation and to react to this situation? We've got supply chain leaders throughout the supply chain, worried and thinking about what actions they need to take. And I wanted to get on this podcast today two experts that understand this field better than most. Today, you're going to join an insightful conversation with Tor Hough, Tor is the CEO of ELM Analytics, and he is no stranger to the space of risk management and data, how we manage data to make decisions in the supply chain. Tor, welcome to the show.

Tor Hough: 02:16

Delighted to be here, Jan. Thanks for the opportunity.

Jan Griffiths: 02:19

Also joining us today, if you've worked a day in automotive, you will know him and love him; it is Sig Huber. Sig is now the Chief Commercial Officer for ELM Analytics. Sig has an outstanding career, formerly global purchasing director for what was previously known as FCA. And he is formerly head of Supplier Risk Management for Toyota Motor Company in North America. Sig, welcome to the show.

Sig Huber: 02:50

Thank you very much for having me, it's great to see you.

Jan Griffiths: 02:52

Let's dive right into a gentleman, shall we? So, Heads of Supply Chain in the automotive industry, CEOs, we know we have to better prepare ourselves and react to this type of risk, this type of immediate pressure that hits the supply chain. So, Sig, let me go to you first. You have been in this situation several times coming at it from an OEM perspective. What do VPs of Supply Chain, what do they do first in this situation?

Sig Huber: 03:27

Here, the first thing that they do is they go out and they try to gather as much information as they can. Because the OEMs know a lot about their Tier One suppliers, but they have a lot less visibility as to Tier Two and below. And in a situation like this, the most vulnerable members of the automotive supply chain, from our viewpoint, in our data, are Tier Two suppliers and below.

Jan Griffiths: 03:50

Yeah, that's so true, right? And I can remember, as you both know, I am a recovering supply chain person. And I can remember the days when a situation like this would happen or any kind of disaster because it's a form of disaster when this situation happens, and there's an incredible amount of pressure being applied to the supply chain. First of all, nobody knows what's going on, people are grabbing information from everywhere, from their friends or colleagues, from the internet. People are trying to make decisions. It's all very reactive, and it's chaos, quite frankly. So let me ask you, Tor, you know, what can companies do to make sure that they stay ahead of this? So they're not just running around like chickens with their heads cut off? What can they do?

Tor Hough: 04:39

Well, I think the key is, I think as Sig said, having the best data possible to understand what's going on in your supply chain. And that's going to be key for anybody that's impacted by any kind of disaster strike, economic upheaval, that kind of thing. So, in our experience, the OEMs have a pretty good bead on the financial health and the operational performance of their direct suppliers. There are a number of tier ones that have dedicated teams for managing this information and collecting that data. As you move further downstream into the supply chain into the sub-tiers. There are less and less resources available for managing this and there's less and less data and yet it's the the tier suppliers that are the most vulnerable when recovering from some kind of an industry-impacting event.

Jan Griffiths: 05:34

But, Tor, how do you get eyes on that Tier Two supply base? You know, is it difficult? I remember, you know, back in the day, the only time I ever knew that there was a problem with a Tier Two supplier is I read about it. You know, I heard about it from somebody that they had gone into bankruptcy or it was a hallway conversation with somebody from Accounts Payable that said, "You know, supplier X has been calling a lot more lately, which are signs of cash problems." But then the only data we had available was D&B, D&B reports, and they're so outdated, they're useless. So, what's different now Tor that we can actually go in and get the data that we need to be able to make the right decisions at the right time?

Tor Hough: 06:20

I think there's a lot of answers to that question. And the attitude that's very popular in the press these days is that Artificial Intelligence and Machine Learning is the answer to all problems. And that we can wave our magic wand, and it will tell us about the health of our supply base. And there are a lot of vendors out there selling solutions that will mine data and tell you about your supply base. The reality is that it's a much more complex problem, it's a tougher problem. And it really involves communication and cooperation and engagement between a manufacturer and its suppliers, and then repeating that process tier to tier as you work through the supply chain. So, I think what's changing today is go back to the original event, that milestone event of the tsunami in Japan that kind of woke the industry up to, hey, we have these things called supply chains, and they're vulnerable, right? And then, you know, we as an industry started working on it. The pandemic was a massive wake-up call, where we started to figure out that, look, these events impact everything: labor, liquidity, parts, demand, transportation, everything gets turned upside down by these kinds of events. It really the answer has, I think, finally dawned on people that look, we have to communicate better with each other, we have to, we have to be able to ask our suppliers for data. And we have to use that data responsibly. And you know, we've been doing this for, you know, 14 years pretty steadily. Our most successful clients are the ones that have the greatest trust with their suppliers, that use the data responsibly, and that use it to strengthen really the entire supply chain. So everybody is better for having, you know, shared the data that they do.

Sig Huber: 08:11

I would just add my personal story from that earthquake and tsunami in Japan. When that happened, we ended up after going out and establishing a war room. And we surveyed our Tier One suppliers. We had like 15 or 20 suppliers that were all buying chips from that one Renaissance plant that was in the nuclear zone after the earthquake and tsunami. And we didn't know, you know, we knew that we had some chips cutting from there. But we didn't know that we had 15 different, 20 different suppliers, all buying chips. And it required a monumental activity on behalf of our company. And our Tier One suppliers and our Tier Two suppliers all working together, looking for engineering workarounds. And it was an amazing event really in driving resilience and flexibility and collaboration among all the parties, which was great. But that got a lot of people in supply chain nervous about what it is that's out there that they don't know about that could have catastrophic repercussions on their businesses. And that's when I started first looking at these types of solutions. And as Tor mentioned before, establishing trust with your supply base is really important. Because if they don't trust you, they're going to be a little bit cautious about what they're willing to share with you. And so that is definitely important. The other thing that came out of that is a need to be more proactive. In other words, can you identify bottlenecks in your supply chain like that one plant that we had so many different parts coming out of and item parts coming out of there? Can you find that in advance and do something a couple of years before disaster strikes? So, I think that right now, what we're seeing is more interest in visibility and more interest in how can they use information proactively versus just reactively. But in the event there is a disaster. How can they react faster?

Jan Griffiths: 10:06

You published a blog the other day, and we talked about the state of the supply chain today is much weaker than it was back then, too, right? We've got issues with coming out of COVID with a chip. Tell us, what's your view on the strength, the overall strength of the supply chain underneath the Tier Ones right now?

Sig Huber: 10:27

Yeah, I think that's a great point. When you look back to pre-COVID, the supply base was about as strong as it's ever been. And when we look at the overall financial scores of the suppliers in our database, and that is a collection of both public and private, the overall financial health is lower, not drastically lower, but it is definitely lower today than it was pre-COVID. COVID, it did create a lot of challenges. But the one difference there was you had the PPP loans and you had the ERC money, and the entire industry was basically shut down in North America. And what's going to be different about this one is you don't have those financial crutches for the supply base and for the OEMs to rely on with those federal funds out there, so there's already starting in a place where they have a much worse liquidity position. So, even though their scores now versus then are just a little bit lower, the number of suppliers facing weak liquidity metrics is higher than it was back then. And there's no financial support to help them. And what's going to make things even a little bit more complicated is this is not going to be a universal shutdown. So some suppliers are going to have some customers that are running and some customers that aren't running. So the challenge is going to be how can they continue to supply the customers that are running when they're only running at maybe 40% capacity? And how can they keep their workers? And how can they keep paying their bills once their accounts receivable stopped coming in?

Jan Griffiths: 11:59

Yeah, that's a really good point. Yeah. Tor, how do you see it?

Tor Hough: 12:02

Very similar to Sig, oddly, you know, I think one of the points that he made that I would underline is that there's kind of a timing issue here, we don't know how long this event is going to last, right? And if you think about how the supply chain works, whether it's the flow of parts or the flow of money, it tends to lag in time. So we watched supply chain shut down slowly over time as the pandemic set foot in the APAC region, Europe shut down first, we shut down second because there were still parts in the supply chain moving through. And it's why 90 days after an event, you can still be as a supply chain manager waking up and discovering, "Oh, I can't manufacture because, you know, this direct supplier can no longer provide their part." The impact is not immediately and if we kind of project that on the financial world today, a lot of suppliers have, you know, have terms where they're getting paid and in, you know, 60, 90, 120 days, and so they're working now, they're building vehicles now, they're building parts, you know, everything's, you know, humming along just nicely, a strike will stop that. And that money will continue to run because they're getting paid for parts that were done over the last, you know, 30, 60, 90 days. So the true impact isn't going to be felt until a point just a little bit into the future. And so understanding the fiscal health, understanding how the disposition of those suppliers direct, and then the next tier up is, is really critical in understanding how to manage your supply chain.

Jan Griffiths: 13:40

Yeah, so what I hear you saying is, it's not too late, even though you might not have all the data that you need right now on your supply chain to feel comfortable that you know where the weaknesses are and you know what the risks are. There is a little bit of time here, is to say, as these payment terms play out, but there's not a lot of time. So you need to get it, you need to get in there right now and start to understand where these weaknesses are in the supply chain,

Tor Hough: 14:11

There are a couple of things we can kind of unpack in that. And one thing is if your supply chain, the design of your supply chain matters greatly. So the type of parts that you're manufacturing and who you're using to manufacture that can have a big impact on how you respond to events. So, if you have a lot of suppliers, but they're pretty close to you as sort of a short fat supply chain, you're gonna respond differently, and your supply chain will respond differently than if you have like a long narrow supply chain where you know, you're getting parts that start in APAC and go to Mexico and eventually work the way to your plant in North America. Those two supply chains, the short fat, and sort of tall, skinny, are going to react very differently to disruptions and the bullwhip effect. And all of those things that supply chain professionals learn to deal with will differ based on the type of supply chain that you have. So, you know, gathering the data to understand that to understand where your suppliers are, you know, is important, and in both preparing for it and then understanding what you need to do to respond once the event occurs.

Jan Griffiths: 15:27

Sig, what have you seen in terms of best practice from your OEM viewpoint, looking into the tiers? What are some best practices that you can share?

Sig Huber: 15:40

Yeah, I think, in a large scale, the best practices that I've seen are related to the financial health side of this equation. And remember, this strike has implications not only from the financial health perspective but there's the restart problem like we had after the COVID lockdowns. And so, there are two different elements here to be planning for. I think that when it comes to the OEMs and to numerous of the larger Tier One suppliers, they have risk management groups that are proactively reaching out to their supply base now. A lot of them are doing financial health scoring of their suppliers. So, they know who are the ones that are likely to be vulnerable based on the fact that their liquidity metrics are low when their profitability metrics are low. And so they're prioritizing reaching out to those companies and understanding what their plans are, what are their plans to continue to pay their bills, even if their accounts receivables stopped flowing in, and they have to restart their operations? How are they going to continue to buy parts? How are they going to pay their employees? How are they going to keep their employees during this gap period? So they're reaching out and proactively asking questions. And they're doing that in a targeted manner based on the information that they already have access to. So those are the best practices from the financial side, from the supply chain side, what I've seen so far is that the OEMs have been pulling ahead volume in preparation for the strike. So that is actually a piece of good news, in my view, because there are about a million units of production, I believe, that's been pulled ahead over the past four or five months. And those receivables are in the pipeline, that money is in the pipeline, on its way to paying the suppliers. So there is a little bit of a cushion. And I know some of the comments I made earlier could be perhaps perceived as doom and gloom. But you know, the supply base has a little bit of extra cushion in there right now. And the other thing is supply base has proven over time to be remarkably resilient in our industry. And so I do have hope that that those two things are definitely in favor of the industry right now. And my hope would be that this, the gap for the strike, or the length of time of the strike, is not too long. If it's a few weeks, I think that the industry will be okay. If it drags out beyond six weeks, I think it's going to be a different situation.

Jan Griffiths: 18:01

Yeah, you know, what interesting we brought up this idea of trust and communication, right? They sort of go hand in hand, what does your experience tell you about the relationships with the supply base and how it pays off this time?

Tor Hough: 18:15

It pays off way, way, way ahead of time that if you have those relationships and you put the effort into working with it, then you're able to collect the data that you need to understand the supply chain before it becomes a problem, right? It's so part of the game you play is I'm going to ask for data, and you know, you want the world but you have to learn to kind of ask for increments of data that are reasonable and accessible for the suppliers and that, that they feel comfortable providing otherwise, you're kind of making work for folks that doesn't produce much fruit. So that trust relationship allows you to get ahead of the problem, identify where the weaknesses are, and then put in countermeasures, which really are the thing that is the solution to the problem when these crises occur is you look within the supply chain for where those countermeasures available the excess inventory. So, you know, the building an extra million units is a countermeasure that was put in place to help add some resilience across the board. That's worth something, excess inventories' worth something having, you know, a lot of the even Tier Two suppliers, many Tier One suppliers are now multinational corporations, where they've got both customers and manufacturing facilities in multiple countries. So even though, you know, this is a regional impact, there are other facilities where parts can be produced and things like that. So there, you know, those countermeasures are those things that you can put in in advance to mitigate the future damage are extremely important. And having a strong working relationship with your suppliers is just critical to that.

Jan Griffiths: 20:04

Yeah. And as I think about this, and I think about these poor VPs of Supply Chains, and Head of Supply Chains, at Tier Ones and Tier Twos, sitting here the day after the announcement, what should they be doing right now? And I want to ask you both that question, but I'm going to share, from my perspective, what perhaps lessons learned, too, from my past, and that is, there's got to be some sort of crisis management team in place, there's got to be a clear understanding of how the communication flows. Because you can't have people just grabbing stuff off the internet or from a buddy or somebody they know who happens to work at the OEM. And part of the company is reacting to that and part isn't. There's got to be a crisis team. There's got to be a protocol for communication. People have to know how often decisions are being made, how often the data is being reviewed. The status is being reviewed, you know, maybe that's twice daily, maybe three times daily, whatever the situation is, and that I want to bring it back to this trust and communication with the supply base, I will fall on the sword right now and tell you that when these crisis situations occurred, I did not communicate adequately anywhere near to the supply base as much as I should have. And part of the reason for that is, there are so many silos within a Tier One, that well, you know, if I do that, it's got to be reviewed and approved by the communications department, and then legal's got to look at it. And then I don't know how I'm gonna get it out to the supply base because, you know, with IT, and all these firewalls, and so on, and so forth. So it's very hard to get that communication out. So I think that now is the time to really think about how are you going to get that message out. Are you going to do live streams? You know, are you going to send out an audio? Or every day you're going to have a call, every day what? But get clear on what that communication is. How you're going to communicate. Who needs to be involved in that? A bit of a long-winded response. But that would be my advice to a supply chain leader or a CEO of a net supply base right now as to what to do immediately.

Tor Hough: 22:21

Let me jump in and respond to that real quickly; Sig is going to have a much better response than I am. I, unlike you guys, I've never, you know, been in that cauldron. You know, my job has been supporting people providing the data, building the systems, that kind of thing, and which is its own challenge. But I think one of the important things you can do during these kinds of crises is, is keep a little pad of paper next to you and start writing down what you don't know when you wanted to know it.

Tor Hough: 21:38

That, you know, okay, we need to communicate with our supply base; one of the things you discover is 40% of all of the data, wherever given, requires some kind of correction that when somebody hands us their list of suppliers, it's usually wrong, right? And when they hand us a list of contacts, they're not any good, right? So you think you're communicating and you're not, and that is a, you know, that's endemic to the industry. That's exactly that's how things work. Well, write those things down, as you discover, you don't know those things, as you discover, you don't understand what the payment terms that were on with every supplier is. I mean, that's a, there's a key fact right there. If suppliers are pulling ahead payments, then that six-week buffer, that financial buffer that Sig and I have talked about, just gone, it disappeared. So they're not, they're not going to have the resilience that suppliers who are, you know, sort of fully in that receivables pipeline are going to have. So understanding what you don't know and as you go through the crisis, making note of those things, because that's what you use to go back to your management team and to the to your supply chain management, you know, your managers and say, look, we have to get better at these things, or we can't respond, right? So that's my take.

Jan Griffiths: 24:10

Yeah, that's so true. I could remember those days when you think you've communicated everything, and you think you've got all the data because you pull it out of the system. And guess what? A big percentage of that is dead wrong. So yeah, that's a really good point, Tor. Sig, your advice?

Sig Huber: 24:25

Yeah, I think your advice around communication is excellent. And I think you can never over-communicate with your supply base. And they just want to know what's going on, what your plans are. And try to be as transparent as you can about that. And be transparent as to what you're doing and what you expect them to do. I do think that that's very important to come out of the gate immediately with that type of communication. What's a little bit different about this instance, versus some of the other supply chain problems that you'll encounter, is that there's time, we've talked about this several times today, we have six weeks, potentially, before things really hit the fan, maybe a bit less. But we've got time. And it's not just planning for financial risk, there's a whole startup risk that needs to be addressed, right? You have supply, it basically comes down to what we call our five pillars we have: liquidity, labor parts, demand, and transportation. And Tor is an expert about this, and he talks about it all the time. But you have to make sure that all of those are in order. For example, are we going to have a shipping container shortage again when we start up? Are we going to have trucking shortages again when we start up? And if so, how do you plan for that? But I'd like to kick it over to Tor to go back through the five pillars.

Tor Hough: 25:41

This was actually something that came out of the pandemic, and little human interest here. I had the opportunity to kind of watch my wife restart a, you know, a $4 billion manufacturing enterprise and, you know, as you watched it, she went through first liquidity issues, where are we going to, you know, do we have enough cash to get things going again? You know, do we have labor, are the workers going to come back? Do we have demand for our product? And you know, demand is always, you know, uneven at that point, the bullwhip effect and things like that, that, you know, cause a peak in demand and lows in demand. Do I have the parts? Can I, you know, are my supply chains up? And then the transportation issues. And really, if you look at the headlines coming out of the pandemic, the auto industry literally cycled through these particular problems, one after the other, right? There was a whole shipping container crisis. And then we started manufacturing tons of new shipping containers, but then we couldn't, we couldn't find enough vessels to move them back and forth. And then it was port congestion, which really became a labor problem. And really, if you sit back and look at a manufacturing operation, in order to meet its obligations to its customers, that plant has to have those five pillars taken care of, and anything that kind of, you know, gets in the way of one of those is, in some way, going to weaken them or reduce their resilience. And so we spend a lot of time as we look at bringing data in and building models of risk, of trying to think of, you know, interesting and clever ways to get out ahead of understanding those, you know, interruptions to those basic pillars.

Jan Griffiths: 27:22

Sig, from a financial risk perspective, we have heard, and it's been reported in the news, that there's a tremendous amount of weakness–financial weakness– in the supply base supporting the Tier Ones. Can you go a little deeper for us on that?

Sig Huber: 27:38

Yeah, based on the data in our database, when you look at a collection of Tier One public, and private data, about eight and a half percent of suppliers are experiencing what we would determine is very weak liquidity metrics, that means they may or may not have enough money to pay their bills as they come due right now. And if there is a sustained strike, and they end up losing 4, 6, or 8 weeks of revenue, that could have a pretty significant impact on their ability to continue producing parts. And if you're in supply chain right now, what you should do is you should be looking at the companies that you know are already weak from a liquidity perspective. And if you don't have that data based on a system that you're using, at least you have some conversations that you've had, and you should have some idea of who's weak from a liquidity perspective. And then the highest priority of those would be the ones that have weak profitability scores as well because they're the ones who could be burning cash. And if they already have weak liquidity, they're going to be the most exposed if there's any type of significant disruption in production over time. So those would be the two areas that I would focus on the most. And then the third group that if you have visibility as to which of your suppliers are factoring their receivables or are on accelerated payment terms, they're not going to necessarily have, you know, 4, 6, 8 weeks of accounts receivable buffer that's going to be coming in. So I would say those would be the three groups to focus on, most urgently for anyone in supply chain. As we mentioned before, there is a little bit of time, but it does require proactively getting out there now in order to understand the risk profiles and take proactive steps to mitigate that.

Jan Griffiths: 29:25

Yeah, thank you. And you talk about getting out there. Now, I would like to wrap this up with a message to all of our leaders out there in the automotive supply base. And that is this, when you identify a supplier with some financial weakness, please do not go in there with a baseball bat and aggressive tactics, show how tough you are, and that you're going to make the supplier perform what is quite possibly the impossible. Please go in there with a nurturing, coaching, supportive approach. This is a tremendous opportunity for authentic leadership to shine in this industry. Let's step up and make it happen. Sig Huber, thank you very much for joining the conversation today.

Sig Huber: 30:14

Thank you very much.

Jan Griffiths: 30:16

Tor Hough, thank you for your insights and knowledge.

Tor Hough: 30:20

My pleasure. Thank you.

Jan Griffiths: 30:26

Thank you for listening to the Automotive Leaders Podcast. Click the listen link in the show notes to subscribe for free on your platform of choice. And don't forget to download the 21 Traits of Authentic Leadership PDF by clicking on the link below. And remember, stay true to yourself, be you, and lead with Gravitas, the hallmark of authentic leadership.