How long can you run at 100 mph?
I've been writing about the pitfalls of suppliers running at maximum capacity since late 2010, when the U.S. auto industry began its rise from the ashes.
The companies that survived the industry collapse the year prior did so by reducing overhead, ditching noncore business units and navigating the new economic reality with relative aplomb. Now, the industry is smaller -- fewer workers, fewer lines and fewer plants -- but is moving at breakneck speed, with dozens of new model launches annually for the foreseeable future.
The downside? When you move that fast, managers can take shortcuts or don't adequately plan. And that can lead to legal trouble or expenses.
Attorneys for suppliers are hearing more anecdotes about clients signing up for long-term, high-volume contracts without acknowledging their limitations or following the basics of contracting.
It's an issue expected to heat up more this year.
After a robust June U.S. sales rate of nearly 16 million units, analysts now project 15.3-15.5 million in U.S. light vehicle sales this year -- marking a return to pre-recession numbers in just a few short years.
"In the supply base, they are trying to hunker down, trying to see how long they can ride out with the capacity they have," said Michael Brady, a laywer at Warner Norcross & Judd LLP in suburban Detroit. "(Suppliers) ... I thought, learned those lessons. But now that things have ramped back up, they are all too happy to be quoting and bringing in business, forgetting about issues that could harm them ... soon."
Brady said suppliers are forgetting the "ABCs of contracting" and signing up for contracts without acknowledging the effects.
"The problem there is that the sales guys and the purchasing guys don't talk," he said. "It's amazing how little communication there is in this industry, and it's dangerous."
Brady said many suppliers are signing contracts without making sure their own suppliers are on board for the life of the program, leading them to hit snags in already thin margins.
Rushed contracting and a stressed supply base are already leading to issues -- recalls. With everyone trying to keep up and honor potentially bad contracts, quality is fading, Brady said.
Recent examples include a 200,000-vehicle recall from General Motors Co. and Chrysler Group LLC's recall of more than 50,000 Ram trucks and Dodge Darts.
"Some of the stress is playing out, especially when you have tooling running well beyond its lifespan," Brady said. "It stands to reason that it's only going to get worse unless we start tackling the capacity issue."