Lessons from the Auto Industry Collapse
article courtesy of allbusiness.com

As the shockwave of the Chrysler and GM bankruptcies reverberates through the second, third and fourth tier of suppliers, there are important lessons to be learned - particularly concerning what sort of economic bets make the most sense for twenty-first century manufacturing companies.

The first lesson is that many suppliers who invested heavily in turn-key operations that cater specifically to the auto industry or one single customer are simply out of luck. As constituted, they cannot easily find a place in the new business ecosystem, and many will find it impossible to adapt. They are paying the price for a "big bet" strategy: investments in expensive, single-purpose capital equipment that can deliver very large economies of scale but cannot easily be re-purposed.

The second lesson is that suppliers in the lower tiers of the supply chain are potentially less vulnerable to see a change such as the one occurring in the auto industry. While these companies can be more vulnerable to foreign competition because their products are typically not complicated, they are also more flexible, with production capabilities that can be adapted to multiple markets.

Component Engineers, Inc. (CEI), of Wallingford, Connecticut, a precision metal component manufacturer with machining, stamping and wire EDM capabilities, is a good example of this adaptability. As far back as the mid-1980's, the company began to encounter stiff competition in the automotive sector brought about by declining auto sales. Rather than simply try harder, the company shifted its focus to include the medical sector. How CEI achieved this illustrates the third lesson about manufacturing success in the twenty-first century: what happens on the factory floor is only part of the story, and arguably not the most important part.

One of the first things CEI did was to contact CONNSTEP for assistance in becoming registered to ISO 9001:2000 and 13485:2003. The company also altered other aspects of how it created and handled paperwork to meet medical sector expectations. Once the company had achieved some initial success, it followed up with attendance at industry events and advertising in appropriate trade journals (which, of course, are now web sites).

Today, CEI has customers in the aerospace, government, and electronics sectors, as well as medical and automotive. The company's head count grew from 34 in 2000 to 90 in 2008.

The point demonstrated by the CEI example is not so much that any particular industry segment is worth pursuing (e.g. medical vs. automotive). The point is that, in order to succeed, companies must continually seek to expand and diversify, rather than relying on one industry.

For more information on Component Engineers, please visit www.componenteng.com.