As the United Auto Workers strike continues, risks of disruption are compounding for automotive supply chain managers.
The union has already idled production lines at three plants in response to failed negotiations with Ford, General Motors and Stellantis. Now, as the union threatens further work stoppages Friday, supplier health may be at risk.
Supply chain managers looking to mitigate risk and disruptions should start by establishing clear communications with suppliers and evaluating the impact on their labor force, industry experts told CFO Dive’s sister publication Supply Chain Dive. From there, understanding the potential risks at bay, including from order cancellations and financial ripple effects, will be critical for planning now that the strike is ongoing.
“Depending on how deep this strike goes, it can be really challenging for the suppliers to kind of stay afloat,” said Mike Wall, executive director of automotive analysis at S&P Global Mobility.
Where supply chain risk is concentrated
Risk is particularly focused on the Tier 2 and Tier 3 suppliers, Wall told Supply Chain Dive.
While suppliers are currently still building parts, the risk grows as potentially more plants go offline, Wall said. In turn, it’s important for suppliers to not only understand their own position, but have a direct line of communication with their upstream customer, or the automaker, to have visibility on the state of the supply chain.
Wall said Tier 1 firms should be talking to downstream suppliers, asking: “‘How are you doing, how are your financials, how are things? When we do get out of this, are you going to be able to ramp back up and turn the machines back out?’”
Supply chain managers looking to be proactive can streamline various processes which include order intakes, raw material and labor planning, Wall said.
However, there is a limit to how much supply chain managers can plan ahead. After all, even the big three automakers do not know where the UAW may strike next.
“As those plants go down or come back up, you’re a little bit vulnerable — it is a little reactionary,” he said.
How order cancellations can disrupt the broader supply chain
Order cancellations from the affected assembly plants can bottleneck the entire supply chain, Ann Marie Uetz, partner at Foley & Lardner, told Supply Chain Dive in an email. Suppliers can continue to build parts regardless of canceled orders, but if the customer refuses to accept deliveries, then suppliers will need to pay to store those parts.
According to Uetz, demand for the parts and materials will decrease or even cease completely as the big three automakers will “likely cancel firm orders for parts and forecasts for future orders in the coming weeks and even months,” depending on the duration of the strike.
As a result, the auto supply chain will likely feel lingering impacts even when the strike eventually ends.
For instance, auto suppliers who may have furloughed workers might take a while to get operations up and running, Uetz said. Not only will it take time to resume operations, but workers may have moved to other industries while suppliers with limited resources “will be forced to fairly allocate those resources among their customers.”
Wall also highlighted the struggles of restarting operations, noting that if more automaker plants get impacted, downstream suppliers may need to reboot their systems.
“So, there’s an immediacy of the health of the supply base, and then there’s, call it the resiliency and durability of the supply base, to be able to restart the system,” he said. “That’s something we’re going to have to be laser focused on because there are definitely some challenges out there.”
Navigating the impact of ripple effects
Ripple effects from the strikes will likely move across the entire supply chain, both experts said.
Tier 2 and tier 3 suppliers may struggle with cash flow as orders are canceled. And, with many of those suppliers financed by commercial banks, some may also struggle to secure financing as operational risks mount.
“Additional strike targets will put more of the smaller Tier 2 and 3 automotive suppliers at risk of surviving.”
Ann Marie Uetz
Partner at Foley & Lardner
“Tier 1 suppliers with strong balance sheets will be fine, but further down the line of Tier 2 and 3 suppliers, weaker and smaller companies will be hit hard and we expect to see increased bankruptcy filings and further consolidation of the supply base,” Uetz said.
The UAW’s strike strategy will also impact facilities that are not directly targeted, she added.
“Suppliers should therefore consider that OEM production shutdowns may accelerate obsolescence for parts that are incorporated into sunsetting vehicle platforms,” Uetz said. “Suppliers should continue to consider and appropriately manage the output to prevent an oversupply of outdated or soon-to-be outdated parts when OEM production eventually resumes.”
Knock-on effects are already being seen. The Detroit Free Press reported GM will temporarily lay off employees at its Fairfax plant — which is not included in the union's first wave of strikes — as the facility's operations will be disrupted from a lack of stamping parts from the Wentzville facility, which has production lines on strike.
In addition, UAW President Shawn Fain has set a deadline for noon on Sept. 22 for the Big Three to either demonstrate progress toward an agreement or announce additional strike locations, according to Automotive Dive.
While supply chain managers may be able to keep things moving, operations may get tricky if the UAW goes after engine plants, Uetz said. Since cars cannot be built without engines, shutting down plants where engines are built will cripple other plants across the U.S., and impact Canada and Mexico, she added.
“Additional strike targets will put more of the smaller Tier 2 and 3 automotive suppliers at risk of surviving," Uetz said. "If more plants are idled and the strike lasts more than several weeks, it could mean the end for some automotive suppliers.”
