"Zombie" Suppliers and Manufacturing

JIT strikes back.

Think this downturn was rough on manufacturers?

Some analysts believe the sector's woes may worsen when demand for industrial products rebounds -- and manufacturers discover key suppliers cannot rebound with them because they are effectively -- but not yet officially -- out of business.

Call them zombie suppliers. Analysts say the speed with which major manufacturers cut output in this recession put unprecedented strain on thousands of small manufacturers that supply the industry with critical parts.

That has left the supply chain with an unknown number of suppliers who are dead but do not know it -- companies so undercapitalized and overleveraged they will never raise the money they need to get their idle plants running again.

This is yet another problem for any economic recovery. A number of marginal suppliers have been lost, so any recovery is likely to come to a point where the absence of these marginal producers create a bottleneck in production.

Subject Meta: 

Forum Categories: 

isn't Chrysler suing some already?

Of course these companies outsourced everything, thinking magically this corporate independent global supply chain...
oops, none of those suppliers would disappear while they were squeezed to zero...

but I read that Chrysler is having trouble getting critical parts to build their cars.

I don't think these suppliers are Zombies though because of course our government won't feed them anything as they die on the vine.

More like ghost ships.

You must have Javascript enabled to use this form.

No idea about Chysler

but, there's a story out of Indianapolis about the shipping of the Pratt and Whitney jet engine plant to Singapore. Not only is the plant going out of business, but it could put an engine rebuild shop in Texas out of business. Here's the story.

You must have Javascript enabled to use this form.

global supply chain

It really seems that a lot of these facilities do things almost without thinking and that's about anything outside of their own corporation.

I wish we had a good "global supply chain" analysis type of blogger on EP to discuss this because we've had a lot of posts from it plain costs more to move to China to parts failure to energy costs and now this...disappearing supply chain.

You must have Javascript enabled to use this form.

It's not just manufacturers

It's not just manufacturers that are going to have a rude awakening.

A lot of employers cut too deeply, in a blind panic. One company I'm aware of cut an entire 400-employee division last November, only to realize in January they had made a grave mistake. They began trying to hire them all back - from the top executives on down. Only some accepted the rehire offers. They lost a LOT of knowledge and it will take them a long time to build the business back to where it was.

Many companies are going to find that when the orders start coming in, they no longer have enough people who know how to do anything. Whether or not they can survive financially til they get the retraining process done - some will, some won't. Some will sell their companies, take the money and run. I see lots of acquisitions in the future.

You must have Javascript enabled to use this form.

it is amazing when it comes to people

CFOs and so on don't seem to get that is the same as throwing away a $1 million dollar piece of equipment and in some of these areas, the specialization is so high level...
believe one can "retrain" someone to obtain those skills in 6 months is not realistic, try 10 years.

I wish we could get these bean counters to count employees way beyond salary but what their real "value added" to the corporate profits, long term strategy really is. Seriously, if they are going to continue doing people by spreadsheet, at least get an accurate accounting of the value.

Thanks for posting that piece of this story!

You must have Javascript enabled to use this form.

This diary and your comment demonstrate

one reason why the rebound might be considerably stronger than almost everyone anticipates.

Let's say that there are prospective suppliers. Four of them are zombies per this diary. Four others are in good shape. The zombies will struggle and the four others will really take off.

The inventory-to-sales ratio is falling quickly -- it is already lower than when the "jobless recovery" from the 2001 recession began. Companies cut too deeply and are going to have to hire a lot of people back in a hurry.

Revenge of JIT, indeed. And by the way, glad to see another diary from MfM.

You must have Javascript enabled to use this form.

There's an assumption in what you say

every analysis starts from first principles, and in the case of economies, there are basically two ways of understanding economic life that are at the center of the debate now.

The assumption that exists in what you say is that the economy is essentially composed of individuals and firms that are atomized and essentially interchangeable. Labor is deskilled and technical specifications are largely ignored.

What I mean is that a car, for example, is composed of several thousand components. A number of them conform to the expectation that you have, that there is more than a single supplier. For example, many parts like a muffler will have an aftermarket. This means that firms other than the original equipment manufacturer (OEM) will produce replacement parts. However, an aftermarket exists for only a fraction of the components in a vehicle.

Take my 2003 Pontiac Sunfire. Last month, I discovered that something which looked like a stick was hanging to the ground form beneath my car. So I crawl up underneath to pull it out, and I realize that it's the bracket the loops around my muffler and connects it into the frame of the vehicle. Specialized components like this for which there is a high degree of technical specification (where do the holes belong, how big is the muffler, what the bracket orientation, etc.) often aren't going to be a profitable aftermarket. So you basically have something that you have to go to the OEM for. If that OEM goes out of business, and the machine tools that are used to produce the pieces have been sold in a liquidation sale to a company in China, a new producer isn't going to pop up overnight. Now anyone wanting to enter the market for this part has to retool their machines to the specifications required by the auto company. And that can be extremely expensive, particularly when you have to finance a new piece of specialized equipment that may take 10-20 years of full out production to repay. This in an environment where credit has dried up. The idea that firms are basically interchangeable breaks down.

The second way of looking at the economy recognizes that the economy is basically a network, and that removing any particular link may impact a number of other links to collapse. It's a contagion element.

You must have Javascript enabled to use this form.