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Suppliers Hit Hardest in GM Closures

A recent article in IndustryWeek, “Laid-off GM workers and their supporters gather for a vigil—and vow to fight,” focused on the 1,400 GM employees in Ohio losing their jobs under the company’s announced cutbacks. While layoffs are always difficult, I applaud General Motors for being proactive rather than reactive in addressing current—and what they perceive will be future—changes in the automobile market. I realize my opinion may seem a bit heartless.

Although 1,400 is a large number, the greater number of jobs lost with the closing of this plant will be with Lordstown’s suppliers. I don’t have any recent data to draw upon, but back in 2008 when General Motors was on the verge of bankruptcy, the U.S. Department of Commerce estimated that for every job GM would lose—and they would experience significant job losses going through bankruptcy—three supplier jobs would be lost. I suspect this ratio is still in the ballpark, and the Lordstown plant closing will have a much greater impact than just the General Motor’s jobs.

The biggest difference between then and now is that instead of a corporate bankruptcy, we’re talking about a single plant closing down. Does this lessen the impact on Lordstown’s supply chain? I doubt it. In fact, in my experience, the bulk of suppliers to large Original Equipment Manufacturers tend to be small- to medium-size enterprises that—for better or for worse—have a large part of their overall business with that primary OEM customer. Consequently, there are probably a fair number of such suppliers that will be greatly impacted by the closing of Lordstown.

It is usually a bad strategy for a company to rely on one customer. In fact, during my days as a purchasing manager, I had a rule of thumb that our factory’s purchases from any particular supplier would not make up more than 20% or so of their overall business. This was so that if and/or when market demand would drop precipitously for our products, the suppliers wouldn’t be put out of business. Did this make me a “good guy”? Not necessarily. We set this threshold because it was in our plant’s best interests to have a ready and willing supply chain with the ability to supply us the parts we would need when our business rebounded.

The point here, is, however that it is likely that at least some of Lordstown’s supply base will be economically devastated by that plant’s closure to a point where they will go out of business. But you sure don’t hear about this job loss on the national news like you did of Lordstown, do you?

What can be done to mediate such situations? I’ve already alluded to the primary one, i.e., don’t become too dependent on any one customer. I know, I know, turning down any business is difficult, but in the long run it’s the right strategy to follow. This strategy would put the onus on a supplier’s marketing function to drum up business with other customers. Did I mention that many small- to medium-sized suppliers don’t have a marketing department? Those that don’t have an effective marketing strategy in place should probably rethink their approach.

Other than the above, however, I don’t have any secret formula for addressing this situation other than applying good business practices. And this includes being as lean as possible.

If you are in a supplier to a large OEM I would be interested in hearing what you’ve done to avoid this dependency trap. Feel free to share your thoughts in the comments section at the bottom of this article.

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