Taking Action to Avert a Supply Chain Crisis
Industry group brings together competitors in order to prevent a global
By Dave Lalain
Vice President, Commercial Development
Automotive Industry Action Group
When a chemical factory in Germany caught fire and exploded, killing two employees and injuring others, the shock waves reverberated across the automotive supply chain. The Evonik Industries AG plant manufactured a majority of the world’s supply of CDT (cyclododecatriene) and a significant portion of PA-12 (nylon 12), a resin used pervasively in coatings and connector applications for fuel handling and braking systems. CDT is a key chemical in PA-12, which is present in nearly every car manufactured around the world.
The March 31, 2012, explosion compromised a significant portion of the global production capacity of both products, a dire predicament for an industry that was just showing signs of a sustained recovery following the recession. TI Automotive was the first auto supplier to sound the alarm that a shortage of the resin could lead automakers to shut assembly lines. The company recognized quickly that suppliers and automakers needed to collaborate in order to find a broad-based solution and avoid a calamity in the industry. It reached out to AIAG to bring together competitors, suppliers and customers to discuss the impact of the explosion, which interrupted somewhere between 70 and 80% of the world’s supply of PA-12.
The Automotive Industry Action Group (AIAG) has a long history of providing an open, neutral, professional and legal infrastructure to resolve complex issues in the global supply chain and was therefore uniquely positioned to lead the effort to find a solution to the resin crisis. Employees at Ford, General Motors and Chrysler founded the organization over 30 years ago to improve quality and efficiency without trespassing on competitive issues, and the not-for-profit has grown to about 1000 members today. AIAG has been involved in hundreds of projects including development of the automotive industry bar code standards, which systematized bar coding for all manufacturers and suppliers, to forming a Y2K task force that gaged system readiness at over 115,000 Tier One supplier locations, ensuring the transition to the new century went smoothly.
Reaching a Consensus
To avoid potential disaster in the industry due to the resin shortage, AIAG helped the automakers and suppliers reach consensus on a common interim design validation plan and report (DVP&R) in a very compressed time frame. The DVP&R would be used to streamline efforts to position alternative materials and designs to replace existing PA-12–laden products. As the resin supply drama played out in the media, the association also provided a unified industry voice in response to inquiries from reporters eager to learn any details about the disaster and what was being done to avoid potential production shutdowns.
The resin crisis and how it was handled is a compelling case study about how AIAG provides a constructive environment for competing companies to work collaboratively without running afoul of antitrust laws. The crisis also raises important questions about the automotive supply chain and how it is possible for one plant explosion to impact so many different companies.
AIAG’s involvement began on April 13, when the organization facilitated an initial meeting with four companies, including TI Automotive, to determine the true seriousness of the resin shortage. PA-12, which is also a component in solar cells, pipelines, sporting goods and household items, was in short supply even before the explosion as demand from the solar industry increased.
The objectives of the first meeting were threefold: to help the industry understand and quantify the current state of global PA-12 inventories and production capacities; to brainstorm options to strategically extend those capacities and/or identify alternative materials or designs to offset projected shortfalls; and to identify and recruit the necessary industry resources required to technically vet, test and approve such options.
Complicating matters, the resin is used in a lot of places in vehicles, with some places easier to replace than others because of the critical level of the application, making it more difficult to find a common solution. Auto parts makers could not easily switch to another chemical quickly because it would need to be thoroughly tested. AIAG was able to step in and help the industry define the steps needed to approve such an alternative.
Using tools from Six Sigma, AIAG facilitated the initial discussion among about 30 participants.
Defining and Prioritizing the Situation
The first thing AIAG did was ask: “What is the problem and what questions do we need to answer to solve the problem?” The next question was: “How do we prevent the complete shutdown of the automotive industry because of a lack of PA-12?”
Once those questions were defined, the group dug deeper to ask more questions: Is there a way to restart the PA-12 supply? How do we “fast-track” approvals of alternate materials? What are the alternate materials for multilayer flexible tubing, connectors, rigid tubing and other products?
The group was not optimistic that the supply of PA-12 could be restarted, and it quickly became evident that the focus needed to be on alternatives the industry could use, and how those alternatives could get speedy approval.
The first meeting led to a summit with more than 200 professionals representing eight automakers and 50 suppliers. Attorneys also were involved every step of the way to ensure antitrust laws were followed. Some reporters even staked out the summit, awaiting word on developments that would impact the entire automotive industry.
At the summit, AIAG formed six technical committees to develop, evaluate and fast-track action plans designed to mitigate the impact of potential PA-12 capacity shortfalls on both component and vehicle production. The committees met in breakout sessions to tackle each issue.
The six technical committees addressed the questions:
- What can be done to restore PA-12 supply?
- What can the OEMs do to fast-track alternative material approvals?
- What are the alternatives for PA-12 for quick connects?
- What are the alternatives for PA-12 for coated metal tubing?
- What are the alternatives for PA-12 for nylon/multilayer tubing?
- What are the alternatives for PA-12 for other products?
The groups prioritized the questions regarding what to do about the shortage, got that down to a manageable list, and then started to figure out how to do it.
Scheduling the Follow-up
At the end of the summit, the work groups came back together to report on what they had determined, then AIAG scheduled follow-up sessions for each committee. The parties exchanged information that could be shared without violating antitrust guidelines; topics they could not discuss, including costs and market share, were left for individual negotiations between suppliers and their customers.
Given the magnitude of the crisis, the normally three-month process to agree on a procedure for replacement materials was expedited. The committees, which understood the urgency of the situation, met at AIAG’s Southfield, MI, offices twice a week. It took them just 10 days from the time of the initial meeting to develop and propose an abbreviated DVP&R that had the support of the Detroit Three automakers and other OEMs, as well as a broad cross-section of the materials and component supplier community. A week later, the stakeholders finalized the process for replacement materials for connectors, multilayer tubing and assemblies. Shortly after that, a DVP&R was approved for metal tubing and rigid tube coatings.
Word spread about AIAG’s response to the issue and its ability to quickly organize conversations and requalification efforts to avert a production meltdown in the automotive industry. In fact, companies in other industries even contacted AIAG for support. Johnson & Johnson, for example, requested AIAG’s help because it uses PA-12 in the production of medical device products.
A New Pattern for the Approval Process
The way the automotive industry handled the resin crisis forged a new path for how to fast-track the approval process for alternate materials that could be used in different situations going forward. The process was consistent across customers, regardless of changing requirements for different manufacturers, and allowed for many OEMs to agree on one standard.
While the AIAG-facilitated process to approve alternatives to PA-12 averted disaster in the automotive supply chain this time, the resin crisis highlights a bigger issue about what the industry is going to do to prevent similar scenarios in the future.
Consider the diamond-shaped supply chain, which leaves the industry vulnerable to production interruptions. An OEM sits at the top point. A number of suppliers go across the broadest part of the diamond, and they supply the OEM, so the OEM appears to have insurance in case one supplier is impacted by a man-made or natural disaster. But then at the bottom point are one, two or perhaps three lower-tier suppliers that make the widget or mix the chemical that all the Tier One suppliers in the middle of the diamond rely on to manufacture their products.
In the PA-12 scenario, Evonik was a major supplier of the resin. While a small number of other companies also make it, Evonik supplied many of them with the essential ingredient CDT, which is necessary to make PA-12. An interruption at the bottom of the diamond makes the middle collapse, and the OEM is left without a reliable supply base.
Floods, tsunamis, earthquakes, volcanic eruptions, fires and other natural disasters throughout the world, as well as man-made disasters, have brought into sharp focus one of the risks of globalization. Initiatives to improve the visibility of where critical components originate, to the Tier X level, are now consuming a tremendous amount of time and resources to more fully understand and model. Efforts to map the supply chain to the point where the industry can find these points on the diamond calls for an industry-wide commitment to collaboration and transparency will be essential to its success.
The Status Quo is Not Sufficient
Understanding that such mapping raises concerns about suppliers’ and manufacturers’ proprietary information, AIAG has launched an initiative to develop a process to pinpoint the suppliers on the diamond while at the same time respecting information that individual suppliers desire to keep confidential.
Going forward, the status quo in supply chain management will not be sufficient as the increasing complexity in car parts, coupled with the contracting and highly specialized supply base, makes automakers ever more reliant on knowing the origin of the materials they need to keep their assembly lines moving. ME
This article originally appeared in Motorized Vehicle Manufacturing 2012-2013.