I’ve worked for nine automotive suppliers over my 25+ year career. Five of my first seven employers (71%) filed for bankruptcy or sold under financial distress within three years of my employment with them. In my Sales role, I had a front row seat to witness the chaos and dysfunction that led these companies into financial duress. The insights gained from my prior experiences lead me to believe that my last two employers (#8 and #9) will also end up in bankruptcy or financial distress within the next couple of years; and if I’m correct, that would make it seven out of my nine employers, or an astounding 78%.
I’m not sure if my career experience of roughly 70-80% of my employer’s ending up in bankruptcy or financial distress is consistent with the industry average for automotive suppliers, or if it’s more of an exception. Either way, to help your company avoid a similar fate, this is what most of these companies had in common that led them to financial ruin:
- Poor Understanding of Cost: Knowing your break-even price is critical to long-term sustainability; and these companies had no idea what it cost them to make a part. This poor understanding of cost showed up in multiple ways:
- Missing key cost drivers in their quote model, such as setup cost, scrap cost, etc.
- Outdated or Wrong Overhead Rates:
- None of these companies reviewed and updated their overhead rates regularly; and at least one of these companies hadn’t updated them in over a decade.
- Using a percent of direct labor instead of an hourly machine rate for overhead cost – this was a common method 20 years ago, before activity-based-costing, but there are several reasons why using this method is problematic.
- Lots of these companies were using book value and accounting overhead rates instead of replacement value; and that works until the company wins so much business that it’s buying new equipment.
- One company knew their rates were wrong, so they would just remove the Overhead cost from their quotes. To make up the difference, the President of the Company would grab an inflated mark-up percentage out of thin air and apply it – in other words, he guessed at the cost.
- Manipulating (lowering) Overhead rates to win new business – some companies and people thought it was perfectly acceptable to just change the Overhead rates to some arbitrary number to win new business.
- Poor Quoting and Engineering Change Management:
- Manually dependent process – These companies all had manually dependent quote and engineering change management processes that were loosely followed.
- System shortcomings – Most of these companies didn’t have a “system”, instead they used spreadsheets. For those that had a system it was inadequate.
- Controls – The companies lacked controls to ensure there were checks and balances; and the result was that errors and omissions weren’t caught until it was too late.
- Lack of Training – The underlying theme at these companies was a lack of formal training and documentation on the processes and systems.
There was one exception; it was a big company that was publicly traded. From my POV, this company suffered from a serious culture problem. The President was a prick who loved to scold people, which created fear and built walls between departments. He also thought the customer was evil. He had verbal disputes with a couple of big customers; and he made them mad enough that we no longer did business together, or we were removed from their bid/quote list and sales were slowly dying off. This company understood their costs, but they didn’t want to recognize that the market drives the price. When it was time for negotiations the company was rigid, which made it tough to close a deal. The old President was eventually forced out by the Board. The new President started about a year after I left and inherited a dire situation. He took the company in a different direction with new products, plants and a pile of debt that led them to bankruptcy.
If what I’ve described above sounds familiar, the time to act is now. Bankruptcy and financial distress didn’t happen to these companies overnight. These companies failed because they chose to ignore these signs early on. In other words, the company was profitable until it wasn’t; and once they reached that point it was too late to act.