GM scrambles after supplier bankruptcy

Franklin, Massachusetts – Automotive manufacturers don’t like surprises – especially when the surprise involves a key supplier that unexpectedly goes belly-up.

To avoid this, OEs maintain elaborate monitoring systems to track each supplier’s financial health. But every now and then, a troubled company falls off the radar screen.

And in this case, the sudden shutdown of a small, family-owned supplier in Massachusetts nearly brought General Motors’ North American production to a halt.

Clark-Cutler-McDermott Co. of Franklin, Massachusetts, is GM’s sole supplier of certain acoustic damping materials, such as dash insulators, wheelhouse liners and floor insulators. In June, the company sent its workers home, and since it was a just-in-time vendor, GM had no reserve inventory of components.

GM scrambled to obtain a court order to re-start production, and Clark-Cutler-McDermott subsequently filed for Chapter 11 bankruptcy protection on 7 July.

GM resolved the crisis on 13 July, when it obtained immediate access to the supplier’s production tooling at a hearing of the US Bankruptcy Court for the District of Massachusetts.

Meanwhile, Clark-Cutler-McDermott is working to find a buyer.

GM is the supplier’s largest customer by volume, accounting for more than 80 percent of its revenue. Clark-Cutler-McDermott has supplied parts to the auto maker for 45 years, court documents said.

This was not the first time a key supplier has filed for bankruptcy protection, though the potential fallout in the form of a shutdown could have wreaked havoc on GM.

Nowadays, auto makers shouldn’t have to resort to last-minute court manoeuvres to prop up a supplier, said Rose Kelly-Falls, senior vice president and head of supplier risk at Rapid Ratings International, a financial health ratings firm in New York.

“Any disruption is a bad disruption,” she said. “You just don’t know how it’s going to cascade down the production line.”

Sheldon Klein, an attorney at Butzel Long law firm in suburban Detroit, said auto makers often require suppliers to shoulder most of a production contract’s financial risk.

Contractual changes – such as a model’s production run that is extended or ended – can be a fundamental risk for a supplier, Klein said. That’s especially true if the supplier depends heavily on one customer for sales.

Thus auto makers often retain the right to move tooling, as GM is doing in this case. But auto makers typically prefer to avoid such drastic measures because tooling transfers to another plant can cause logistical and quality problems.

That’s why auto makers are making a greater effort to identify and manage troubled suppliers.

GM has “a very robust and transparent process” with suppliers to monitor their financial health, said GM spokesman Nick Richards in an emailed statement. “We also work with potentially troubled suppliers to identify opportunities to help improve their business.”

GM does not anticipate any additional disruptions to its supply chain, he added.

“In theory, this should happen less often,” Klein said. “(But) there will never be a time where there won’t be a troublesome supplier time crisis.”

The agreement ultimately reached between GM and Clark-Cutler-McDermott didn’t surprise Kelly-Falls. “It’s exactly what I expected to happen,” she said.

Clark-Cutler-McDermott did not immediately return a phone call.