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Print articleAutomotive
Chain of success
Many managers know that an efficient supply and distribution chain is a key component of a successful business. Over the last 10 years or so there has been a sustained move to rationalise supplier numbers and to develop deeper and stronger relationships with those that remain. However, closer links and greater dependency on the supply and distribution chain can bring an increased level of business risk should one of these key supplier or customers experience financial or operational difficulties.
By Kenny McKay, Director, Restructuring practice at KPMG and Will Wright, Manager, Restructuring practice at KPMG
In recent years there have been a number of collapses in the UK and Europe of key suppliers to the automotive industry. In many cases, the knock-on effect has been disruption to delivery timetables and, in order to secure continuing supplies, customers who are unable to secure a replacement supplier have had to swallow significant price rises (sometimes double or triple normal prices). Not taking this approach could otherwise result in major disruption to their production lines of up to six months.
Furthermore, even if this short term approach means that production can continue, it certainly does not guarantee a sustainable long term solution. In many cases, all it buys is a little time in which to source and secure a more long term deal with an alternative supplier. However, clearly this is not a position of strength from which to begin the long and difficult process of negotiating and establishing new supplier relationships.
As is the case in other industries, businesses that end up in crisis or collapse display signs of distress long before the problems become acute. Spotting these warning signs early is critical to help ensure that the problem business has sufficient available time and resources in which to deliver a turnaround.
Typical warning signs can include:?
- Declining financial performance
- Declining operational performance
- High levels of senior management turnover
- Refinancing activity
- Reducing credit rating
- Request to accelerate payments
KPMG?s Restructuring practice has extensive experience of this issue within the automotive industry and has seen the problem from both sides. Our experience tells us that one of the keys to a successful outcome for all parties can be early and active intervention to affect a successful restructuring plan in order to prevent the risk of a serious interruption to a business becoming a reality.
Typical examples of potential supply chain disruption
Example 1 - Background
A major OEM had identified a problem in its supply chain. One of its key suppliers had lost control of its largest operation and was regularly stopping assembly lines. Each attempt by customer supplier development teams to fix the problems worked for a short period but poor performance always returned. We were introduced to the management by the customer and, following a brief diagnostic, were engaged to support the supplier?s management team with the dual objectives of recovering delivery performance, stabilising the financial position and returning the operation to profitability.
What we did
We introduced a simple cycle of twice-daily meetings to turnaround the business, briefed key customers and started to fix fundamental problems with production scheduling, materials management and shop fl oor supervision. Once delivery performance had started to improve we began to address more fundamental issues: reducing costs, improving the financial structure of the business, changing the make-up of the management team, introducing a redundancy programme and negotiating key supplier arrangements and reorganising the shop fl oor.
Outcome
Within weeks, delivsery performance had recovered to 100 percent with unplanned transport costs dropping to zero after ten weeks. Over half the management team changed and the output of the plant increased despite a significant cut in headcount and temporary labour. The financial position was stabilised and the business returned to profitability.
Example 2 - Background
It was a call that every chief executive dreads - the directors of a major component supplier informed him that it was unable to meet its payroll commitments and was to petition for Administration at the end of the week.
What we did
At the customer?s request we undertook a brief diagnostic review that determined the extent of the problem. Some immediate cash management assistance was required to provide the supplier with sufficient cash fl ow to help meet its short term commitments. Despite having gained a little time however, it was clear that the longer term forecasts showed the supplier heading towards insolvency if it did not stem the losses in its core business. Working with management of both the customer and supplier a radical restructuring plan was developed and agreement brokered with key stakeholders.
Outcome
The supplier avoided formal insolvency and as part of the restructuring plan the customer acquired part of the supplier?s business. The rescue package protected the customer from a potentially expensive disruption to its supply chain and the remaining stakeholders of the supplier enjoyed a better outcome than could have been the case with formal insolvency.
For further information please contact Kenny McKay, Director, KPMG LLP on 020 7694 3188 or Will Wright, Manager, KPMG LLP on 0121 335 2772. © 2005 KPMG LLP, the UK member firm of KPMG International, a Swiss cooperative. All rights reserved. Originally produced in the United Kingdom. KPMG is the global network of professional services firms who provide audit, tax and advisory services. KPMG LLP operates from 22 offices across the UK with 9,000 partners and staff. KPMG recorded a UK fee income of £1,066 million in the year ended September 2004. KPMG LLP, a UK limited liability partnership, is the UK member firm of KPMG International, a Swiss cooperative. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.