View Full Version : "Zombie suppliers" haunt manufacturing sector

09-03-2009, 08:03 AM
CHICAGO (Reuters) - Think this downturn was rough on manufacturers?
Some analysts believe the sector's woes may worsen when demand for industrial products rebounds -- and manufacturers discover key suppliers cannot rebound with them because they are effectively -- but not yet officially -- out of business.
Call them zombie suppliers. Analysts say the speed with which major manufacturers cut output in this recession put unprecedented strain on thousands of small manufacturers that supply the industry with critical parts.
That has left the supply chain with an unknown number of suppliers who are dead but do not know it -- companies so undercapitalized and overleveraged they will never raise the money they need to get their idle plants running again.
"Their lenders are going to say, 'Sorry, we're not going to increase our exposure with you because we don't know if you're going to make it or not," says Bill Diehl, the chief executive of BBK, an advisory firm that does supply chain risk analysis.
And that, of course, would be a horror show for the publicly traded manufacturers that rely on these suppliers. It could leave them scrambling to secure components once the recovery starts -- and missing some of the rebound's benefits.
"That's the bigger risk," says Craig Giffi, the head of Deloitte's U.S. consumer and industrial products practice. "They could be left unable to capture the upturn."
In the past, suppliers were often initially insulated from the effects of industrial cycles because their big customers were slow to cut production -- because they believed the downturn would be brief or because slow internal processes made quicker cuts impossible.
But the industry's move from mass production to a build-to-order paradigm, and the outsourcing of many parts once produced in-house to outside suppliers, have changed all that.
That is a big reason why U.S. industrial output tumbled at a record rate in this downturn. Sure, demand evaporated last fall after the collapse of Lehman Brothers essentially paralyzed the credit markets. But manufacturers also reacted differently than they had in the past, immediately shutting down production at their own plants -- and, by extension, those of their just-in-time suppliers.
"It's never happened this fast before," said Alex Blanton, an analyst at Ingalls & Snyder who has covered manufacturing since the 1970s.
The sector, in other words, is in uncharted territory. So concerns are high. "When you take 50 to 75 percent out of your purchases overnight ... you can inflict terrible, permanent damage on your supply base," says Eli Lustgarten, an analyst at Longbow Research.
During a recent meeting with analysts, Gerard Vittecoq, Caterpillar Inc's (CAT.N (http://www.reuters.com/finance/stocks/overview?symbol=CAT.N)) production guru, acknowledged that the company was already seeing "a lot of disruption with suppliers going bankrupt or having difficulty" -- and the Peoria, Illinois-based company is still largely cutting output.
The banking industry's troubles are adding to the uncertainty. Diehl at BBK believes many lenders, overwhelmed by the woes of consumer borrowers, have resisted foreclosing on distressed commercial borrowers -- provided they keep their heads down and do not come looking for help.
"Lenders don't want to have to pay the property taxes and everything else associated with keeping that stuff up once they foreclose," he says.
"So as long as the borrower isn't trying to request additional funding, they've basically been sitting still, even with borrowers who are in default, hoping that the market would come back and some of them will be able to survive."
Giffi at Deloitte agrees. He says that "bankruptcy statistics aren't indicative yet of the weakness that we're seeing in a broad base of suppliers.
"Until those companies have to produce something -- and to secure raw materials, to make a part, to hire more workers -- no one will know how weak their balance sheets and credit positions really are."
To be sure, not everyone thinks the industry is on the verge of a "Night of the Living Dead"-like supplier nightmare.
An analysis by the financial information company Sageworks of the quarterly balance sheets of more than 1,000 small manufacturers -- the kind that often produce parts for larger companies -- found surprising signs of health.
While the analysis found that average profit per employee had tumbled nearly 50 percent at small manufacturers over the past year, other financial metrics have improved. The average quick ratio, for instance, a rough-but-reliable indicator of a company's ability to pay its bills, rose to 1.7-to-1 from 1.4-to-1 over the last year. Any ratio above 1-to-1 is considered healthy. And cash as a percentage of total assets has also improved.
That leads Melinda Crump, a Sageworks spokeswoman, to declare suppliers "may have a fighting chance" -- especially if the economists are right and the rebound turns out to be a slow, U-shaped affair rather than a rapid, V-shaped uptick. That, Crump says, would allow companies with low production levels "to rebuild economies of scale instead of being part of an overwhelming wave hitting the banks for large sums."
But no one denies that some suppliers will never return, no matter what shape the recovery takes.
"The robustness of the supply chain won't be the same," says Lustgarten. "You're going to lose some of the marginal players and manufacturers that aren't thinking about that right now will probably be facing some difficulties in the upturn."

"I have several open service calls where parts for even new machines are unavailable. My auto repair buddy is running into the same problem a lot more too."

09-03-2009, 08:23 AM
Turns out to be a big issue for us. We're working on a new prototype with an illuminated membrane switch pad. It's on a tight schedule. The vendor for the part called us to say that we wouldn't get it on time as they were re-sourcing it. (Re-sourcing? We hired you as the vendor - aren't you MAKING the darned thing?) Turns out the supplier was in China and went belly-up, so now they are scrambling to find a new vendor and so are we!

Captain Blight
09-03-2009, 08:24 AM
Looks like it might be a good time to buy stock in McMaster-Carr.

09-03-2009, 08:27 AM
Looks like it might be a good time to buy stock in McMaster-Carr.

Call them and ask, they are scrambling now. I had a couple of recent back orders with one just puled as their supplier is gone now.

09-03-2009, 08:28 AM
Looks like it might be a good time to buy stock in McMaster-Carr.

Doesn't always help. They've had parts they've been out of recently with LONG lead-times. I think they're feeling the pinch as well.

IIRC, really big projects, such as the Boeing Dreamliner are being held up due to issues with things like fastener supply.

09-03-2009, 08:36 AM
I have been modifying equipment to use alternate parts lately.
It may be a good niche market for me as I am starting to do outside work for other service outfits but how long can that go on? Never mind the increased liability I am taking on. It really sucks to be flying without a net and all I need is one lawsuit and I am finished.
The big outfits are staying out of it and the end users are ending up with boat anchors. Its nice to be the hero but if something fails with a modified machine who gets crucified?

Andrew Craig-Bennett
09-03-2009, 09:02 AM
The container shipping industry is going to be a "zombie supplier".

Be warned that this link in the chain is being absolutely gutted.

09-03-2009, 09:09 AM
The container shipping industry is going to be a "zombie supplier".

Be warned that this link in the chain is being absolutely gutted.

A friend in the container business told me they are scrapping boxes that are near their inspection dates instead of re inspecting at the New Jersey terminals and used container prices have plummeted.
I wouldn't mind getting some 20's and 40's cheap. The trucking costs are phenomenal though.

Andrew Craig-Bennett
09-03-2009, 10:03 AM
Trucking has always been the priciest part of the business.

Be careful to check the roof, if buying.

09-03-2009, 12:00 PM
Trucking has always been the priciest part of the business.

Be careful to check the roof, if buying.

I worked for five years in the retrofit of them, Built portable refrigeration with the cold boxes. They are a very practical item when taken out of intended use.

I do hate those fiberglass 53' ones though. They are pretty much spent when I see them.

Andrew Craig-Bennett
09-03-2009, 01:23 PM
Me too. I hate 53footers, I hate Europallet width boxes, but I espescially hated the aluminum reefer boxes with wooden floors which had been treated with copper wood preservative...:rolleyes:

09-03-2009, 01:46 PM
'nother Zombie Supplier for you. The vendor for Neoprene foam gasketing isn't making stock in the thickness and durometer we want anymore. Time to find another one or a new material.


Bill R
09-03-2009, 02:40 PM
I have the same problems geting parts for relatively new transmitters. Transmitter manufacturer outsources for a lot of the components, and they are having problems getting the components from their suppliers. We have started stockpiling parts just to have them in an emergency- when I need one part, I have been ordering 2 or 3. Same thing with computer components- we are ordering bulk parts when we only need a few.

I have had to manufacture/build/recreate some of the mechanical parts due to lack of immediate availability.

My vendors tell me it is only going to get worse.

Captain Blight
09-04-2009, 07:09 AM
One of the guys I work with-- his day job is as a purchasing agent for a local fastening manufacturer/supplier. He says they just had to swallow a big loss: what had happened was that their supplier, in SE Asia (Thailand maybe?) had mis-marked some bolts. And word of this had got around the industry. So even though they had their lot of fasteners tested-- twice, by two different independent laboratories-- and found that they met specs; even so, McMaster will not buy those fasteners from this Minnesota company because of this mis-marking debacle of a couple years ago.