Auto In-Sourcing…Here We Go Again

Posted by Adrianna On November - 9 - 2012 0 Comment

Henry Ford must be smiling. After decades of outsourcing manufacturing, engineering, and other responsibilities to suppliers stateside and in low-cost regions, The Big Three automakers are beginning to bring sub-assembly back in-house.

Beginning in 2008, Ford Motor Company — the birthplace of Henry Ford’s vertical integration manufacturing model — was the first to take back assembly work, starting with the instrument panels for its Ford Taurus and Lincoln MKS sedans. General Motors and Chrysler also followed with in-sourcing select sub-assembly work.

Detroit’s motivation for rethinking their long-held outsourcing strategy is twofold:

  • Make good on promises in a new United Autoworkers (UAW) labor contract
  • Counter supply risks associated with an increasingly financially troubled auto-parts industry.

Specifically, the latest hard-fought labor contract includes a two-tier wage structure that pegs wages for new-hires at $14-per-hour, about half the going standard and on par with those of outside auto-parts suppliers. The deal also includes lower benefit costs. In return for these concessions, The Big Three have agreed to in-source thousands of jobs for sub-assembly work that is currently performed by third-party suppliers.

Ford Group Vice President for Global Manufacturing told USA Today that Ford was looking at every part and product “to see what may be candidates” for in-sourcing. He added that the decisions for bringing assembly work in-house will go beyond labor costs, and include assessments of capital investment, production availability, material prices, and logistics.

Meanwhile, Chrysler, which suffered a production shutdown recently when a plastics injection molder for its vehicle interiors — Plastech Engineered Products — filed for bankruptcy, provides tough evidence how the move to in-source could help offset undue supply risks. Having bailed out the supplier twice in the past year, Chrysler is now seeking to pull its tooling and manufacturing equipment out of Plastech’s facilities.

Truth be told, in-sourcing flies in the face of conventional supply management approaches in the manufacturing sector, which has in recent years rushed to lower costs and curtail inventory and capacity risks by outsourcing a greater portion of production to suppliers. So, one has to speculate whether automakers would have embraced in-sourcing were it not for concessions in the UAW labor agreement.

While Detroit tries to put a good spin on their in-sourcing experiment, the reality is that the move will likely exacerbate already tenuous relations between The Big Three and the supplier community. And, auto-parts suppliers that lose more business or experience increased pricing pressure by competing with in-house assembly workers, could be at even greater risk of financial decline. Expect things to get a lot worse in the automotive supply chain before (or if) they get better.

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