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Hidden Threats to Your Supply Chain

July 18, 2016
Automotive Blog Post
Father and son standing together in a shop
Small, family-owned businesses often have not made sufficient arrangements to deal with the contingency of suddenly losing an owner or key manager to an accident or life-threatening health concern.

In 1997, during a period of peak demand, a factory fire at Aisin Seiki Co., one of Toyota's key suppliers, shut down production of P-valves, a small but vital component in Toyota's braking systems. Toyota, champion of just-in-time production, suddenly had a huge crisis on its hands. Because it had only a day's worth of P-valves in stock, it was forced to shut down production. It was only able to restart the line several days later after enlisting the help of 62 other suppliers. This brief shutdown led to losses ~160 billion yen in revenues for Toyota alone, not to mention those of its suppliers.

Such a story is an object lesson in what can happen to an auto manufacturer when a key link in its supply chain fails during a period of high demand. As auto production has ramped up again today, it is wise to minimize the risk of production shutdowns. In the case of Toyota, the cause was a factory fire, which made production physically impossible. But there are less obvious risks. For example, what would happen if a key person in a supplier suddenly died, paralyzing the business by throwing its ownership into question or its management into disarray?

If you are a lower tier supplier, this risk may be particularly relevant for you, as you likely do business with some small yet essential family-owned businesses. Small, family-owned businesses often have not made sufficient arrangements to deal with the contingency of suddenly losing an owner or key manager to an accident or life-threatening health concern. Though such events may not appear likely—much like the fire at the factory in Japan—they are certainly always possible. That is why encouraging your suppliers to have a plan for dealing with situations like that—a succession plan—is vital to minimizing the risk of a stoppage in production.

Succession plans in this context generally have two primary components: a plan for a smooth transfer of ownership interests in the company (e.g., a buy-sell) and a plan for an orderly transition between senior managers. With no clear path laid out for the transfer of ownership to the next generation in a family business, the death of the current owner can lead to family infighting and prolonged disputes over how the value in the business should be distributed. In much the same way, if a business loses a member of its senior management and has no immediately apparent successor waiting in the wings, it may be hard for the business to carry on production without significant disruption. Either circumstance has the unspoken potential to destabilize the business and threaten production, the worst case scenario for you, the customer. A responsible succession plan will resolve these issues ahead of time with the result that ownership passes seamlessly and business continues without skipping a beat.

As you can see, fires aren't the only thing that can threaten a supply chain. Do yourself a favor and encourage your suppliers to take adequate precautions against surprises. Having the conversation now might make all the difference when the unexpected happens.

This article was co-written by Justin Ooms, a summer associate at Varnum in 2016. Justin is currently a student at Indiana University Maurer School of Law.

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