General Motors (GM) has narrowly escaped “catastrophic” disruption and potential job losses in its North American manufacturing operations after settling litigation with a key supplier that had declared it was filing for bankruptcy and ceasing production.
Massachusetts-based Clark-Cutler-McDermott (CCM) application for Chapter 11 bankruptcy protection on July 7 cited unsustainable losses of US$30,000 a day as a result of unprofitable contracts with GM. The car giant accounts for 80% of all sales revenue at CCM.
CCM has been a key GM supplier for more than 45 years and has been named GM’s ‘Supplier of the Year’ four times. It provided around 175 individual parts and was the sole supplier of certain acoustic damping materials, such as dash insulators, wheelhouse liners and floor insulators, present in every one of GM’s cars in North America.
CCM first lodged an application for bankruptcy protection in June but the US District Court for the Eastern District of Michigan granted GM a temporary restraining order that required CCM to continue production of certain critical parts. GM argued that it had pumped millions of dollars into CCM and had also increased the price it paid for some parts. CCM said in its court filing that an unprofitable contract with GM had caused it to lose US$12m since 2013.
When the restraining order expired in July, CCM again filed for Chapter 11 protection and GM again filed a motion to prevent this. In court documents GM said: “A continued disruption in the supply of component parts will also cause a catastrophic disruption in the supply chain and the operations of countless GM suppliers, dealers, customers, and other stakeholders, including the potential layoff of tens of thousands of workers in the event GM’s North American operations are completely shut down.”
GM also said that CCM’s application was a “direct result of the self-interested and wrongful conduct of [CCM’s] ownership and management”. GM accused them of “having run [the company’s] businesses into financial distress” and says that the purpose of the Chapter 11 filing was “to protect their personal assets and avoid personal liabilities”. CCM’s ownership and management “ignored… their fiduciary duties to creditors”, GM claimed.
However, the two sides reached a settlement in US Bankruptcy Court in Worcester, Massachusetts. GM will keep the tooling that CCM used to make the parts. GM plans to redeploy that equipment to another manufacturer so that production can continue. GM can also buy any finished product that CCM has in stock, GM spokesman Nick Richards said after the hearing.
CCM will seek a “turn-key sale” to another company.
Risks of ‘single sourcing’ and ‘just-in-time’
The episode has highlighted the financial risks when manufacturers implement ’single sourcing’ and ‘just-in-time’ practices, not least in an industry that has seen many smaller auto parts suppliers in the US failed in the wake of the 2008 financial crisis.
Single sourcing enables the customer to buy more cheaply as it gets the benefit of economies of scale, but means that the buyer is entirely reliant on the viability of that supplier. Just-in-time processes increase customer vulnerability by reducing the time available to switch suppliers if necessary.
But as was made clear in GM’s court documents, single sourcing coupled with just-in-time manufacturing could have deep financial costs in the event that a supplier fails. GM said in its court documents: “Even one day’s disruption in the supply of Component Parts could cause a shutdown of GM assembly operations.” It added that the cost of such a shutdown “would be in the millions of dollars per plant per day”.