Legal Lessons From Automotive Supply Chain Attorney Dan Sharkey

Dietrich: 00:07

We really can't predict the future because nobody can. What we can do though, is help auto manufacturers recognize, prepare for in profit from whatever comes next. Auto Supply Chain Prophets gives you timely and relevant insights and best practices from industry leaders. It's all about what's happening now in the automotive supply chain and how to prepare your organization for the future. Because the auto supply chain is where the money is.

Jan Griffiths: 00:40

Hello, and welcome to another episode of Auto Supply Chain Prophets. In this episode, we took our microphones in our setup on the road we were live and in person at the OESA supplier summit in Novi, Michigan, November 2022. And we had the opportunity to interview several fascinating guests. Guests that really understand what's happening in the auto industry today and reflect the views of the audience that were actually present at the event. Our first guest is Dan Sharkey from BWST. The lawyer. I have worked with Dan on both sides of the table and he certainly has his finger on the pulse of what's happening in the auto supply base, today. He understands the complex challenges and risks faced by automotive suppliers. Let's dive in. We are ready for our next guest at the OESA supplier conference and it is Dan Sharkey. Dan is well known in the automotive industry and represents suppliers all throughout the tiers in a manner of different contract disputes. So Dan Sharkey, welcome to the show.

Dan: 01:56

Thanks so much, Jan.

Jan Griffiths: 01:57

It's great to have you here.

Cathy Fisher: 01:59

So Dan, with all of your years of experience in automotive, what do you see as the biggest challenge for automotive manufacturers going forward with electrification and the supply chain?

Dan: 02:11

Well, I would say for me, electrification feels very long term. I think a lot of people were skeptical about one or the other. But now they're saying, okay, autonomous, it might be a while, it might be a decade or two. But electrification, it's happening really fast. So a lot of our clients we represent 80, or 90 automotive suppliers are sitting in there and saying, okay, in the next five, seven years, how do I recapitalize to change from the old Ice World to the New World. But the second part is where I come in supply chain. And there's two big issues. Number one is pricing. You know, the world we live in its logistics, its inflation, its freight, its labor, its raw materials, all these costs are going up. My average client, I would say is give or take 20%. And they would say their prices are up. Well, if if their margin was seven to 10%, and their costs are up 20%. That's not going to go well. So I spend more than half my time now doing pricing negotiations, just trying to get higher prices for the parts. The OEMs have raised their prices by 30 to 35%. And number two is volatility and releases in the stop and go is so hard for our clients to manage. They have a full four week schedule of releases, and then they're zeroed out. Oh, and then they shove them back in and you can't run a business that way. So that those are the two biggest challenges that I see.

Terry Onica: 03:33

How are you managing the volatility? What advice are you giving to suppliers out there to manage that?

Dan: 03:38

The number one thing is, get ready for a legal world. That's the B word, breach. It's like, hey, wait a minute, we have two or three weeks of firm releases, and you just cut into them. So guess what customer you just breached our contract. You made a commitment and firm, not forecast releases, and you've just zeroed it out. It's a breach. You did something to me now let's have a discussion to at least open up an negotiation. So we can have a discussion. Not that we need to run off the court. We've all been around for volatility, but the last year and a half, nothing like we've ever seen, right? I mean, it's just it's totally unmanageable. And it's it's really literally killing some suppliers.

Cathy Fisher: 04:17

It's interesting that you're mentioning about the volatility, because I think all of us have been in the industry a long time. And I remember the cycle was like five to 10 years, and now we're talking like weeks or months that that cycle is happening. Do you see a change in the future of how scheduling or that expectation will be set? Will it be level loading? Will it be something completely different than what we've traditionally had as far as the commitments between the OEMs and their suppliers?

Dan: 04:47

I wish we could just snap our fingers and say, Okay, we're gonna get eight or 10 weeks of firm, we're gonna be able to plan. The OEMs don't want to do that the OEMs want to have be able to manage up and down because what do they have? They have union issues. They have chip issues, they have freight issues, they have this one little component that we never thought we weren't gonna be able to get. We can't get now they have all these issues. So it's the eternal tension or battle. They only want to give us two weeks a firm. But we've we the suppliers, the tier ones, we have to order out, not weeks months, steel got the 26 week lead time on a melt at one point, right? You're talking about six weeks to melt steel, to make parts with a two week firm release period. How do you manage a business is crazy, right? It's like well, wait a minute. I have to order for six months, but I only get two weeks orders. So there's a lot of risk there. I wish I could tell you. Yeah, I think in a year it's everything's gonna be wonderful. I don't. And I think this volatility is gonna last a long time. I could be wrong. But I that's what I think.

Terry Onica: 05:51

What is the one piece of advice you would give to the automotive industry to ensure the success of the future of supply chain?

Dan: 05:58

Contract deliberately, not by default. And what I mean by that is, you worked so hard to get the business, you're building relationships, you're responding to RFQs, you finally get the PO. And your instinct is to celebrate go out for beers. And selling parts is tough. But you've got to take a deep breath and say, What did I really just get? Did I win it? Because my cost, I goofed up on my quota that was too low. Do I really have a long term commitment from this customer? If they can terminate for convenience? After six months? Are they going to come to me a year into the program after I'm tooled up and say, Oh, you're $10. Your competitors offering me nine, lower your price, you're gonna lose the business. So just be a little, not a lot, just a little one page checklist or something, to say, what do I really need out of this contract, when you're happy, take a deep breath, and make sure it's business that you really want. And you got to so that's what I would tell them.

Cathy Fisher: 06:54

Make sure that you can deliver on the promises delivered to that customer as well.

Dan: 06:59

We have clients who are super technical, great executors, sales, this kind of, they can survive. The most trouble clients, we have our great sales team selling and selling, but the back end operations don't support it. And they can't swallow the capacity. So now they're miserable. They're working weekends, overtime nights, you know, seven days, and they can't keep up with the orders and their quality of suffering. Everybody's unhappy, they're unhappy. So I just say if I had to pick, sales is super important. It's your face to the customer, but don't outsell your capacity. And the other thing, if you fire one really bad customer, every year, you'll be happier. Meaning, take your list of your you might have eight customers, you might have 80, but whatever it is, find that one customer you're not making money on and say hey, not that we're gonna stop shipping tomorrow, but we're gonna get out of this. And we're gonna have an orderly exit over the next six to 12 months. And so many people look at you funny, like, Well, wait a minute, we're trying to get business. But once they go through that process, it's so much better.

Terry Onica: 08:03

Great advice. Thank you so much for being here.

Dan: 08:05

Yes, it's nice to meet you. And Cathy, good to see you again. Yeah, take care.

Dietrich: 08:08

Are you ready to find the money in your supply chain? Visit www.autosupplychainprophets.com to learn how or click the link in the show notes below.