As the Detroit 3 automotive OEMA’s continue to restructure, the impact on the Tier 1 suppliers has become increasingly critical. Multiple articles have been written detailing the plight of these large enterprises. But what about the smaller firms, the Tier 2 and Tier 3 mid-market companies? What trauma are they experiencing as a result of their shrinking customer base? Of equal importance, how do lending institutions and private equity investors evaluate these firms when familiarity with their product, operations, and human infrastructure is limited?Beyond the obvious financial criterion, smaller companies operations can be evaluated on four attributes to truly critique viability. The areas are: human infrastructure, sales pipeline, processing excellence, and in-bound and out-bound contracts. Successful firms excel in all four areas.Human infrastructure is the leading indicator of success for any mid-market automotive supplier. In 1994, Jim Collins and Jerry Porras wrote the ubiquitous book Built To Last. The authors specifically selected the topic of organizational design and human resources (human infrastructure) as their leading topic. This selection was no accident; their research clearly indicated the leading edge relevance of human infrastructure. Similar to virtually all business organizations, the human infrastructure variable is critical to the operational success of Tier 2 & 3 companies.Within these mid-market companies, smaller staffs require employees and leaders to wear multiple hats. Cross training becomes increasingly important, as critical individuals have limited back-ups.An evaluation of an employee’s talents and training is necessary to the success of these firms. In fact, most reduce training expenditures in times of financial stress. The result is similar to reducing vehicle development in times of OEMA restructuring. Both mean certain trouble. It is critical for smaller firms to expand training as restructuring talent is lacking, therefore knowledge of concepts such as lean manufacturing, Six Sigma, and Value Stream Mapping become essential for operational success.Voids in leadership, as a result of limited numbers of people, multiply the need for training. Start up entrepreneurial companies, family owned businesses, minority led suppliers, and cost consensus suppliers often select the less expensive person, a family member, or someone simply experienced in their industry to lead their companies. These firms hope this individual will rise to lead their firm from the depths of mediocrity. In fact, this decision all but defines the destiny of the company. Selection of this leader becomes the most critical item, as restructuring talent can only come from successful experience. Ford Motor Chairman, Bill Ford, realized he had never led a company through restructuring. Consequently he and the Board decided to recruit a world-class turnaround talent. It all starts with leadership talent, and the Board was painfully aware of the issue.Sales pipeline is defined as the landed opportunities not yet being produced and sold. Success in this area is not a specific number, but is defined as a percent of total replenishment. A firm standing still with no appreciable revenue growth inevitably fails. Each firm must show year-over-year real growth at a rate above the general rate of inflation. This is done by replacing lost revenue due to impact of car model change or desourcing, while acquiring new business in excess of the replacement value. Ultimately, a company’s success in replenishing the sales pipeline is measured in year-over-year growth during an extended period of time.To accomplish this task, a solid sales and marketing strategy must be employed. The strategy has to include focused customer diversification. As the OEM market share continues to shift to new domestics and foreign OEMs, successful firms seize the opportunity for aggressive marketing to the relocated companies. Tier 2 or 3 suppliers don’t have the privilege of direct marketing to these OEMA’s. Subsequently, they have to target specific companies doing business with these transplants. It is even more important to refocus the marketing effort in light of the failing domestic OEM’s and their “tied at the hip” Tier 1 and 2 suppliers.Processing excellence in not simply a plant floor objective, instead it should be pursued by all functions of the company. Not a single process from material movement, to data transfer, to accounts receivable processing can go unscrutinized. At very step of the process there is fat and waste. Each area defines one or more of the 7 Wastes in the Toyota Production System (TPS). Elimination of waste is essential for survival, even at the expense of closing facilities, laying off long-standing employees, or removing non-performing family members from critical positions.Communication of metrics plays a critical roll in getting the entire organization on the track to recovery. The use of value stream maps allow for the visual representation of the waste. This technique is simple, quantifiable, and becomes the foundation of operating metrics. This is just one of the many tools used to help redefine operational performance resulting in the excellence needed for survival.The fourth and final area encompasses in-bound and out-bound contracts. This can be defined as contracts with both customers and vendors. Material costs and selling prices have dramatic effects on the viability of Tier 2 & 3 companies. Material costs such as petroleum and steel have escalated in the past two years. The results have been depleted gross margins and net profits. As inbound costs have escalated, companies have been forced to aggressively pursue price increases. In almost every case, this has led to significant conflict with customers. Often, this conflict has resulted in lost business and/or future opportunities, or unsuccessful price negotiations.Constant reevaluation of suppliers, material quantities, order patterns, and opportunities for synergies are necessary. A methodical process of searching for offshore suppliers, new technology, and aggressive supply prospects is absolutely required to maintain margins. Smaller firms lack resources to implement these processes due to the firefights of the day and a fundamental lack of process knowledge. Successful companies have made this part of their culture.Out-bound contracts involve getting and maintaining a fair price for the product. Active discussion with customers on material price constraints, customer specified materials, and technical specifications have to be at the forefront of customer management. This becomes difficult as most sales professionals avoid conflict as it could impact future sales and commissions. The sale professional pay structure of the past must be altered to accommodate the changing culture. Margins on sales have to be the focus versus revenue itself. Collins and Aikman and others selected a strategy of revenue first. It led many of them into financial distress.The four major categories of survival will not be enough if the corporate culture is set on maintaining legacy organizations nd processes. This change requires a commitment to a “soup to nuts” value stream mapping of the entire organization. This may sound like an overwhelming task. In fact, it is easier with the smaller firms. They inherently have less bureaucracy, few layers, and an increased sense of urgency. This urgency is critical, as the financial community has limited patience with smaller, struggling firms. Some Minority based suppliers have the added issues of being under capitalized, performing lower margin value added tasks, experiencing declining support from the OEMA’s, and lack experienced leadership.It might sound like a lost cause. However, there are many cases of firms attacking these areas…and flourishing. It simply takes commitment. And that comes from the top. When critiquing one of these smaller firms, evaluate sales pipeline, contracts, processing, and human infrastructure and forget about the quality plaque on the wall.CMM Engineering’s team of proven turnaround specialists can assist firms to maximize profits, expand revenue, launch products, and improve overall operating efficiency. We will teach and mentor leadership to promote change in troubled times, plus assist in the implementation of the enhancing shop floor and business transaction efforts.