Strattec Security Corp., like most automotive suppliers, has been on quite the rollercoaster since the onset of the COVID-19 pandemic.
The Glendale-based maker of vehicle keys, locks, latches, lift gate systems and other vehicle access products dealt with the complete shutdown of its Mexican operations through the first part of the pandemic followed by a ramp up in demand that made for the company’s best year since it spun off from Briggs & Stratton in the mid-1990s.
More recently, Strattec has dealt with its customers, automotive giants like Ford, GM and Chrysler parent company Stellantis, shutting down plants amid the global shortage of semiconductors.
Frank Krejci, president and chief executive officer of Strattec, said in February he had a customer tell him the chip issue would be resolved by mid-March.
“Maybe it will be March, but it will be 2022 or 2023, not six weeks from when they were telling me,” he said.
Strattec worked with customers as they’ve navigated the shortages by trying to prioritize popular vehicles and the ones they can get all the parts for, Krejci said, noting the thought in the industry was August would be better than July and September would be better than August.
“Instead of continual improvement we fell off a cliff,” he said, adding that at one point in September GM had 10 of its 16 North American plants shut down.
In some cases, Strattec had products ready to ship only to have a customer call to say the plant they were destined for would be closed the next week.
“You go from going 100 mph to a dead stop,” Krejci said.
The result for Strattec is a quarter that shows the impact of the global supply chain issues. Net sales for the quarter were down 20.5%, a more than $25 million drop to $100.3 million. The company barely reported a profit with net income of $101,000, down from more than $8 million at the same point last year.
Krejci, however, wasn’t overly concerned about the quarterly result.
“Right now, if I really wanted to optimize our earnings, I could lay off a bunch of people, especially in Milwaukee, we’re not doing that,” he said.
lnstead, Krejci is taking a long-term view and he’s encouraged by several things in the market. For starters, automotive dealers have around 20 days of inventory on their lots, down sharply from a more typical level of 77 days. That means there will be plenty of demand from customers for restocking, Krejci said.
Things have also been going better in October, he said, with fewer shutdowns and a gradual ramp up in demand. Strattec also had a number of new business wins in recent years that are now coming to fruition.
The company has also used the downtime to prepare for increased demand by building inventories and improving the efficiency of its plants.
Krejci said that in more normal times, new equipment purchases don’t always end up in the ideal spot, perhaps because something is already there or because of the pressure of day-to-day production.
“You do that over and over again over a 10 or 20 year period, pretty soon you’ve got a bunch of things that, they’re OK, but not optimized,” he said.
The customers' shutdowns have allowed Strattec to make changes that will allow for more profitable production when demand returns. Krejci said there was a list of projects to tackle when the shutdowns hit and that has expanded as employees have gotten into the work. The company has also been able to accelerate the projects, getting things done in a month that might have taken a year with production running at the same time.
“It’s also got our people excited, because they're seeing some of the benefits of this, so as we're making change, now they're coming up with additional ideas," Krejci said.
The company has also seen its inventories ramp up over the past several quarters. At the end of September 2020, the company had $54.4 million in inventory, a figure that climbed to $58.3 million by the end of March and nearly $70.9 million by the end of June.
At the end of September of this year, Strattec’s inventories were at $77.7 million, a more than $26 million increase from pre-pandemic levels.
Building inventories comes with several advantages, Krejci said. When customers are producing again, the company is able to avoid paying premium freight charges and is better positioned to meet the ramp up in supply. Krejci said some of the data seems to suggest Strattec was keeping inventories too low and can save by consolidating shipments with more inventory on-hand.
It also helps maintain supplier relationships.
“We don’t want to shut off our suppliers, they’ve been loyal to us,” he said. “If we shut them off and then we try to gear them up again, by then they might have other customers and we may not get the attention and support we need out of them.”
Even when his customers are shutting down plants, Krejci said he is still taking deliveries from suppliers.
“If I wasn’t looking long term, than as soon as I get that information (about a shutdown), I send out a memo to all my suppliers and say don’t ship next week,” Krejci said. “I’m not doing that. I’m saying ‘keep shipping, I don’t want to cause you the problems that my customer is causing me.’ That strengthens our relationship and keeps them as viable suppliers.”
He said there is one area where he’s pushing back on suppliers. With prices for many materials like steel, resins, aluminum or zinc increasing, many suppliers are seeking to pass along price increases. Krejci pointed to the rise and fall of lumber prices and is seeking to apply those price increases as surcharges instead of just increasing the base price.
“Rather than having it get lost in the shuffle, we’re trying to hopefully learn from what lumber did and give it that visibility so that if it does come back down again, it’s going to be a lot easier to identify and react to,” he said.
