Originally published in Automotive News

By Daron Gifford

In the past few years, major auto recalls have gone from the occasional front-page news story to what one consultant recently called the industry’s “new normal.”

But the numbers, according to the National Highway Transportation Safety Administration, are anything but normal. For the first nine months of 2015, the NHTSA issued 141 recalls covering about 34 million vehicles. The data last year: 902 recalls involving 74 million vehicles — more than double a record set in 1999.

Blame the surge on several factors: More complex electronic technology in vehicles; pressures to meet performance targets; better repair tracking; the spike in older cars on the road; and NHTSA’s more aggressive stance toward recalls.

One previously lesser known Japanese supplier, Takata, is now a familiar name in the business press. NHTSA has recalled 19 million cars in which eight U.S. fatalities and more than 100 injuries have been linked to the company’s faulty airbags.

And let’s not forget the Volkswagen scandal. The German automaker has admitted to bypassing the emissions control system in some 482,000 vehicles purchased with the 2.0-liter diesel engine in the U.S. since 2008. Recalls are expected.

Supply chain pressure

The recent and anticipated recalls are putting new pressure on automotive suppliers on quality control and every link of the supply chain. It comes as the major automakers had already been increasing efforts to recover costs from their suppliers over warranty issues.

So, it’s even more critical that component makers take steps to prevent the fallout a recall might have on both the company’s bottom line and its reputation.

This requires closer working relationships among suppliers and between suppliers and the automakers — both to identify problems earlier and to clarify who’s responsible for fixing them.

Four steps

Here are four steps auto-parts suppliers can take to reduce their recall risks:

• Suppliers should negotiate with automakers on specific recall terms and data access. As the number of recalls has risen, the big automakers have become more proactive in soliciting and analyzing data from their dealers and repair shops to help identify defects earlier. It’s critical that suppliers not only know what information is available from the manufacturers that pertain to their work — such as warranty claims and parts orders — but demand speedy access to that data as part of their contract. Too often in the past, automakers and suppliers have made informal “handshake agreements” around warranty and recall issues and how that might affect future pricing. That’s a terrible way to do business in any climate. Over the last two years, General Motors and other automakers have pushed harder for recall-cost-recovery from their suppliers. In a time of increased cost shifting, it’s vital that suppliers understand all contract terms and conditions that relate to recalls, including specific details about how liability and costs are determined.

• Component makers must collaborate with each other and manufacturers to solve problems. Suppliers increasingly work off of their own designs, or they work from designs and specifications that come from a customer. When recalls arise, there can be disputes over whether to blame the supplier’s design, the manufacturer’s design or problems at a supplier’s plant. Today, a new level of transparency and cooperation is urgent to solve problems faster — especially among the various layers of parts manufacturers. Engineers for a Tier 1 or Tier 2 supplier often can detect a problem before the automaker’s experts.

• Boost your in-house capacity to read field data. Historically, quality control has centered on problems at the production facility — not consumer issues that arise in the field. Parts makers that are successful in gaining more data about performance and possible defects will need to hire quality-and-reliability engineers to study and interpret new field information. That’s an added expense, but in today’s environment it’s more cost effective than the big hit — both in dollars and reputation — from a major recall.

• Analyze risk to be prepared for any recall-related problems. Manufacturers, which deal with multiple warranty-and-recall issues every year, typically set aside as much as 2 percent to 3 percent of annual revenue in reserve. That strategy usually hasn’t been utilized by smaller component makers where establishing a reserve will impact earnings. But with recalls growing and more data available, suppliers need to analyze their financial risk more closely in order to cover their recall-related cost.

The stakes can be high. In 2001, reports of fatal rollovers in the Ford Explorer and the subsequent recall led to bitterness and finger-pointing between Ford and Firestone, which not only ended a 100-year relationship between the two iconic companies but caused substantial losses and damage to the Firestone brand.

That kind of catastrophic breakdown doesn’t need to happen. Even in a challenging recall environment, smart planning, better data analysis, transparency and collaboration can prevent a vehicle defect from creating nasty surprises.

Daron Gifford leads automotive industry consulting at accounting firm and consultancy Plante Moran in Detroit.