November 01, 2023 | Supply Chain Strategy
What is one of the biggest priorities for automotive companies today?
The answer isn’t difficult to guess, considering the production hiccups in recent times due to supply chain disruptions during and after the pandemic.
Yes, for most automakers around the world, the biggest priority today is their supply chain.
No longer can they afford to depend on suppliers located on a different continent and expose themselves to potential disruptions. Instead, they are looking to build an agile and resilient supply chain that can withstand disruption, adapt quickly to changing conditions and mitigate potential risks.
The question now is: how can they succeed in this endeavor?
The answer isn’t straightforward, given that a typical motor vehicle is made up of 15,000 to 25,000 component parts.
It is hardly surprising that automotive supply chain management means dealing with a vast network of suppliers, manufacturers, distributors and service providers. This network is spread around the world, with different regions specializing in the manufacturing of different automotive parts.
While automakers may have long-term agreements with suppliers located in far-off regions, their supplies are often impacted because of unforeseen events. This was seen during the pandemic when restrictions in the movement of goods and people resulted in prolonged shortages of semiconductors and other critical components.
Even basic raw materials such as steel, aluminum, rubber and thermoplastic resin were not easily available. As a result, automotive production took a hit for most leading manufacturers. Global automotive production fell by 16% in 2020 , according to the International Organization of Motor Vehicle Manufacturers.
There is also the sustainability challenge, with increasing pressure on automakers to reduce their carbon footprint and protect the environment. As automakers increasingly focus on manufacturing electric, hybrid and autonomous vehicles, their demand for batteries and semiconductors is set to increase significantly.
As a result, they may increasingly become dependent on regions that supply raw materials for batteries and other components. For example, many original equipment manufacturers (OEMs) source electronic components from Asian countries such as China and Taiwan.
How can manufacturers overcome these challenges and streamline automotive supply chain management?
To address supply chain, inflation and other ongoing challenges, it is vital for automakers to transform their strategy and operations.
Here are six ways they can navigate through uncertain times and succeed in building a resilient supply chain.
At the outset, automotive manufacturers must map their supply chains. In this process, they should look beyond tier 1 and identify lower-tier suppliers. The mapping exercise will help identify risk at various points in the supply chain network. This is especially vital in case of critical parts and components.
Automakers should look to reduce their dependence on supplies from far-off regions. This means adopting a localization strategy and sourcing components from nearby places. Ford, for example, has partnered with a US semiconductor chip manufacturer GlobalFoundries to reduce its dependence on overseas suppliers.
In addition to sourcing, many automotive companies are planning to move production back home. Government incentives such as Advanced Manufacturing Tax Credit, which applies to components for wind, solar and battery projects, are also encouraging companies to bring manufacturing back home.
Uncertain times have necessitated a vital change in inventory management. Following a spate of disruptions and critical supply shortages, several automakers have replaced (or plan to replace) a just-in-time strategy with a just-in-case strategy. In this model, they carry buffer stocks of assemblies and components to prevent supply shortages.
Global automakers and Tier 1 suppliers dominate the market and leverage their stronghold to negotiate lower costs. But they do not share their bargaining power with their supply base. In general, automotive OEMs are demanding and inflexible with suppliers on schedules. This puts a lot of pressure on suppliers, which gets further passed to lower-tier suppliers. Amid growing uncertainty and price volatility, there is a need for OEMs to work closely with their suppliers and improve cooperation.
Companies must streamline operations and invest in advanced supply chain technology that can provide real-time and end-to-end visibility. When companies have a complete view of their supply chain and suppliers, they can spot bottlenecks, act proactively and mitigate risks. They can better collaborate with suppliers and make intelligent, data-driven decisions.
Automotive supply chain management needs an immediate overhaul. Nearshoring, localized sourcing and the adoption of supply chain technology can help manufacturers future-proof their operations and stay ahead of competition.
Additionally, product design and engineering teams can also play a role in mitigating supply chain risks. By incorporating risk scenarios in design assessments, they can create flexible arrangements and establish a process to make rapid design changes and product substitutions.
Here’s how GEP can help transform the automotive procurement and supply chain.