Can Automakers Find a New Normal Amid Supply Chain Blues?

The past two years have presented many challenges for the automotive industry.

Leading automakers have struggled with pandemic-induced lockdowns, factory closures, supply disruptions and labor shortages. And there are few signs of recovery.

As many manufacturers continue to battle inflationary and supply chain pressures, they continue to experience a sharp increase in costs.

Ford Motor, in a recent update to investors, said it may incur an extra $1 billion in costs in the third quarter of 2022.

Earlier, General Motors warned investors about reduced earnings in Q2 due to lack of components because of supply chain snarls.

The shortages of semiconductor chips and other parts have crippled the industry.

In case of Ford, this has impacted the manufacturing of 40,000 to 45,000 vehicles, including high-margin trucks and SUVs.

New Strategies for The New Normal

Today’s rapidly changing business environment requires automotive companies to innovate and devise new strategies to remain competitive.

Here are a few ways they can weather the storm in their supply chain.

1. Pre-Qualify Dual/Multiple Components:

Manufacturers are well-aware that any disruption in the supply of critical components can bring automotive production to a complete halt. They are therefore taking steps to mitigate these supply risks. Firstly, they are looking to expand their supplier base. Secondly, they are pre-qualifying more than one component for production. In other words, they are trying to identify alternate components that can work effectively in an identical (or nearly identical) manner.

Tesla, for example, used this strategy to good effect and successfully modified its software to enable utilizing alternative electronic components in vehicles. At a time when most carmakers were struggling with semiconductor chip shortage, the use of alternate electronic components helped Tesla to maintain and even increase production levels.

2. Revisit Cost Increases:

In recent times, automotive suppliers had put a premium on their supplies due to ongoing disruptions. Companies therefore accepted significant cost increases to ensure preference from suppliers and reduce production impacts.

However, with a slight hint of recovery, it is now time to review these increases and negotiate with suppliers where capacity is now more aligned with demand. Assess if the cost increases continue to make sense in the current environment.

3. Work Closely with Suppliers:

Along with reviewing cost increases, this is the time for automotive companies to revisit previously discussed strategies and ideas with suppliers. Suppliers are often an untapped resource, and they now have an opportunity to truly act as partners. They may have suggested several ideas for cost and process improvements in the past that for some reason could not be implemented or was not a priority.

Some of these suggestions may work well in the current environment, especially as corporate profit margins are likely to tighten.

However, to implement these suggestions, there must be a clear governance structure in place. Procurement can play a vital role in this process. It can act as a central point of contact, collect the ideas and network with the stakeholders. It can also review and track the benefits of these suggestions.

4. Reuse and Reduce Components:

Manufacturers must review consumable components in production and packaging and identify components that can be used longer or refurbished. Reusing components can also help drive a company’s long-term ESG goals.

Following this strategy, a leading automotive manufacturer reviewed its SOPs requiring regular rack replacement and found that their life could be safely extended. Similarly, automotive robotic paint components such as shields that were previously replaced after a set number of cycles can be washed and reused. Such reuse can also reduce the total number of components consumed during automotive production.

Also Read: 3 Ways Automakers Are Reworking Sourcing Strategies

The Bottom Line

The automotive industry will take some time to fully recover and return to its pre-pandemic normal. Automakers have learned hard lessons during this period and must quickly devise new plans to counter cost increases and build resilience in their supply chains.