Why Risk Management is Essential to the Automotive Supply Chain
Events such as the 2011 earthquake and subsequent tsunami in Japan, persistent component shortages, tariffs and evolving regulatory standards continually push the automotive supply chain to reframe how it prepares for the unexpected.
These ongoing challenges have taught automotive industry leaders the importance of supply chain resilience and ingrained risk management best practices. Yet, 2020 was the first time we experienced a complete global shutdown. COVID-19 forced plant closures, country-wide lockdowns, component constraints, job losses and staffing shortages.
In a September 2020 Jabil Special Report: Supply Chain Resilience in a Post-Pandemic World, Dimensional Research surveyed 105 automotive OEM decision-makers about the impact of COVID-19 on the automotive supply chain and their company’s risk management practices. When asked about their supply chain strategy for the next two years, automotive decision-makers clearly prioritized resilience and risk management.
In the next two years...
If there is a silver lining to the disruptions of the last decade, it’s that they revealed supply chain management vulnerabilities will always exist. The secret is in how we prepare for and address them. Looking ahead, the automotive supply chain continues to be impaired by electronic component shortages while adapting to a new set of industry challenges born out of electrification.
How can the industry make the automotive supply chain more resilient? Here are four considerations:
1. Make Multi- or Dual-Sourcing an Integral Part of Your Automotive Supply Chain
The automotive industry is known to have a more mature global supply chain than others. Still, the cost of downtime and no supply is catastrophic. So extraordinary measures are taken to keep manufacturing running during a crisis.
Due to the just-in-time (JIT) manufacturing nature of the automotive industry, you need to have certain buffers in place to offset the impact of any disruption. If a problem forces a month-long manufacturing hiatus, it isn’t easy to recover unless you have a significant amount of safety stock in the plan. That’s why the automotive industry relies on regional supply chains as a risk management measure—it's also economically more viable. If the industry stuck to true JIT in all parts of the supply chain without having safety stock, they would be in big trouble.
In building up the safety stock within their supply chain and ensuring business continuity, some automakers rely on multi- or dual-sourcing strategies to keep their operations running. In addition to risk mitigation, an advantage of a multi-sourced, localized supply chain is its ability to lower costs.
Automotive suppliers located close to the point of production reduce logistics costs, and multiple suppliers means several solutions, providing more opportunities for cost savings. Specific to electrification, the transition of material usage has implications for supply availability and continuity as well as exposure to commodity prices. For example, copper is heavily used in power and charging electronics -- multiple localized suppliers manufacturing components with heavy copper content are key to production efficiency and cost savings.
From a supply chain point of view, OEMs and Tier 1 suppliers need to make sure that their suppliers and manufacturing partners’ suppliers have the right sourcing strategy and capacity to meet flexible production requirements.
While there are instances where there’s not an economic return for certain types of components to have additional sourcing, others are simply not possible to dual-source at all. With an estimated 80% of global automotive supply chains linking to China, many automakers feel the pain of single-source reliance on Chinese suppliers when hit by the chip shortage, supply disruptions or tariff issues.
Tied to the intense focus on vehicle electrification, the number of electronic systems used in each vehicle is growing faster than the auto industry can keep up. In fact, the ongoing semiconductor shortage have put the automotive industry in deep competition with consumer electronics for parts. With many pandemic lockdowns in effect around the world, growing demand for gaming consoles, laptops and other electronics has overwhelmed semiconductor chip suppliers. As a result, many automotive manufacturers have had to shut down or halt production. With no immediate fix in sight, the shortage is expected to last at least another six months. More than 600,000 vehicles could ultimately be impacted, according to IHS forecasts.
Continuing to diversify approved vendor lists and allowing for multi-sourcing where possible is an area where the automotive industry can make more headway. More than eight in 10 of Jabil survey participants agree that while they’ve known the value of a diversified supply chain footprint and sourcing strategies, recent events have made it even more clear.
In relation to the diversification of your automotive supply chain, ask: How can we diversify our sourcing strategies and partnerships to be ready for localized shutdowns or interruptions? Beyond a global pandemic, what can we do to prepare disruptions such as natural disasters, strikes, trade wars and shifting regulatory standards?
2. Incorporate Supply Chain Visibility with Predictive Capabilities
Having access to real-time insight into your materials, orders, suppliers and component information is a critical part of supply chain visibility. The benefits are plenty: an improved supply chain planning process (especially at granular levels), ability to make better decisions with complete insights and reduced errors that lead to better performance.
In the Jabil survey, 48% of automotive decision-makers said the key goal to their company’s approach to resilience was to increase visibility into their supply chain to make decisions faster.
Visibility provides you with a deep awareness into your supply chain. But the thing about visibility is that it can only show you what has already happened. This provides time to react but doesn’t help proactively plan for the future.
Mitigating risk with a multi-source, globally distributed supply chain only goes so far. The next step is to ensure systems are in place that provide immediate knowledge in the event of supply chain disruption (natural disaster, weather impacts, factory shutdowns etc.). The goal is to access a system that provides visibility of what’s on order, where that part is being manufactured and solutions to pivot away from the affected area to find alternatives sources if necessary.
That’s why predictive intelligence is vital to supply chain operations. You can build scenarios to problems that could occur (no matter how probable) through this capability. When you have a better idea of possible disruptions and how they can impact your automotive supply chain, you can address them sooner.
For example, if the 2011 earthquake and tsunami in Japan was to happen today, an automotive OEM with robust supply chain visibility and predictive capabilities could sense the interruption and swiftly initiate a business continuity plan to switch to alternative suppliers. The supply chain team could also adjust schedules to accommodate customer needs.
In Jabil’s survey, only 9% of automotive and transportation respondents said they were fully executing on a predictive supply chain risk management initiative with implemented technology and team structures. Nearly half (46%) are in the process of developing their program. As a result, only 19% rated their company’s predictive supply chain risk management approach in dealing with COVID-19 as excellent, in that they had full visibility into coming disruptions and adapted easily.
Ask yourself: What can we learn from the 2020 lockdowns and shutdowns, changes in health and safety operations and global transportation disruption? How did we respond in 2020?
3. Build A Technology Roadmap while Managing Costs
When the pandemic first hit the automotive supply chain, research and development budgets were cut. After all, if an innovation isn’t included in the immediate product lineup, it could go back on the budget for the following year. As OEMs were feeling the financial shock of the pandemic, R&D seemed like the right place to make cuts. In fact, 42% of automotive decision-makers say they’re postponing mature projects by six months to a year, according to IHS.
Historically OEMs have relied heavily (but not entirely) on third parties to develop and deliver off-the-shelf solutions, rather than taking an end-to-end approach for product development and production. Today, automakers have more options of developing and producing technology than in the past, based on their financial, procurement, design/engineering capabilities and IP ownership goals.
Technology roadmaps are a perfect fit for partnerships. In fact, we see these types of partnerships across different companies along the value chain: Ford and Volkswagen are collaborating to advance autonomous driving and electrification; Honda and Isuzu are partnering to research the use of hydrogen fuel cells to power heavy-duty trucks; Aptiv and Hyundai are joining forces to create an autonomous driving joint venture.
These R&D partnerships allow automakers to share technology in areas that don’t have as much competitive overlap. The result? Technologies that are available more broadly through higher volumes, leading to cost advantages at half the R&D budget. It keeps the automotive supply chain more agile and resilient.
In partnerships, look for mutual wins. How can partnerships with OEMs, Tier 1s and technology companies help us better meet consumer and industry demands? What changes do we need to make to allow partnerships? How will these partnerships bring cost efficiencies and access to competitive technologies?
It’s clear every company, regardless of size or scope, needs end-to-end supply chain transparency, instant responses and immediate availability. No one can predict the future, but it’s important for automotive leaders to partner with companies such as Jabil, which has all the core enablers of a supply chain resilience strategy – people, processes and tools – to ensure the future is not riddled with disruption, loss and uncertainty.
Therefore, ask yourself: which companies who have the technologies, people and processes to help us prepare for and respond to disruptions? How can we collaborate with manufacturing and supply chain partners who can effectively absorb risk?
4. Outsource the Risk within the Automotive Supply Chain
The impact of COVID-19 has been felt across the automotive industry for over a year—with 93% of Jabil survey participants affirming that their financials have been affected by the pandemic. More than six in 10 say they’ve lost up to a $100 million just within the first few months of the pandemic.
Beyond financial losses, building a resilient supply chain requires deep know-how and significant investments. But when faced with supply chain complexity and disruptions that exponentially grow together, where do you focus? Do you assess critical component shortages? Do you change the vehicle design as needed? Do you invest in new tools and technologies to enable supply chain visibility? There’s a lot to consider.
As supply chain teams have navigated the coronavirus, they have shifted their perceptions on outsourcing to a manufacturing partner. In fact, 57% now say they are more likely to work with partners who can absorb risk more effectively and have more flexibility. The evolution of these perceptions may be due to the catastrophic impact COVID-19 and ongoing shortages are emphasizing within the industry.
With feet-on-the-ground, a manufacturing partner can identify why a part may not be ideal from the product lifecycle to the lack of geo-redundancy. This partner can provide extensive visibility into the supply chain ecosystem. It can support product demand forecasting and adjust production lines. But most importantly, it can reduce risks while delivering tremendous efficiencies, allowing the OEM to focus on its core competencies.
This is the right time for automotive OEMs to take a step back and reconsider how they approach risk management, resilience and supply chain operations. Even though many automotive leaders in the industry already leverage regionalized operations, more changes and growth are required.
Risk is ever-present in every decision you make and could jeopardize projected profit margins, consumer demand or manufacturing commitments. However, too many industries ignore risk. It’s important to honestly assess risk management and supply chain operations with an eye on the future and in being responsive, agile and resilient. The future of the automotive supply chain depends on it.
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