Reuters Events | Supply Chain & Logistics Business Intelligence

The automotive industry has been buffeted by the forces unleashed by the pandemic, so now the race is on to build more resilient and open supply chains

When a system is jolted by a shock it produces cracks in that system, but by revealing those weaknesses it gives the opportunity to not only mitigate them, but to build back in a stronger, more stable manner. As covered in part one of our look at automotive supply chains, the challenges right now are considerable, but they have produced clarity around what needs to be done to future proof this sector. the aim is not only to guard against a similar external shock, but also to transition to a future where more of the sales are electric vehicles and a greater proportion of those sales are done online.

The focus now is to consolidate automotive supply chains into a more compact and resilient structure that can draw on greater resources closer to the point of need and meet the customer rapidly, whether that is a consumer or an Original Equipment Manufacturer (OEM), with the right inventory in the right place through a digital infrastructure.

Observing from the widest possible view

The number one lesson learnt from the events of the last 18 months is to extend the available view of the automotive supply chain, both in terms of breadth and depth, and also to project that forward into more accurate forecasting.

The need is extremely prescient for automotive supply chains as not only do they face a complex international freight environment, especially with many time-sensitive items shunted to air freightat the moment, but also a fragility within the supplier ecosystem. The sudden collapse of a key supplier can threaten whole production lines, which would be especially damaging at this point where the market is really beginning to heat up after dropping off in the first half of 2020.

For Dana Incorporated, which supplies a host of complex components to the industry, supplier risk management is “A huge focus for us … because we know the consequences,” says Craig Price, the company’s Senior Vice President - Global Purchasing & Supplier Development.

When it comes to electronic components, because it's your larger, more competent ones that have a good grasp on managing the supply chain and are able to help you to manage through these issues

Those consequences can be severe, as we are seeing now with the massive issues surrounding electronic components in the supply chain, most notably semiconductors, which is affecting the automotive industry particularly hard.

For Marco Caputo, Vice President Global Supply Chain Management for BorgWarner, the current shortfalls in this are “Reiterating who you're choosing to partner with when it comes to electronic components, because it's your larger, more competent ones that have a good grasp on managing the supply chain and are able to help you to manage through these issues.”

He warns that “If you're running off to a mom-and-pop shop, and trust me, when it comes to things like circuit boards, there are millions of little companies out there that may look attractive in pricing, but they are not able to manage the supply chain and cope. I would hate to be in a situation where you've got a lot of those suppliers to deal with, because then it's basically up to you to find parts for them, whereas when you're working with the well-established multinational circuit board suppliers they're very strong in their supply chains.”

Those that could either refinance their debts or maximise the cash flow, were the ones that we saw perform the best over the last year

Murray Goodrick, VP Business Development - Manufacturing Logistics at DHL Supply Chain, agrees that financial stability and cash reserves are critical as in the last year they have seen that “Those that could either refinance their debts or maximise the cash flow, were the ones that we saw perform the best over the last year.”

The risks of critical supplier collapse or failure have led Dana to put in place “A program in place where we monitor, track and mitigate the risks from high-risk suppliers. We have a number in our portfolio right now that we have mitigation plans [for].”

Those that could either refinance their debts or maximise the cash flow, were the ones that we saw perform the best over the last year

These at-risk suppliers have been identified by a playbook that Dana uses to keep on top of supplier health, with a heavy emphasis on trying to understand financial stress for suppliers as early on as possible. This involves monitoring a range of factors to try to determine financial health, including open-source intelligence, such as financial statements or news “Alerts about, ‘hey, this company is laying off so many people’ or changes in ownership,” alongside “staying in contact with our plants and understanding, OK, a supplier is working with early payment requests,” explains Price.

However, he notes that “As you go lower down the supply chain, the ability of the small and medium type suppliers to have these kinds of programs in place to monitor and mitigate risk is a challenge. So, a constant focus for all of us is the tier-two, tier-three supply base that, somehow, we have to indirectly monitor. That's always a challenge, because the data on those is less visible,” which is making their object of “cradle to grave visibility of the supply chain” that much harder.

Supply chain visibility, and having enough information readily at hand in order to make educated decisions, is really becoming a key theme that is accelerating in 2021

Murray is also of the opinion that “Supply chain visibility, and having enough information readily at hand in order to make educated decisions, is really becoming a key theme that is accelerating in 2021. So, what does that mean? It means being able to forecast more accurately, holding the relevant inventory levels at various different points along the chain, and, especially if you’re sourcing from the Far East, … actually holding stock closer to the point of views in order to protect your supply chain.”

Price also sees the need to “Use smart forecasting to help us”. Their approach has involved inventory dashboards in warehousing facilities and “daily critical supply meetings … not only focused on today but focused on … up to 16 weeks out so that we are doing what we need to do in terms of securing supply.” This helped them to recognise that automotive production was coming back in the second half of 2020, starting with the light vehicle market. However, he also points out that it has been key to “introduce incremental supply chains that are within region to help supplement our existing supply chains.”

A long-term change in manufacturing bases?

Price feels that this is critical as the winds of change are blowing, pushing automotive supply chains to reduce their reliance on purely lowest-cost manufacturers that are distant from end-markets and in highly concentrated production centres.

“One of our key practices from a sourcing perspective is we do try to source within region … because that gives us increased response time in terms of demand fluctuation,” he says.

What we saw during this crisis, and now in the ramp-up, is that there's a lot of instability in the demands of the customers and it's very difficult to react to that when you have number one, a long supply chain, but number two, unreliable or delayed logistics

Caputo is another advocate of this approach and feels like the shift has been reinforced since the advent of the coronavirus pandemic. In the “Last five-to-ten years we've seen a shift in the supply base from the higher-cost labour countries, like the Western European countries, into China, and I think the industry kind of realised that we have too many eggs in one basket. That … point hit home when the US had put the tariffs in place with the Chinese suppliers. So, we knew it was kind of a wake-up call then that we had to start getting a little bit more geographic diversity.

What we saw during this crisis, and now in the ramp-up, is that there's a lot of instability in the demands of the customers and it's very difficult to react to that when you have number one, a long supply chain, but number two, unreliable or delayed logistics

“I think the other thing that the crisis had bought home is the need to really look at total landed cost” adds Caputo "because you can keep the long supply chain, but you lose the inventory, the flexibility. What we saw during this crisis, and now in the ramp-up, is that there's a lot of instability in the demands of the customers and it's very difficult to react to that when you have number one, a long supply chain, but number two, unreliable or delayed logistics.”

Mike Bristow, Managing Director Manufacturing Logistics at DHL agrees: “My personal view is I think we'll start to see a lot [of production] moving back to the UK,” especially in light of the post-Brexit environment. “They may pay a bigger piece-price in the UK, [but] with the knowledge that the factories are going to be going every day rather than an on-paper cheaper solution.”

Expectations in terms of the electrified automakers, they are moving at a very fast pace. So, if you have long supply chains, the ability to react to the changes in design, in demand presents challenges

For BorgWarner, they are mainly focusing on “Developing a lot more around suppliers in the Asianregion” but also “we're trying to do more regionalisation” and “looking for more opportunity around Eastern Europe,” as well as Mexico, underlining that there will likely be a broadening of the supplier base within automotive.

This trend could be accelerated by electrification of drivetrains, believes Price, not only because of industrial policy from countries like the US under the Biden administration, and changing trade policies, but also because the “expectations in terms of the electrified automakers, they are moving at a very fast pace. So, if you have long supply chains, the ability to react to the changes in design, in demand presents challenges. As much as possible, we would like to be within region or region with a caveat that we have to be competitive.”

Taking things up a notch with tech

Achieving that cost-competitiveness in this diverse spread of locations will require more automation and system integration to help mitigate the increased costs of labour and transportation that may occur.

Even in the automotive space, which has eagerly adopted automation throughout production lines, there is still enormous room for innovation as information infrastructure lengthens and deepens across supply chains and in the manufacturing process.

“I think that companies are gathering a ton of data right now and what you do with it is the important thing,” says Price. He gives the example of the deployment of sensors in their production line, initially using them on stamping tools “to determine tool life. Tools wear and run out after a certain tool life, so we run a program with our supply base in terms of preventative maintenance … so that we improve uptime of production to meet our production requirements.” Excitingly, the introduction and utilisation of the Internet of Things (IoT) is “really in its infancy” in his opinion.

You can’t replace expertise

Although more robotic process automation throughout supply chains will be key, there is no replacement for expertise, and indeed the current environment has underlined the importance of retaining critical workers and enhancing the skills base at hand.

We're going back and re-looking at investing in educating our people on how to get the most out of the out of the current tools that they have, in order to keep the minimum amount of inventory and maximise the flexibility we have

Caputo found that although they have very powerful tools to enhance their supply chain, “When we look at it, and we really get down into the into the weeds, we see that we're probably not using it to its full capability. We're going back and re-looking at investing in educating our people on how to get the most out of the out of the current tools that they have, in order to keep the minimum amount of inventory and maximise the flexibility we have.”

Similarly, Bristow has found that for the freight control towers they utilise, the knowledge base of the team has been critical, as “I can't see a scenario where we can run those without having that expertise within the team.” This is especially so in the context of Brexit, which has introduced added complexity and procedures, so “people who are in the operational teams who get it, and get why you have to fill a particular document out in a certain way, are critical.”

In Goodrick’s opinion these figures who grease the wheels of supply chains, cooperating with different actors and understanding fully the requirements and tools of their supply chains, have seen a boost to their profiles in the last year. “I think that collaboration and kind of breaking down historical barriers, that was a real positive that I think came out of 2020,” he believes. “That collaboration is actually really gathering pace, I would say, in this early part of 2021,” which is why they’re “seeing a significant amount of resilience and collaboration across the various different teams.”

E-commerce meets automotive

Upstream may be transforming but so is the final point of delivery. With customers cooped up indoors due to lockdowns, the opportunity for the traditional dealer-led model of sales dried up. Already, innovators were moving in to provide online sales and straight-to-door deliveries, but the pandemic has put this on steroids.

What’s more, this isn’t just a salve for the conditions created by COVID-19, but likely to herald a major change in how consumers buy cars and expect them to be delivered. This creates a new logistical burden at the very end of the chain. “All of the logistics requirements and supply chain requirements needed to put those networks in place to deliver to people's homes or places of work - doing those quality and handover checks - all of that is quite an exciting market for 2021,” says Goodrick.

I think that the changing environment of how people buy cars, and how they receive the cars from an individual is massive, and I think we were only just seeing the tip of the iceberg with that

“I think that the changing environment of how people buy cars, and how they receive the cars from an individual is massive, and I think we were only just seeing the tip of the iceberg with that,” agrees Bristow. Now “people can search through the internet, can haggle … on a price, they can agree a set of finances, they can sort the trade-in … for their personal car, and then it can get miraculously delivered to the doorstep,” without ever stepping into a dealership.

That handoff and that interaction with clients is really going to be key for the secondary sale, and the ongoing sustainability of the automobility market

This means a need to handle not only the final mile for the industry but also “The final thirty feet from the roadside,” as “handing over somebody's dream that they've spent thousands of pounds on, I think, is really a key factor” feels Bristow.

“That handoff and that interaction with clients is really going to be key for the secondary sale, and the ongoing sustainability of the automobility market,” concurs Goodrick.

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