Top 3 Factors Impacting the Automotive Supply Chain
The automotive supply chain is in a state of adjustment. In the past few years, the industry has faced a series of disruptions that have no clear end, causing a ripple effect on OEMs, suppliers, consumers, and the broader market alike.
As automotive manufacturers work to make critical improvements and changes to their processes, navigating the supply chain is still a complex and costly challenge. Along with inventory updates, parts tracking, and complete visibility, this process involves managing the on-hand stock materials and parts required to maintain a stable just-in-time/sequenced production process. The automotive supply chain is being forced to ask questions for which there are no easy answers.
However, that doesn’t mean automotive OEMs and suppliers are completely adrift. Automotive supply chain trends are continually shifting, but most of the changes revolve around three primary factors.
We’ve outlined these factors affecting the automotive supply chain to help you better understand where the industry is at and where it is headed.
1. The Uncertainty of the Industry
The most daunting issue automotive OEMs and suppliers need to deal with right now is the sheer uncertainty of their industry. In the wake of the pandemic, it was unclear if or when people would be buying cars again, putting OEMs in the difficult position of dealing with uncertain production volume.
“In the automotive sector, the downturn in productivity and the disruption to the automotive supply chain is already impacting both new-car demand and the supply of original equipment,” reported Business Wire.
When factories reopened, delays in production and renewed consumer interest created a supply and demand gap that required OEMs to become more agile. More recently, geopolitical issues across the globe, along with disruptions like the semiconductor chip shortage, have created even more insecurity. As a result, suppliers and OEMs are focusing more on developing and launching contingency plans. It’s never been more critical to have access to “agile and accurate scenario modeling” that Industry Week says will help you better “understand cash flow, profit and loss, and balance sheet impact.”
2. The Global Impact of 2020
A significant number of manufacturing facilities around the world shut down or were significantly disrupted in 2020. The automotive supply chain struggled with production that, in some cases, stopped business entirely. When primary suppliers ran out of parts, OEMs had to shut down, causing the entire automotive supply chain to halt abruptly.
This standstill left the industry in a delicate position that continues to have an impact. Buyers need to know that things are still moving and that actions are being taken to increase material inventories. Having a contingency plan, particularly one with space for reassurance, has become necessary.
Two primary contingency plans that have been discussed and developed within the industry are reshoring and third-party logistics (3PL).
Many organizations use factories overseas to carry out the bulk of their manufacturing needs. But shipping disruptions, rising shipping costs, and ongoing geopolitical issues, many businesses are considering moving aspects of their operation back to their primary country.
Industry Week affirms this approach, recommending that companies start exploring strategies to “buy where you make and make where you sell.” And they’re not alone in that either, as Supply Chain Drive showed that 64% of companies in the manufacturing and industrial sectors “are likely to bring manufacturing production and sourcing back to North America” as a result of the pandemic.
Third-Party Logistics (3PL)
Third-party logistics is one of the more cost-effective solutions to the problems currently affecting the automotive supply chain. By outsourcing specific areas of your business’s operation to third parties, you can save money on logistics and redistribute your internal resources to more pressing needs. This is leading an increasing number of organizations to outsource “logistics operations to 3PL providers to achieve improved operational efficiency and cost savings.”
Utilizing the last mile expertise of a regional 3PL could enable a supplier to increase the available finished parts within that specific region at a more cost-effective rate, thus providing a more robust contingency for future supply chain disruption.
3. Finding a Cost-Effective Balance
Finding a cost-effective balance in the face of all these disruptions and changes is tricky. Businesses must find a way to keep workers safe while still producing the necessary parts. In many cases, OEMs need to expand their supplier base and operating locations to ensure a steady stream of raw materials and parts while maintaining profitability.
Each factor that we’ve discussed here is intrinsically linked to the others. For example, the uncertainty of the automotive industry makes a cost-effective balance akin to wishful thinking. How can organizations be expected to know how many parts to keep in stock if the nature of their business faces an uncertain future? What can they do during parts or materials shortages to mitigate production delays? How can they navigate an increasingly complex global supply chain?
Ultimately, the key is a balance of understanding where the automotive sector is both financially and physically and making decisions that keep the business going without compromising the health and safety of the workers who keep the gears turning.
Lessons Learned by Suppliers
If recent disruptions have demonstrated anything, it’s that the automotive supply chain needs to stay as agile as possible. But it can only do that if the organizations that make up that supply chain are paying attention and learning. The keys to overcoming these challenges, and future challenges, will be an increased prioritization of innovation and collaboration built on trust (with both your internal teams and your external partners) and technology.
By adopting digital-centric processes and integrating supply chain technologies, manufacturers can begin developing a more transparent, accountable, and resilient supply chain. That visibility will help organizations set up real-time alerts to share relevant data, inform decision-makers when a product fails to ship, and notify the necessary people when a factory is experiencing problems. Building trust in technology means building trust in each other. The more trust the industry has amongst itself, the easier it will be to reduce the risk of “Black Swan” events and the associated disruptions.
Looking to the Future
The global automotive industry is making a recovery but is tempered by increases in the cost of living and inflation. However, the signs are positive with the focus on electric vehicles and a significant change in the supply chain demographics with new suppliers coming into the industry. If automotive manufacturers don't take action, it could be too late, and they could struggle to maintain their supply chains due to a lack of real-time visibility and the sheer volume of demand.
Now is the time to make the necessary changes towards a fully digitized supply chain to ensure success and be protected and ready to manage the risks and challenges of future global events as we return to a vibrant automotive industry.
About the Author: David Eyes, VP/GM of Automotive Solutions at TrueCommerce, has long been an influential figure in supply chain management and digitalization markets. With more than 25 years of expertise in supply chain business development, David has helped hundreds of businesses leverage integration and automation for greater success. In addition to his position at TrueCommerce, he also serves on the advisory boards for the Alabama Automotive Manufacturers Association (AAMA) and Georgia Automotive Manufacturers Association (GAMA), acting as Chairman of the GAMA Supply Chain Committee. When he isn’t helping business owners, David uses his knowledge and passion to support supply chain education in younger generations, regularly visiting and speaking at schools, colleges, and universities about opportunities in the field.