The automotive supply chain is in a moment of confusion. Due to the COVID-19 pandemic, the industry is facing a disruption that has no clear end, which is causing a ripple effect on OEMs, suppliers, consumers, and the broader market alike.
As they scramble to make the necessary changes to their processes in order to comply with social distancing rules (which differ from one location to another), OEMs have a difficult time identifying product volume needed as well as product volume that is on hand and accessible. 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 changing, but most of the changes revolve around four primary streams. We’ve outlined the top four streams affecting the automotive supply chain to help you better understand where the industry is at, and where it seems to be going:
Stream 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 COVID-19. It is unclear if, or even when, people will be buying cars, which puts OEMs in the difficult position of having to deal with a nebulous production volume.
“In the automotive sector,” Business Wire says, “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.”
Now that factories (primarily ones outside of the United States) are starting to open up again and the industry begins the process of regaining its footing, suppliers and OEMs have to develop and launch contingency plans. It’s never been more important 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.”
Stream 2: Impact of COVID-19 on the Supply Chain
As a result of the COVID disruption, a significant number of manufacturing facilities in China were shut down, and as a result the automotive supply chain got stuck in a disruption that, in some cases, stopped business entirely. It’s called a supply chain for a reason, after all: every part is linked to another part, and what affects one area will affect the others.
When critical suppliers ran out of parts, OEMs had to shut down, grinding the entire automotive supply chain to an unfortunate halt. This leaves the industry in a tricky position, which is why it’s necessary to have a contingency plan, and specifically, to have a contingency plan with space for reassurance.
Buyers need to know that things are still moving and that despite a disruption to the industry, there’s still action being taken to increase the stock holding of materials. Two of the primary contingency plans being discussed within the industry are reshoring and third-party logistics (3PL).
Many organizations use factories overseas to carry the bulk of their manufacturing needs, but with the COVID disruption, many businesses are starting to consider 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 reported on a survey which 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 COVID disruption.
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 their “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.
Stream 3: Finding a Cost-Effective Balance
Finding a cost-effective balance in the face of COVID-19 is tricky business, as you need to find a way to keep workers safe while still producing the parts you need. As social distancing requirements slow down production times, manufacturers have to decide whether they want to reduce the volume of cars they’re producing or if they need to “take it on the chin” and absorb the losses.
Each of the streams we talk about here is intrinsically linked to the others. The uncertainty of the automotive industry, for example, is making a cost-effective balance feel like something akin to wishful thinking. How can organizations be expected to know how many parts to have in-stock if the nature of their business faces an uncertain future?
Ultimately, it’s a balance of understanding where the automotive sector is both financially and physically (i.e., staying overseas or adopting a regional reshoring strategy), and making decisions that keep the business going without compromising the health and safety of the workers who keep the gears turning.
Stream 4: The Lessons Learned by Suppliers
If this disruption has demonstrated anything, it’s that the automotive supply chain needs to stay as agile as possible. But it can’t do that if the organizations who make up that supply chain aren’t 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 (within both your internal teams and of your external partners) and technology.
For example, one of the disruptions resulting from COVID that had a huge impact was the suppliers’ shutdowns. For many, this came as a surprise and had a similar effect as throwing a spoon into a blender - it wasn’t pretty. In the past, when no digital connection existed between the supplier and the OEM, no other organization within the supply chain would know when a supplier was in dire straits. This would then lead to the entire automotive supply chain experiencing setbacks when a crisis occurred at the supplier level.
By adopting more modern and digital-centric processes, 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 (i.e., automated real time digital communication) 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.