Innovation inflection point in the auto industry: suppliers must react

For automotive supply chains, the past few years have been exceedingly volatile, with varied shocks overlapping. The impact of Covid-19 and the semiconductor crisis seem to have passed, however shortages of raw materials (particularly those used in battery-making) and geopolitical risks including the ongoing war in Ukraine, have not gone away.

In addition to external shocks, the supply chain is also being fundamentally reshaped by the transformation of the auto industry itself. As vehicles become increasingly software-enabled and electric, the balance of power between OEMs and suppliers has shifted. As we set out in previous articles in this series, true collaboration is essential starting in the development stage, and selecting the right supplier can make the difference between success and failure.

Effective risk detection and risk mitigation strategies are therefore becoming increasingly critical for both OEMs and suppliers to ensure their long-term resilience and success. When the next crisis inevitably hits, how will the supply chain hold up? Too many mitigation strategies still address only short-term and obvious risks. Rarely do either OEMs or suppliers think more radically, taking steps such as buying a mine to ensure supply of a key mineral, acquiring lower-tier suppliers or designing more value-creating components in-house.

Here, we look at how automotive companies can first harness the power of data to identify risks at every level of their supply chain. Armed with a clear and detailed picture of the risk landscape, they must then act to stop problems arising, typically in three categories: with the supplier, with their own product requirements, and with their own organizational processes.

Risk detection: Know your supply chain

As described above, risk has increased in automotive supply chains as companies have been simultaneously hit by external disruption and the industry’s own technology changes. Electrification and a greater share of software in vehicles demand new suppliers, new raw materials and new types of supplier relationships.

As the number of suppliers increases, the risk of production stoppages increases, because disruption to one link in the supply chain may bring the entire production process to a halt. At the same time, the increasing product and process complexity means automotive companies are working with new technology suppliers that enjoy a near-monopoly position in some technologies. This has created greater dependency by OEMs, which cannot reduce their risk by having multiple suppliers.

The result of all these factors is that early risk identification and analysis is essential. Data holds the key: as Figure 1 below shows, there are eight steps across three layers to follow, starting with data collection (internal, external and historic), followed by analyzing and classifying the data, and lastly using it for risk assessment:

ACCESS RISKS OF CRITICAL SUPPLIERS
After identifying and ranking the most critical suppliers, risks are assessed in a risk matrix for further measure definition.

Figure 3: Eleven key supply chain risk mitigation measures

Here we take a more detailed look at how OEMs and suppliers can apply one of the key measures in each of the three action areas:

Supplier: b(u)y passing the Tier-1 supplier

To ensure auto companies have adequate supplies of essential parts even in times of crisis, radical risk mitigation strategies must be on the table, even those which require a higher degree of capital tie-up and longer-term planning. These include buying critical Tier-n suppliers outright or taking a majority stake to gain direct to control. This may mean buying a raw material producer or a mine supplying a vital resource. Companies can also make non-cancellable and non-refundable committed purchase agreements to buy large quantities, of lithium for example, and act as a dealer by distributing the raw material to their Tier-1 and 2 suppliers. Contracting directly with the manufacturer of a high-value part for which a Tier-1 supplier usually does the integration, without an agreed purchase quantity, is another option. The overall aim is to be a priority customer for deliveries, with an increased level of confidence in securing the necessary components, even during times of crisis.

We expect strategic co-development partnerships, as well as co-investments and joint ventures, with critical subcontractors to become increasingly common as OEMs and large suppliers prioritize stable supply chains. These measures are out of the comfort zone of most automakers, which have established arm’s length supply arrangements over decades in the search for ever-greater efficiency. But change is now unavoidable.