Critical parts in auto supply chains: Can firms ensure continuous visibility?
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The success of just-in-time production largely depends on precise coordination between businesses and their suppliers.
Production planners in the automotive industry face challenges daily to ensure the required components and subassemblies are available for timely output and delivery. Add a global pandemic to the mix, and all the careful planning goes haywire. The microchip shortage in the auto industry highlights how disruptions impact multiple tiers of the supply chain, causing ripples of unexpected demand fluctuations, both upstream and downstream. While the automotive industry accounts for less than 10% of the global semiconductor demand, it may suffer nearly 80% of the $125 billion in lost sales due to the shortage in 2021, estimates KPMG.
Challenges in the automotive supply chain
Automotive supply chains are highly complex in nature, consisting of multiple inter-dependent tiers of suppliers.
Original equipment manufacturers (OEMs) source components from tier 1 suppliers (called the N tier), who in turn buy input material from multiple other suppliers (N+1 and so on). Though this long supply chain affects flexibility and resilience, it provides cost benefits to the OEMs and reduces dependencies. However, during times of unexpected disruptions, manufacturers lose more in terms of delayed throughput than the losses caused by missing components or holding excess inventory.
Automotive supply chain planners today face challenges including:
Improving supply chain visibility
To overcome the challenges and ensure uninterrupted availability of critical components during volatile times.
Manufacturers may have to set up collaborative networks and technology solutions. Some of the approaches include:
The need for extended visibility
Businesses can select any combination of the approaches, or sign up for all of them, depending upon their requirements.
Some of the benefits of extended visibility include:
Improved speed: Businesses will be able to leverage the information in their downstream supplier networks to quickly optimize throughput.
Enhanced supplier relationships: Manufacturers get real-time visibility into all the layers of the supply chain. Suppliers’ commitment to forecasts enables two-way communication between them and the buyers.
Increased cost savings: Suppliers will get to plan more effectively with the big picture in mind, thereby improving resource utilization. Buyers can avoid involuntary shutdowns owing to parts shortages.
Better risk management: Buyers can leverage the ability to predict bottlenecks, especially avoiding shortages of critical components.
Reduced carbon footprint: Enhanced supply chain monitoring tools and advance notifications reduce cases of last-minute emergency transportation. In the long run, improved supply chain visibility will not only save on costs but will also be better for the environment.
Planning for a positive future
Though the automotive industry has started to heal from the effects of the pandemic, industry observers continue to project a modest pace of recovery.
According to BCG, growth in car sales across the major global markets will most likely remain in the negative (down 1% at 61.8 million units by 2022) compared to 2019 levels. It may roughly remain the same or increase by less than 4% in 2022. The industry must optimize its supply chains and extend visibility beyond its Tier 1 suppliers to reach better growth levels at least in the medium term beyond 2023.