Few in the auto industry have rested easy since the initial coronavirus outbreak in China. But if we are honest about it, at least some of the pain is self-inflicted.
Over the past several decades, the auto industry, like other industries, pursued a global efficiency play. Immediate piece price, single tooling and other cost considerations have been paramount. This, in turn, fueled the big push to single sourcing suppliers in low-cost countries. Many automakers even issued top-down quotas to their purchasing departments to source a certain percentage of parts from China, regardless of the holistic business case. Such priorities helped China to become a major automotive manufacturing hub and have elongated supply chains to a web of multinational interdependencies.
There is much to admire in all that's been accomplished. Modern automotive supply chains are monuments to human capacity to reap rising efficiency from increased global complexity. Yet shortly after the calendar flipped to 2020, events revealed a costly gap in this magnificent enterprise: Agility.
We are not suggesting that the COVID-19 crisis caused the industry to panic and freeze. To the contrary, auto leaders have responded rapidly and decisivelyscraping inventory where possible by going into idle plants to collect parts, for example; adjusting product mix to avoid part shortages on select options; ramping up alternative suppliers; and driving transparency into the Tier 1 and Tier 2 supply base, to gain more visibility into exactly what parts and materials will be available in the weeks ahead. Similarly, savvy dealers are syncing closely with automakers to track supply risksparticularly in aftermarket parts, as new vehicle parts will be prioritized.
However, the fact that such extraordinary and often costly measures are now needed is itself evidence that today's automotive supply chains lack intrinsic agility. Ask yourself: How well could you continue to adapt and operate if the COVID-19 outbreak continues to spread for six months or more? Is your supply chain structurally prepared for such a possibility?
Even in the best case, it will take time for conditions to return to normal. Factories recently shut down will not immediately regain full capacity. In some areas, public transportation may remain idle for an indefinite period, leaving many workers no way to get to their jobs. Those fortunate enough to have access to personal transportation may find that the infrastructure, such as parking spaces and traffic control, isn't set up to handle the increased number of drivers. HVAC systems will stay turned off in many facilities, making working conditions uncomfortable and potentially unsafe. And the global transportation network will continue to be hampered, to unpredictable degrees, by travel restrictions and other safeguards designed to contain the contagion.
Do recent events invalidate the auto industry's push toward more global, efficiency-driven supply chain strategies? Not at all. Superior quality at lower costs is still essential. But so are innovative features and differentiated driving experiences, particularly in the most lucrative vehicle segments. Pressures to reduce carbon emissions are intensifying, perhaps exponentially, particularly in global markets. Ongoing trade wars could keep automotive supply chains in an uncomfortably precarious state. And as the coronavirus has demonstrated, even the mightiest global production platforms can be seriously wounded by sudden disruptions no one could foresee.
In sum, today's operating environment demands a more balanced approachone in which the relentless drive for efficiency is leavened by a corresponding commitment to flexibility to meet new challenges, and to increased agility, to adapt to unforeseen disruptions. This can be achieved by developing new capability to sense what is happening in your operating environment, through real-time health and supply monitoring, for example. It also involves building in greater ability to pivot to changing conditions via shorter supply chains, more dual sourcing or validated backup suppliers, and more natural hedges against raw material and foreign exchange risks.
True, executing these strategic shifts may marginally increase your operating costs under normal conditions. But in light of the endless procession of "black swan events" — the Japan tsunami, foreign exchange shocks and Brexit, to name a few — it only makes sense to account for the reality that unanticipated disruptions are inevitable. Your business cases and corresponding supply chain solutions should consider the high probability, going forward, that the conditions under which you must profitably compete will be anything but normal.
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June 01, 2020 at 11:00AM
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Crisis exposes a costly gap in automotive supply chain strategy: Agility - Automotive News
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