The amount of new technology available in automobiles is growing every year – from new telematics and infotainment solutions to advanced sensors embedded in tires, fenders and other components.
With that evolution, new types of suppliers have been introduced to the automotive supply chain for both the OEMs and aftermarket – high-tech companies in far flung corners of the world who provide advanced electronics to more traditional automotive suppliers. In this environment, Tier 4 suppliers have become just as important as Tier 1 suppliers, and can cause even greater disruption in the supply chain when there are shortages or delays.
Logistics provider DHL has outlined this shift in the auto supply chain in a new report, “Quiet Revolution: Convergence and the Future Automotive Supply Chain.” DHL commissioned the Harrington Group to draft the report.
According to the company, the addition of new technology suppliers has added potential volatility to the supply chain. “These suppliers aren’t positioned where the car manufacturers are producing vehicles,” says Michael Martin, vice president of strategic development, global automotive, at DHL. “That creates a longer supply chain, which increases risk. How do you manage that risk?”
Supplier risk has taken on new urgency and complexity. “There is newfound risk in competing with other industries, not least the consumer tech industry, for tech supplies,” Martin says. “Automotive players need to diversify their supplier base by sourcing locally or near-regionally to reduce dependence and hedge their risk.”
Today’s average midsize vehicle has approximately 40 to 50 microprocessor-driven systems, which require 20 million-plus lines of code. In contrast, a Boeing 787 has less than 15 million lines of code. Auto manufacturers are transforming into technology companies, and the supply chain has to keep up.
“The old ways of doing business in the automotive industry are over,” says Lisa Harrington of the Harrington Group. “Gone are the days of siloed industry operations where an OEM had a supplier base solely from within the automotive industry. This demonstrates how intricately linked and therefore dependent the two industries have become. While consumers stand to benefit from increasingly intelligent and tech-savvy cars, manufacturers must face the challenge of greater risk and uncertainty entering their supply chains. Businesses must be proactive and work with suppliers to ensure supply chain practices are fit for a modern operation to avoid business interruption.”
A new supplier landscape
The convergence of new technology and traditional automotive supply chain processes will have a transformative effect on logistics operations. This convergence has occurred alongside the emergence of the “global mega supplier,” as 82 percent of components used by auto manufacturers are now sourced from or contributed by suppliers. This increased dependence on suppliers (up from 56 percent 30 years ago), has shifted power away from the OEMs. Mega suppliers control more of the supply chain via acquisition and vertical integration.
Logistics operations will also be affected by the fact that technology and automotive sectors are on different iteration schedules. Vehicles have long development cycles, while technology changes much more rapidly.
“With some technologies, we may see automakers take a more modular approach in the future so the technology could be upgraded on its own,” Martin says. “In terms of the aftermarket opportunity, that might create more demand for having those upgrades done via aftermarket channels.
Every supplier has become critical, and any disruption can bring down an assembly line, DHL says, because even a Tier 4 supplier may be the sole source for a particular part. Auto companies may also be competing for supplier capacity with the technology industry. According to DHL, “This competition naturally injects risk into the automotive supply chain, and is forcing automotive OEMs to forge closer partnerships with their supplier base, and hedge risk by securing multiple suppliers for the same component.”
Visibility is critical for inventory control and reliability. “Companies are utilizing more sophisticated forecasting tools, analyzing lead times for emergency shipments, and managing those risks using inventory,” Martin says. “For example, during times of the year when there are poor weather patterns that could affect shipping, you increase your inventory levels to compensate for that based on the risk probability.”
In the aftermarket, DHL says that companies are moving to a less centralized model with smaller, local distribution centers in the network that carry shallower stocks of faster moving items. Slower moving items are stored in a central warehouse. Making that model work requires business intelligence to analyze the demand and velocity of SKUs, and place them in the network based on that data.
Standardization, risk management are top priorities
According to DHL, this shift in the supplier base means that the auto industry requires greater standardization, visibility, and risk management in supply chain operations. This is because they are working with new types of technology suppliers that don’t necessarily operate in the same manner as traditional auto parts suppliers.
General Motors, for example, is in the midst of a global standardization effort for its logistics operations that includes rationalizing the way the company contracts for service and measures performance. OEMs are looking for consistency among suppliers, and standard access to information. GM’s efforts include the deployment of a new transportation management system to improve visibility, and smart sourcing tools that will give the company the ability to analyze sourcing options based on cost drivers. They will also use analytics to improve their supply chain network design.
Standardizing the management of the physical and information supply chain will allow OEMs and suppliers to streamline operations and reduce costs. Increasing visibility through analytics and tracking systems will allow companies to see what is moving across their global network, which enables more effective risk management. There are also risk management tools available – DHL offers one called Resilience 360 – that can analyze the entire supply chain based on a number of risk factors (weather, geography, political instability, etc.) and provide guidance on gauging risk against supplier criticality.
That type of risk management will be critical, particularly where smaller suppliers are involved. That analysis has led some companies to adopt the type of local sourcing described above in order to guarantee parts availability. As cars become more intelligent and connected, the data they generate will further fuel this transformation of the supply chain, particularly for repair parts in the aftermarket.
“The modern automotive supply chain will shift to a model where connected cars tell us they need parts, and you keep much shallower stock levels closer to the customer,” Martin says. “That’s changing the nature of the aftermarket supply chain.”
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