For the automotive industry, excellence in supply chain management has long been a critical capability. The principles of Lean Production and Just-In-Time delivery pioneered by Toyota in the 1950s depended for their success on close, collaborative relationships with suppliers.
And Toyota’s innovative ideas didn’t just transform quality and productivity in the sector, they also boosted resilience and responsiveness. When the successive oil crises of the 1970s drove collapses in U.S. car sales, Toyota was quick to meet the emerging demand for smaller, more fuel-efficient vehicles. Between 1971 and 1981, the Japanese company tripled its market share in the country.
By the end of the 20th century, the rest of the global automotive industry was aligning itself with Toyota’s approach. But as the Just-In-Time philosophy became the standard for the sector, emerging trends began to test the effectiveness of the approach. Greater product complexity, the globalization of production and the emergence of new markets such as India and China led to significant increases in the complexity and footprint of supply chains.
Just-In-Time survived these challenges remarkably well, and it wasn’t until the until the Great Financial Crisis of 2008/2009 that serious cracks in the system began to emerge. OEMs weathered the storm, thanks in part to intervention by governments. U.S. taxpayers invested more than $80 billion in GM and Chrysler during the crisis, for example. Many of their critical suppliers were not so fortunate, however. Vehicle manufacturers were forced to develop financial supplier risk management capabilities, which fought weekly battles to identify and prevent supplier insolvencies.
As economies recovered, other risks rose to the fore. In 2010, for example, ash from the Eyjafjallajökull volcano in Iceland brought European air transport to a standstill, forcing BMW, Honda, and Nissan to shut production lines or close entire plants. In 2001, the Tōhoku earthquake and tsunami in Japan became the costliest natural disaster in history. Toyota’s production in March that year fell almost 63%, to levels it had not seen since 1976. The same year, flooding in Thailand damaged major automotive and electronics plants, leading to global component shortages. By the end of the decade, automotive companies had ramped up their supply chain risk management capabilities to include expertise on cyber, semiconductor, commodity, capacity, sustainability risks and many more.
While the industry was thinking about risks long before COVID-19, the pandemic provided the stiffest test yet of its supply chain resilience. No recent peacetime event has been comparable in the scale and geographic breadth of its economic and social effects. And recovery from the crisis is presenting further challenges, as demand from multiple sectors overwhelms supply capacity in critical categories such as semiconductors. The chip shortage is expected to cost the automotive industry as much $210 billion in high prices and lost sales this year, according to analyst estimates. Today, calls for a transition to a Just-In-Case model—meaning dual sourcing strategies for critical components—are getting louder.
Demand for sustainability drives change
Building and operating reliable supply chains is challenging enough, but companies need to make those supply chains cleaner too. The imperative to address the causes of climate change is already reshaping the industry’s products and its operating practices, driven by pressure from regulators, investors, and customers alike. In a 2020 survey by consultancy KPMG, 98% of automotive executives identified sustainable products and manufacturing processes as a key differentiator for their industry.
Governments are also enforcing better executed and monitored due diligence for global supply chains. In 2010, for example, California Attorney General Kamala D. Harris passed the California Supply Chain Transparency Law. Now, Vice President Harris has helped to put supply chain issues on the U.S. agenda of the world’s largest economy. The Biden/Harris administration announced the creation of a Supply Chain Disruption Task force in June 2021. European countries including Norway, UK, France, and Germany have also passed their own supply chain laws.
Pressure to improve sustainability adds further complexity to the automotive industry’s resilience challenge. The desire to meet aggressive targets for the carbon footprint of components and materials, for example, can restrict the options available to industry players if flows from their primary suppliers are disrupted.
The limits of visibility
For automotive players, current and future challenges are exposing the limitations of established approaches to supplier risk management. Understanding the status of first-tier suppliers is no longer adequate in a world where the key bottlenecks or sustainability risks may be hidden far upstream in the value chain. Executives are now looking for ways to expand their visibility into the sub-tier supply chain to anticipate and predict potential disruptions even earlier. In a recent Deloitte survey on Supply Chain Risk Management at German automotive companies, 96% said tracking only tier-one risks is not sufficient, for example.
Current best practice for n-tier supplier visibility is limited, at best. The standard approach is for companies to ask direct suppliers to conduct their own due diligence of the upstream supply chain. At its simplest, this involves sending out a code of conduct to Tier-1 suppliers and hoping for it to stir a ripple effect through the supply chain. That method is too time-consuming, unwieldy, and difficult to police to be of practical use in fast moving crisis situations, however.
Today, there is a growing consensus that organizations need to take a more proactive approach to the development and maintenance of a resilient and sustainable sub-tier supply chain. In the words of a 2020 report by The Lab, a global initiative funded by the Swiss State Secretariat for Economic Affairs (SECO): “Applying supply chain risk management principles to just top-tier suppliers with the expectation that they will cascade to lower-tier suppliers is not realistic.”
Leading automotive companies are now attempting to build a more detailed picture of their sub-tier supply chains. Requests for information on lower tier suppliers have become a common feature of industry requests for proposals (RFPs) to prospective suppliers in recent months, for example. That sort of information is often considered sensitive, however, and suppliers may be reluctant to comply with such requests unless forced to do so by commercial pressure. Research by Deloitte conducted in response to the semiconductor crisis suggests that best-in-class automotive OEMs are achieving 70% visibility of their Tier-2 suppliers. We have seen a few OEMs take decisive action to gain information on deeper supply chain tiers, but this is hard work and progress remains frustratingly slow.
Technology as an enabler
The requirement for sub-tier visibility in the automotive industry has never been greater. Hidden risks to supply and brand, and the need to ensure legal compliance, make visibility beyond Tier-1 one of the biggest, if not the biggest, supply chain challenges in the industry. Or as Bain & Company puts it: “Visibility and traceability are at the heart of the supply chain of the future.”
As the sector pursues solutions to that challenge, it has some important new allies. Before COVID-19, supply chains were already on the road to digitalization, but the response to the pandemic has significantly accelerated that journey. The data generated by digital supply chain management systems has the potential to provide key insights into the structure of networks, the status of supply chain participants and the nature of the flows between them. And as more supply chains become more digital, that data is becoming ever richer.
Furthermore, over the next three years, half of all supply chains are expected to invest in applications that support artificial intelligence and advanced analytics capabilities. AI Solution providers see supply chain management as a core market to invest into and are always looking to solve new problems and create compelling offerings for their customers. And there are very good reasons why a third-party solution provider can help to solve the sub-tier visibility challenge.
First, data acquisition is not easy: Identifying useful external data-feeds that show supplier relationship is not a one-time exercise. The more useful data can be acquired, the better algorithms can operate. Once a good source is found the data rights need to be clarified to stay compliant. Afterwards the feed needs to be harmonized to the global database. And existing feeds also need to be continuously updated to stay relevant.
Second, cross sector knowledge boosts accuracy: While Automotive Tier-1 suppliers are often dedicated to the industry, lower tier participants include many generalists such as chemical, technology and manufacturing companies. These types of business can have profoundly different footprints, operating practices, and risk profiles, requiring sector- specific data and domain knowledge for effective analysis.
Third, the automotive sector is an interconnected eco-system, and 16% of today’s automotive players have already begun the task of identifying and characterizing participants at Tier-2 and beyond started on their journey on identifying Tier-2 and beyond for selected parts of their supply chain. With significant overlap and commonality between supply networks, this creates opportunities for win-win data sharing and collaboration. Combining information from multiple networks has the potential to accelerate supplier discovery and optimize risk management and mapping algorithms.
Automotive procurement drives value
For Automotive Procurement and Supply Chain Management functions, adopting and mastering new digital approaches will be a key step in the transition to a new strategic role within the organization. In the coming years, there is likely to be a shift in the way these functions operate, with the increased use of automation, analytics, and artificial intelligence. That’s going to demand far-reaching change within the purchasing function and beyond, as companies adopt new technologies, and develop the talent, systems and culture required to make the best of the opportunities they offer.
Supplier Sustainability, Supplier Risk Management, and other means of managing by exception will be key value drivers in this change. Companies that have already put in the effort to achieve supply chain visibility down to the sub-tier level are already reaping the benefits, including 10–15% greater cost efficiency in inventory and transportation, and higher on-time-in-full deliveries to customers.
Given the complexity of the challenges faced by the sector, and their potential to create industry-wide disruption, some problems may best be solved through cross-company collaboration. Efforts in that direction are already under way. The Catena-X automotive network, for example, is a consortium involving BMW, Mercedes-Benz, VW and several suppliers and technology providers. It aims to develop new standards for digital information exchange between supply chain participants that will promote resilience and sustainability in the sector. Elsewhere, ten major automotive OEMs have formed the Drive Sustainability partnership, which aims to develop and promote circular and sustainable concepts in the automotive value chain.
More fundamentally, sub-tier visibility will allow automotive players to establish direct relationships with sub-tier suppliers, ultimately leading to a shift away from today’s value pyramid to new, faster, and more flexible a hub and spoke supply chain models. New business opportunities will be generated, which will foster further automotive growth.
Driving to a safe and sustainable future
Automotive supply chains are in a state of flux. In the coming years, electric vehicles will replace the combustion engine and new types of components and suppliers will be needed to enable future approaches to mobility. That will change the structure of the supply chain, with new, often untested companies entering the market, or being asked to scale rapidly from niche provider to mainstream supplier. And for the first time Automotive OEMs talk to each and build joint strategic roadmaps to address the challenge. Drive Sustainability and Catena-X are concrete examples of how a push for a more robust and sustainable supply chain is changing automotive supply chains as we know them. Moreover, a paradigm shift from a value pyramid to a hub and spoke supply chain will drastically change how supply chains operate. In a world of volatility, uncertainty, complexity, and ambiguity (VUCA), transparency and AI-led decision support will enable automotive supply chain leaders to ensure resilience and sustainability for their company.
In July 2021, western Germany experienced catastrophic flooding. The Auto Heinen plant, a leading maker of aluminum die cast parts, was destroyed. Auto Heinen had supplied parts to a powertrain company used by two OEMs. One of the OEMs used Everstream’s solution and had a clear picture of their sub-tier suppliers. This allowed them to deploy an alternative sourcing strategy, working jointly with the powertrain supplier.
The other OEM didn’t use Everstream. They had to begin a new sourcing strategy days after the flooding while the powertrain supplier was trying to avoid a plant shutdown.
Navigating the network graph
Achieving sub-tier visibility is only one step on the road to next-generation supply chain resilience and risk management. Where automotive companies might have looked at 10,000 direct material suppliers before, suddenly there are 100.000+ suppliers to manage. Companies often ask themselves how to understand and manage these newly revealed sub-tier supply chain relationships.
One emerging approach involves the use of in network graphing technologies, which can help procurement and risk management specialists to navigating through high volumes of complex supplier data. “Asking the right questions to a network graph is vital to achieve results.” says Jim Hayden, Chief Data Scientist at Everstream Analytics.
Mark S. Granovetter argues in The Strength of Weak Ties that the overlap of friendship networks is directly tied to the relationship between each other. This thesis is fundamental for network graphing theory. In the context of sub-tier supply chains, a question to ask is: How often do same-tier suppliers interact with each other?
Whenever a major adverse event occurs, such as an earthquake, a hurricane, or a regional production shutdown, there is one question procurement executive get asked by the board: Do we have suppliers in the area? The network graph is poised to answer this exact question yielding the necessary results quickly.
Combining media monitoring and network graph technology, meanwhile, can enable the efficient monitoring of potential unfair working conditions, supplier-caused environmental damage, or other brand risks. Does my sub-tier supplier engage in unsustainable work practices? This today is still a very tricky question to answer for most automotive companies. Soon, the answer will be only a mouse click away.
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