Reducing supply chain Risk in an era of instability

The automotive supply chain has become increasingly complicated. Companies have been able to lower costs by procuring from a global set of suppliers and efficiently moving goods across continents.  Continually improving management systems allows for the reduction of inventory in the supply chain, minimizing working capital requirements. Yet, lowering individual component costs while adding complexity exposes the supply chain to additional risk that is not priced into most agreements.

What is now known as ‘lean’ was born out of necessity in post-war Japan. Toyota had far fewer assets compared to European and American competitors. The Toyota Production System was designed to maximize productivity out of limited resources.   Over time, efficiency and quality gains realized by Japan were envied elsewhere.  As companies in different regions and situations adopted the approach, the “rules” grew detached from their genesis. In the long run, imitation without understanding of the underlying conditions creates new challenges.

The principle of having minimal inventories relied on stability. Inventory is a cushion that allows for instability in the supply chain. Given the supply disruptions and an increasing feature set in modern vehicles, it’s prudent now to put inventory back in the system. Inherently, inventory isn’t good or bad, its impact is dependent on the circumstances.  

Companies have to pragmatically reexamine their old cost paradigms. Plant managers and functional leadership should quantify supply chain risks and adjust inventory levels accordingly. This can be done through a multi-factored assessment of the impact of a supply disruption on lost production and the risk probability that it occurs because of supply shortages.

This approach is more than extrapolating trends from the past, it requires a look to the future. Examine areas in the supply chain that are potentially most vulnerable and most volatile and put inventory in there to protect your output:

Severity of supply disruption
Probability a disruption occurs
– Long lead times
– No-build parts, where you can’t retrofit
– Single source vs. dual source supplier (or availability of other suppliers for tool transfer)
– Fixed available production capacity
– Regulatory requirements, where a defective product means government intervention  
– Past supplier performance (delivery history)
– Political impacts from trade sanctions and conflict
– Complexity of material
– Unaddressed environmental concerns (Geographic exposure to weather & climate)
– Distance parts travel & number of border crossings
– Transparency into supplier (will there be an early warning)

Certainly, instability is climbing in some regions.  Global networks of trade and travel increase the frequency of “Black Swan” events. Disease, weather and geopolitical factors now are becoming more dynamic. We encourage the Tier N supply base and OEMs to reevaluate their supply chains and quantify risk in the supply chain.

Increasing inventory is not the only way to reduce the impact of the risks outlined above.  There are costs to holding inventory, adjusting the warehouse footprint, and modifying production control and logistics processes.  

Companies should value ongoing stability in the supply chain and develop longer term relationships with a more collaborative approach, rather than a competitive one.

In the last 20 years the OEMs have developed system suppliers with responsibility for a large portion of the vehicle content. OEMs have lost some of the visibility in the Tier N supply chain. The lack of insight coupled with additional complexity related to software and electronics is exposing OEMs to greater risk with less control.

For inventory planning and scheduling, if a lack of transparency is increasing risk, improving supplier communication, conducting audits, and implementing digital production tracking increases visibility into the supply chain. By understanding the safety levels within the supplier business, there can be collaborative risk mitigation. This applies to current suppliers but also to procuring and making contracts to build your future supply base.

Financial prudence is as important as ever. Our cost approach is based in reality. Assessing the success of a supplier cost profile at the time of signing a purchasing contract or any single point in time makes sense in a consistent predictable world. However, as complexity rises, the number of factors that need to be managed to stay in control increases.

Instead of seeking the lowest cost produce, take a mature look at cost by developing a comprehensive view of the risk, and pricing the cost of that risk into a risk-adjusted “total landed cost.” Planning and sourcing needs to reflect the new reality. Pricing in risk-weighted impacts into operational decisions and planning offers great potential to help us avoid these problems in the future.

Ambrose Conroy

Founder & CEO, Seraph

About Ambrose Conroy:
Ambrose Conroy is the founder of Seraph, an automotive consulting firm. Seraph helps clients increase output, ramp-up production capacity, relocate operations, conduct due diligence, solve engineering challenges and optimize operations.

May 9, 2024

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