Supply Chain Management Insights – Lessons Learned From The Global Automotive Industry

Supply chain management professionals today have never before experienced such a proliferation of global disruptions. Every industry has been touched by the challenges experienced since the onset of the pandemic, however, the automotive industry has consistently made the most headlines.

Car and truck production lines around the world have been severely impacted by the current global supply chain crisis, especially with the semiconductor shortage. With this in mind, we believe there are important lessons we can all learn from the challenges that the automotive industry is currently navigating.

SAY GOODBYE TO JUST-IN-TIME INVENTORY MANAGEMENT

As many supply chain pros discovered, ”just-in-time” often turned out to be much-to-late in the last 12 to 18 months. According to Mark Baxa, the interim President and CEO of the Council of Supply Chain Professionals, “the pandemic… drove a nail in the coffin for just-in-time production and inventory management.” 1

Baxa continued, “Vice presidents and EVPs of supply chain did not understand the magnitude of risk within their supply chains, at least to the extent that they thought they should, or that they thought they had.” Even as companies strived to optimize inventory management systems and diversify their supply networks, many landed on sources used by others in their industries. 2  Per Baxa, “a prime example is the semiconductor industry, where manufacturers in Taiwan eventually became the suppliers for 85% of the world’s semiconductors.” 3

There is no bigger thorn in the side of automotive makers that the global shortage of chips. According to a recent article from BBC News, “Chips are vital to modern cars, with features including touchscreen controls, automatic emergency brakes, reversing cameras, fuel efficiency equipment and airbag deployment systems all relying on them.” 4

As just one example, recently, BMW temporarily shut down operations at their Mini production facility in the UK. According to a company statement, “As a result of the global semiconductor shortage, an issue that has affected the entire automotive industry for the last year, Plant Oxford is making some short-term adjustments to its production schedule.” 5

Honda’s Chief Operating Officer summed up the chip-shortage dilemma by saying this: “It’s like everyone is grasping to get a supply of semiconductors,” according to The Wall Street Journal. 6  The chip shortage may take years to resolve and when it does, one can be sure that automakers will no longer be focused on getting their semiconductors “just-in-time”.

IMPROVE YOUR SUPPLY CHAIN RESILIENCE

The world’s top-selling automaker, Toyota, recently suspended production at all 14 of the company’s factories in Japan. Why? One of their key automotive-component suppliers got hit by a cyberattack. Of note, Toyota  had already planned temporary production stoppages at multiple factories because of parts shortages. 7

In North America, the recent 6-day blockage of the Ambassador Bridge, which connects Detroit, Michigan, to Windsor, Ontario, revealed how removing just one transportation link can severely impact the automotive industry. According to Reuters, “The estimated loss from the blockades to the auto industry alone could be as high as $850 million, based on IHS Markit’s data, which puts the 2021 daily flow in vehicles and parts at $141.1 million a day. Remarkably, 25% of the value of all US-Canada trade traverses this bridge.8

Many U.S. supply chain managers rely on production facilities in China for their goods. As such, it is easy for them to forget that Canada, not China, is America’s largest trading partner.9  It is sobering to think how thousands of businesses on both sides of the border rely on a single bridge to keep their production lines running.

Improving the resilience of your supplier network takes time. Yet, time is of the essence. Savvy supply chain managers must bolster their resilience initiatives to mitigate high levels of risk to their businesses.

FOCUS ON PROFITABLE SEGMENTS

As reported in a recent article in The Wall Street Journal, several global auto manufacturers generated strong profits in the past fiscal year, despite the semiconductor shortage that curtailed vehicle production. The limited output emptied dealer lots causing new-vehicle prices to soar, which padded automakers profits. 10

Another factor that drove revenue higher was a focus on producing the most profitable models. Several brands focused on sourcing the supplies needed to produce pickups and SUVs for the US market, while reducing the purchase of components for lower margin vehicles, such as sedans.

An article in The New York Times verifies the success of this approach. “G.M. used the chips it had to produce the most popular and higher-priced models, in particular large pickup trucks and sport utility vehicles.” The strategy worked as “G.M. reported $10 billion in profit for 2021, a 55 percent increase from 2020 and its highest total ever.” 11

A new, lucrative opportunity has emerged for many automakers: build-to-order (BTO). Consumers win by getting precisely what they want in a new vehicle. The automotive companies benefit by optimizing their inventory and production schedules to meet real-world demand. Another profitable benefit to the automakers is costly buyer incentives are often unnecessary for BTO customers. 12

INVEST IN FUTURE GROWTH OPPORTUNITIES

When it comes to electric vehicles, the financial stakes are monumental. Major automakers are betting big on a future with robust EV sales. That future is coming sooner than many people realize and supply chain managers will need to scale their supplier networks fast. Recently, Ford Motor Company announced it will invest up to $20 billion over the next five to ten years converting factories to produce EVs. Remarkably, that investment is over and above the $30 billion Ford plans to invest in electric vehicles through 2025. 13

Volkswagen Group, which sells 9 million vehicles a year globally is investing much more. As reported in Fortune, “the company committed a hefty €159 billion ($180 billion) over the next four years to transform its production, with the aim that by 2026, one-quarter of new vehicles would be battery-powered.” 14

Many automakers are also investing big in the software development and battery production necessary to succeed in the EV market. If you want an idea of how devoted automakers are to EVs, consider this: six of the seven ads during the 2022 Super Bowl featured EVs, even though only 9% of passenger vehicles now sold globally are electric. 15

Few companies have billions and billions to invest in the future, however, the salient point is clear. To succeed over time, business leaders need to invest in future growth opportunities.

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Footnotes:
1, 2, & 3. Gregory Van Tighem, “Supply Chain Disruptions Likely to Continue in Near Future”. February 14, 2022, as published by Transport Topics.
4 & 5. “Mini Oxford plant production halted due to chip shortage”. February 23, 2022, as published by BBC News.
6. Sean McLain, Toyota, Honda Strike Pessimistic Note About 2022 Car Supply”. February 9, 2022, as published by The Wall Street Journal.
7. Ben Dooley and Hisako Ueno, “Toyota stops production in Japan after a cyberattack at a supplier”. February 28, 2022, as published by The New York Times.
8. Kayla Tarnowski, David Morgan and Chris Helgren, “U.S.-Canada bridge reopens after police clear protestors”. February 14, 2022, as published by Reuters.
9. Paul Solman and Ryan Connelly Holmes, “Canadian trucker blockades impact production on both side of the border”. February 11, 2022, as published by PBS News Hour.
10. Mike Colias, “GM Earnings Rose Sharply in 2021”. February 1, 2022, as published by The Wall Street Journal.
11. Neal E. Boudette, “G.M. expects production to return to normal this year as a chip shortage eases”. February 1, 2022, as published by The New York Times.
12. Paul A. Eisenstein, Bill Howard, “With Dealer Lots Bare, Car Shoppers Turn To Build-To-Order”. February 24, 2022, as published by Forbes.
13. Michael Wayland, “Ford reportedly plans to increase EV spending by up to $20 billion”. February 1, 2022, as published by CNBC.
14. Vivienne Walt, “VW is making an $180 billion bet to dominate EVs and catch Tesla”. January 31, 2022, as published by Fortune.
15. Catherine Clifford, “Electric vehicles dominated Super Bowl ads, but are still only 9% of passenger car sales”. February 14, 2022, as published by CNBC.