The Automotive Supply Chain: the need for resilience and transparency
Capgemini recently released a report, Automotive Supply Chain: pursuing long-term resilience, on the automotive supply chain’s resilience-building strategy to mitigate many of the problems of supply chain shortages that followed COVID lockdown. The report underlined the short-term importance of nearshoring and inventory building to overcome shortages and reduce order backlogs. But it also highlighted the negative effect of such initiatives on sustainability efforts and how a lack of transparency and trust hamper supply chain management.
When “just-in-time” is too late
Originated by Toyota in the 1950s, just-in-time (JIT) manufacturing has dominated the automotive supply chain philosophy for years. The benefits of reduced waste, lower warehousing costs, and the potential to free up working capital have been attractive. However, the volatile business landscape of late has exposed the downside of JIT, disrupting supply chains worldwide and making it impossible for manufacturers to maintain lean inventories.
As James Rowan, CEO, President, and Director of Volvo Cars, confirms in Capgemini’s report: “Supply chain architecture, in general, is changing. This just-in-time process that we've enjoyed for decades now, when there was frictionless trade across the world, that time has gone, and people are now rearchitecting the supply chain to make it more resilient.”
Nearshoring brings inventory closer to home
The proportion of supply obtained from offshore locations has dropped by 25% in Europe (22% in the rest of the world) over the past two years. A further decline of 19% is expected in the next two years. Offshoring is making way for nearshoring, a business practice whereby a company outsources some of its work or services to a nearby or relatively close location, typically in a neighbouring country. This is done to take advantage of cost savings while maintaining geographical proximity, making communication and coordination easier than outsourcing to more distant locations, such as offshoring to a different continent. It's like finding a balance between cost-efficiency and convenience. This has contributed to supply chain resilience, evidenced by increased market confidence and reduced order backlogs by 61%. The trend is expected to accelerate, particularly as the transition to electric vehicles grows.
Regulatory policy is also a reason behind nearshoring growth. The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) obliges organisations to conduct due diligence regarding human rights and environmental responsibility along the supply chain. The EU's new Circular Economy Action Plan for the automotive industry proposes that to support the EU's environmental and climate goals, automotive manufacturers must develop circular supply chains using recycled materials. Such circular economy initiatives require reverse logistics, which globalised supply chains cannot readily support. Organisations prioritising sustainability in their business operations – and across their supply chains – will be better positioned to comply with emerging regulations.
OEMs and suppliers have used inventory building, funded by working capital, to boost supply chain resilience. Doing so means manufacturing can continue with disruption. Still, it’s not a long-term strategy and results in suppliers paying higher interest rates than OEMs, which is a non-viable long-term option. As a result, money has been focused away from sustainability initiatives. OEMs, however, have increased investment in sustainability slightly. However, the automotive industry is currently projected to overshoot its carbon budget to meet the Paris Agreement by 75%. However, a shortage of suppliers of recycled materials and a lack of the materials themselves has delayed the scaling of the circular economy, which is an important long-term goal for the automotive industry.
Lack of trust and transparency
Capgemini’s report highlighted the continued mistrust between OEMs and suppliers due to their being locked in a vicious cycle of lack of transparency and data-driven intelligence. Suppliers are sceptical of OEMs’ manufacturing requirements, and OEMs lack confidence in suppliers’ self-reported sustainability data. This hampers business-critical activities such as risk management and sustainability, plus challenges procurement and replenishment, which is compounded by the supply chain’s lack of mature data-driven intelligence.
So, what’s the solution?
Capgemini sees the solution in developing a robust, interconnected, intelligent, and environmentally responsible supply chain, which seems idealistic, but is it possible? This supply chain should possess the capacity for flexibly responding to the procurement challenges associated with scarce resources, such as minerals essential for batteries and semiconductors. Nevertheless, accomplishing this transformation is a formidable task. The automotive supply chain traverses multiple regions and nations and is susceptible to worldwide disruptions, including natural disasters, political upheavals, and trade conflicts.
In Europe, 52% of organisations state that outbound logistics is a key challenge in fulfilling order backlogs, and 70% say the same for inbound logistics.
Richard Palmer, outgoing CFO of Stellantis, comments: “In Europe, the real issue continues to be outbound logistics – that’s still top of the list of our things to resolve.”
To address this crisis, automotive OEMs and suppliers have invested in equipment and fleets, established more long-term relationships and contracts, and built inventories. For some organisations, increasing inventory is necessary in the short term, even though it involves tying up working capital. As a CEO of an OEM parts logistics organization explains: “Strategic stocks are being increased by employing working capital. As transportation costs are high, increased stock and storage are a better alternative.”
The automotive supply chain has faced unprecedented disruptions in recent years, from the pandemic to geopolitical shocks. To address these challenges, car manufacturers must revamp their supply chain model alongside the supporting organisational and technological frameworks. The future supply chain must prioritise intelligence and data-driven approaches to tackle upcoming industry hurdles. Integrating circularity poses a formidable challenge. Automakers' success hinges on their supply chain's ability to foster trust, enhance collaboration, and boost agility while embracing sustainability. A resilient, connected, intelligent, and sustainable supply chain could emerge as a key competitive edge for automakers.