In the wake of a more than two-year-old pandemic of COVID-19 and a growing global shortage of microchips, auto companies are taking stock of their suppliers to stay on top of unprecedented challenges to their supply chains. As the automotive industry grapples with the challenges ahead, companies and governments are trying to understand the incredibly complex supply chains better.
Past vs. Present
In the past, automakers and Tier 1 suppliers might not have been concerned about where certain raw materials were sourced from Tier 2 suppliers or where widgets were sourced for significant components manufactured elsewhere. The global supply chain operated smoothly despite natural disasters, strikes, or political crises. Nonetheless, COVID-19 upset everything, shutting down factories and making parts once believed to be readily available hard to find.
“Overall, the supply chain has been very stable for decades. It took a global natural disaster to really shake the foundation”, said Dan Hearsch, a managing director in AlixPartners’ automotive and industrial practice. “We know we can’t rely on the old playbook anymore, so we have to have better systems to give us visibility and confidence that the suppliers are managing their risks,” he added.
In late 2020, German automotive giant ZF Group ran into supply issues. To counteract this, ZF put together a task force to keep track of the latest developments, particularly in the advanced driver-assistance systems and electronics groups department. These efforts proved to be futile.
Rebecca Streng, vice president of supply chain management for ZF’s advanced driver-assistance systems and electronics division, explains how it was simply not enough. “We realized our traditional tools were not satisfactory to manage this situation,” she said.
A prototype of ZF’s eventual customer tracker was developed that uses Microsoft’s Power BI data visualization software to visualize data on incoming supply to help managers know when parts shortages are likely to occur.
“If the root cause of an issue is that supplier X is having COVID issues in China or Malaysia, we try to take that information and communicate it to the team to see if that is going to hit us in other places,” Streng said.
ZF is not the only one creating these types of systems. Robert Bosch, the world’s largest auto supplier, has a similar vision. Paul Thomas, Bosch’s executive vice president of mobility solutions, says, “Bosch views transparency as the ‘No. 1 priority’ in its relationships with suppliers and automaker customers.”
Robert Bosch’s developers emphasize data-driven software that uses predictive analytics, artificial intelligence, and historical models to help identify problems that could arise in their supply chain before affecting parts deliveries to auto manufacturers.
“We’re looking at being able to predict and forecast demand beyond what our customers can even give us. We’re trying to be more collaborative with suppliers, and that includes engagement from our OEMs. We’re still trying to get our OEMs to give us forecasts beyond 52 weeks,” says Thomas.
Several companies have prioritized improving visibility over the past two years, but it’s not the first time. It has been more than a decade since Japanese automakers and suppliers attempted to clarify their supply chains.
After the tsunami and earthquake that hit Japan left the country unable to produce any vehicles, Toyota decided to map out its entire supply chain, including Tier 4 and Tier 5 suppliers. Supply chain Application for Visualization and Enhancement, or SAVE, was launched to see how supplier operations might be affected by future crises.
Dan Hearsch explains that Toyota handled the global microchip shortage better in the early days of the crisis by understanding where parts were coming from and when they would arrive.
Speaking on the 2011 production halt due to the earthquake and tsunami, Hearsch says, “The Japanese automakers were really impacted and couldn’t make cars and were disrupted in a way that many other automakers were not. Ten years later, they still had many of those lessons. Many Western companies hadn’t experienced that viscerally and created systems that were more fragile than they needed to be.”
The stability of the supply chain industry before the COVID-19 pandemic allowed suppliers to take on more risks to satisfy costs. “This sort of created a system where the OEMs simply made the vehicle, and it was the Tier 1’s responsibility to deliver parts,” he said. “Suppliers were willing to take on the risk because the system was robust.”
Today, suppliers and their customers are almost playing a game of trust. Suppliers and customers must have considerable trust to get more clarity on the supply chain. “You don’t want to give away too much information to your customer because you have to trust that they’re going to do the right thing with it,” says Kristin Dziczek, an automotive policy adviser at the Federal Reserve Bank of Chicago.
Dan Hearsch piggybacks on this point as well. Who knows what automakers would do with such important information? “OEMs have a history of wanting to use this information to reduce their costs, and that often comes at the expense of Tier 1 or Tier 2 suppliers”, says Hearsch.
“We don’t want to confuse the supply base, either. If every one of our customers knew that one supplier was the source of a bottleneck, one could only imagine how many confusing messages the supplier would get”, says Bosch’s Paul Thomas.
“That’s not to say we don’t need the help of our OEMs with the bottlenecks, but at the end of the day, it’s difficult to have multiple people directing multiple different directions at our supply base,” he adds.