Smart Solution for Supply Chain Challenges in Automotive Industry

The global climate change with growing demand of automotive is increasing pressure on automotive companies to make the appropriate decisions in many areas, including supply chain, R&D, and manufacturing. In real world scenario, emission level targets threaten to alter the entire structure of the auto industry. These challenges affect an industry already with high costs, lower profit margins, and accelerating competition. New entrants from India (Tata Motors) and China (Chery Automotive) are working aggressively to acquire their share in global market. Only very few companies are constantly delivering satisfactory profits such as Toyota, Honda, and BMW. Tier-1 suppliers such as Bosch and Denso; with some specialized tier-2 and tier-3 companies.

The cost of energy and raw materials are increasing due to growing global demand. Another strong challenge is fluctuating exchange rates. In a dynamic business environment, a strong supply chain is one critical element to helping automakers differentiate themselves from the competition. Many of trends in the auto industry are reinforcing the need to redefine supply chain strategies, layouts, and operations. This suggested improvements summarizes the current challenges in the automotive industry and analyze their implications on supply chains.

With this being said, executives know the business process within the industries has changed. According to an enterprise resource planning software builder company SAP’s research shows that 90% CEOs believe the digital economy will have the impact in their industry, though less than 15% are funding and executing on the plan (CapGemini, 2013).

Customer satisfaction, product quality improvement and collaboration at various levels; these dynamics require companies to change how they interact with customers, suppliers and other partners in design, planning, manufacturing and distribution of goods and services. They need to adopt digitalize and extended supply chain model that can respond immediately to the challenges such as visibility in the organization, cost containment, risk mitigation and globalized manufacturing. According to Society of Automobile Engineers and IBM’s review of supply chain executive responses challenges which are affective industry have analyzed and sorted out major challenges which can be improved by the technological aids through which overall scenario of the current supply chain in the automotive industry can be sustained.

Global Challenges & Trends

Based on the opinion across the industries and also within automotive, supply chain executives have sorted out challenges in Automotive Industry. (Schwarz, 2013)

Auto Industry Trends

External:

• Environment, safety etc.
• Raw material & energy cost
• Exchange & interest rates

Customer:

• Stabilize demand and price pressure in established markets
• Segmentation and polarization (based on cost, low vs. premium)
• Decreasing loyalty

Competition:

• Quickly entering every segment
• Moving targets — everyone optimizing or restricting
• Global game (aggressive new entrants worldwide)

Industry:

• Global overall capacity
• Complex alliances, partnerships, M&As
• Consolidating ecosystem (suppliers and dealer groups)

Based on these trends, five major challenges are identified from supply chain executives as below,

Top Five Challenges for the Automotive Supply Chain

1. Supply Chain Visibility
2. Cost Containment
3. Risk Management
4. Increased Customer Demands
5. Globalization

Smart Supply Chain Characteristics

Same as all the industries, cost containment is a concern that affects highly on the automotive industry. However due to its worldwide market and logistics visibility ranks even higher compared to cost containment. The most unexpected finding is the lack of significant weight placed on risk management, especially the downs the industry has seen. To effectively address these challenges, automotive companies may need not only simple and more efficient supply chain but also it requires smart supply chain with consist of three important characters.

Instrumented

Using sensors and “smart” devices to gain greater visibility across the network, mitigate risk, reduce cost and manage rising complexity.

Interconnected

Integrating the entire supply chain — even the fragmented aftermarket — to share information, make decision collaboratively and manage in real time.

Intelligent

Relying more on advanced analytics, simulation and modeling tools to evaluate increasingly complex and dynamic risks and constraints and act on better insight.

The Case for a Smart Automotive Supply Chain

Automotive executives viewed above mentioned challenges as impacting their supply chains to a significant or very significant extent.

Visibility

Similarly, as the other industries, automotive supply chains’ top challenge is visibility. In fact, the concern is even higher for automotive; compare to 70% in all other industries, the automotive industry has concern rate of 81%. Even though 84 percent of automotive executives have implemented real-time supply chain information transparency in the enterprise, only 13 percent have done extensively. Additionally, less than 30 percent of automotive companies view their collaborative practices as very effective at customer inventory planning and arrangement programs.

Analyzing across the different visibility practices, automotive companies trail top supply chains by some considerable margins. The rate of top supply chains that are extremely effective at sharing real-time demand and inventory data is five times higher than automotive supply chains. However, the responses across industries suggest that the most significant barriers to visibility and collaboration are organizational, rather than technological. Automotive executives agree, with organizational structure identifies as the primary obstacle. It is also interesting to note that top supply chain observes technology as a larger problem than automotive companies do. This appears to be driven by the maturity of their collaboration processes — which often include technology as an enabler. (Heaney, 2013)

Visibility in Smart Supply Chain

The smart automotive supply chain sees visibility as the basic building block for responding to the other top challenges, including cost containment, risk, customer and globalization issues. To obtain more visibility, the smart supply chain uses RFID (Radio Frequency Identifier) tags, sensors, and intelligent devices to track and optimize the movement of materials from suppliers to receiving docks and throughout assembly line. However, it takes instrumentation even further, using it to improve visibility downstream. For instance, the dealer might use smart tags not only to locate specific automotive across expansive lots but also ensure the appropriate customization on a particular vehicle.

Embedded systems and software are also helping the smart supply chain through instrumentation of the vehicle itself. These sensors provide data on leading indicators of potential failures. This information provides demand visibility for parts and service and helps the manufacturer improve quality and reduce warranty costs. Smart automotive supply chains are also highly interconnected — even across extended dealer networks. For example, dealers can view their own parts inventory as well as the inventory of other dealers and distribution centers. They can also order parts they need from any location. Dealers are not forced to choose between locally stocking slow moving inventory and also losing business because of service delays. (Malaviya, 2015)

These smart supply chains also have the intelligence needed to optimize their operations based on increasing visibility. Sourcing quantities, safety stock levels, and replenishment thresholds are calculated using accurate information and sophisticated analytics and event actuators automate action based on these predetermined rules.

Cost Containment

Within the automotive industry, more supply chain executives rank cost containment as a top challenge. While top 3/4th of automotive companies are concentrating on cost containment to meet business challenges, only 48% of top supply chains are doing so, choosing instead to position their supply chains to run revenue growth.

Cost-cutting intentions are obviously strong, but the key questions arise while cost containments are; whether automotive supply chains looking in the right areas? Are they selecting targets strategically? Findings suggest that there is some uncertainty here. For example, more than 80% of automotive supply chain executives say that they have implemented variable cost structure in which the costs align with the fluctuating revenues, while 20% have done extensively. Top supply chains have approximately the same rate of adoption. Yet, automotive executives are continuing focus on cost indicates there is still much more to do.

Findings suggest that outsourcing is one of the potential areas of opportunity to alter the costs. The only supply chain function that is extensively outsourced by the majority of automotive executives is transportation, which is nearly 76%. Only one in five reports widespread outsourcing of customer/export management and warehousing or distribution center. Less than 5% use contract manufacturing and not a single automotive executive report extensive outsourcing of procurement. (Accenture, 2014)

Automotive supply chains also have room to improve outsourcing effectiveness. Even in areas like transportation, which 95% of automotive companies outsourced to some level, the industry’s effectiveness lags that of top supply chains. The gasps are larger in areas that require more flexibility and advanced analytics capabilities, such as separated logistics services and network optimization.

Cost Containment in Smart Supply Chain

The smart automotive supply chain takes full advantage of increased instrumentation, interconnectivity, and intelligence to reduce cost. Using these capabilities, it maintains the optimum inventory of incoming materials, finished products, spare parts and accessories spread across distribution centers and thousands of dealer repair shops.

Intelligent forecasting, inventory management and dynamic pricing of parts are particularly important — not just for efficiency, but because they position the smart supply chain to capture the expected growth in the service segment as consumers hold onto their vehicle longer (R.L. Polk & Co., 2009).

In a smart supply chain, spare parts forecasting and planning are done at a lower level of detail. Even with hundreds and thousands of parts and millions of part-location combinations, it can simulate different scenarios and tailor replenishment strategies for each individual part. Sophisticated procedures help to better predict periodic demand fluctuations. The entire chain saves money by carrying less inventory and reducing uncertainty through better parts utilization.

The smart automotive supply chain also uses analytics to optimize distribution networks. For example, by analyzing production and customer locations, order quantities, transportation cost and delivery times, a manufacturer can determine the right number of distribution centers and their ideal locations. The optimized network reduces warehousing and transportation costs, while still maintaining high service levels.

Risk Management

Across different industries, one-third of all supply chains fails to manage risk on a formal basis. While in automotive companies that percentage is 37 which is slightly worse compare to other industries. Automotive companies lag top supply chains in implementing risk management practices. Currently, 61% of automotive companies have integrated risk mitigation into their supply chain planning processes. Within three years, this adoption rate is expected to rise to 75%, which is the current level among top supply chains.

Also in three years, more than nine out of ten top supply chains expect to have process controls implemented across logistics and operations (96%) and compliance programs in place with their suppliers and service providers (92%), as compared to 85% and 75% respectively, of automotive supply chains. (Bastos, 2016)

Yet, what research found most troubling was automotive supply chain executives’ opinions on the benefits of risk mitigation. This is particularly seeming when we compare their answers to the responses of top supply chains and automotive CFOs. Fewer automotive supply chain executives believe risk mitigation would increase forecast accuracy despite the link between this metric and the importance of real-time visibility. Similarly, automotive supply chains do not see a strong link between risk mitigation and increased responsiveness, even though they are depending on variable cost structures that measure up and down as situation change.

Through research, it is also come to know that responsibility for supply chain risk management is rarely included in the role of automotive supply chain chief officer. This may explain the participants’ view that risk mitigation strategies do not significantly impact their supply chains. Without formal accountability for a comprehensive, company-wide view of risk, executives can easily misjudge business impact.

Risk Management in Smart Supply Chain

For automotive companies, supply chain risks are many and varied. Increasing globalization and new economic challenges have produced even more. However, with sophisticated demand, variable cost structures and better integration with suppliers, the smart automotive supply chain is more capable of flexing supply up and down with demand. Greater visibility along with closer customer and supplier collaboration help maintain the right mix of vehicles and products in stock. Stronger make-to-order capabilities also reduce the risk of having dealer lots of full of unwanted inventory.

With vehicles staying in use longer, the demand for spare parts is rising, along with it the occurrence of counterfeit and gray market parts. It is a trend that threatens one of the industry’s most profitable segments. The smart supply chain mitigates these risks with smart tags that allow parts to be authenticated and traced throughout the supply chain.

In addition, at any given time, more than 15 million containers are traveling through international waters or waiting to clear customs. ( IBM Corporation, n.d.) These deliveries face many risks: delays, diversion, and physical damage. For traditional supply chains, cross-continental transit typically means loss of visibility. But the smart supply chain can track its cargo containers anywhere in the world. Instrumented containers collect information and report on their physical location, environmental factors such as temperatures and humidity, as well as signs of tampering. Besides reducing risk, these capabilities enable “green-lane” customer treatment, which offers further supply chain efficiencies.

To help identify and prepare for the uncertainty, the smart automotive supply chain equips itself with advanced business analytics. Instead of simply responding to changes it sense, the smart supply chain uses real-time information and sophisticated modeling to predict outcomes and take appropriate actions ahead of time. For example, a manufacturer could model the effects of an uncertainty — such as supplier shutdowns and closures of ports and airports — and implement mitigation plans to minimize supply chain disruption.

Customer Demand & Collaboration

Across the industries, demand planning with customers is the least frequently implemented process for synchronizing supply and demand. The same is true among automotive companies. When contrasted with the full sample, a higher percentage of automotive supply chains report collaborating with customers on-demand synchronization. Yet, on the whole, supply chain planning is done primarily within the organization. Only 26% collaborate with customers to a significant level, as compared to 77% who use internal sales and operations planning processes. (Little)

In terms of customer collaboration on product innovation, automotive supply chains fare much better (Figure 5). Compared with top supply chains, significantly more automotive supply chains support customer product configuration and specifications. Similarly, twice as many auto companies collaborate extensively with customers on product design.

In context, these findings suggest that automotive companies’ ability to collaborate effectively with customers is inversely related to the speed and frequency of the interaction required. In other words, automotive supply chains excel at periodic customer collaboration. But when real-time, transaction level interaction required, the industry’s collaborative capabilities fall short. Although it may be difficult for light vehicle OEMs to create these capabilities because of the size and varying levels of IT capabilities among their dealers, other automotive companies should seize the opportunity to connect with large customers and dealers. (Kevin O’Marah, 2014)

Customer Demand & Collaboration in Smart Supply Chain

The smart automotive supply chain uses greater instrumentation and interconnectivity to improve products and supply chain operations as well as to gain consumer insight. Traditionally, dealers and service/repair shops possessed the most information about the consumer, with OEMs and suppliers having the least. However, with a smart supply chain, more information is shared across the network.

With online communities, embedded systems, connected automotive and online vehicle configuration and ordering, the smart supply chain has more information about consumers and how they use their vehicles than before. More importantly, it has intelligent analytics to synthesize and use this wealth of information.

For example, a heavy equipment maker might instrument its vehicles to electronically transmit performance data. This information would flow directly into product development to improve quality and reduce warranty costs. Analysis of the information would allow the manufacturer to predict equipment failures and notify customers of the need for preventive maintenance, helping reduce their service costs and avoid business disruptions. Instrumented and interconnected vehicles create a host of new opportunities for services based business, like fleet management, which typically provide steadier revenue streams than products.

The smart automotive supply chain also addresses rising customer demand for configurable products. Its vehicles are designed to be tailored either during manufacturing or at the dealership. Because the smart supply chain is appropriately flexible and interconnected, customers can adjust an order until just a few days before manufacturing begins.

Globalization

Automotive is one of the most global industries, second to electronics. (IBM Institute for Business Value, 2008) Indeed, the automotive industry has been at the forefront of establishing global infrastructure. As other industries begin to catch up, they are struggling with some of the same operational issues automotive supply chain executives have faced for some time; mainly quality and delivery reliability. These two issues are the top challenges across our entire sample and within automotive as well.

As because of this, supply chain executives across industries are not achieving the benefits they anticipated from their global supply chains. In fact, only 1/3rd of automotive supply chains report improved overall performance a result of globalization.

In contrast, nearly 60% of top supply chains report that globalization has improved their overall performance. Additionally, they expect to have delivery reliability and quality issues largely under control with the next couple of years (figure 6). (Weatherston, Wilkinson, & Brooks)

Their top future concerns are more advanced business issues like the regulatory and legal challenges of an international supply network and the organizational and cultural obstacles posed by increasingly virtual relationships.

Globalization in Smart Supply Chain

The smart automotive supply chain is focused on integrating its global supply chain. This includes integrating the product lifecycle management and enterprise resource planning systems of all its partners. In addition, collaboration, knowledge sharing and social networking tools help close distance gaps and build networks across the extended value chain.

To easy integration, the smart supply chain establishes common processes and terminology. For example, “ship” means the same thing in Mexico and Singapore, and production schedule is calculated same way at every plant.

Instead of running each facility separately, the smart supply chain manages resources globally; matching demand with sourcing and manufacturing capacity around the world. Though intelligent business analytics, it tracks and synthesizes demand and supply trends, evaluates complex what-if scenarios and acts based on the most likely outcomes.

These insights combine with supply chain flexibility allow the smart supply chain to adjust sourcing and production planning to optimize operations globally. This intelligence makes a global available-to-promise function feasible.

Managing the Smart Supply Chain

In automotive companies, the highest-ranking supply chain executive is more likely to report directly to the CEO. In addition, nine out of ten automotive supply chain executives have responsibility for strategy, planning and operational execution. Yet, the comparison between automotive and top supply chain companies shows some basic differences in executives’ functional responsibilities. A negligible percentage of automotive supply chain executives oversee non-traditional functions such as risk mitigation and new product design. In fact, top supply chains surpass the automotive industry by more than three to one margin in most of these emerging areas of responsibility. (IBM Corporation, 2014)

Given these contrast, automotive Chief Supply Chain Officers should consider whether their current goals require them to have a broader scope of responsibility. For Example,

• Eight out of ten automotive supply chain executives struggle with end-to-end visibility but only 15% are responsible for manufacturing and just 7% manage post-sales functions
• Risk management is a major challenge for 57% of automotive supply chains but just 7% of executives have a risk management function reporting to them
• More than half are concerned about rising customer demands but only 4% oversee product design and customer management

When their span of control is limited, automotive supply chain executives will have to compensate for even greater collaboration and personal influence.

Conclusion

Currently, automotive companies are involved in a worldwide industry transition. Nearly everything about their businesses is changing — their products and services which includes from engine types and fuels to be used to the smart service offerings, where and how they’re sold (Tesla is one of the examples of Make-to-Order selling in commercial market), the degree of governmental involvement, even the fundamental business models of the industry.

By implementing described various means of technological aids such as instrumentation, sensors, electronic data records according to data standards such as GS1® the supply of automotive parts and services can be improved in next 2–3 years. According to the current rate of technological advancement and suggested collaboration here with current adaption rate throughout the industry, it is projected that risk mitigation in the industry can be improved from current level of 61% to the 75%. Also with the help of more visible and centralized enterprise resource planning, process control implementation in logistics & operations can be increased from 85% to 96% and compliance program with supplier/service provider can be increased from 75% to 92%. While the contract manufacturing for cost containment is projected to a major increase to 48% from current 5% in next couple of years because of risk mitigation techniques through more transparency and quality improvement. Supplier collaboration is also expected to increase because of quality assurance standards and improved system design prior to supplier contract such as standard parts library integration which also eliminates chances of counterfeit, technical access to the design and system responsibility according to OEM standards.

At the center of this massive change is the automotive supply chain. For automotive companies, emerging from this period of transition as healthy, vibrant business depends on the large part on how their supply chains adapt. Greater speed and efficiency will help, but won’t be enough. Automotive supply chains need fact-based intelligence to predict with future scenarios are most likely to occur — and the flexibility to get repositioned before they do.

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