The automotive industry is facing two major struggles: strengthening its supply chain and meeting the increased pressure to control greenhouse gas (GHG) emissions. Any assumption that electronic vehicles will solve all their problems is no longer viable.
Supply chain and emissions issues converge at several points, most notably in the realms of supplier optionality, supplier relationships, and internal collaboration between planning, procurement, engineering, and operations.
Three paths to stronger supply chains
In the auto industry, manufactured parts cross international borders multiple times as different suppliers in widespread locations add their bit—everything from a complete infotainment system to the neon gas used to manufacture one semiconductor. While an automaker may have a few major suppliers of parts, those suppliers have dozens of suppliers who, in turn, have more suppliers. As a result, the automotive industry has one of the most fragile supply chains, even more complex, less visible, and more easily disrupted than that of the aerospace industry.
1. Supplier Optionality
Sole sourcing and sole-country sourcing are a major problem that can be rectified with strategic sourcing strategies like optionality. But many procurement departments are viewed as transactional services only; they are not geared up to develop relationships with current suppliers, let alone find new ones.
Finding alternative suppliers also requires weighing various considerations such as:
- Length of the supply route
- Vulnerability of suppliers to political, weather, and economic upheavals
- Ability of the supplier to pivot with new innovations or consumer demands
- Skill and size of the available workforce
- Relationship of the supplier with the supplier’s suppliers.
By considering all those factors, a mature procurement department often finds that the solution considered most expensive, such as in-shoring, is much less risky and much more likely to provide the quality, turnaround, and flexibility that the manufacturer requires. It may happen that the search for new suppliers delivers alternatives within the same geographic area; or suppliers in other geographic areas may have the potential to rival the original location given a year or two to develop.
2. Supplier Relationships
Relationship building is vital in an industry where competition for suppliers is fierce but often based solely on the cost of components. While cost control is important, so is the financial health of suppliers. If suppliers are driven into bankruptcy by the demand for low-cost components, no one benefits.
Moreover, relying solely on cost makes optionality ineffective. China is still the lowest cost supplier but China is now investing in South American suppliers because it recognizes their potential even if automakers are still hesitant to switch. By developing relationships now, with transparent and mutual communications about needs, the automotive industry will ensure a strong supplier base in future years.
3. Internal Collaboration
Automakers may benefit from looking at alternative ways to reduce costs, such as design for excellence (DfX), obsolescence management, asset utilization, and complexity management. When procurement, engineering, and operations work together, busting through siloes and giving each function a voice at the decision-making table, they reduce costs, find new sources of working capital, and improve profits.
Three paths to stronger sustainability initiatives
The push for electric vehicles is only one of the sustainability challenges facing automakers. An even greater challenge is controlling Scope 3 greenhouse gas (GHG) emissions. Scope 1 emissions are directly under the automaker’s control and Scope 2 emissions, while indirect, are visible. However, Scope 1 and Scope 2 are far less of a concern that Scope 3, which embraces the entire end-to-end supply chain (upstream and downstream) and accounts for 70% or more of all GHG emissions.
1. Supplier Optionality
Any optionality analysis should consider a supplier’s ability to control their own GHG emissions and their ability to help the automaker’s sustainability efforts.
While almost all global automotive suppliers have targets for sustainability, very few have abatement programs up and running. Among the headline news in 2022 was the BASF/BMW alliance to reduce the CO2 emissions from paint by about 40%. This is a far different approach than reducing emissions from the end product, the manufactured vehicles on the road.
2. Supplier Collaboration
Ally sourcing concentrates on suppliers who are located in countries that share economic, political, or strategic alliances. In the cause of controlling Scope 3 emissions, ally sourcing would confer the benefits of a mutual understanding of goals and carbon capture, utilization, and storage (CCUS) technologies. There might even be possibilities for sharing costs.
In addition, any accurate calculation of Scope 3 GHG emissions requires supplier collaboration and transparency. While the cost-of-goods-sold gives a rough baseline, investors, stakeholders, and regulators expect more detailed calculations that take into account every source of Scope 3 emissions.
3. Internal Collaboration
The sustainability goals of an automaker are only attainable if those goals are reflected in every part of the plan-buy-make-move supply chain. For example:
- The decarbonization of materials requires internal collaboration in the design and manufacture of products, as well as the procurement of materials.
- The reduction of waste materials, recalls, and returns requires improvements in strategic sourcing, forecast and demand planning, quality control, and product lifecycle management, among other collaborative processes.
- Any advanced analytics must be based on trustworthy data from every function, which is then organized so that each function can access the information it needs—again, an impossible task without collaboration.
If the automotive industry wants to strengthen its supply chain and sustainability initiatives, then it must improve supplier optionality, supplier relationships, and internal collaboration. Those three initiatives reduce end-to-end supply chain risk, offering a win-win for both the automakers and their suppliers.
