Navigating the Perfect Storm: Automotive CEOs Focus on Strategies to Counter Inflation and Enable Supply Chain Resiliency
The automotive sector has switched lanes into a new digital world, where the pace of change is also hurtling manufacturers into oncoming traffic in the form of geopolitical, economic and natural crises.
This mix of an increase in data volume, velocity and frequency; evolving customer expectations; and external impacts, has led to a pivot among CEOs around what constitutes resiliency. During this rethink, more and more decision makers are coming to the conclusion that it will be supply chain revolutions that drive their businesses forward in the months and years to come.
These revolutions span demand, supply, inventory, transportation, and warehouse planning, informed by an ever-growing swathe of connected data from across their digital assets. What we’re seeing more and more of, are these assets being hit by « VUCA » impacts. These signify volatility, uncertainty, complexity, and ambiguity brought about by outside influences.
Whether it’s Brexit, the Suez Canal incident, inflation, COVID-19, chip shortages, or the conflict in Ukraine, there is now a new normal where supply chain disruptions are merging into a perfect storm. As we await the next inevitable “Black Swan” event, automotive players have realized the need to be proactive, not just reactive.
This proactivity is best achieved through a rethink of the supply chain.
A Complex, Morphing Ecosystem Requires Boardroom Intervention
But why has automotive been so significantly impacted? These are global, cross-sector incidents, after all.
Well, it is in part due to the complex nature of automotive ecosystems. As well as OEMs, the landscape is made up of Tier 1, 2 and 3 suppliers, logistics service providers, and even dealers; all of which feed off the efficiencies or failures of each other. In this regard, it’s more of a network than a chain.
Across that network, not only are those aforementioned supply chain disruptions on the rise, but we’ve seen inflation hit 40-year highs, congestion increase across networks, transportation delays, log jams at ports, and significant labor shortages brought about by COVID-19. Tier 1 suppliers, in particular, are being squeezed by increasing material costs, supply chain disruptions and rising transportation costs. Meanwhile, demand mix changes are heavily impacting auto OEMs, which is having a big knock-on effect on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) margins. While the latter OEM contingent have been able to raise prices, Tier 1 suppliers have had to absorb most of the costs.
In addition, we are also noticing an industry morphing occur, which is strengthening the ties and ramifications within that network. The industry is no longer separated across automotive, industrial, high-tech, semiconductors, and consumer electronics. Cars are essentially computers on wheels in the modern era, and a shortfall in one of these areas is akin to taking a wheel off. This blurring of sub-verticals is expected to culminate in 100% of vehicles being connected by 2030, according to McKinsey. Also, by 2023, according to the same report, 50% of new cars sold could be highly autonomous, and 50% are forecasted to be electric (in the U.S., a Presidential goal was set at 50%).
The speed of step change reemphasizes the perfect storm being navigated at present. And, amid this perfect storm, 70% of CEOs now believe that the supply chain is critical to their business coming out the other side, unscathed. Really, how could they not, given the extent of disruption?
But this vital realisation has also triggered valuable questions about how to be more resilient.
Short-, Medium- and Long-Term Solutions
As part of this resiliency conversation, there are three timelines being addressed within the context of the supply chain: short-, medium- and long-term.
In the short-term, resiliency hinges on end-to-end visibility, an absolute must if manufacturers are to embrace the industry morph and actually connect these strands from a response perspective. Incorporating OEMs, all tiers of supply, distribution centres, all the way down to dealers, being able to visualise the entire flow of goods allows for more accurate disruption impact measurements. Proactive risk mitigation plans are the desired result from this complete visibility.
In the midterm, supply chain resiliency can be enabled through improved scenario planning, simulation capabilities and multi-echelon inventory optimization. This includes the ability to develop a range of scenarios which inform robust contingency plans, complete with an understanding of trade-offs across cost, sustainability and customer impacts. Demand realization, demand mix and supply disruption scenarios are all required as part of this process, and are aided by the already-achieved end-to-end visibility. Resiliency, in this context is about being agile and lean at the same time, implicating cost control, working capital reduction and cash flow preservation. With inflation at a 40-year high and 55% of CEOs expect further significant rises, it’s no surprise to see companies like Mahindra leveraging artificial intelligence (AI) and machine learning (ML) models to become more precise with forecasts and decisions. Through their work with Blue Yonder, the company has improved service levels by 10% as a result, while also reducing inventory investment by 20% and customer response times by 40%. Overall, business revenue has grown by 10% as the ultimate upshot of this medium-term ploy. %. Overall, business revenue has grown by 10% as the ultimate upshot of this medium-term ploy.
Longer term, resiliency should revolve around risk mitigation. Recent geopolitical events, compounded by COVID-19, have proven that disruption can occur from unforeseen places, and the key to dealing with the unknown is agility. By revisiting the entire supply chain network design, and reconfiguring chain flows, manufacturers can give themselves more stability should an unexpected event sideswipe them. Multi-shoring or nearshoring are two examples of how this might play out, while also removing dependency on single sources of supply.
Invest During the Downturn
While the speed of digital change has created obstacles in the road for the automotive sector, it has also provided more innovative and advanced ways to manage and stay ahead of supply chain disruptions.
A connected, intuitive, automated suite of supply chain solutions can convert reactivity into proactivity. By improving the ability to ingest and analyze both internal and external sources of big data, and by leveraging AI and ML for predictive and prescriptive analytics, insights into what is happening, and how to respond to what might happen, are achieved in tandem.
And, best of all, such solutions can now be deployed in weeks rather than months or years, when teaming up with a provider that has addressed the blurring of sub-verticals and that is seeking to connect the dots through their platforms. What this proposition will do is indulge a contingent of automotive CEOs who now plan to increase their supply chain improvement initiatives year on year, from this point.
They will be the business leaders and companies who grace the fast lane of progress looking forward – investing now during the downturn, so they can hit top gear during upturns to come.
As the automotive sector adapts to a visible industry morph, and unforeseen external factors, it has never been more important to deploy digital solutions that can ensure agility, cost-effectiveness and resilience, simultaneously. Supply chain management will be the control hub of this network-wide effort, and Blue Yonder is on hand to help you push the right buttons.