Banner Vehicles July 2019

Explaining the Automotive supply-chain problem - Part 2

Some of the challenges for automakers like Ford and GM with a disrupted supply-chain, have shown up in different forms.

  1. Profit DownturnPossible profit down-turn if alternative means of supply is required.
  2. Higher manufacturing costs, associated with bringing in new suppliers while still ensuring a consistent quality product output.
  3. The need for capital-raising to invest in new manufacturing capacity to fit new supply arrangements.
  4. Increasing frustration and loss of confidence over continued delays for consumers.
  5. Growing concerns about cutting corners and/or poorer quality.
  6. A possible dent in short-term sales, earnings, shareholder returns and expectations.
  7. A drop in share market value.

Without fully understanding the financial health of critical key suppliers, businesses can suffer from several follow-on problems, including damage to the brand, decreased working capital and reduced safety nets that are necessary to buffer against continued delays.

Business RelationshipsA way forward for automakers like Ford and GM, means they will need to implement risk-mitigation strategies across their global supplier system. They will also have to carry out careful analysis of the financial health and viability of key suppliers, as part of an overall supplier risk strategy.

Strengthening their supplier relationships, including procurement, compliance, marketing, and even public relations is also important.

Both Ford and GM are discussing foreseeable risks and where they can build stronger relationships with key suppliers.

The restructuring of global supply-chains is likely to continue for the automakers as well as other manufacturers throughout the world. For many global businesses, the main lesson of supply-chain shocks caused by COVID-19 is not to concentrate production and parts supply too much on a single source, but to maintain at least two or three important key supply-chain sources.

In the months and years ahead, automakers like Ford and GM will change their zero-inventory strategy, and maintain proper inventory levels, which will become the industry normal.

Toyota has signalled that the challenge now is to secure alternative supply of parts to make up for the lost production in time to meet global demand for vehicles as stock levels shrink. The pandemic ended up shaking one of the world's best supply-chains.

The underlying question for automakers is, will they continue to follow the business strategy of putting efficiency first and keeping minimum inventory after the pandemic? It now looks as though they will have to adjust to keeping supply chains in high visibility, maintaining some stocks of risky components like semiconductors.

The COVID-19 pandemic has severely impacted global supply-chains. As the pandemic continues, the global supply-chains will undergo changes.

COVID-19 has exposed the fragile links lurking in the global economy, it has however accelerated the adoption of new technologies and practices that will make the global economy more robust, which should hopefully lead to a new improved way of working.

November 2021


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