CEO at Actify, Inc., helping manufacturers to build some of the world’s most complex and advanced products.
The global microchip shortage has gotten a lot of attention, and it has halted or delayed the production of vehicles across the automotive industry. Unfortunately, it has also obscured the fact that the critical base of auto suppliers is struggling with a whole range of issues including material availability, extended lead times, sudden cost increases and an unprecedented shortage of labor. We are likely to see the chip supply recover in early to mid-2022, but when the original equipment manufacturers try to restart or ramp up their assembly plants, they may face a variety of other supply problems that could stall the recovery.
Our company develops solutions to help automotive suppliers do a better job of managing their automotive programs. Recently, every conversation I have had with Tier 1 and Tier 2 auto suppliers seems to come back to supply chain and labor issues. Their supply of basic raw materials like steel, aluminum, rubber and thermoplastic resin has become unreliable and the prices are incredibly volatile. Some of these problems are related to pandemic shutdowns but the global transportation woes, weather disruptions and misguided tariffs have made that problem even worse. These material shortages inevitably lead to longer lead times, which the automotive supply chain is not well prepared to deal with. The entire industry has adopted just-in-time inventory practices and shrunk its raw material and work-in-process inventories to almost zero. As lead times begin to extend out for raw materials and purchased components, the velocity and precision of the auto supply chain rapidly break down.
It has been many years since planners and buyers in the auto industry have had to deal with six to nine month lead times for their basic materials, and there is a whole generation of people who have very little experience with the strategies and practices of materials management in a constrained environment. The power inevitably shifts from the buyer to the supplier, and techniques like supply forecasting, hedging and buffer inventories become necessary. I have heard of a number of suppliers in the metal fabrication and plastic molding industries who are now ordering materials well out into 2022 in anticipation of customer orders and in hopes of locking down prices and supply.
In addition to the problem of meeting delivery commitments, many suppliers I have talked to are also dealing with unanticipated cost issues on their existing programs. It is quite common for auto suppliers to quote prices to the OEM with no provision for passing on or at least sharing the impact of major cost increases. The price of many commodities and transportation has soared as the global economy recovers, and auto suppliers, like many other employers, have been forced to significantly increase wages to attract and retain workers. All of these cost increases have eroded or erased profits on programs that were awarded 12 to 18 months ago in a very different environment.
The entire automotive supply chain, from OEMs to lower-tier suppliers, is in need of a fundamental restructuring because the relationship between cost and risk has gone out of balance. With supply lines that stretch across oceans and continents, and an extraordinary level of interdependency, there is simply not enough resiliency to absorb climate, political or health disruptions. The relentless drive to remove costs and increase speed has left the supply chain too brittle, and we are seeing the cracks everywhere.
I think the problem really begins with the OEMs who have set a pattern of collaborating with suppliers on design issues but being totally demanding and inflexible on schedules and commercial terms. Unfortunately, many Tier 1 suppliers complain about the OEMs but are guilty of the same practices with their own suppliers. Particularly in a time of widespread material and labor shortages and price volatility, there needs to be much better bidirectional visibility and cooperation. Automobile manufacturers are raising prices and dramatically reducing incentives on new vehicles, but in most cases, they are not willing to give any relief to their suppliers. By not providing any level of risk-sharing or flexibility on commodity prices, they are encouraging suppliers to build in additional levels of cost protection in new bids.
The large, established auto OEMs have enormous market power that they regularly use to negotiate lower costs and better delivery terms. What they rarely do is share that bargaining power with their supply base. Even when the OEMs do step in to help drive lower prices on commodities like steel or aluminum, they typically insist on taking all of the cost savings. It is probably not realistic to expect North American or European OEMs or Tier 1s to adopt a keiretsu model of supply chain cooperation, but there is a great deal they can do to improve their interaction with their suppliers. The prevailing “arms-length” procurement relationship means that customers do not know their suppliers very well and they do not invest in developing them and are not able to capitalize on their expertise. In pre-award situations, I often see customer and supplier engineers working cooperatively to improve designs and processes. Unfortunately, once the contract is awarded, and prices are established, the relationship becomes much more transactional and commercial. These companies need to find a way to cooperate on design, procurement, logistics, manufacturing processes and quality throughout the duration of the contract.
In my experience, most automotive suppliers are financially and emotionally invested in the success of their customers. They genuinely want those vehicles to be successful in the market, as well as safe and reliable. I believe that the OEMs and large Tier 1 vendors have to become much more proactive about supplier development and cooperation. They need to get to know their suppliers much better and establish broad-based interaction and visibility. In order for this enormous global supply chain to continue to function effectively, and to deal with the challenges of electrification and autonomy, we must see a new level of collaboration and risk-sharing. It is not enough to call your suppliers partners — you have to treat them that way.