Automakers typically demand high-quality products that are delivered on time, at the lowest possible price, without hitches. But mitigating risk today requires that they dig more deeply into their supply chains to get to know their suppliers.

By Mark Shortt

All of the top automakers know that winning is a team effort—one that requires high performance from top-tier, mid-tier, and lower-tier suppliers. What the OEMs and high-tier suppliers value most in their supply base is fairly consistent across the board: a demonstrated ability to meet quality and safety standards, achieve continuous improvements, and deliver high-quality parts on time at the lowest possible price.

The last thing an automaker or high-tier automotive supplier wants is a disruption in its supply chain. Problem is, many don’t know their suppliers well enough to have anticipated the disruption and planned an alternative strategy to get around it. In a somewhat volatile global environment, the X-factor in automotive engineering and manufacturing is how well you know your suppliers.

In the last two years, the COVID-19 pandemic and ensuing semiconductor chip shortage have placed the onus on automakers to do more to detect, mitigate, and prevent supply chain vulnerabilities. That means delving more deeply into their supply chains to identify and patch potential risks before they become problems. But while visibility into supply chain data is helpful, it’s equally important to know what all that data means. Supply chain visibility is most useful when it complements OEMs’ ability to understand the factors that impact their suppliers, and the challenges they’re up against.

A Missed Opportunity

 The chip shortage reveals why automakers need to look deeply into their supply chains to understand how their suppliers—in this case, chipmakers—operate. Its economic toll reinforces the need to do due diligence, which begins with asking numerous questions. What does the chip fabrication process consist of, and how much time does it require? What are your suppliers’ major pain points? Are operational constraints impeding their production?

Also, as car designs change, are there any industry developments underway—or on the horizon—that could affect your suppliers’ ability to receive the materials they need to make components?

The answers to such questions can help OEMs make better, more informed decisions about purchasing parts and components. Cutting chip purchases in half at the beginning of the pandemic, when plants were shutting down, may have seemed like the most cost-effective thing to do at the time. But semiconductor chip manufacturing is not like turning a faucet on. If it takes three or four months to fabricate and package a wafer, you’ll likely need to wait the same amount of time to receive your chips once you’ve resumed purchasing and are ready to restart production.

The OEM purchasers who didn’t take this aspect of the chip manufacturing process into account when deciding to cut chip purchases in half were more likely to be left holding an empty bag when it came time to start automotive production again.

New Opportunities Going Forward

Today, automotive technology is shifting in new directions, creating opportunities for suppliers who can provide advanced development work, prototyping, and testing. New supply channels are opening up for parts used in everything from e-axles to electric motors, power inverters, and lithium ion batteries. But as the industry pivots toward electric, connected, and autonomous vehicles, its supply chain won’t magically transform overnight. Automotive OEMs and high-tier suppliers still require tight-tolerance manufacturing in areas like casting, sheet metal fabrication, extrusion, stamping, injection molding, and coating, and will continue to demand it for the foreseeable future.

Some companies have been suppliers to the industry for years, making parts for traditional gasoline engines, transmissions, and the like, but may not be making the transition to EV part manufacturing. Others will successfully pivot, having already identified a niche where their expertise will be needed. Regardless of where your suppliers operate in the value chain, it’s important to get to know them—their strengths, limitations, and relationships with their own suppliers and vendors.

Find out about the culture of the ecosystem in which they operate. What’s it like doing business at their position in the value chain? How do they navigate the heavy cost pressures, stringent quality and safety requirements, and ongoing shortages of parts, materials, and labor? How have they handled the challenges of the pandemic? Can they identify potential risks in their supply base, and do they proactively implement risk management strategies? Do they have sufficient capital to sustain their operations in the event of a disruption? Most important, have they demonstrated the ability to be a trusted partner to their customers?

As companies throughout the automotive ecosystem adapt, evolve, and establish their roles, now’s the time to look more deeply into the supply chain. Meet the players, do some due diligence, and find out which companies you can rely on.

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