MHI Solutions Improving Supply Chain Performance
A single automobile is the product of an intricately complicated supply chain with sometimes far‑flung sourcing and myriad suppliers. In fact, a typical car has more than 30,000 parts, underlining the complexity of the global supply chain network necessary to manufacture each vehicle, according to Nichole Allem, a customer communications manager with Maersk. The network “encompasses a multitude of interconnected processes and entities, including raw material extraction, component manufacturing, assembly lines, logistics and distribution channels. This global network involves numerous stakeholders such as Tier 1, Tier 2 and Tier 3 suppliers, original equipment manufacturers, logistics providers, dealerships and aftermarket service providers.”
For that reason, the success of the auto industry rests heavily on a supply chain that runs smoothly and efficiently—issues anywhere in the chain can create major and costly disruptions. The automotive industry has “gone through a lot over the last several years,” most prominently the supply chain shortages that accompanied the COVID‑19 pandemic, according to Mike Wall, executive director, automotive analysis, S&P Global. Sales slumped as a result, but they have been bouncing back, though they still have not returned to 2019 levels, he said.
“We’ve been on a positive trajectory,” Wall said.
If the industry is going to continue on that trajectory, some supply chain topics will be front and center.
A Level of Uncertainty to Global Trade
As of mid‑March, the ongoing questions surrounding tariffs and their potential impact on the auto industry have introduced an elevated level of uncertainty and caused the industry to spend a great deal of time evaluating the potential impacts of a variety of scenarios and how to respond to them.
“Overall, tariffs can have a profound impact on the automotive sector supply chain, leading to increased costs, supply chain disruptions and a decrease in competitiveness,” said attorneys Devinder Singh, Matthew Kirk and Ludmilla Kasulke of Squire Patton Boggs in a commentary article for Reuters. “As global trade policies continue to evolve, the automotive sector must remain adaptable and resilient.”
The attorneys noted that the tariffs add complexity to existing challenges for the industry.
“The tariff announcements come at an already unstable time for the sector, which is already grappling with continuing shortages of key components, skills and labor, increasing inflation and increased competition from new market entrants,” the attorneys wrote. “Supply chains will be affected as companies seek to switch supplies to any alternative sources that are not affected by tariffs (subject to considerations of cost, quality and reliability, etc.).”
A major theme in the United States in response to the possibilities of tariffs is reconsidering sourcing strategies with suppliers, Wall said.
“We’ve got a supply chain in automotive that’s been built up as a trade block with borderless trade between three major countries [the U.S., Canada and Mexico]for the last 30 years, and in fact, between the U.S. and Canada, probably for close to the last 60 years, and it’s really hard to disentangle yourself from that—to decouple from that,” Wall said. “And I don’t think it’s all that practical either.”
Businesses love certainty, though ultimately it’s “a quixotic quest,” Wall said. The possibility of ongoing heightened uncertainty surrounding tariffs would make planning challenging, he said.
“While this is going on, automakers have vehicles they’re trying to launch and will be launching in the future, and they’re having to go through the supply chain to source out those components, and it’s really tough to plan your business around that,” Wall said.
Wall said S&P Global’s estimate in mid‑March was that the tariffs would be a shorter‑term disruption. “But if it goes longer, it is going to have a material disruption to production. Longer than that, it’s going to have a big impact on vehicle sales,” he said.
A drawn‑out trade war that lacks clarity also could slow production and planning for new vehicles. The Squire Patton Boggs attorneys said the implementation of tariffs related to the auto industry could lead to an increase in legal disputes tied to the supply chain.
“A clear area where disputes may arise is in relation to who is responsible for discharging new tariffs,” they wrote. “Whilst some contracts will clearly specify this, others may be silent or there may be inconsistency between the contract terms and the Incoterms. This ambiguity can lead to disruption. The impact on profitability could result in many contracts becoming loss‑making (either directly or for those further down the supply chain). This can lead to refusals to supply or refusals to honor purchase commitments, potentially disrupting the delicate balance of just‑in‑time supply. The impact on suppliers could be devastating, potentially leading to financial stress or distress for many companies. Those involved in the supply chain will need to closely administer and monitor supply contracts to be able to spot when a supplier may be in financial difficulty.”
Sophisticated Tech and Heightened Efficiency
Wall said a key lesson for manufacturers from the pandemic was to have a better handle on the full span of their supply chains. Often, he said, they had a strong understanding and visibility of their tier one suppliers, but that visibility blurred as they went deeper down the line of suppliers. In recent years, “I think all the automakers have made some big strides in really investigating and uncovering and understanding those downstream supply chain implications,” he said.
In fact, he said, manufacturers had begun to intensify their visibility efforts as far back as the earthquake in Japan in 2011, which affected suppliers for some North American manufacturers—”some automakers were really caught unaware,” Wall said. “They just didn’t have a great understanding of their supply chain.”
With vehicles’ many parts and suppliers, manufacturers are left vulnerable. Problems with a single part at a downstream supplier can undermine production on a vehicle if a manufacturer is not prepared for that type of challenge. Due in part to its inherent complexity, “end‑to‑end visibility is crucial in managing the intricate and expansive automotive supply chain and leads to actionability—the ability to not only see and understand the data across the entire supply chain but also to take meaningful and timely actions based on that data,” Allem said.
“By leveraging advanced technologies and partnering with integrated logistics experts, automotive companies can gain real‑time actionable insights, optimize operations and mitigate risks effectively,” Allem said. “This comprehensive visibility ensures that every component arrives on time and in the right sequence, maintaining the smooth operation of assembly lines and enhancing overall efficiency.”
Digital transformation, in fact, is creating “a more agile, responsive and efficient supply chain ecosystem” in the auto industry, according to Neeraj Bansal, a senior partner with KPMG India.
“Today, emerging technologies such as AI, cloud computing, IoT, advanced analytics and blockchain are being widely implemented to reshape automotive supply chain processes,” Bansal said. “As the industry continues navigating through volatilities, OEMs are now building a more collaborative ecosystem with their suppliers, using technology to anticipate disruptions, identify complexities and develop innovative solutions.”
Wall said the pandemic accelerated efforts to make the auto supply chain more regionally focused—referring to the process as “de‑globalization” or “re‑regionalization.” The process also can improve visibility.
“When you can bring everything a little closer to home, it does remove some uncertainty,” Wall said. “It removes some of those logistics, shipping and travel risks, and it allows for a bit more transparency when you’re not having to source such a significant chunk from an ocean away versus when you’re dealing with a more nearby trade block.”