Turn and Face the Change: Automotive Supply Chain

By August 1, 2017News, Your Advantage

Automakers worldwide have long chosen steel as their material of choice. Approximately 65% of every vehicle is made of steel.

The automotive and related market segments are always changing in an effort to meet global consumer needs. The supplier — whether directly for an automotive assembly plant or one of the tier levels — is required to be extremely flexible. In turn, the automotive industry demands many additional resources from their suppliers. A few of these include:

  • Continuous technical support including in plant presence JIT, VMI, deep payment terms, and single invoice logistics
  • Transparency
  • Unfettered access to all levels of a supplier including the executive suite

All the while, they are contractually responsible for meeting year-over-year cost reductions.

A supplier must be able to meet JIT inventories whether for raw material, processed coil, processed sheet, blanks, fabricated parts, stamped components, and/or assemblies. The automotive assembly market segment moves fast and is currently challenged with manufacturing automobiles that are lighter and stronger. In order to develop such materials, a supplier must provide qualified technical resources able to respond at a moment’s notice.

For a service center, an inventory analyst is an integral part of the automotive supply chain team. He or she is required to quarterback material consumption, coordinate processing and logistics, and serve as a key conduit to procurement. These professionals juggle a number of additional tasks, including:

  • Material consumption
  • Seasonal forecast and changes to forecasting
  • Extra material needs above forecast
  • Unexpected production run ahead

In the last 10 years, there has been an OEM (original equipment manufacturer) shift in focus towards supplier relation, and costs. We’ve seen a trend towards emphasis on fostering long term success amicably versus a one-sided position. The costs for automotive suppliers have risen to a point where providing additional resources above the commodity and meeting cost saving needs beyond the commodity can no longer be the burden of suppliers alone. The new focus has resulted in a transparent emphasis on value delivery, the true/actual landed delivered total cost of ownership. In my opinion, the service center suppliers, converters, and assembly providers must share the burden of exposure in order to reduce costs.

The domestic steel mills responsible for producing the material headed directly to an assembly plant or tier partner have become better at controlling the market pricing and deploying lead time pressure. In these areas, the automotive supplier is able to significantly reduce costs year-over-year beyond the normal commodity shrinking.

In other words, value add is critical, more so than in other industries. This holds true as many automotive manufacturers negotiate their material contracts directly with mills. Therefore, when a mill negotiates price, terms, and conditions directly with a steel mill, there is no opportunity for the supplier to reduce cost associated with the commodity. With no ability to reduce the commodity cost, the service center is expected to find reductions elsewhere. The demands  that the automotive industry makes of suppliers (such as price targets and squeezing margins) eventually challenges an organization’s decision over whether the expense to service and financial exposure is worth the resources required to continuously generate a positive ROI.

As with any large OEM market segment, there are risks, rewards, and challenges. The automotive market is typical in these respects. In fact, it may be more difficult to enter as a new participant than in other markets. The primary reason? Service centers that are considered “Major Automotive Service Centers” have aligned together, over time establishing an indispensable role in the supply chain. Their tenure of measurable success, ability to provide multiple levels of competitive deliverables, and the historical experience to do so profitably is what newcomers have to overcome when attempting entry.