Tomorrow's Automotive Sourcing
Efficient sourcing has long been one of the automobile industry's biggest levers in attaining profitability. Competition among suppliers is fierce because price pressure directly finds its way to all parts of the supply base. It is difficult for both OEMs as well as suppliers to carve out a profitable corner. The following will give an overview of the procurement function in automotive companies and how their relationships with suppliers are evolving.
Understanding the Landscape
Currently, OEMs face many hurdles in securing an efficient supply chain and procurement process. Among other factors, they have to deal with the increasing complexity of builds, new entrants to the marketplace, supplier and market complexities, and global component shortages. Furthermore, consumer demand and next-generation technology are not only forcing billions in research and development spend, but it is also leading to a massive change in carmakers' priorities. According to Roland Berger, the biggest drivers of disruption in today’s automobile industry are new types of mobility, autonomous driving, digitalization, and electrification. Following are some of the most critical developing procurement focuses.
Building supplier-manufacturer goodwill
It is becoming increasingly important for automobile companies to foster closer relationships and integration with component suppliers. All OEMs have realised the importance of a trustworthy supplier relationship, it is however extremely difficult and time-intensive to implement one. Research shows that good relationships with suppliers lead to faster development processes, quality improvement, and reduced costs, year over year.
For instance, a 2003 OEM benchmark survey, used to gauge supplier-manufacturer relationships, found a significant advantage in close relationships. The company’s Honda and Toyota were far at the top of the list. Specifically, they value open communication, are more trustworthy, and care more about the profitability of suppliers. Instead of bullying their suppliers, they aim to act as a “parent” in raising production standards and showing them how to best integrate. The goodwill and close long-term relationships pay off by a variety of metrics. For instance, Toyota and Honda take just 12–18 months to design new cars while their American counterparts take an average of 24–36 months. Furthermore, close integration reduced production costs of key models such as the Camry and Accord by 25%.
Why integration is increasingly important
In the past, many components that manufacturers needed were commodities. It was possible to switch suppliers in the medium term if needed. However, this practice is becoming increasingly difficult. Self-driving technology and other tech features require exhaustive and detailed planning. In many cases, suppliers are the ones who are innovating the tech that make it all possible. Suppliers are inclined to sell their technology to OEMs who treat them fairly.
While companies have typically worked with just a limited number of suppliers to achieve optimal quantities of scale and scope, they are now seeking to diversify the number of suppliers producing the same product. This mitigates supply chain failures and provides new avenues for expansion. For instance, it is possible to more easily change supply numbers in case of changing market conditions. This change is also happening on the supplier side of the equation. In the past decades and even now, suppliers have typically had a very high revenue concentration coming from a limited number of OEMs. They are gradually shifting away from this practice in order to eliminate risk.
Leveraging Data in combination with best practices
Digitalisation is leading to new aged sourcing technology, advanced negotiation models, and data-backed decision making. This in turn streamlines the sourcing process, completely changes the workflows of employees, identifies best practices, and identifies cost optimisation potential. The knockdown effect has the potential to lead to greatly increased profitability as well as smoother workflows and results.
Tomorrow's procurement function
These three priorities show that the procurement function is significantly changing. Technology is driving procurement departments out of their comfort zones. There has always been close collaboration between all parts of the design and manufacturing process, which includes procurement. However, the advancement of technology has significantly increased the value that excellent sourcing can bring to the table. Technological advances and new tools fundamentally change procurement’s ability to impact companies’ bottom lines and business trajectories. Companies that do not embrace the change, will find it increasingly difficult to compete in the future digital playing field.
Knapp, O., Dressler, N., & Marlinghaus, S. (2019, September 11). Automotive procurement has reached an endgame. Roland Berger.
Building Deep Supplier Relationships. (2014, August 1). Harvard Business Review.
Nehra, R. (2018, November 23). 5 Key Trends in Automotive Sourcing. Infosys BPM.
Gifford, D. (2019, August 21). Why OEM-Supplier Relationships Need to Evolve. WardsAuto.