Key Supplier Strategies for a Reimagined Automotive Future

Against the backdrop of the most significant automotive transformation in our lifetime, suppliers are facing unprecedented disruption from multiple forces including economics, politics, geopolitics, environment, climate change, regulation, technology, supply-chain uncertainty and tariffs. Suppliers have historically faced significant challenges, but in my more than 25-year career, the amount of disruption we are now experiencing has been overwhelming for small- and medium-sized suppliers.

The positive news is that where there is disruption there is opportunity. This unprecedented disruption offers an opportunity to reimagine automotive supplier manufacturing. We are more focused on how suppliers can not only compete now but also take advantage of the opportunities to position themselves for success well into the future.

There are many considerations that suppliers should revisit during such turbulent times. Before we address those, it is important to understand the current state of the industry with a few key benchmark metrics. Days’ inventory is back to normalized or higher levels and product mix is uncertain between internal-combustion-engine vehicles, battery-electric vehicles and hybrids. At the same time rising costs and global competition have never been fiercer, leaving OEMs focused on cost reduction internally and with their supply base. With this context, the following are strategies that we have been advising our automotive suppliers to use to succeed in a volatile environment.

The future is high-mix, low-volume production

Given the uncertainty in production mix and the launches of BEV platforms in the short- and mid-term, the average volume per vehicle is forecasted to decline on average to 30,000 to 40,000 units. Couple that with the uncertain mix and declining near-term BEV volumes, and suppliers need to focus on getting highly efficient at high-mix, low-volume production. Many factors of production are affected, from planning and scheduling, inventory management, procurement and quick changeovers. Certain suppliers are set up for high volume and when the mix changes to a lower one, bottom lines and returns on investment take a hit. Automotive suppliers need to position themselves to be more agile and flexible, not lean too heavily in one direction and always be ready to pivot so that you avoid major losses if the market goes the other way.

Foster a culture of continuous cost improvement to build competitiveness

Industry reports are clear: U.S. OEMs are trailing their Chinese competition when it comes to cost, especially with BEVs where the gap can range from 10%-20%. If you are an OEM, you must look at every aspect of your business and the one that is the most significant is once again your input costs from your supply base. Therefore, we are advising suppliers on how to foster a culture of continuous cost improvement. This is just a brief look at cost reduction ideology and strategy, but in summary, some small and midsize manufacturing companies have long been built on “that’s how we have always done it.” The cost-reduction process starts with tone at the top and a willingness to change. The success of this initiative starts with a plan to look at every operational process and review what you buy. Implementing a purchasing strategy can improve your spend by 2% to 5% percent or more! Review planning and scheduling to improve throughput and develop a plan to reduce frozen cash tied up in inventory. Finally, and most importantly, drive these savings through your quoting models to drive up your win ratio. Without a plan, small and medium suppliers will be at a competitive disadvantage as OEMs look to reduce costs throughout their supply base. Do not be left behind!

Consider diversification options to create enterprise value

Disruption and volatility currently are prominent features of the automotive industry and while we expect opportunities to arise, it is wise to diversify product offerings to capitalize on other sectors. If your company is struggling to achieve 10% EBITDA margins in automotive, then it may be time to diversify while opportunities are developing in other sectors due to the factors we previously outlined. Automotive suppliers can leverage their expertise in other advanced manufacturing sectors to diversify into the aerospace and defense, industrial, medical devices, energy and heavy machinery sectors, to name a few. Diversification can reduce reliance on automotive market cycles while tapping into growing sectors with parallel technological needs.

Invest in equipment and technology to drive efficiency and throughput   

For those suppliers with strong market positions, investment in equipment, software and technology is vital to building a competitive advantage and driving industry innovation. These investments enhance production efficiency, reduce costs and improve the precision and quality of components. Most importantly, continuous investment helps assure long-term viability and enhances enterprise value. Embracing digital technologies such as data analytics can offer real-time insights for optimizing supply chains and predictive maintenance. Both strategies will allow suppliers to boost operational performance and meet evolving demands of electrification and diversification into other verticals. AI is a developing technology we see used at varying levels for suppliers. Assign a key leader to continuously watch how this technology may impact your business. For small and medium-sized entities, cost benefit is essential, but real change will happen sooner than we think, so everyone needs to stay on top of this one.

Originally published in Wards Auto.