Automotive supply chain and purchasing strategy changes in the Covid era

Simon Schwengle is a partner at KBC (Kemeny Boehme and Company) and an expert in purchasing and supply chain issues with focus on automotive. Project objectives include supply chain/purchasing strategies, preventive supply chain management, cost initiatives, and reactive supply security. in the following interview with Global Ambition Simon talks about the impact of COVID-19 on the industry and the changes it will bring. 

 

  • Global Ambition: The current supply chain structures in the automotive industry is changing drastically due to the COVID19 situation. In general, in which areas of the relationships between OEMs and related Tiers do you see the biggest impact?               

Simon Schwengle: We are currently in the second phase of the impact of COVID-19 on OEMs and their multi-tier supply chains. The focus has been on ensuring the short-term, highly critical supply of series production requirements, on supplying development/research and protection requirements as well as keeping to industrialisation schedules for tool and system suppliers. It is the second phase that has a much greater impact on supplier relationships along the entire supply chain in the long term by focusing on costs. Many suppliers are already attempting to request reimbursement from OEMs for additional costs both in upkeep and general continuation of production as well as for the discontinuation of previously agreed discounts. The OEMs will take a tough approach in this regard, while always precisely assessing the risk of impacting supply. Suppliers with professional claim management will have an advantage over competitors. A general restructuring of the supply chain in line with geographical considerations (as some reports in the press have suggested) will not be possible in the short or medium term, and in the long term, cost pressure will continue to be the deciding factor when selecting locations and therefore when developing supply chains. However, OEMs will be much more interested in transparency across the entire supply chain (from second to n-tier suppliers), as well as the chain’s management and price structure.

              

  • Global Ambition: Demands in all areas are shifting and in most cases they unexpectedly dropped. What challenges do you see suppliers facing in their dealings with buyers and customers, considering pre-placed orders, long-term contracts, related claims and their overall annual planning?  

Simon Schwengle: At the moment, suppliers are, more than ever, having to manage conflicting objectives, including ensuring liquidity, maintaining supply outputs and controlling costs. As things stand, there are far fewer insolvencies than expected. The tools offered by governments are effective and reserves set aside by the OEMs are less strained than expected so far. As a result, the first big cases of insolvency have all been ailing companies struggling with problems that go beyond the impact of COVID-19. However, liquidity measures still need to be taken in good time, both with regard to customers and concerning a company’s own suppliers. These measures can reach from amending terms of payment to detecting the need/option for shifts early on. To ensure supply – an objective that can sometimes stand in stark contrast to ensuring liquidity – suppliers that have a great deal of flexibility within their own production and along their supply chains are at a clear advantage compared to the competition. As a general rule, agreements and EDIs should always be documented/archived, customers’ terms of purchase need to be interpreted correctly and additional costs always need to be approved to provide a professional basis for processing claims. Controlling costs will start to become the main focus in the fourth quarter of 2020. The volumes required by OEMs will fall by 20% to 30% in the current and coming year. Any and all part prices and investment calculations will need to be revised. This is another area where suppliers need to be professional in order to present plausible claims to customers and effectively guard against claims by their own suppliers and OEMs.

              

  • Global Ambition: Do you have any suggestions or common practices in mind for companies that deal with claims, either on the supplier or the customer side?

Simon: For us, there are two important dimensions: The analytical dimension and the strategic/tactical dimension. Analytical and detailed preparation is the foundation of claim management. In this regard, “players” with a good basis of facts will also be able to assess situations correctly and generate a coherent external perspective. In our experience, suppliers with professional change management are much more successful here. Remnant costs should become the focus for suppliers if quantities fall. Additional information, such as the progression of raw material prices (traded or not listed) or public company ratings, can also be helpful. However, the strategic, tactical dimension is usually the more important one. The key questions here are: What is my position at the customer compared to competitors? Which tenders are outstanding? Which pending payments can I use? The OEMs are traditionally in a very strong position in this regard. They will attempt to use the pessimistic forecasts as a way to pressure the suppliers in their portfolios.

 

  • Global Ambition: How could the procurement of products in the industry change – considering price competition and development/implementation of new technologies?  

Simon Schwengle: I don’t have a very precise answer for you: It really depends… Generally speaking, OEMs align their supply chains with the target dimensions of cost, quality, flexibility, innovation and sustainability. The last aspect, in particular, will see the pressure on supply chains with high energy consumption increase the most. Depending on the product/component groups, the contributions are designed for the target dimensions in order to avoid cost increases in favour of achieving other objectives. New technology, either on the product or in the production process, is therefore generally an opportunity to increase prices or reduce costs. However, this only applies if old technologies made the biggest contribution to achieving cost objectives prior to COVID-19 – either in skipping new development cycles (negative for supplier development revenue) or in part prices.

 

  • Global Ambition: Speaking about technological development: Which areas of the modern technologies do you think will be pushed out by OEMs and Tiers, and are there sub-sectors where you expect somewhat ‘normal investment’ even in the near future?

Simon Schwengle: We differentiate between the following clusters: New technologies, regulatory requirements and classic automotive. The latter will become more and more difficult to place on the market in the near future. There will be big players offering scaled options for unprofitable/unattractive scopes, resulting in new dependencies between OEMs and suppliers. For products depending on regulatory requirements, there will continue to be moderate growth. Requirements are on the rise (and can quickly lead to big problems and pose big risks, as the example of the RDE introduction shows) in end-customer markets across the globe. New technologies are following the major e-mobility trends with regard to drive concepts, autonomous driving and expanded functions for automated driving assistance – that is to say increasing E/E scopes in vehicles – and the expansion of networked services and mobility services for vehicle users.

 

  • Global Ambition: Lastly, what do you recommend companies to consider when positioning themselves towards their customers after the industry ramped up again?

Simon Schwengle: Recovery and return to old volumes for conventional automotive is not realistic until at least 2022, and the ordered volume scenarios for the coming years will not be achieved for the time being. The price demands, as well as all other requirements from OEMs, will still remain unchanged, however. There will be adjustments in supplier markets – so make sure your reaction to short-term enquiries from customers is quick and well-considered. Use opportunities offered by your existing customers – horizontal integration can be an important driver for revenue. Find sensible ways of diversifying without making big investments – vertical cooperation can also contribute to a better cost structure along your own supply chain. Increase flexibility for manufacturing companies – if this did not already happen before COVID-19.

 

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