Auto industry rethinks playbook as COVID, chip shortages disrupt supply

Brittle supply chain

Efforts like Dana’s are under way throughout an industry buffeted by a series of unexpected events. The chip shortage is a high-profile problem, but not the only one.

“The whole issue is exposing the brittleness, the fragility of the automotive supply chain,” said Richard Barnett, chief marketing officer of Supplyframe, which provides market intelligence to companies across the global electronics sectors.

BorgWarner CEO Frederic Lissalde told Reuters companies are looking at the total cost of any approach instead of simply its upfront price tag.

“We’re trying to dual-source whenever possible critical components,” he said.

David Simchi-Levi, a professor of engineering systems at the Massachusetts Institute of Technology, who has worked with companies like Ford Motor Co. on strengthening supply chains, said interest has exploded in the last year. “Resiliency is here to stay.”

The math is simple. Such approaches may cost more upfront, but they are likely to pay for themselves if they help companies avoid the charges of up to $2 billion and $2.5 billion faced by General Motors Co. and Ford, respectively, for the chip shortage.

Ford’s chief product platform and operations officer, Hau Thai-Tang, said the automaker previously altered its approach, but the past year has accelerated the change further. Stockpiling key parts or materials, and using multiple sources are back on the table.

“If you’re down for 30 days at the F-150 plant, what’s the cost to the Ford Motor Co. versus paying this insurance to stockpile these chips?” he said, referring to the company’s highly profitable full-size pickup truck. “That’s the way we would think through it.”

Even so, Ford has had to halt F-150 production temporarily at times, and is stockpiling trucks that are missing parts.

Ford is looking at what other parts or materials could face the same pressures in the future, and has already started buying some specialized microchips directly from chipmakers rather than going through its largest suppliers, Thai-Tang said. Ford also is providing a six-month vehicle mix and volume forecast to suppliers instead of just two weeks, and looking at extending that visibility out to a year.

Just-in-time here to stay

Automakers cannot afford to abandon the just-in-time system’s down-to-the-penny cost consciousness in a business where profit margins are often less than 10 cents on a dollar of revenue.

“The solution cannot be more waste,” said Ramzi Hermiz, a former supplier CEO who advises companies. “The objective needs to be how do we build more simplicity, flexibility and speed in the supply chain.”

Answers could include the establishment of more suppliers closer to their final customers, including bringing back work from China and other parts of Asia, and greater use of standardized parts and systems where possible to allow for more supplier options, industry executives said.

Bob Roth, co-owner of RoMan Manufacturing, which makes transformers and glass molding equipment in Grand Rapids, Mich., said the resiliency conversations have accelerated over the past year. However, the answer cannot be simply to shift the burden to smaller suppliers like his $40 million company.

“We’re not going to tie up our working capital just because you think building inventory or stockpiling stuff is a great idea,” he said.

The answer for many companies will be stress-testing their supply chains to find weaknesses much as banks did after the 2008 subprime crisis, said Tim Thoppil, a partner and head of consulting for the Americas at engineering firm umlaut. Raw materials and parts for electric batteries and motors could be the next crisis spot.

Unexpected events like the pandemic and chip shortage are just a sign of the times, said Steven Merkt, president of transportation solutions at TE Connectivity, which makes sensors, connectors and electrical components for automakers.

“This isn’t a series of black-swan events,” Merkt said. “This is a precursor of what life is going to be like.”

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