The supply chain challenges in restarting the Auto Industry after COVID

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The supply chain challenges in restarting the Auto Industry after COVID

The unparalleled effect Covid-19 has had on the global economy was noteworthy for its simultaneous disruption of both demand and supply. When nations and businesses revive the economy, it is important to resuscitate supply chains. A typical modern car consists of thousands of parts, each of which is important for assembling the final product. Measured by value, about 65% comes from suppliers. Usually, automakers import parts from several hundred suppliers, each of whom will likely have a dozen sub-suppliers. This network usually casts a large footprint across the world. Many of the automakers do not have ample information about the capacities of their low tier suppliers. Re-starting production will depend upon each of these suppliers being prepared to supply the parts at an expected rate and having access to an operational logistics network.

 

Globalization to regionalization

Many of the world's leading automakers currently import 30% to 60% of their parts from China, including modules and sub-assemblies. Given the extremely large number of needed parts – each with varying lead times – a return to regional supply chains is a task that is incredibly complex. However, stakeholders are finding the task worth taking on for a post-COVID environment.

OEMs, component manufacturers and auto sub-system assemblers are now looking to strategically source, assemble and deliver from within their regional borders, and are also reconsidering setting up regional logistic hubs.

 

Fundamentally rethinking the supply chain

 

The distributed global business model, being primarily driven by an objective to achieve minimum cost, needs to be resilient. Supply chain models will need to be reconfigured, based on business optimization. Modifying the supply chain as a key business driver and bringing back timely human oversight are some critical factors that can bring inherent agility.

 

The way forward

 

Going forward, supply chains will focus on three topics: resilience, flexibility and technology. Automakers have come to understand that resilience has been undermined by efficiencies obtained in the process. It's obvious this won't be the last pandemic or natural disaster the world faces. With global disruptions becoming more common, supply chains must evolve and rely more on adaptability.

Supply chains implementing Single Source approach for economies of scale would eventually require a second source from a different region for the same portion. Such redundancy is likely to increase costs but will help build in the durability needed. Resources and operational productivity will become essential skills at more versatile and smaller scales of output. Countries like India, where one-time set-up costs are competitive, can serve as attractive second locations for global sourcing.