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Sourcing and Procurement

5 Key Trends in Automotive Sourcing

Reinvention and innovation are two essential attributes a business needs to have in today's rapidly changing market. In order to stay ahead of the curve, businesses need to effectively manage market instabilities and customer expectations at the same time. The automotive industry is no stranger to such challenges, given the rise in costs for automotive technology and customer expectations which incline towards manufacturing being closely linked with services.

Challenges in Automotive Supply Chain:

The automotive industry is already facing challenges such as intense competition, new entrants, quality concerns, supplier and market complexities, along with the added pressure of attaining profits. Technology has also brought about an increase in demand for next-gen mobility, electric and hybrid vehicles which is a major sign that automotive manufacturers need to re-think their strategies and business models.

The average car has 30,000 parts, needless to say that materials constitute a major part of the automotive manufacturing process (40-50%). Bringing down the cost of purchased automotive components and cost per unit has always been the key focus area for automotive procurement. With changing times, the procurement and supply chain teams have a crucial role to play-now more than ever in ensuring cost competitiveness of existing and developing supplier networks and supply chains for new models of vehicles. The function will need to support the alignment of new technologies and business models with the company's vision.

While traditional levers like Make Vs Buy, Global vs Local sourcing decisions etc. are at helm of many cost saving initiatives across the automobile industry - Let us look at 5 levers/ best practices in automotive sourcing that are gaining prominence in view of the major shifts that are happening across the industry:

5 Best Practices in Automotive Sourcing:

  1. Supplier Diversification
    While in the past most Automotive companies have worked with a limited number of suppliers or part manufacturers, to mitigate risks of supply chain failures, many companies are adopting the strategy of supplier diversification. In other words, increasing supply base to award flexibility to ramp up capacities in the wake of increased demand or enhanced speed to market - when entering new markets or product segments. Similarly, on the supplier side, more and more suppliers are looking at servicing a larger OEM or regional base than just one, as in past.

  2. Strengthening Supply Chain collaborations and cross functional relationships
    The importance of long term partnerships between automobile companies and their component/assembly supplier cannot be emphasized enough. With the rise of trends like Ride-Sharing, automotive ownership might take a dive which makes cross functional relationship even more important. In metros, the growing availability of ride sharing platforms, app based taxi services like Uber and Ola are discouraging people from owning and maintaining private cars, this evolution is upon us and hence makes sense for developing collaborations with services or providing linked services.

    From a procurement in automotive industry standpoint this also means identifying avenues for procuring outsourcing services, supporting businesses in identifying avenues and assisting in building long standing contractual relationships. Since artificial intelligence and new technologies have brought about electric vehicles, smart cars and next-gen safety features, the demand for state-of-the-art features are also on the rise. Hence it is also imperative to build forward-looking relationships with technology provides as tapping into new technologies and faster adoption might be the most important differentiation an organization can possess in the current clustered market.

  3. Sourcing closer
    In the past, global sourcing was the trump card the automotive procurement teams possessed. Current trends have indicated otherwise and one of the contributing reasons is that costs are becoming equitable across regions once considered low cost. Companies are also re-assessing their stand based on risks such as high logistic costs, long supply chains and cost fluctuations. Recently, in the Indian market, companies like BMW, Honda and Volkswagen have been increasingly looking at sourcing locally- an arrangement which creates a win-win scenario and helps ward-off supply chain failures and cost fluctuation risks.

  4. Holistic Costs efficiency focus
    While a CPOs agenda is to save costs, the same focus needs to be ingrained across the entire product life cycle and value chain. Improving procurement alone isn't the answer to solving inefficiencies which have snowballed right from R&D and other strategic decisions. Transformation and synergies also need to be established across the entire product lifecycle- quantitative modeling like should-costs, process complexity reduction and value engineering are some tools that aid in driving a holistic cost efficiency across the entire life cycle.
    For e.g. a lot of car manufacturers are looking at 'Indigenously designed and developed' vehicles being shipped as CKD or SKD or BUX - completely knocked down or semi knocked down vehicle, Built- Up for export kits which can be then reassembled by manufacturers at target country locations- while these decisions are mainly taken by companies to tackle the gaps in local manufacturing or R&D capabilities, these decisions also contribute to savings millions by way of taxes. Procurement teams can work with businesses in identifying business cases for such opportunities.

  5. Technology and data leverage for improving processes involved in Procurement & Sourcing
    Last but not the least, procurement organization maturity and excellence in sourcing and procurement practices is the first step towards transformation; a well-structured Category and Sourcing strategy, application of Sourcing technologies, negotiation models, data analytics and business intelligence backed decision making are all key towards establishing best practices and identifying cost optimization and process improvement opportunities.

The above list through non- comprehensive could be a starting point towards identifying many value imparting initiatives. What are your views- please do share any other levers or best practices identified by you or implemented in your organizations to optimize sourcing? Let us know in here.

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