To respond to new market trends and demands set by the globalization, automakers have to rethink carefully plan their their policy strategy towards suppliers. The relationship between automakers and their suppliers is the central aspect of the new strategies of automotive sector to support the process of internationalization. As supply chains become more complex as a result of global and local sourcing, supply chain risks increase. The challenge to automotive business today is to manage and mitigates these risks, set by the structure and transparency of the supply chain.
To summarize, we can categorize the premier supply chain risks by the localization of automakers’ supplier:
- Global outsourcing
- Low-cost countries sourcing.
With globalization progress it’s relevant to mention the rise of global suppliers. Companies like Bosch, Johnson Controls, Lear, Magna, Siemens Automotive, TRW, Yazaki, and others have become the preferred suppliers for automakers around the world [Timothy J. Sturgeon and Richard K. Lester, 2003]. Simultaneously, we can see the vertical integration in combination with globalization among first tier suppliers, creating primarily functional or process-oriented global supply-base that spans religions, time zones, languages, legislations and cultures.
However, the choice of the global mono-supplier, specialized in complex systems, or keen focusing on global sourcing can pose several risks:
- Increased need of high-level collaborative working through extended/lead-times and reliance on global partners
- Global economic, political and environmental uncertainties, such as disasters, world-wide industrial disputes, terrorism
- The risk associated with the volume fluctuations onto the supplier
- The high interdependence between automaker and its supply chain and total risk sharing
- The increase of transportation costs across inbound and outbound “move” activity
- Financial stability of suppliers’ downward spiral chain and the threat of cascading supplier bankruptcies.
On the other hand, we can’t underestimate the rapid rise of emergent markets among the world’s largest car manufacturers, as China, India, Brazil primarily. The trend for the auto industry to source from low-cost countries and relocation in countries in Eastern Europe and the Far East will undoubtedly continue. Nowadays, automakers use their strategies to implement new plants in emergent markets [Mário Sacomano Neto and Sílvio R. I. Pires, 2008]. However, together with relocation to low-cost countries, cutting labor and energy costs and aiming at domestic suppliers, the vulnerability of these markets and local supplies leads to several risks as well:
- The additional expenses to adopt adaptive strategies, critical development and manufacturing dimensions
- Local disturbances of business environment
- The danger of violation of intellectual property rights
- The risk of possible business interruption by transferring production of certain arts from plants in their control to a third-party operation [Patricia Vowinkel, 2005] in low-cost country
- The threat of product quality as a result of the low qualification level of local workers
- Choice of “best-cost-country”
- Risks of political changes and instability, as well as adoption to local labor, economic and tax legislation.
To be more precise, mention should be made to the fact, that naturally companies of the automotive industry tent to create the smart supply chain that will integrate its global and local suppliers. This includes integrating the product lifecycle management and enterprise resource planning systems of all its partners. This leads to the need of higher-level collaboration and interconnection within the supply chain, as this creates risk of non-synchronization of global supplier logistics with local ones.
Talking about the vulnerability of the automotive supply chain, it’s necessary to take into consideration the apart-standing transparency and accountability trend, that has implications and can cause probable risks in automotive industry. Business operations are becoming more complex and global. Supply chains are turning into complex supply networks. As a consequence, auto manufacturers and suppliers need transparency and accountability across the entire supply network [Michael Schwarz, 2008]. So, within the process of globalization, taking into account information integration, several risks occur, that can dramatically influence automakers and their suppliers. Namely, they are risks of non-performance, not transparent output, non-real-time information flow between the supplier and car manufacturer and unsafe supply network.
Maintaining a flexible automotive supply chain and developing a supplier relationship management program in the changing conditions of the global processes are not enough. Today’s supply chain professional faces a dynamic range of natural and man-made risks and global sourcing and off-shoring reduce a company’s visibility and control of issues within their supply chains [Andrew Dailey, 2006]. Automotive companies need to build their supply chains in order not only to improve operational performance, materials flow, and manufacturing flexibility, but also to mitigate risks, set by their international activity. The task of supplier selection is of primary importance in the automotive industry, but secondly a car manufacturer has to provide supplier collaboration, visibility and event management. A systematized approach, that covers the diverse time zones, languages and cultural business environments of the global automotive industry, should be introduced.
In addition, several steps can be taken to mitigate supply chain risks:
- Strategy toward supplier reduction. For each major module a partnership can be made with one or two key suppliers. For each region, additional local suppliers can be chosen to contribute to particular market development process.
- Foundation of strong supply tiers, based on mutual beneficiary and long-term contracts.
- Selecting a secondary supply source instead of depending on single supplier for parts and components with no short-term alternatives. The creation of a double chain can positively impact the whole supply process.
In the long run, automotive companies can benefit from the possibility to predict where the next weak link in the supply chain can be, and holding international supply chain visibility and event management. Several techniques can be used to mitigate supply chain risks:
- Modeling the supply chain, so that it becomes evident what the structure of supply is, and what are all the tiers with potential bottlenecks and problems, regarding quality and quantity of supply, political and environmental breakdowns.
- Introduction of constant proactive monitoring within the supply network, collecting information about suppliers and market shifts. Such measure will determine the “health” and stability of each supplier, predicting the highest risks and designing a company’s risk profile. Simply looking at your own suppliers and competitive ones will reflect whether the supplier is getting better or worse, or maintaining the same.
- One of the most important measures is to prepare an action plan In order to make some corrections if needed. So that, if a supplier turns out to have some financial problems, immediate actions can be introduced to move it to stable condition.
And one more feature, that is of some value and importance between automakers and suppliers is the suppliers pricing proposals, and this can be primarily addressed to supply chain management with respect to raw materials. A company’s ability to manage energy and raw-materials, such as metals, costs is very significant and leads to the company’s prosperity. Maintaining relationships with multiple suppliers typically improves bargaining power and reduces the risks associated with potential supply disruptions [DBRS, 2008].