3 Ways Automakers are Reworking Sourcing Strategies

The automotive industry value chain is highly globalized with first, second and third-tier suppliers and manufacturers of various assemblies and sub-assemblies spread across different geographies.

Because of this, during the COVID-19 pandemic, automotive manufacturers struggled to source assemblies and components from their suppliers in different countries due to lockdowns and restrictions on the movement of goods and the resultant supply chain issues.

Through 2020 as the pandemic intensified, automakers like Hyundai, Kia and General Motors had to halt production due to parts shortages. In 2021, the new challenge for them is the shortage of semiconductors.

These developments have made automotive manufacturers rethink the tried-and-tested sourcing strategies they have used for decades.

1. A shift towards glocalization

The biggest change from automakers has been a shift from globalization to glocalization.

Before the pandemic, more than a decade of globalization meant that automotive supply chains had transformed into a complex system of interlinked supply bases spread across the globe lured by the low cost of production and labour in developing economies.

However, the pandemic laid bare the shortcoming of this system as it became clear that demand does not always guarantee supply. This has led to companies focus more on localized production and supply chain networks rather than global ones. For example, Japan last year earmarked $2.2 billion in funding to manufacturers that shift production out of China to Japan.

Also read: 3 Strategies to Help Automotives Mitigate Commodity Shortages

2. Reduction in global delivery footprint

Automotive manufacturers are also trying to reduce their global delivery footprint with a “build-where-you-sell” strategy.

To minimize the impact of supply chain issues, automakers are increasingly trying to assemble vehicles at local assembly sites. They are also shifting from the famous just-in-time inventory and minimum stocking model to a just-in-case model where local warehouses carry buffer stocks of assemblies and components in the event of any disruption to the supply chain.

3. Lower number of car variants

Automakers are also reducing the number of customer-specific variants they manufacture. Lowering the number of variants on offer decreases the number of unique parts and components needed for assembly. This lessens the complexity during sourcing as well as stocking inventories besides also freeing up resources to make more electric vehicles.

Conclusion

Apart from these changes to their sourcing strategies, automakers are employing automation, IoT and ensuring better support from original equipment manufacturers to their suppliers to make supply chains and assembly lines robust.

Of all these sourcing changes, the shift towards a more local supply chain is being seen as the most fundamental, not only for the automotive industry but for other sectors that rely on a global supply network to keep their businesses running.