Automakers and suppliers are continuing to face disruption from multiple fronts. With ongoing macroeconomic volatility, geopolitical tensions, sourcing challenges, and sustainability reporting requirements, it is no surprise that many players have reported feeling distress. Multiple crises are putting performance and operating models under pressure, forcing companies to react constantly and quickly, but sometimes supply chain strategy and objectives are not always updated accordingly. For example, many OEMs are moving toward supply chain centralization for improved risk management, which makes sense, but that is just one small part of a much larger transformation. So, looking ahead, what is a smarter approach to supply chain management in the auto industry?
In this article, we will outline and define a framework that can act as guardrails for strategy development, incorporating both upstream and downstream considerations, addressing external conditions, internal capabilities, and operational priorities while balancing the compromises necessary.
We believe that it is critical to think about supply chain management holistically. In order to address the changing external forces, supply chains and their corresponding strategies need to be revisited and redesigned regularly while considering the company’s corporate strategy and its demands on the supply chain. To do this, we propose to look beyond the classical triangle of time, cost, and quality – however, using these as a starting base – and rather focus on so-called meta-strategies that balance and prioritize between these dimensions. As a result, companies can adapt towards one of four strategies – (1) Costs and capital, (2) Resilience, (3) Sustainability, or (4) Flexibility – that sets the basis for the development of a holistic supply chain strategy.
Here's an example. Given the current multi-crisis environment, building resilience is critical. But a focus on resilience, for instance, often costs money and capacity – necessitating upfront investments in redundancies, diversification, and risk management. In turn, that may increase operational expenses which conflicts with the cost and capital focused strategy. Whatever higher-level strategy is prioritized, tradeoffs and necessary compromises are needed.
Currently, in the auto industry, supply chain priorities are often determined by relatively sudden incidents. For instance, collapsing supply might drive an organization to make changes in its sourcing. Or constant cost pressures could force an organization to cut costs. But rather than being solely reactive, a proactive and holistic approach enables leaders to respond quickly and more effectively. It supports deriving the right key performance indicators and strategic capabilities needed to achieve a longer-lasting competitive advantage.
Our framework suggests starting to define the supply chain strategy from the internal firm and operations strategy with a limited set of strategic performance measures around time, cost, quality, and above all customer satisfaction. Based on these strategic measures, one of the four meta-strategies emerges as the leading target picture which is described through a set of specific qualitative and quantitative KPIs. Conflicting objectives between the meta-strategies must be clearly identified and transparently resolved across all supply chain functions.
The next layer of the framework deals with the strategic capabilities that are needed to execute the defined supply chain strategy. Capabilities can exist and be built around the three dimensions – (A) Operating Model, (B) Ecosystem, and (C) Enablers. Through their Operating Model, companies align their organization, processes, and people to the overall strategic business objectives and ensure an internal set-up that works toward set targets. Within the Ecosystem dimension, companies review and evaluate their value chain positioning and footprint while facilitating proactive management of supplier, stakeholders, and regulators. Lastly, capabilities along key enablers such as culture and technology bridge the gap between internal and external requirements that companies need to meet to achieve their strategic ambition.
Defining a supply chain strategy based on a prioritized meta-strategy and capabilities that companies need to build in alignment with their internal and external environment does not happen in isolation. With supply chain of multinational companies stretching across the globe, external conditions not only need to be considered but deeply integrated in the strategy definition. For this, it helps to think in three categories that define the boundaries for supply chains to operate.
A supply chain strategy that addresses all the above-mentioned dimensions is well sounded and ready for execution. However, arriving at this stage is a complex process and requires rigorous steering and management of all supply chain functions and related internal stakeholders. Our proposed framework set out a blueprint to guide companies through that process, one step at a time. Of course, when you design your own supply chain strategy, you will need to tailor it – including all the specific factors affecting your business and decision-making. This is why it’s critical to take a holistic and customized approach to supply chain strategy definition, to meet the rapid changes in the auto industry proactively and ensure future success and profitability.