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Plan B

How COVID-19 is Transforming Automotive and Industrial Supply Chains

May 11, 2020
Organizations that will emerge the strongest post-COVID-19 will be the ones that overhaul their supply chains to better anticipate risks.

By Salim Shaikh and Ehap Sabri


The COVID-19 outbreak has been a humanitarian crisis that has gravely affected the global economy and is posing unprecedented challenges for supply chain business leaders. It is increasingly becoming a challenge to represent and evaluate the impact because by the time a response is formulated, the situation has changed, and the scale, speed and impact of issues have unexpectedly intensified. Automotive and industrial manufacturing plants are being shuttered around the world, which have impacted not just the OEMs but also their Tier 1, Tier 2 and Tier 3 suppliers.

Although it may be difficult to predict the exact consequences of COVID-19 and how to handle the immediate impact, supply chain organizations have to start planning for post COVID-19. Automaker Daimler has already reopened its factory in China and has said the vast majority of its dealerships have reopened. Nearly 100% of car dealerships in China had reopened by mid-April, up from 28.3% on Feb. 10 . The world’s biggest automaker by sales, Volkswagen, also started production in its European factories in April.

The after-market segment is seeing an upswing as well because of increased shipments of food, infrastructure materials, medical supplies and goods during the coronavirus outbreak. For example, PACCAR parts had a record setting Q1 as it is working to provide fleets with necessary equipment as they respond to the pandemic demands. No one knows the likely duration of the COVID-19 pandemic, the full impact that the pandemic will have nor the speed of recovery for automotive and industrial manufacturing, but organizations need be ready to start thinking and taking actions by running different scenarios and building resiliency in their supply chains.

Supply Chain Resilience

Visibility is the key to help predict current and future impacts of COVID-19. By taking real-time data feeds from the Centers for Disease Control and Prevention (CDC) on the exposure spread and mapping it to an organization’s suppliers, manufacturing and distribution sites, customers can proactively identify issues deep in their global supply chain across Tier 1, Tier 2 and Tier 3 suppliers that are most affected by disruptions. Visibility includes the ability to track inventory of finished goods and raw material in relation to COVID-19 activity, understanding the customer’s demand and its relation to COVID-19 impacts globally and the ability to drill into each region and get related impacts.

By leveraging machine learning (ML)-based prescriptive analytics and recommendations, customers can resolve the exceptions looking at different scenarios and its impact on customer service levels, revenue and margin of different decisions.

Supply Chain Risk Mitigation

The current share of indigenous to imported sourcing for the OEMs is approximately 40:60. After the recent geopolitical events such as Brexit, U.S.-China trade relations, tariffs, renegotiation of the North American Free Trade Agreement and the COVID-19 pandemic, organizations are increasingly looking at building supply chain resiliency. Developing supply chain resiliency includes revisiting the supply chain network design and reconfiguring global and regional supply chain flows, sourcing critical components from local suppliers and conducting trade-offs according to needs, cost, service and risk scenario analysis.

Organizations should look into building agility and speed into their supply chain by creating finite, decentralized, agile ‘mini-operating models,’ with flexible supplier contracts and relationships with manufacturing closer to the point of purchase. Companies should also explore strategies to “buy where you make and make where you sell.”

Scenario Planning

Amidst such uncertainty, it is critical that companies take a comprehensive approach and develop a range of scenarios and robust contingency plans to navigate through these turbulent times. Access to agile and accurate scenario modeling to understand cash flow, profit and loss, and balance sheet impact has never been more important.

Understanding how different demand and supply risk scenarios impact your business is crucial for planning and executing business in even the most stable times. Managing the gap between the current plan and the annual operating plan based on different economic recovery outlooks is key. Increasingly enabled by AI and automation, supply chain managers can run scenarios and help prescribe rather than just predict—with humans providing contextual understanding to augment the final decision.

Segmentation

In the current demand-constrained environment for the automotive and industrial segments where demand has fallen off a cliff, organizations need to build a plan to prioritize and protect their most valuable segments and customers based on margin, revenue, strategic importance, contractual obligations, etc. They also need to understand high-margin and high-opportunity cost products for prioritization in case of labor constraints or material shortages.

Automation

Organizations need to explore deployment of supply chain technologies—such as transportation management systems, warehouse management systems, robotics and autonomous materials movement—to decrease worker density throughout their operations. As finite labor in the warehouses are stretched because of constrained resources, organizations need to look into improving throughput with lower headcount. Automation will be key to drive throughput acceleration and labor resiliency.

Organizations that will emerge the strongest post-COVID-19 will be the ones that can see the current emergency as an opportunity to overhaul their supply chains and enable the strategies outlined above. Although the future is uncertain and tomorrow’s disruption is already brewing, chance favors the prepared.

Salim Shaikh is digital transformation executive, Auto/Industrial, with supply chain solutions provider Blue Yonder. Ehap Sabri, Ph.D. is supply chain lead for Industrial Manufacturing with global consulting firm KPMG.

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