Parts Shortages Show Cracks in OEM Purchasing

Over the last 100 years, American industry needed to continually evolve to adjust to changes in markets and technology. And for the most part, it has. For instance, automobile manufacturers have been able to develop and offer more technologically advanced vehicles that both deliver a good customer experience and meet government safety requirements. 

However, over that same time, there has also been a business-as-usual attitude among supply chain and other C-Level executives in automotive. This has led to a multitude of problems such as those made visible with the impacts of COVID-19, including part shortages due to supply chain failures.

 There are two primary approaches used to address issues that arise: short-term reactive firefighting and designing and implementing the changes in strategy and process needed to adapt to a changing business environment. 

Unfortunately, at least up-till-now, it appears that firefighting is the methodology of choice. Over the decades, while supply management has seen incremental improvements, meaningful ones have been few and far between. Significant, step-function-magnitude changes must be made to both eliminate the need for reactive problem-solving and, at the same time, position purchasing to have more of a positive impact on executive-level financial metrics. In other words, business as usual will not suffice.

Unfortunately, the 2021 North American Automotive OEM-Supplier Working Relations Index Study reported that supplier respondents continue to see a business-as-usual relationship management approach from their OEM customers. This is disappointing. Why? Because a crisis should be the ideal time to consider significant changes to address weaknesses in current practice.

There are other costly supply chain problems that, while they have been visible at the executive level, have not been addressed. For instance, consider the amount of pre-built finished goods automotive companies must hold at dealerships to maintain acceptable customer-fill-rates. There are all sorts of costs associated with building and maintaining inventory.  Yet some manufacturers have stubbornly stuck to a strategy of embedding long supplier lead-times into their overall enterprise by chasing lower piece-prices overseas. And long supplier lead-times, by the way, are a primary reason why some OEMs rely on finished product inventory to support sales.

For instance, during the last year of normal operations in the automotive industry—2019—Toyota, which both tends to source “locally” and has a more collaborative working relationship with its suppliers, consistently hit a 95% customer fill rate. Meanwhile, it had about half of the inventory held on dealer lots compared to General Motors. GM needed over 100 days of cars at dealerships and still hit only an 80% customer-fill-rate. In case you haven’t guessed it, GM has a reputation for managing suppliers on a transactional basis and sourcing with overseas suppliers.

New strategies, practices and tools need to be considered. Darren Coil, director of strategy, business automotive, manufacturing and supply chain technology at Microsoft, told the story of that company’s initial foray into the adoption of cloud data technology.  He has noted that while there are problems that will always need to be addressed in implementing a fundamental change to business practice, they can be addressed—and dealing with them can result in significant positive financial benefits.

It’s interesting to note that while automotive OEMs have invested significantly in internal cloud computing technology, most do not—or have not even seriously considered—extending this connectivity to their supply chain tiers. If they did, the resulting data would likely give significant visibility to the financial advantages of sourcing with shorter lead-time suppliers. 

One of the biggest hurdles for moving past traditional business practices is having people with years of experience working with current strategies and practices—and the routines and business relationships they developed to support them. This especially applies to executives. Even highly intelligent and motivated individuals often create hurdles to improvement, fearful that change could imply the existing practices they have installed and maintained are not optimal.

Attempts to adopt more progressive business strategies and practices typically stall out if they are championed by middle management level; i.e., bottom up. Yet top-down changes can stall out when championed at the C-Level without first getting organizational buy-in.

Collaboration, both within an organization and with strategic suppliers, is the most effective approach to making the types of changes needed to transform purchasing from a transaction-based tactical function to one that has a more strategic outlook.  

I guess a good start would be to challenge Mary Barra, Jim Farley and Carlos Tavares to re-evaluate how supply management can positively contribute to corporate financials, above-and-beyond material cost.

A good first step towards understanding how this can be done would be to order and read the book Better Business: Breaking Down the Walls of the Purchasing Silo. (Ericksen: Sorry, I couldn’t help myself! I just had to put a plug in for my new book here). 

Tim Biggs has spent 20+ years in leadership roles at both Fortune 500 companies and small specialty firms, in manufacturing and technology.