Industry Transformation Demands Future-Proof Procurement Plans

With growing pressure on automotive suppliers across the world due to raw material and semiconductor shortages, procurement strategies have become an increasingly important issue for OEMs. While the global supply chain still faces disruptions, automakers are finding ways to secure component supply, from negotiation to vehicle design changes.

Disruption has become the new normal in the automotive industry following the COVID-19 pandemic, the US-China trade war, the Ukraine-Russia conflict, inflation, among several other factors. These events, in addition to key component shortages and logistics constraints, have put the sector in a difficult position as it goes through a major transformation, which includes disruptive technology shifts needing unprecedented investment, radically changing customer expectations and aggressive attacks from new mobility competitors, according to Deloitte.

Procurement, which has always played an important role within OEMs operations, plays a key role in the industry’s transformation. Automakers rely heavily on their supply chain to survive and thrive and maintaining the stability, quality and commercial performance of these complex N-Tier supply chain networks is the job of the Chief Procurement Officers (CPOs).

Among the challenges that CPOs are facing toward a strategic sourcing approach, Deloitte highlights five: how to stay on top of technological developments, how to empower and equip teams with the new skills required in a rapidly changing technology and supplier landscape, how to create future-proof procurement organizations that incorporate new agile work models and automated operational processes, how to make the most of new cloud-based procurement systems and how to establish an effective and fast innovation sourcing process.

A key component for strategic sourcing is cost reduction. Reducing the number of suppliers reduces costs for OEMS, while fiving more volume to each supplier enables them to reduce their cost per unit, as well. Still, quality goals are as important. Strategic sourcing teams must ensure that suppliers are in line with the OEM through intense qualification processes, which include component and system testing. In addition, innovation plays an increasingly pivotal role for strategic sourcing teams. Current innovations and industry shifts are impacting the automotive value chain by integrating new players and complexities.

The Automotive Value Chain of the Future

Future-proofing procurement will depend on the different scenarios that the sector could face. In the most positive scenario, OEMs become data and mobility managers, as connectivity, electromobility, autonomous driving and integrated mobility become a common reality for the general public. Under these circumstances, OEMs would continue setting the standards as the dominant players in the industry. Tech and mobility companies, as well as innovators, would play according to the rules set by automakers, which would continue to attract the most talented people. In this case, procurement teams would become innovation drivers. Future-proof procurement in this scenario would entail mastering new technologies and helping new service offerings to develop, according to Deloitte.

In a second scenario, e-mobility and autonomous vehicles are not widely accepted by consumers, while lobbying prevented high-tech players to enter the market. In this case, procurement teams would continue working as they have done for decades, says Deloitte. However, strategic sourcing teams would be more focused on electrified drivetrains.

A third scenario considers the car becoming exclusively a means of transportation with mobility transforming into a commodity, decreasing OEMs’ profit margins. Mobility providers grow their presence and forge alliances directly with suppliers to provide affordable mass mobility. This future would force procurement teams to dramatically reduce costs, aiming to maintain OEMs profitable despite not dominating the market anymore.

In the final scenario, OEMs become primarily suppliers of white-label cars to technology and internet giants. In this context, automakers lose direct customers and slip into a Tier 1 supplier role. Procurement strategies then would align to what global mobility giants demand rather than in-house projects.

Taking Action in the Present

While the future of the automotive industry remains uncertain, CPOs and their teams continue facing challenges to ensure that production keeps going. Nikolaus Helbig, Partner, Lead Sourcing and Procurement, Deloitte, highlights five main moves that CPOs can adopt toward the automotive procurement transformation:

• Accelerating supplier portfolio development without compromising supply chain robustness
• Building technology-enabled procurement and maximizing potential from process digitization
• Organizationally splitting transactional and knowledge-intensive procurement tasks
• Bringing employees in on the journey: training capabilities, adjusting team structures and aligning performance management accordingly

Shortages have also pushed companies toward innovation and redesign. The biggest impact on the automotive industry has been the semiconductor shortage, said to MBN David Pineda, Head of R&D Queretaro and ADAS Mexico, Continental. “[Shortages] spur us to increase development activities. When a component is not available, we kick off a redesign process to look for alternatives with available components. This redesign needs a complete series of validations to ensure that the final product works perfectly.”

Reacting faster to changes in the market is crucial for companies and OEMs, said to MBN Karen Lellouche Tordjman, Managing Director and Partner, BCG: “Securing supply is all about diversifying the supplier base and understanding where the risks come from. Manufacturers have calculated their risks in a very detailed way by vendor, supplier, network, location and material. This will allow them to monitor disruptions in real time, as much as possible. A best practice to achieve this fast reaction is to create risk indicators and track them to anticipate outcomes depending on what happens in the market.”