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Analysis

MAR21 - New Supply Chain Standards: Safe, Sustainable, Smart

By Alejandro Enríquez | Thu, 03/18/2021 - 06:00

The pandemic brought new meaning to "safe operations." The challenge to balance the economic impact and virus outbreaks forced governments to end lockdowns and companies to operate under strict health standards. Companies implemented social distancing measures and consequently accelerated the implementation of smart manufacturing strategies. Meanwhile, at the global level, automakers announced unprecedented commitments toward carbon neutrality that will also drive suppliers to meet more thorough environmental standards. In short, the sector is witnessing the forging of a safer, smarter and more sustainable supply chain.

Safe Operations

Over the year, MBN has interviewed more than 100 industry leaders and they all agree: "people come first." Companies are focusing on employees' well-being holistically, meaning both physical and mental health. For the supply chain in particular, safe operations are meant to prevent, monitor and track COVID-19 contagions. Otherwise, production might be compromised.

On March 20, 2020, OEMs started to suspend operations due to outbreaks and government measures. Production in April hit its lowest point ever recorded. Just 3,722 light vehicles were assembled in a country with 13 light vehicle OEMs, a 98.8 percent year-on-year variation. The US, the destination for most Mexican auto parts production, faced a similar scenario. It was not until mid-May, when the National Health Council declared transportation equipment manufacturing an essential activity, that production of vehicles and auto parts gradually resumed.

Resuming operations presented a major challenge for both suppliers and OEMs. Many benefited from their global footprint and replicated measures taken at their Asian facilities, for instance. Others trusted automotive clusters to support them as they resumed production. "There has been a great deal of collaboration and partnership between all clusters. Each region has its particular needs but we also have common ground across the industry. Since the pandemic began, we have held meetings to share what each of us is up to in our respective states," explained Manuel Montoya, President of the Mexican Automotive Cluster Network, which groups nine automotive clusters in the country.

Not all companies advanced without complications, however. In early June 2020, as production was resuming, Lear, with 42 manufacturing plants in Mexico and 56,000 employees, faced a complicated scenario as workers were wary of returning to the factory after a COVID-19 outbreak that resulted in the death of 20 factory workers.

Implementing social distancing measures also required additional investments from suppliers. In Queretaro, for instance, the automotive cluster reports an average initial investment of about US$28,794, followed by a monthly investment of US$4,479 to keep up with all the necessary protocols and additional health equipment.

Smart Manufacturing Needed More Than Ever

Health measures also led to increased digitalization. Industry leaders agreed that manual processes and tracking systems needed to evolve as fewer people were allowed to be at the plant, depending on the color of the epidemiological traffic light system implemented at the federal, state and municipal levels. "The pandemic demonstrated that even though it might be expensive to embrace automation, it might be costlier to not be prepared for a situation where manual labor is unattainable. If companies are looking for more efficient operations while avoiding contagion, digital tools become a feasible option," said Daniel Hernández, Director General of the Querétaro Automotive Cluster.

As US vehicle demand started to recover, production capacity needed to increase while keeping all employees safe. "Thanks to USMCA, automotive companies have also experienced greater levels of demand from their customers since August. Comparing 2020 to 2019 in cold numbers, the difference in demand is minimal in Guanajuato," said President of the Guanajuato Automotive Cluster (CLAUGTO) Alfredo Arzola.

According to cluster leaders and smart manufacturing companies, the greatest challenge for suppliers to embrace digitalization and smart manufacturing is financial. "Many are aware of the potential benefits but the financial situation is their priority, even more so during the pandemic. In the short term, those who choose not to digitalize their process might run the risk of being left out of the sector entirely. As a cluster, we need to tell them the truth," said Carmen Hernández, Director General of the Jalisco Automotive Cluster.

At the global level, smart manufacturing trends include 5G and additive manufacturing, or 3D printing. Three elements enable potential use of 5G networks for industrial applications. The speed provided is 100 times faster than 4G, according to Ericsson, a relevant player in the field. 5G also means no wires are required on the manufacturing floor, which reduces implementation costs. On the other hand, additive manufacturing, the ability to print particular components remotely and in specific materials, emerges as a solution to supply chain disruptions resulting from the pandemic.

"Mexico needs to address its regulatory and technical elements before 5G can penetrate the country. It might not be for the general public, however. A better approach will be to place some antennas in industrial niches that can take full advantage of the potential applications. Our portfolio goes in that direction," said Sergio Bautista, Robotics and Discrete Automation Director at ABB México.

Automakers Go Carbon Neutral

While the industry is coping with the effects of the pandemic, it is not losing its focus on long-term goals, particularly those related to the environmental impact of vehicle production and use. "The global car industry must shift to low carbon to survive," stated a Carbon Disclosure Project report in 2018. Under the Paris Agreement, countries must meet strict emissions standards, which means industries must follow.

Over the last three years, most major automakers have announced detailed plans to reduce greenhouse emissions and all of these plans focus on the downstream and upstream value chain. Key areas include manufacturing operations, carbon credits and an aggressive offer of electric vehicles.

Most automakers have set goals to be carbon neutral by 2050, including Toyota, Volkswagen, Ford, Honda, Nissan and Renault. GM has set the deadline at 2040. Recently merged FCA-PSA, now Stellantis, is yet to release a detailed plan. Hyundai Motor Group, although embarking on sustainability mobility ventures, is also pending a release of a carbon neutrality plan.

Manufacturing operations are expected to be powered by sustainable energy sources, while suppliers are encouraged to follow stricter environmental standards. Most companies expect to have a green vehicle portfolio, as well, including battery electric vehicles (BEVs), fuel-cell electric vehicles (FCEVs), non-plug-in hybrid vehicles (N-PHV) and plugged-in hybrids (PHVs). Carbon credits will also play an important role. These are permits for emitting greenhouse gases obtained from funding other environmental initiatives.

Toyota’s 2020 environmental report shows that out of 15 categories in the value chain, “purchased goods and services” accounted for 16.4 percent of its CO2 emissions. Most strategies are thus based on reducing emissions in operations across the supply chain.

OEMs have certifications and standards that suppliers must follow regarding quality: IATF, ISO and other certifications involving corporate social responsibility, ethics and environmental standards. The latter will become a priority as the deadline to reach carbon neutrality approaches. Toyota has also incentivized this by issuing its Toyota Green Purchasing Guidelines in 2016. Another example is Audi’s facility in Puebla, which is the only manufacturing plant in North America that has announced its sustainability ranking. The plant’s “S-Ranking” ensures “successful and sustainable long-term trade relationships” to make sure the Q5 model manufactured at the facility meets all environmental commitments.

"The environmental trend is gaining strength. Our customers used to focus greatly on auditing our operations and quality systems but now, all of them are asking about the environment, sustainability and green energies,” Felipe Villareal, CEO of Alian Plastics, a Mexican Tier 2 supplier for premium OEMs and EV brands, told MBN. Ignacio Moreno, CEO of Bocar Group, one of the top Mexican Tier 1s with more than five decades in the market agrees. “It is really important for us to focus on sustainability and that is why we have a team dedicated solely to making our processes and products more sustainable,” he said.

Photo by:   Bosch
Alejandro Enríquez Alejandro Enríquez Journalist and Industry Analyst