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Challenges of supply chain management in dynamic markets
The automotive industry is facing enormous challenges as markets and technologies are changing rapidly.
To remain competitive, car manufacturers and suppliers must adapt their supply chain management and make it more resilient than ever. The COVID-19 pandemic, geopolitical tensions and rapid technological change have exposed the vulnerabilities in the automotive industry's global supply chains. In this article, we will look at the challenges that a volatile market environment poses for automotive supply chain management and discuss possible solutions.
Causes of uncertain supply chains in the automotive sector
The automotive industry depends on global supply chains to ensure a reliable supply of parts and components. However, various factors have led to increased uncertainty and volatility in recent years:
Globalisation: globalisation has enabled automotive manufacturers to expand their supply chains worldwide to reduce costs and facilitate access to new markets. However, greater geographic reach also leads to longer and more complex supply chains that are more susceptible to disruption.
Such disruptions can take the form of geopolitical tensions and trade disputes, which can lead to tariffs, embargoes or logistical disruptions, affecting the efficiency and continuity of supply chains.
The COVID-19 pandemic has also ruthlessly exposed the dependence on individual low-cost production sites and suppliers. Local production stoppages could have far-reaching consequences. When factories in China had to close due to the lockdown, there was a sudden shortage of https://www.cnbc.com/2020/02/04/coronavirus-damages-chinas-auto-industry-as-outbreak-worsens.html’">1.7 million vehicle parts on the market.
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Technological change: Technological change in the automotive industry poses immense challenges for the supply chain. The rapid development of innovative technologies (multimedia, autonomous driving, driver assistance systems, connected cars) and the increasing importance of electromobility are fundamentally transforming the way cars are constructed. Each of these advances requires the supply chain to adapt in order to keep pace.
The problems this can cause were illustrated by the global chip crisis. When vehicle sales plummeted in the wake of the Covid-19 pandemic, semiconductor manufacturers shifted their capacity to chips for consumer electronics or fitness equipment, sales of which increased. When vehicle orders then increased faster than expected, the necessary chips could no longer be produced as quickly.
Dependence on raw materials: Battery-powered vehicles in particular require problematic raw materials for batteries, such as lithium, cobalt and rare earths. Their mining is often associated with ESG problems, such as environmentally harmful mining conditions and human rights violations in some mining regions. In addition, the concentration of such raw materials in just a few countries can jeopardise security of supply and lead to price fluctuations.
A closer analysis of the lithium market, for example, provides a good example of the associated problems: the light metal became scarce between 2020 and 2022 and the price rose by 400%. There was a gold-rush atmosphere on the market and Elon Musk was already talking about the ‘new oil’. New players entered the market and established mine operators increased production volumes. However, demand then developed worse than expected and the price collapsed, although it is still well above the 2020 level. https://www.commodity-capital.com/de/produkte/structured-solutions-next-generation-resources-fund’">Experts expect demand to almost triple by 2030, although it is still unclear how this will be met. South America can hardly contribute to growth as most of the salt lakes are already in production. Australia will grow, but has already experienced its greatest growth. Africa is a potential supplier, but the lithium there is inferior. Canada and the USA could meet some of the future demand, but only if the authorisation procedures are speeded up.
However, a potential discrepancy between supply and demand is not the only problem with lithium: the most dominant player on the market is China. In addition to concerns about environmental protection and human rights violations, there is always the risk that the autocratic regime will exploit its market power for geopolitical reasons.
Challenges and bottlenecks in global supply chains
Managing global supply chains in the automotive sector poses numerous challenges that can lead to bottlenecks. Here are some examples:
Transport delays: Shipping automotive parts and vehicles over long distances can be time-consuming. These delays can be further prolonged when multiple modes of transport are involved, such as road, rail, air and sea freight.
Customs procedures: Customs can be a significant bottleneck. Clearing customs formalities can be time-consuming, especially if documentation is not in order or if regulations are complex and varied.
Transport capacity : The availability of transport capacity can vary and is often difficult to predict. Factors such as seasonal fluctuations, fuel costs and the availability of drivers or ships can influence transport capacity. These fluctuations can lead to bottlenecks, especially if several manufacturers are competing for the same resources.
Minimising inventory: The just-in-time production system widely used in the automotive sector minimises inventory levels and requires precise coordination between suppliers and manufacturers. While this increases efficiency, even a small disruption in the supply chain can lead to production interruptions. Bottlenecks can also occur if demand increases unexpectedly.
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Language barriers: In global supply chains where participants from different countries and with different native languages work together, language barriers can lead to misunderstandings and delays.
Time zone differences: Coordinating activities across multiple time zones can be difficult and lead to delays in decision-making. This can affect the responsiveness of the supply chain, especially in the case of unforeseen events that require a quick response.
Cultural misunderstandings: Cultural differences can lead to misunderstandings in business practices, communication styles and even the interpretation of contracts. This can affect trust and co-operation between supply chain participants.
Strategies for more resilient supply chains
There are two main strategies for countering the uncertainties and challenges described above and making supply chains more resilient:
1. Re-shoring production
One possible strategy for increasing the resilience of supply chains is reshoring production. This involves relocating production back close to the home market and to regions with more stable political and economic conditions. This can lead to shorter and more agile supply chains and reduce the risk of geopolitical tensions and natural disasters. According to an ABB study conducted in 2022, 86% of German and 74% of European companies are planning re-shoring or near-shoring measures.
However, the automotive industry is still hesitant in this regard, as the basic conditions must be right for reshoring to be implemented effectively. For example, a study by Porsche Consulting revealed that the cost issue is particularly relevant for suppliers when strategically considering re- or nearshoring. Avoiding surcharges for carbon prices, which are passed on by the OEMs, could tip the scales here. Overall, the study lists four basic prerequisites for re- or nearshoring to be considered at all:
- Access to renewable energy and low carbon emissions
- A reliable supply of energy and resources
- efficient logistics
- Qualified employees
The shortage of skilled workers in particular is a problem, as the required skilled personnel ‘cannot simply be transferred from one country to another or recruited there’, as Dr Ralph Wiechers emphasises. However, the VDMA's chief economist does not categorically rule out reshoring measures: ‘In view of the lack of skilled workers and the comparatively high labour costs in Europe, battery cell production here, for example, can only be profitable if the factories are highly automated.’ A popular pioneer from another industry is Adidas. The sporting goods manufacturer has been producing parts of its collection in a highly automated factory in Ansbach again since December 2015.
2. Diversification of the supply chain
Diversifying supply chains is an important step towards reducing dependence on individual suppliers or locations. There are various measures for diversification:
- Multi-source supply: Rather than relying on a single supplier, car manufacturers can source critical parts and components from multiple sources. This reduces the risk of disruption if a supplier fails or experiences difficulties.
- Geographic diversification: Production and sourcing can be spread across multiple locations to reduce the risk of geopolitical tensions, natural disasters or lockdowns.
- Local sourcing: Sourcing parts and materials from local or regional sources can reduce transport costs and shorten the supply chain. This can also lead to better control over quality and delivery times.
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Diversifying the supply chain requires careful planning and analysis. Companies need to weigh the costs and benefits of different scenarios and ensure that the quality and compatibility of parts is maintained. However, a well-diversified supply chain can contribute to a more resilient and agile automotive industry.
Conclusion
The automotive industry faces major challenges in adapting its supply chains to the demands of dynamic markets. By re-shoring production and diversifying procurement sources, manufacturers can build more resilient and agile supply chains. Effective supply chain management today requires careful planning and the ability to adapt quickly to market changes. Companies that invest in resilient supply chains will be better positioned to manage disruption and thrive in a volatile market environment.
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