Auto Industry Rethinks Cost-Cutting Playbook With COVID-19, Chip Shortages Disrupt Supply Chains, Auto News, ET Auto

By Ben Klayman

Unexpected events like the pandemic and chip shortage are just a sign of the times, said Steven Merkt, president of transportation solutions at TE Connectivity, which makes sensors, connectors and electrical components for automakers. .

DETROIT: After a year of being hammered by the pandemic, a semiconductor shortage and storms that rocked Dana Inc’s global supply chain, the auto parts maker is looking for a new guide.

Many automakers and suppliers like the Ohio maker of axles, driveshafts, and other auto parts, are deciding that securing their supply lines is the most pressing agenda.

Craig Price of Dana, senior vice president of purchasing and supplier development, is pushing companies in his supply chain to change the way they do business, sometimes moving away from the just-in-time production practices that have guided them. car manufacturers for almost 40 years.

Dana purchases key products such as resin, castings, forgings, and some electrical components from multiple vendors, requiring vendors to keep a critical inventory backlog in warehouses and expanding its software network to better track vendors. , a process that Dana hopes to complete. year, said Price.

This flies in the face of the just-in-time inventory and production approach that manufacturers have taken in relation to Japan. Toyota Motor Corp since the 1980s. The new watchword in manufacturing is “resilience,” underscored by Toyota’s February revelation that it had built up a four-month stockpile of chips.

Dana has also taken steps to help its small suppliers recruit workers and secure shipping space on containers to avoid any impact on its operations, Price said.

And at the company’s headquarters outside of Toledo, Price is working on vendors to join a data-sharing network that will give Dana detailed insight into how two- and three-step deleted vendors are doing – rather than simply rely on shipments to appear as expected in a contract.

“We are working towards full transparency of the supply chain, which is generally not available at the moment,” he told Reuters of the company’s $ 7 billion plans. “This is a journey where we are getting as much data as possible, not for any other reason than simple security of supply.”

BRITTLE SUPPLY CHAIN

Efforts like Dana’s are underway in an industry rocked by a series of unexpected events. the shortage of chips is a high profile issue, but not the only one.

“The whole problem exposes the fragility, the fragility of the automotive supply chain,” said Richard Barnett, chief marketing officer of Supplyframe, which provides business intelligence to companies in the global electronics industries.

BorgWarner chief executive Frederic Lissalde told Reuters that companies are looking at the full cost of any approach instead of just the upfront price.

“We try to double source critical components whenever possible,” he said.

David Simchi-Levi, professor of engineering systems at the Massachusetts Institute of Technology, who has worked with companies like Ford Motor Co on strengthening supply chains said interest exploded last year. “Resilience is there for stay. “

The math is simple. Such approaches may cost more upfront, but they are likely to pay for themselves if they help businesses avoid the costs of up to $ 2 billion and $ 2.5 billion that they face. General Motors Co and Ford, respectively, for the chip shortage.

Ford’s product and operations platform chief Hau Thai-Tang said the No.2 U.S. automaker had previously changed its approach, but last year accelerated the change even further. The storage of key parts or materials and the use of multiple sources are back on the table.

“If you stay at the F-150 plant for 30 days, what is the cost to Ford Motor Co compared to paying that insurance to store those chips?” he said, referring to the company’s highly profitable full-size pickup truck. “That’s how we would think.”

Despite this, Ford has at times had to temporarily halt production of F-150s and is piling up trucks running out of parts.

Ford is looking at what other parts or materials might face the same pressures in the future and has already started purchasing specialty microchips directly from chipmakers rather than going through its larger suppliers, Thai-Tang said. Ford is also providing suppliers with a vehicle mix and volume forecast for six months instead of just two weeks and plans to extend that visibility to one year.

JUST IN TIME HERE TO STAY

Automakers can’t afford to let go of the cost awareness of the just-in-time system in a business where profit margins are often less than 10 cents per dollar of revenue.

“The solution can’t be more waste,” said Ramzi Hermiz, a former vendor CEO who advises businesses. “The goal must be how to create more simplicity, flexibility and speed in the supply chain.”

Responses could include establishing more suppliers closer to their end customers, including repatriating work from China and other parts of Asia, and making greater use of standardized parts and systems where possible. to allow more vendor options, industry executives said.

Bob Roth, co-owner of RoMan Manufacturing, which makes transformers and glass molding equipment in Grand Rapids, Michigan, said conversations about resilience have accelerated over the past year. However, the answer cannot be to simply shift the burden to smaller vendors like his $ 40 million business.

“We’re not going to tie up our working capital just because you think stockpiling or storing equipment is a great idea,” he said.

The answer for many companies will be to test their supply chains for weaknesses, just as banks did after the 2008 subprime crisis, said Tim Thoppil, partner and head of advice for the Americas at from the engineering company umlaut. Raw materials and parts for batteries and electric motors could be the next point of crisis.

Unexpected events like the pandemic and chip shortage are just a sign of the times, said Steven Merkt, president of transportation solutions at TE Connectivity, which makes sensors, connectors and electrical components for automakers. .

“This is not a series of black swan events,” Merkt said. “It’s a forerunner of what life is going to be like.”

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