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Look ahead to mitigate operational and reputational risk in your supply chains

24 March 2016 | Stuart Young and Julian Pallett
stuart-young Gowling WLG

Stuart Young, head of automotive, Gowling WLG

The UK automotive industry continues to boom, with a record number of cars hitting the roads, expansion across the entire industry and huge investments into research and development. Such growth is great news for the sector and the economy, but it doesn’t come without its risks.

In order to meet demand and boost production capacity, many manufacturers are expanding their roster of suppliers, meaning the quality and resilience of supply chains are being tested to the extreme. There are also issues coming up ahead, which both OEMs and suppliers need to bear in mind. The impact of ‘generation rent’, disruptive technology and new entrants to the industry are just a few examples.

Thinking ahead about the possible threats and opportunities is crucial to success. Here are the key questions we think OEMs and suppliers should be asking in order to mitigate operational and reputational risk within their supply chains.

Am I prepared for disruptive technology?

The industry is seeing new entrants (the likes of Google and Apple), new disruptive technologies and new ways of designing vehicles. The traditional model of years in development, heavy investment in tooling and a long production run is likely to have to change. In its place we’ll see 3D-printing, driverless cars and ever increasing connectivity.

This shift to fluidity poses both opportunity and threat for supply chains. The situation favours agile companies with access to the latest technology, adaptable machinery, and a highly skilled and adaptable workforce. Mercedes-Benz, for example, has recently replaced robots on the S-Class production line with humans who can better deal with the level of individual vehicle customisation.

An inability to adapt could see your customers go elsewhere.

What are my rights?

Supply chains are full of indirect relations and reliant on a web of complex contracts. In fact, they’re almost too complex to operate without goodwill. When a major issue such as insolvency happens and the goodwill erodes, those without solid contracts can be left exposed.

A good contract will help to ensure continuity of supply through clear statements of a party’s rights, including the ownership of model-specific tools and dies. It’s crucial that OEMs and tier one suppliers alike know their legal rights, whether contractual, design or intellectual property. If relationships turn sour, the ability to uplift your tools and designs is key to avoid being held hostage.

How strong are my relationships?

julian-pallet Gowling WLG

Julian Pallett, head of restructuring and insolvency, Gowling WLG

As well as knowing your rights, it’s important to know your relationships. Generally, suppliers and OEMs have far more collaborative relationships today than they might have had ten years ago; no longer are we seeing customers pushing suppliers into insolvency, for example. The supply chain is stronger as a result.

However, thanks to the consolidation of big tier one suppliers and the surge in demand across the industry, traditional OEMs may be left exposed and blind to problems in tier two and beyond. In order to avoid disruption, you need to work hard to monitor what’s going on, and make an effort to get to know what’s happening beyond the relationship. As the great financial crisis proved, merely relying on credit rating will not provide a full picture of supply chain risk.

As well as monitoring quality, delivery times and response rates as the usual early-indicators of distress, we often advise our clients to take other indicators into account. They need to be sensitive to the relevant parties but could, for example, monitor LinkedIn and other social media to ensure the key personnel and positions are stable. And looking back to your rights – contractual rights to the provision of financial information – may assist with monitoring and provide early warning of financial problems that threaten supply stability.

How might ‘generation rent’ affect me?

Just like disruptive technology, ‘generation rent’ is set to have a significant impact on the industry. The trend towards renting, as opposed to buying, has already impacted property and telecoms industries, and we think the way people approach vehicle ownership will also shift in the future. Rather than purchasing a vehicle, we may see people buying journeys, enabling them to take a camper van down to the beach for the weekend, a smart car to nip in to the city and a hatchback to the supermarket.

Vehicles are currently used for around 5% of their potential life. A new model of car ownership, which sees vehicles being used for 50% of their life, could leave us with a complete oversupply of vehicles. The positive flipside is that there could be growth in the parts market, with your average vehicle treated more like a racing car, swapping parts in and out as necessary.

Our tip to manage this issue is to look for the evolving players who may become key customers. If ownership changes, who will own the fleets? Will they become the equals of OEMs? Or will it be the emerging, consolidated parts groups?

How can I get a holistic view of potential risks?

The problems of the past are not necessarily going to be the problems of the future. Broader, more creative thinking is required from supply chain managers and we believe that businesses need to reconfigure how they look at risk internally to get a holistic view of potential issues.

In this period of disruption, scanning the horizon is a bigger job than ever, so it’s important to get a wide range of viewpoints. Have you got the right people on your supply risk committee? Are you getting innovative thinking from wider inputs, such as technologists, lawyers and insurers? Getting the right team, and more than one view, is crucial.

It is certainly a time of change for the automotive industry and as ever, everyone within the supply chain will need to adapt and innovate to continue to thrive. Looking back at how things have been done before is unlikely to suffice – all eyes should be on the road ahead.

Stuart Young leads the automotive group at international law firm Gowling WLG, formerly Wragge Lawrence Graham & Co. Julian Pallett is head of Gowling WLG’s restructuring and insolvency team.

This article may contain information of general interest about current legal issues, but does not give legal advice.

Tagged with: Digitalisation, Govt Policy/regulation, Risk, SCM, Tier Suppliers