Supply chain planning
Typically, the world experiences waves of economic nationalism every three decades but these are often limited to one region each time. Today we’re experiencing a global wave of economic disruption across multiple regions simultaneously. In reaction, automotive manufacturers are having to increase the flexibility and agility of their supply chains – increasing pressure on suppliers and logistics partners to provide more cost-efficiency.
Llamasoft’s recent survey on global manufacturing supply chains reveals that more than half of global manufacturers will change their supply chains in response to economic nationalism. In the US specifically, a large number of automotive parts are sourced from other regions and significant manufacturing of American brands was also undertaken abroad, specifically in the Latin America and Asia Pacific regions.
Increasing tariffs mean that model may become less attractive. As a result, US automotive manufacturers need to assess whether to move manufacturing back into the local market or into alternative markets where the tariffs don’t apply.
Our survey found that 86% of North American manufacturers already use supply chain design software. Advances in supply chain technology and specifically supply chain modelling are aiding automotive manufacturers by letting them build and test different supply chain scenarios and prepare for different eventualities.
Incentives and investments
Automotive manufacturers have historically opted to move manufacturing facilities abroad to access cheaper labour and benefit from the incentives such countries offer to those bringing their business to the region. Recently, increased tariffs have begun to undermine the value of these benefits, however.
Typically it takes 20-30 years for manufacturers to see a return on investment in a facility, so they need to think long-term when deciding where to establish them. Of the US supply chain decision-makers responding to the survey, 61% said they were likely to see operational costs increase, citing economic nationalism as the cause. This is higher than both the UK (59%) and Germany (53%), suggesting the US automotive sector could be hit harder, despite the UK’s withdrawal from the EU and other forms of economic nationalism evident in Europe.
Yet North America is most prepared for economic disruption, with 69% of supply chain decision-makers in the survey stating that they felt prepared for its impact. With supply chain design technology, automotive manufacturers can explore all the possible options. For example, rather than close down an overseas facility, they could explore the feasibility of simply downsizing operations, increasing their dependence on local manufacturing. Of course, this would have significant impact on internal costs, with factors like labour being more expensive in the local market.
Shift in supply
There could also be a shift in supply, with tariffs pushing up the costs and leading manufacturers to seek local suppliers. Identifying possible scenarios and outcomes is becoming increasingly important in preparing for these challenges. The most important thing is knowing what the alternatives are and making sure supply chains are flexible and agile.
Automotive manufacturers operating on tight margins will be forced to get creative to stop their margins from shrinking, given economic disruption. Moving manufacturing facilities and changing suppliers won’t entirely mitigate rising costs but changing transport methods could. Solutions like Tesla’s electric truck – which promises to bring the cost of road transport down towards that of rail – will have to be given serious consideration.
China, on the other hand, will probably be dealing with a lack of demand from the tariff generating countries, so instead of focusing on the US, for example, it will focus on additional markets. We can expect the automotive market to become increasingly competitive around the world, given this new pressure to explore.
For UK vehicle manufacturers, with the new tariffs that may be levied in the EU, competing will be a significant challenge, both from a labour perspective and from an export position. Costs will be under pressure and companies will need to be creative in making adjustments. Car models are being assigned to different manufacturing facilities in the region, while talent and skills are being repositioned in the global landscape to help mitigate any competitive glitches. Identifying the margin to serve each different type of model and consumer region will be fundamental, and doing so fast will be crucial. Buffers within just-in-time (JIT) production systems are among those areas that could be re-evaluated, given the complexities of bringing spare parts across the EU in tight timeframes. Supplier selection and alignment with JIT operations will pose a considerable challenge.
This may be good news for the end consumer, but it will make things tougher for the automotive business. The shift will be felt across the supply chain. Automotive manufacturers are dependent on suppliers and 3PLs, and the increased costs will trickle down to them and through their own supply chains. Supply chain modelling, testing and planning for every potential scenario is set to become increasingly important for players at every stage of the automotive supply chain, therefore.
Carlos Valderrama is senior vice-president of global customer success at software provider Llamasoft