The automotive supply chain has changed rapidly over the past few years and its digital transformation has only accelerated as economic pressures from outside the industry spur modernization. Platforms and joint ventures are changing production models. Car ownership is shifting more and more from individuals to fleets in developed countries. Power sources are shifting to more sustainable technologies. And all of these trends are reacting to the global impact of COVID-19.
We talked with two of our experts about new and persistent challenges faced in the automotive vertical. We also discussed the evolution of parts procurement and streamlined inventories — the new normal of Just in Time (JIT) and digital logistics platforms which are helping meet these challenges head on.
Lars Kastrup, the global head of TradeLens sales at Maersk, has watched carmakers adapt to new shipping and logistics models for over two decades. John Andrew Carmichael is global head of automotive at A.P. Moller-Maersk, who has worked with customers at all levels of the supply chain.
What trends has there been in the global automotive industry in recent years compared to now?
John Andrew Carmichael: It's a very global supply chain. Cars are sold on pretty much every continent of the world except Antarctica and they have a pretty broad production footprint. So, the challenges the auto industry faces include running a global supply chain with a very complex web of suppliers and production locations, but also a very fragmented supply chain.
This increasing complexity, the increasing number of suppliers and the fragmentation of their supplier base, is what drives a lot of the past and current challenges for automotive companies.
Lars Kastrup: Knowing where the goods are, knowing as soon as possible if something goes wrong, and having the time to make contingency plans and take corrective measures, these are issues that the industry has been struggling with for quite a while.
When the global supply chain and logistics industry get questions from the automotive industry, it's typically; “Where is my product?” or “Where is my container?” There is a constant concern about the location and status of the goods or parts needed for their factories where we hear, “Has my document been uploaded? Has my document been changed? Where is it in the flow?” and so forth.
The JIT principle is something the auto industry has been working toward to answer these questions — and it's something Maersk has been working with the auto industry on for a long time now. Actually, the first long-term contract that this company had was with Ford, all the way back in 1928. So, there's been a long understanding of what drives the industry.
The challenge we are tackling now is to provide a single, reliable version of information throughout the tiered automotive supply chain. One of the greatest pain-points the automotive sector has is the lack of visibility. The technology is here and that is what we are addressing — providing consolidated data throughout the supply chain.
What are some of the implications of not knowing where goods are in a supply chain?
John Andrew Carmichael: The auto industry focuses on having the right part at the right time, ready for the assembly line. When that fails, the situation starts getting critical. The costs of a stopped production line can be in the thousands of dollars for every vehicle the manufacturer does not produce — and if you are producing hundreds of vehicles per day, this can be a massive cost.
There's a lot of focus on ensuring that automakers know what parts are in transit, when they are arriving, and whether or not those parts will be at the production facility on time. So, the data visibility of every parts flow is a critical aspect of the supply chain that carmakers focus on. That's this JIT concept mentioned earlier: How do we do this with the least amount of inventory possible without jeopardizing our production?
The costs involved with holding inventory in the auto industry are significant, and supply chains must be kept as lean as possible.
What is the impact of tiered suppliers holding more inventory, and where does the JIT model fit in?
John Andrew Carmichael: We have seen tiered suppliers hold more inventory than they potentially would prefer, to try and ensure that they don't cause a production stoppage, because of the risks and the penalties that a stoppage can incur. The JIT supply chains are not only for the automaker, but also for the suppliers. It’s about how they manage their inventory and the data visibility that they need as well.
Lars Kastrup: All tiers of suppliers are playing a key role in the overall supply chain for original equipment manufacturers and that can make it even more complicated. These suppliers are typically companies that are doing business with numerous OEMs so if you’re one of these suppliers, you need to connect to multiple supply chains at once. That's where we believe that digitization and compiling data in one place is really driving efficiencies in terms of data visibility and how you build your inventory across the supplier tiers. There’s a huge opportunity here to really drive digitization and get manual document flows into a digital format. It can really take out cost inefficiencies in the system.
Can you expand on these opportunities for digitization and its effect on the automotive vertical?
Lars Kastrup: Sure. If you take a GM or a BMW, for example, a lot of the orders they send, are repetitive orders. Plus, it can be GM-to-GM or BMW-to-BMW. You have within those corporations a lot of manual work being done on physical documents exclusively for these intra-company shipments. This should be a pretty easy step forward in terms of digitalization, given that the risk is relatively small.
On the data visibility side of things, what really happens today — because data is not available on one platform in many cases, and is not instant, and is not delivered in a proactive way — is that many receiving factories can be caught unprepared. They'll have, say, a ship that comes in on a Tuesday, and then Wednesday they figure out, “Hey! The goods are not on the ship as anticipated.”
It's important that the data, the visibility, and the changes to a transport plan are known as quickly as possible. That's where data being instant matters. So, if there is a change to the transport plan at the origin, which can easily be known two or three weeks before it arrives at the destination, then the receiver can start taking contingency measures immediately once that discrepancy is known. They can get parts on a truck, or delivered through a different method, like air freight, to ensure that production does not stop.
It's about proactive information, getting it as early as possible. That's the key for the automotive industry. You are not interested in the 95 percent of situations where everything goes according to plan; you care about the five percent that doesn't. That's where TradeLens can help, with greater data visibility, directly from each source, as instant as possible.
John Andrew Carmichael: I think, also we have seen cases where, due to a lack of immediate information, decisions are made to protect the integrity of the supply chain which come at a much higher cost than they should have.
For example, having the information one or two days late might trigger the decision to do air freight for parts — which is more expensive — and that could have been avoided by having this information sooner and being able to choose an alternative transport mode like rail. Part of the importance of immediate information is to make the best possible decision to keep supply chain costs running as low as possible.
What challenges are supply chains facing right now, and how is the industry moving forward?
John Andrew Carmichael: A lot of companies shut down their assembly lines due to the COVID-19 crisis anywhere from a week to a few weeks or more in many countries. The impact of shutting down supply chains has been immediate, occurring both for employee safety and diminished demand, which is expected to be down 25 percent globally, lasting years.
However, I think the biggest up-and-coming trend that will continue, even despite the crisis, is the electric vehicle transition. Forecasts prior to COVID-19 were expecting that by 2030 up to 60 percent of vehicles would be either electric or plug-in hybrids or some version of hybrid vehicles. All of those require lithium-ion batteries, which is the best technology currently available for electric vehicles.
I think that's one of the biggest impacts to the supply chain within the next few years: how do you incorporate a battery supply chain which has all of these special handling characteristics? It also has traceability aspects, and quality aspects, that need to be maintained, across the supply chain.
Lars Kastrup: I think one of the things that you need to be able to cope with is peaks and valleys. As part of an automotive supply chain, you need to be able to be flexible. Especially now it’s all about being flexible, being there for your customers. And it's our job with TradeLens to help firms accommodate those peaks and valleys.
I think what's coming in the auto industry, as John outlined, is really something that supports these digital initiatives as seen in the industry right now. It's definitely something that's high on the agenda for automotive producers. So, I would say, the industry’s future plans, combined with what's happening right now with the pandemic, are both really accelerators for the digital transformation.
What current trends will continue, and what innovations are coming with digitization?
John Andrew Carmichael: I think the digitization journey and current crisis has elevated even further the need for supply chains to run digitally as much as possible and will only accelerate into a fully digital supply chain. I think visibility and document flows will be critical for that. We are already seeing interest, but I think it will turn into action, at a much quicker pace than it has in the past.
I think a lot of customers will be focusing on resiliency over the coming years. “How do I ensure that our supply chain is resilient?” The digital aspect of that supply chain will be critical to ensure resiliency in the post-COVID world.
Lars Kastrup: First of all, it's a journey. I've seen more happening in the last five years than I have in the first 20 years of my career. By building the TradeLens ecosystem, and connecting via a platform with our customers, we are taking a quantum leap in how to digitize the industry. I think that's the foundation — and then as our products mature, the collaboration and the level of collaboration between partners in the supply industry is what's really going to drive the digital transformation.
When we have the data flowing, once we have full visibility, once we have digitized all the manual documentation processes that we have today, the next step is to figure out what additional services a platform like TradeLens can provide.
There is now a foundation, getting the data in one place, providing data visibility and digitizing these documents. With that accomplished, in collaboration with the OEMs and the complexity of tiered suppliers, we can figure out based on all this data how to take it to the next level. That's what I think is really interesting about where we are now.