The silver lining with our forced Coronavirus (COVID-19) automotive production pause is it provides us a rare respite from the buzz of daily operations to reflect on the risks associated with how our companies create value. We’ll look back on this period in history as a turning point for leaders – those who reacted to supplier risk, and those who acted to prevent it. Stages of rapid change during volatile economic times require predictive information so we can take swift action to win in the future, which is why proactively monitoring your suppliers ensures your organization will survive and prevail.
The utilization of proactive risk management performance metrics in the automotive supply chain is lacking. Supplier scorecards aren’t balanced enough and basically support reactive decision making. Yes, select OEMs and Tier I suppliers do equip themselves with management scorecards that can identify some trends in advance. They’re often referred to as dashboards, reviews and audits, and they allow managers to view the progress of their supply chains according to a collection of performance indicators, and they can show some early warning signs if suppliers are under-performing; however, they fall short on having systems with event-based alerts that let them know when their supply chains are at risk. Until that happens, managers won’t take appropriate and well-managed risks (e.g., they’ll source to low-cost regions to meet their cost savings goals and not stay within an optimal range on the risk management side), which produces consequences that are glaringly apparent with recent COVID-19 originated events.
Most manufacturers have developed and monitor a set of performance metrics to maintain a risk profile for their supply chains. They do so by using an assortment of tools and techniques such as: initial supplier evaluations, QS audits, industry benchmarking, supplier questionnaires, etc. The majority of manufacturers also use supplier risk rankings, similar to credit scores used in the financial industry, to measure suppliers on stability, contingency planning, and on-target delivery performance. While most manufacturers track this type of performance through supplier scorecards to monitor leading indicators that impact risk, few have an ongoing risk-review process to ensure that they keep their risk profile within an optimal range of economic impact.
In general, supply chain professionals aren’t compensated or incentivized in their day-to-day job to look at and evaluate the risks within an optimal range of economic impact. Such situations inevitably force managers to compromise on risk issues as they focus on achieving cost efficiency. Further, major black swan events like the Japan earthquake and tsunami of 2011, tend to warrant lagging supplier risk management tools useless. During times of rapid change more agile tools that can flex information resources – software and people – on demand are needed.
Automotive leaders looking to mitigate supplier disruption should take the following actions in the days ahead to not only manage through, but also position their companies to thrive during this downturn and beyond.
Automotive Supplier Risk Management Actions
Action 1: Operationalize Value-Driven Metrics
Value is always important, even more so in a recession. Use the below value formula to help you identify early cracks in suppliers’ value proposition that could lead to supply risk:
Value = Performance (Quality, Service, and Flexibility)/Cost
- Quality =
- Product Reliability, Product Durability, Conformance to Specifications, Design Quality, Company Reputation
- Service =
- Pre-Sale Customer Service, Product Support, Procurement Lead-time, New Product Development Time, New Product Introduction Time, Manufacturing Lead Time, Delivery Speed
- Flexibility =
- Delivery Dependability/Reliability, Delivery Flexibility, Volume Flexibility, Mix Flexibility, Changeover Flexibility, Modification Flexibility
- Cost =
- Low Production Cost, Competitive Pricing
Action 2: Proactively Monitor Supplier Health
Automotive leaders need to set up scalable systems and processes for cost-effectively measuring a supplier’s ongoing financial and delivery risk. As global manufacturing operations restart, prior delivery metrics can’t be taken for granted. Partner more closely with suppliers to better understand realistic expectations while tracking target versus actual standard lead times and part availability. Critical financial metrics and tools for proactively measuring a supplier’s risk include: Current Ratio, Quick Ratio, Inventory Turnover Ratio, Days Sales of Inventory Ratio, Altman Z-Score, Current Assets/Liabilities, Long Term Assets, Balance Sheet, Income Statement, and Cash Flow Statement.
Action 3: Measure Risk Across Sub-Tier Supply Base
It’s often not your Tier I suppliers but your sub-tier suppliers that are the source of supply disruptions. The most successful manufacturers measure their sub-tier suppliers. These metrics often begin with a detailed Plan for Every Part (PFEP) for all Tier I parts, including tooling and gauges.
In complex assemblies like headlamps, use the bill of materials (BOM) and focus on the most strategic materials. Meaning, start with your top sales generators and work your way down to their parts suppliers, and their suppliers, ideally, all the way down to the raw materials level. You should go down as many tiers as possible because there may be at-risk suppliers the buying firm isn’t aware of. The map should also include information about which activities a primary site performs, the alternative sites the supplier has that could produce the same parts, and how long it would take the supplier to begin shipping from another site.
All of this should be done by partnering closely with your Tier Is to map and measure your Tier II supply base; if positioned properly, you can “add value” not “micromanage” your Tier Is by helping them de-risk their businesses, in addition to yours.
Action 4: Engage a Scalable Supply Chain Risk Management Partner
During an economic downturn, the amount of people required to manage can spike periodically depending on the day, but hiring freezes limit new employee onboarding. The most successful manufacturers in the 2008 Great Recession proactively engaged technology enabled managed services firms to support their supply chain risk management efforts. These firms should have experienced automotive professionals on staff with the ability to add people to support you as needed. A managed services firm can act as the “ignition button” you can push for added resources to respond to changing market conditions faster than your competitors. Leading OEMs and tier suppliers are incorporating managed services firms into their operations to remotely monitor supplier risk via cloud software and execute supplier plant audits and continuous improvement initiatives on site.
Act to Prevent Supplier Risk
The measurement of supplier risk doesn’t necessitate a new or unique set of performance measures; however, if the reward system only compensates those who achieve their objectives regardless of due attention to risks, then managers will strive to achieve objectives at the cost of disproportionate risks. During years of record volumes, managing risks in the supply chain has been perceived as something that contradicts the process of achieving company objectives. This tradeoff mindset led to the most appropriate strategy not being adopted because of factors such as performance metrics.
Today, practical applications of predictive supplier risk management technologies like artificial intelligence (AI) are accelerating the analysis of supply base data while predicting supplier failures before they occur. Act to track the right metrics across your tiered supply base to enable proactive supplier risk management. Your suppliers’ success is your success, so partner more closely with your suppliers during these difficult times to strengthen your extended enterprise.