It's no secret the automotive world has come a long way since Ford's Model T. Cars are now communicating with each other, driving, braking and parking themselves, and losing their traditional combustion engines in favor of batteries and hydrogen for power.
What were once thought to be fundamental car parts are now becoming rare. And with that change, traditional supply chain practices and relationships adjust, too.
Traditional supply chain relationships become blurred
Technology is changing at such a rapid rate that suppliers and original equipment manufacturers (OEMs) are often collaborating to innovate and stay ahead of the curve, enabling open communication and a flow of ideas between vendor and customer.
The level of interaction between OEMs and their Tier 1 supplier has increased significantly over the past two decades, according to a report by MForesight. In 1989, just under half of suppliers were contributing to part designs. In 2011, that figure was up to 70%.
“In the past, you could just buy a list of suppliers,” Joern Buss, partner in Oliver Wyman’s Global Automotive Practice, told Supply Chain Dive. “But when you get into the new technology areas, that's much more fragmented, and it's not always clear cut by industry.”
Supplier partnering changes the transactional nature of their relationship and blurs the lines between an OEM and its Tier 1 supplier.
“With confidence that their customers are engaged with them, suppliers become innovation partners, not just fillers of purchase orders,” the report stated.
This opens up the pipeline for a “Tier 0.5” supplier, Buss wrote in a company post.
Tier 0.5 suppliers work long-term with their customers, often jointly setting cost targets and sharing product developments. This blurred relationship, however, does raise questions about how to negotiate contracts with a supplier.
“It will be difficult to quantify that type of relationship,” Buss said. “Do we do joint development on this? How do we price the joint development? How do we incorporate third and fourth parties into these development prices?” Joint development can also create legal complications of which parties own the intellectual property arising from the development.
Perhaps this is a sticking point in negotiations, putting a thorn in the supplier-OEM relationship. Despite the increase in collaboration, relations between suppliers and OEMs haven’t improved significantly over the past decade. The Automotive OEM-Supplier Working Relations Index from Planning Perspectives (PPI) reveals Toyota and Honda are rated as having some of the best supplier relations among OEMs — however their ranking still falls into the “adequate” category.
This relationship should be a focus of improvement for OEMs. “Their supplier relations rating is highly correlated to the benefits the OEM receives from its suppliers — including new technology, lower pricing and best supplier support — all of which contribute to the OEM's operating profit and competitive strength,” PPI’s press release stated.
The Tier 0.5 model can work in the favor of both partners — suppliers build a close relationship with the OEM and secure a strong strategic partnership; OEMs get the benefit of keeping a close eye on their supplier and learning from the vendor.
Sourcing managers are buying electric car parts
Two areas in particular with a steep, ever-changing learning curve are electric cars and autonomous vehicles (AVs).
“All companies have now announced the next generation of electric cars, and with that it will also fundamentally change the entire supply chain as well as procurement in a very substantial way,” Marcell Vollmer, chief digital officer at SAP Ariba, told Supply Chain Dive.
As production of electric vehicles expands, OEMs will buy more electric powertrains and batteries, and fewer combustion engines that run on fuel. In fact, Volvo has pledged to create only hybrid or electric vehicles beginning in 2019.
“You have to have some people in house who are dangerous enough to talk knowledgeably about these topics — to educate the sourcing [manager], educate leadership on what to look for, what to do."
Partner in Oliver Wyman’s Global Automotive Practice
To make this transition, OEM purchasing managers face a few options: continue to work with the same suppliers in hopes the vendors will innovate and deliver, or find new suppliers specialized in manufacturing electric parts — or a combination of the two.
Suppliers “have all the capabilities to create the current components needed for internal combustion engines,” Steve Eppinger, professor of Management Science and Engineering Systems at MIT Sloan, told Supply Chain Dive. “How can they use those same capabilities to create the electric drive trains?”
Today, the majority of major car manufacturers have at least one electric vehicle in their lines. It’s no longer just about building an electric car, but making it better than previous versions — and better than its competitors.
We’re seeing “a lot of innovations now on how to really have a long-distance capability with the right batteries,” Vollmer said. “I think in the future, this might be the differentiator.” Vollmer added that using a battery that charges quickly may also give OEMs a leg up on the competition.
Automakers seek suppliers to assist with e-mobility
While electric vehicles are very much here and now, automakers see full automation as the future of car technology.
IHS Markit said sales of vehicles with autonomous technology will reach “significant volume” in 2021, with OEMs forecasted to sell 51,000 AVs. That figure will escalate dramatically — IHS Markit predicts 1 million AV sales globally in 2025, increasing exponentially to 33 million annual sales by 2040.
For automakers, the ultimate goal is “level five” as outlined in SAE International’s six levels of driving automation.
|SAE Level||Steering, Acceleration & Deceleration||Monitoring of Driving Environment||Fallback Performance|
|0: No Automation||Human Driver||Human Driver||Human Driver|
|1: Driver Assistance||Human Driver & System||Human Driver||Human Driver|
|2: Partial Automation||System||Human Driver||Human Driver|
|3: Conditional Automation||System||System||Human Driver|
|4: High Automation||System||System||System|
|5: Full Automation||System||System||System|
Source: SAE International
At this point, however, fully autonomous vehicles create more questions than answers. Do purchasing managers still need to buy parts for a steering wheel? Are gas and brake pedals necessary? What about a gear shift?
“You could even ask the question, ‘why do you need lights?’” Vollmer said. “Safety in the future will no longer be what you can see, feel and touch.”
Before futuristic, Jetsons-like, self-driving, light-less cars become the norm, automakers must first get regulators and consumers on board with autonomous features, working their way through driving automation levels 0-4.
Most new commercial vehicles fall into levels one and two. Automakers are installing autonomous, driver assistance technology in cars, such as park assist and cruise control — and they need the materials from their suppliers to help deliver these features.
“Tier 1 is doing more and more integration so they can deliver more complete systems, instead of just major components,” Eppinger said. “So what we're going to see is the OEMs are going to ask the Tier 1 suppliers to deliver the integrated systems for these new e-mobility challenges.”
How to close the knowledge gap
With OEM sourcing managers armed with the knowledge of evolving technologies, the challenge remains in how to stay ahead of the curve.
Emerging technologies can change so quickly that it’s difficult to keep up. By the time an OEM learns a new technology and how to implement it into its supply chain, the technology is already “old” by innovation standards.
At this point, fully autonomous vehicles create more questions than answers. Do purchasing managers still need to buy parts for a steering wheel? Are gas and brake pedals necessary? What about a gear shift?
Supply Chain Dive
Many car manufacturers have recognized the difficulty of learning and keeping pace with new technologies in house, and have started to partner with technology firms.
This circles back to the idea of collaboration across the supply chain. In the traditional sense where each component was somewhat siloed, those barriers are coming down as departments educate one another on the latest and greatest trends.
Buss said an automaker’s purchasing division must interact closely with the engineering side. The engineers may be able to provide insight into which suppliers are staying on the cutting edge of technology.
“You have to have some people in house who are dangerous enough to talk knowledgeably about these topics — to educate the sourcing [manager], educate leadership on what to look for, what to do,” he said.