Ruminations on Automotive Supply Chains
Recently, there’s been much coverage in the media on strained supply chains in the automotive industry. Whether you’re a true motorhead or just a fan, you may have seen that Ferrari is looking for a new Chief Executive. My application is in. No word back, yet.
I’m a bit of a car nut and have been since childhood.
I’ve heard the leasing industry was built for people like me, since I often keep cars three years or less. I love both the experience of buying something new and the experience of different types of cars and trucks that are available. As quality has gone up and the abundance of choices make it appetizing for someone like myself to (go ahead and say it) “waste” money on transportation as something more than an appliance, I have enjoyed myself with the infinite variety.
With that in mind, I knew I had to get a Ford Bronco.
The Bronco is iconic. It is quintessentially American, like Jeep. Obviously, I am not the only person to feel this—as reservation books opened, Ford has amassed almost 200,000 pre-orders for the new Bronco.
That’s a pretty good first year of production.
Ford’s marketing department has also done a masterful job in whetting the appetite for pre-orders and making the launch a draw for thousands of potential buyers.
Well, in December, I received this email:
As a result of the unprecedented effects of the COVID 19 pandemic on our suppliers, we have updated timing news to share with you.
While we originally communicated that your Ford Dealer would begin reaching out in December 2020 to schedule an order consultation and place your order, this process will now begin in mid-January 2021 and extend through mid-March. As a reminder, your order cannot be placed online; however, you are encouraged to spec your Bronco using the Ford.com Build & Price tool ahead of your dealer consultation and save a copy to help when you place your order.
Subsequently, Ford also clarified with their dealers that, due to supply chain problems –
- They could not even estimate a production date until mid-May 2021.
- If you wanted any of the so-called “popular” options, like a 2-door, or a bigger engine, you were going to be waiting longer.
- Dealers would likely be allocated one third to half of the number of orders they have already received for delivery in 2021.
- The remainder of orders would be converted to model year 2022. (Presumably at model year 2022 price uplifts?)
Well, my Bronco is ordered now but I have no idea when I’ll be able to get it, so I have moved on to other things. It is a refundable deposit anyway and maybe I will find something more interesting before I fully commit.
What I found interesting is there is clear supply-chain-disruption-blame placed on the pandemic itself.
Even though the timing from signature to ignition has been protracted, I’m still balancing enthusiasm with tempered expectations. As a CFO & COO, I also empathize with the auto makers, given the current state of strained supply chains that many industries are currently experiencing.
Anyone who has ever seen a bill of materials or parts explosion for a vehicle certainly is aware of the thousands of components, sub-assemblies, ever-more sophisticated electronics, and so forth, that go into today’s modern vehicles. Mind boggling what actually goes into what we often take for granted (take that car-as-appliance shoppers!)
Disruption for both auto makers and their extensive ecosystem of Tier 1s and Tier 2s is a considerable challenge.
Fact: the automotive industry wraps together some of the most globally complex supply chains in modern commerce.
Fact: vehicles are also many things. They’re not only systematized transportation machinery—they’re also recreational chambers, fortified shelters, computers, style statements, and, yes (begrudgingly), appliances.
Each of these aspects are heavily dependent on global fulfilment chains. Any exogenous shock to those chains, like COVID, can make it extremely hard to react and manage end-customer happiness.
Look no further than Honda (just a few weeks ago), and now Ford where supply chain disruptions are metastasizing. What’s more, it’s not even the tires or the large-scale fabricated metals but the tiniest parts, that are now creating the biggest delays.
Modern automakers don’t have it easy. There’s a cascading, cyclical, and potentially devastating impact when it comes to delays (for both auto company leadership and for the end customer).
For company leadership:
- From the topline—it’s going to slide back overall revenue expectations by a quarter or two;
- which then creates a ripple effect on long- or medium-term plans;
- and ultimately, capital-raising activity (like bond floats) which you’d need to invest in manufacturing capacity;
- followed by a profit-effect, where you’re seeking alternate means of supply or trying to find different suppliers;
- and dealing with the cost of re-tooling and replacing elements or parts in your manufacturing process because you had to onboard a new supplier—getting up to speed while still ensuring quality.
- The brand immediately takes a hit as customers—I—grumble about delayed orders;
- meanwhile, the consternation created by delayed gratification plants (rightly or wrongly) seeds of quality concerns;
- “is the carmaker cutting corners?” for instance—beyond missed expectations—safety factors now weigh heavily on the car-buying decision-maker;
- capped by thoughts of “do I cancel my order?”;
- taking you back to fewer sales, to earnings potential, to shareholder/analyst impact, share price, and the bottom-line of all the effects mentioned at the start of the “For company leadership” list.
So, without fully understanding the financial health of even one of your critical suppliers (as defined by your business (but I’d like to think anything which can impact demand fulfillment)) your business can suffer from myriad follow-on problems—detriment to the brand at-large, decreased working capital, and diminished safety nets necessary to buffer against continued delays.
All humor aside, one of the reasons why I love being a leader at RapidRatings is that we have a clear process (and platform to execute that process) for companies across a global supplier ecosystem—from large enterprises to privately held small businesses—to implement risk mitigation strategies that aid in brand protection, availability of working capital, and ultimately, earnings potential.
For the auto makers:
- I’d begin by mapping spend analysis to financial health and viability of your critical public—and importantly, privately-held—suppliers as part of your overall supplier risk strategy.
- Then I’d create risk profiles for the difference business lines, identifying and triaging which categories need to be addressed first—to build action plans in the near-, medium-, and long-terms—and move from a reactive state to a proactive (and predictive) state.
- After, I’d heavily collaborate with multiple internal departments like Procurement & Sourcing, Compliance, and even PR & Marketing to discuss the (now) foreseeable risks, where we can help suppliers, build stronger relationships, and ultimately protect the brand from potentialities that impact trust—and sales from signature to ignition.
By the way, this isn’t all bad news.
But preparing for future innovations and model changes—like remote car delivery—will also require greater trust between business partners, between businesses and clients, and advance warning up and downstream of supply chains. RapidRatings is already helping many companies in the automotive ecosystem. Request a demo to learn more.