Transforming the automotive supply chain for the 21st century

Transforming the automotive supply chain for the 21st century

Geo-political tensions and digital transformation–which continue to reshape production and assembly processes across various industries–have exposed vulnerabilities in the traditional “just-in-time” (JIT) supply-chain model in the last few years. Pioneered in Japan and popularized by Toyota in the 1970s, the JIT method aims to avoid excess inventory by ordering products and raw materials only when needed to minimize costs and maximize efficiency. Manufacturers of all products, from automobiles and consumer electronics, are now realizing the fragility of the JIT model.

When the covid-19 pandemic hit in early 2020, manufacturers of automobiles, electronics, and other tech products expected sales to decrease and so they reduced semiconductor orders. The industry is still reeling two years later from that decision. The reduction in semiconductor orders led to a global shortage, which caused some manufacturers to stop production. In the automotive industry, for example, US car inventory dropped to below 1 million units in the US in the second half of 2021–roughly one-third of the pre-pandemic level–according to automotive industry services provider Cox Automotive.

For the JIT model to work, the quality and supply of raw materials, the production of goods, and the customer demand for them must remain in alignment. The impact on the supply chains that cross the globe if any of the links breaks, stalls or falls out of tune can be felt immediately. Companies that fail to fulfill orders on time can lose not only efficiency but also brand credibility and market share.

Companies are looking for new ways to manage their supply chains that allow for greater flexibility and transparency. Nissan and JIT pioneer Toyota, both in the automotive sector, are increasing their chip inventory, while other companies like Tesla and Volkswagen are trying to secure their rare metals supplies. Companies can also benefit from new technologies like 5G, Internet of Things (IoT), and business applications that allow them to respond to unexpected circumstances and avoid disruption.

Disruption and transformation

The transformation of the automotive supply chain is taking place in an increasingly-digitized world, beset with environmental concerns. As climate change concerns intensify, and governments across the world compel industries to switch to more environmentally-friendly practices, the automotive industry and its supply chain networks are undergoing a profound shift. Automotive manufacturers are shifting away from large-scale manufacturing and internal combustion engines to zero-emission, low-carbon electric or autonomous vehicles that are primarily powered by electric or hydrogen. For example, autonomous vehicles are considered “servers on wheels” and rely on wiring, programming, and laser technology rather than combustion engines. Japan’s Sony and China’s Baidu have announced plans to develop their own electric vehicles (EVs), fueling a heated race in the EV market.

According to the International Energy Agency, global sales of electric cars hit 6.6 million in 2021, making up 8.6% of all new car sales: more than double the market share from 2020, and up from a mere 0. 01% in 2010. Business insights provider IHS Markit estimates the number of EV models in the US will increase 10 times over, from 26 in 2021 to 276 in 2030. At the same time, charging stations alone will need to increase from 850,000 in 2021 to nearly 12 million in 2030. Manufacturers must create a new ecosystem that supplies the parts and accessories needed for successful manufacturing and operation of battery-powered vehicles to meet increasing demand. According to research from Transport Intelligence, “the supply chain for the entire powertrain will be transformed and the types of components, the logistics processes employed to move them, the markets of origin and destination as well as the tiered character of automotive supply chains will change.” This has enormous implications for how the automotive supply chain is ordered.

All things in the automotive industry, from automobiles to factories, are becoming more connected thanks to technologies like IoT, 5G and robotics. In recent months, Nissan has unveiled its “Intelligent Factory” initiative in its Tochigi plant in the north of Tokyo, which employs AI, IoT, and robotics to manufacture next-generation vehicles in a zero-emission environment. And Volkswagen has deployed a private 5G wireless network at its headquarter plant in Wolfsburg, Germany, to trial new smart factory use cases.

As manufacturing becomes more digitalized, so does consumer behavior. Direct-to-consumer sales models are being introduced by automotive brands. This allows customers to do more of the sales process via digital channels. While new players may be embracing an online-only sales model, incumbents are adopting digital initiatives in partnership and with dealers. This allows fulfillment, after sales and services to still be provided through a dealer. In 2020, 69% of dealers in the US added at least one digital step to their sales process. And 75% of dealers agreed that they would not be able to survive long term without moving more of the sales process online. To ensure accurate inventory and availability, both models require greater visibility into their supply chains.

How manufacturers are responding

Ever more connected consumers, factories, automobiles, and supply chains generate a wealth of data. This data can be used to help manufacturers reduce business risk, increase efficiencies, and give customers more precise timelines. Predictive analytics, for instance, can help manufacturers answer “What if?” questions, and prevent potential supply chain disruptions. Digital traceability allows companies to track products and goods as they move through the value chain. This provides them with precise information about the origin of inputs, supplier sources, and conversion processes. Mohammed Rafee Tarafdar (SVP and CTO at Infosys) says that customers want real-time visibility about when their automobiles will arrive and what status they are in service.

Manufacturers are using a variety technology solutions, including business applications–suites that support business functions. The right business applications, when paired with cloud services, can give organizations greater access and control over cutting-edge technologies that can be managed at scale. This will allow them to address the needs for visibility, security, and analytics. “There is a need for technology that can scale with the demand as everything becomes more connected and autonomous.” Tarafdar says cloud and business applications play a crucial role in this. He also adds that manufacturers are using both public and private cloud to create hybrid clouds. This is possible with the help of private 5G networks.

The road ahead: Agility and resiliency

As manufacturers modernize the supply chain with the hope of making it more agile and resilient, Tarafdar says that manufacturers will start moving toward a sentient supply chain; that is, a supply chain that can sense, process, and respond in real time. Sentience can be applied to a few areas of the supply chain, such as planning, insight, traceability and asset and inventory management. Sentient supply chains can, for example, recognize when inventory needs to move between factories and take appropriate actions.

“Some of these capabilities aren’t fully baked into the platforms that are currently available,” says Tarafdar, “But investments in cloud, AI, and technology that models the entire supply chain network into a graph, essentially enables us to create a digital brain that can make informed decisions or recommendations.”

It’s hard to tell when such digital intelligence will be fully formed. Experts agree that the next decade could be a significant time for disruption in the global automotive industry. As the lines between tech companies and auto companies blur, it’s hard to predict when such digital intelligence will be fully formed. The development of electric and autonomous vehicles will bring new players to the automotive industry and change its supply chain practices. The automotive supply chain will face challenges due to globalization, disruptive technologies and shifting consumer demands. Maximizing supply chain visibility is crucial to improve production efficiency and speed time-to-market. Automakers will need to adapt to new technologies such as cloud, AI, machine learning, data analytics, and IoT in order to ensure that their suppliers are transparent, agile, resilient to global volatilities, and that they can make use of new technologies.

This content was produced by Insights, the custom content arm of MIT Technology Review. It was not written by the editorial staff of MIT Technology Review.

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