Since the COVID-19 pandemic, inflation, product shortages and supply chain disruptions have been a major source of concern for many industries, including the automotive industry. When you factor in geopolitical tensions and new technologies, it gets even more complicated.
Amy Broglin-Peterson, a faculty member in Michigan State University’s No. 1-ranked Department of Supply Chain Management, is an expert in international logistics and transportation, warehousing and distribution, and purchasing and sourcing. She has done consulting work for industries including manufacturing, automotive and electric vehicles.
Broglin-Peterson recently spoke at a Crain’s Detroit Business panel called “Bringing the Supply Chain Home,” which addressed how business leaders can mitigate shortages and delays. Here, she dives deeper into tactics to create more effective supply chains, as well as pitfalls businesses should avoid.
What are some common supply chain issues in the auto industry?
The automotive industry has operated on a just-in-time, or JIT, inventory management model for years, mainly due to the sheer volume and cash value of car parts. Auto companies want to minimize how much time they’re sitting on piles of inventory, so ownership transfers from the sellers — the companies who make the parts — to the buyers — the auto manufacturers — at the very last minute. It’s led to a very complex system in which you have parts arriving hours, or even minutes, before they’re used on an assembly line. The problem with that scenario is you’ve predicated this whole model on the fact and expectation that your supply chain is going to function as you’ve designed. When you see those models start to break and fall apart, the repercussions are huge.
What are some repercussions that could result from the automotive industry’s current supply chain model?
There are many downstream repercussions, but those most significant include various cost factors. There are 30,000 parts in the average car. If you’re missing one or a few of those parts, you can't build a car. If you're not producing vehicles, which is what drives your revenue, you're eating into your profitability. Plus, you suddenly have inventory piling up that you don’t have space for. And because the parts aren’t there, workers can’t do their jobs, but still need to get paid. You might still be able to produce without the right part, but then you end up making cars without certain components and retrofitting them later, which means incurring more labor costs than necessary.
What is reshoring and why is it important for the auto industry, as well as other fields?
Reshoring is bringing supply and/or production into the North American market from sources and locations that are abroad. Most of the time, when people talk about reshoring, they’re talking about taking production and supply out of China or other Asian regions and relocating to more optimal regional locations. China is a key area of focus right now because of its involvement in global geopolitical issues and the supply chain disruptions associated with shipping goods from Asia.
What are the advantages of reshoring?
Prior to the COVID-19 pandemic, you were looking at anywhere from 25 to 35 days to get product from Asia to North America. When the pandemic hit, with all the congestion, shutdowns and other issues, it took anywhere from three to six months, sometimes more, to receive the goods that you ordered. Companies were losing customers, revenue and shelf space. When you reshore, ideally, you receive your goods much quicker and the transportation cost is a lot less.
Another huge consideration factor is carrying costs. When inventory is sitting on a ship for six months, it can’t be sold. With reshoring, you avoid that possibility. You don’t have cash tied up in inventory and, in theory, can have a better chance of selling parts or products and generating revenue.
What is the difference between reshoring and localization?
Reshoring and localization are generally similar. Localization involves trying to locate supply close to where you’re producing — close to where your markets are — while reshoring involves moving operations from one country to another. A grocery store in Michigan sourcing food from Michigan farmers is an example of localization. An automotive company moving its parts production from China to the U.S. is an example of reshoring.
What are some strategies that companies can put in place to reduce product and part shortages?
One of the most important strategies is forming partnerships with critical material suppliers and transportation companies. In the past, organizations would change who they worked with for services such as transportation, warehousing and sourcing for pennies on the dollar based on the financials they needed to hit.
When firms form longer-term partnerships with other companies in their supply chain, they have an advantage to secure capacity and a deeper knowledge of how key partner processes work, which is especially useful when there are capacity and congestion issues. There is such a thing as customer of choice. I think a lot of companies learn that the hard way — after many years of switching suppliers, transportation services and other key partners — they aren’t able to get help or intel on their supply chain when they need it most.
How can companies keep up with technological advancements in the supply chain?
Unfortunately, right now, many processes in the supply chain are highly manual and fragmented so there’s not a lot of communication and data sharing. Another problem is that while new and promising technologies exist, many companies haven't put in the time, effort and resources to build their basic infrastructure to support these additional layers of technology.
What is the one thing companies should know when it comes to creating and maintaining efficient, cost-effective supply chains?
Many companies do a surprisingly poor job of ensuring that basic data about what they’re producing is captured and kept relevant and updated. That has huge repercussions downstream in a supply chain.
For instance, if you're manufacturing a pencil, you should have the basic information about the pencil captured in your system: the required materials to make and ship it, as well as weights and dimensions. You should build out product packaging in units that support how you want to ship your product. All of these things should be captured and updated regularly through a documented process.
When these processes are not in place, you lose out on the strategic and financial advantage of filling up your ocean transport containers with the maximum load allowed and consolidating freight options. Without basic weights and dimensions, you can’t ensure the most optimized design for your new product warehouse — not to mention the risk of running into compliance issues with misreported weights.
When I do consulting, I also suggest that companies make sure their current systems are functioning properly before they go out and invest in new technologies because, no matter how shiny a new technological solution is, it won’t do a company any good if it’s not being fed useful data.