The COVID-19 pandemic has driven humanity and the global economy into a crisis that perhaps has not been seen since The Great Depression. The pandemic caused a high infection rate and exhausted the health system across the globe. Therefore, most governments were compelled to enforce nationwide lockdowns. These lockdowns affected every sphere of business, be it production, supply chain, transport, or workforce. They have disrupted not only communication but also the value chains.
The automotive industry has a lion’s share in the business world of the US. It has also failed to escape the brutal impact of the Pandemic. It has made the OEMs and the suppliers consider their supply chain model once again. To cope with the crisis, everything needs attention, from the sourcing of raw materials and manufacturing process to the finishing touch and delivery of the end products. The biggest three US-based automakers and their Asian and European counterparts have already realized the severity of the crisis and its impacts on automotive industry sourcing.
Let’s have a look at how the giant companies have been affected across the world:
- Ford, FCA, and GM suspended manufacturing in multiple areas of the US and opted for medical device production
- Daimler suspended European production due to its exhausted supply lines
- Toyota paused its production in Europe
- Honda has closed four US vehicle plants due to the assumed fall of the market
The outbreak of the pandemic has caused a reduction of 7-10% in new cars sales. As an outcome, the annual volume is also likely to be decreased by 20%. These statistics are enough to shake the suppliers off. Suppliers are struggling against multiple issues, such as:
- Tight Margins
- Dependence on OEM production
- Market fall brought by the Pandemic
How Should Automotive Industry Address These Issues?
As the Pandemic has changed the market trends, automotive industry sourcing should be remodelled to adapt to the changes and address the challenges. Listed below are some facts that may help automotive supply chains restore themselves:
Risk Management or Mitigation Plan
Many automotive businesses have already implemented a risk management plan. Business continuity is the first thing that needs to be considered while mapping out a risk management or mitigation plan. This strategic plan must diversify the supply chains from a geographic perspective. It should ensure the safety of multi-sourced key commodities to reduce dependency on a single supplier. Moreover, the plan must restore the inventory systems to stop supply chain disruption.
Cash Flow Protection
Suppliers need an effective plan for cash management. The plan should address the critical issues, such as the collection of aged receivables, extending payables to conserve cash, etc. Also, the suppliers need to focus on the Coronavirus Aid, Relief, and Economic Security Act.
Special Attention to Supply Network
Tier 1 suppliers should improve the communication and discussions with major Tier 2 suppliers. In this context, it is important to note that the health and operations of Tier 2 suppliers can influence Tier 1 suppliers’ order fulfilment performance. To ensure the overall progress of automotive industry sourcing, tier 1 and 2 suppliers need to work together systematically.
Bottom Line
Along with the facts discussed above, the automotive businesses need new financial and operational plans to address the current crisis posed by the COVID-19 pandemic.