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How can manufacturers in the automotive sector protect themselves against supply chain disruption?

There are many factors affecting the automotive sector at present, including Industry 4.0, changes in car ownership, self-drive vehicles, Brexit and the recently announced Automotive Sector Deal.

Up to three quarters of components for vehicles in the automotive industry are not produced by the original equipment manufacturer (OEM) itself, but delivered by the suppliers making up increasingly complex supply chains. Against the backdrop of disruptors in the sector, issues can arise at any stage in the supply chain, leading to a very vulnerable position and a failure in supply.

We are increasingly seeing OEMs and tier one suppliers adopting more complex supply chain structures, modelled on a combination of the concepts of just-in-time and just-in-sequence production. This is especially true with the advent of Industry 4.0, where automotive OEMs have generally been high adopters.

This approach can increase efficiency and improve the production process, but this can also put further pressure on supply chains. A failure or delayed delivery at any point can cause a knock-on trigger throughout the chain, leading to delay in the final product and potential claims for damages. OEMs are increasingly seeking to pass this risk through the supply chain, placing further pressure on suppliers to adopt new technologies and accept increasingly onerous contracts.

Suppliers should focus on contract negotiations and the terms of supply to avoid potential claims and issues. Depending what level of the supply chain they are at, they should also put in place robust terms with their own suppliers to back off any exposure.

Customers and tier one suppliers usually seek commitment to a specific delivery time. Suppliers may wish to negotiate, in that delivery times are estimates only – although customers are unlikely to accept this position. As an alternative, a supplier may wish to attempt to limit the damages available for late delivery to ensure that its exposure is quantifiable and restricted to direct losses only.

Automotive supply contracts usually contain a force majeure clause. This allows the supplier’s obligation to deliver to be suspended without liability on the occurrence of certain events outside its control. The Supplier may wish to extend the breadth of this clause so it covers a wider variety of events. Whatever the position adopted, this must be backed off through its own supplier contracts.

Traditionally we have also seen single sourcing options. With the increasing adoption of just-in-time sourcing, this could create issues as alternative suppliers would not be in place to enable production to continue when a failure occurs. Depending on the complexity of the component, establishing an alternative source can take substantial time. Putting in place contingency plans or loss of production can quickly add up to large losses and damage to reputation. In order to mitigate these issues, OEMs and tier one suppliers are also looking to multi-sourcing and more flexibility in the supply chains. Again, a supplier must be aware of the changing nature of supply chains, and look to protect its position both in its contracts and with its own suppliers.

Published: April 2018


Focus on Manufacturing - Edition 7

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