automotive supply chain – respond2demand

Automotive – An industry in transition – Big threats, Bigger opportunities

Technology driven transitions have a significant impact on companies, industries, and markets. This paper provides insights on preparing and executing effectively during such transitions. It analyzes the transition that the automotive industry is going through that has major risks and outsized opportunities. Two areas have been emphasized – operationalizing long-range planning and adapting structurally to market demand signals. The author outlines unique capabilities that Zyom specializes in to help companies navigate the complex and risky road ahead.

Technology driven transitions

All transitions, especially new technology-driven transitions, that are global in its reach, result in big risks, even for strong incumbents in the industry impacted by the change. Most of the risks are unknown, before the technology achieves suitable level of maturity for larger scale usage. Some can be existential risks.

However, in most cases, these transitions result in significant opportunities to create and carve out extremely large, market opportunities. A sizeable subset of these transitions have an outsized impact in altering user/consumer behavior in profound ways.

While there is a large body of work about the disruptive impact of new technology on companies and industries impacted by the change, most of it is focused on higher level competitive strategy.

While this is an important line of investigation, it suffers from a major shortcoming.

Far too often companies fall short in the vital area of executing – making their strategy operational. And this problem plagues larger incumbents who get knocked off their perch by these transitions, and strong, mid-size competitors alike.

This paper is a study of one of the most critical transitions that is ongoing in the automotive industry – from polluting ICE cars to lower-carbon alternatives – which is yet in its early innings. It offers new ideas and approaches for operations management to prepare, plan and execute during these transitions effectively and efficiently.

The points surfaced here can be utilized by cross-functional operations leadership (product, operations – sales and supply ops, and operational finance) for any other technology-led, large-scale transitions that are emerging or ongoing in any physical products industry.

Automotive – A massive, bumpy transition, a looming imperative

The automotive industry is in the middle of a massive transition. This has resulted in big risks, and sky-high opportunities.

A massive, seemingly irreversible transition[1] is going on in the Automotive industry, starting with the large, well-capitalized economies– from legacy IC[2] Engines to Battery EV (or EV [3]) and other alternative energy auto options (hybrid, hydrogen, etc.), due to a confluence of many forces:

Adverse impact of fossil fuels on humanity’s well-being on a large scale – pollution, air-quality, grave hazards to ecologies and humans caused by oil extraction companies and ICE autos, which is also a key ingredient causing extreme climate uncertainty. In 2020, the transportation sector alone accounted for about 20 percent of global greenhouse-gas emissions (source: McKinsey, McKinsey__Study-on_the-future-of-mobility).

Resulting government regulations, along with controls, incentives and creative policies put in place by some of the largest global economy players and GHG[4] emitters – from EU to US to China, Australia, India, among many others.

Availability of suitable technologies & materials – Although technologies are still far from optimal – for instance, EV battery materials resulting in more mining, potential future conflict between energy and food supply chain needs[5], greater dependence on energy from utilities, most of which are still dependent on carbon-intensive/dirty carbon sources, the supply-side of these materials have scaled up significantly over the last 5+ years, so has driving range and charging availability[6].

Shift with bruising bumps in market demand[7] towards EV (and other low-carbon options), and away from the traditional ICE auto, despite higher prices of EVs/ alternatives versus ICE autos[8], near term demand slowdown notwithstanding.

A major transformation underway among legacy ICE auto-makers as they slowly but surely wake up to the serious competitive, potentially existential threats posed by the electric transition, as a means to cut emissions, the technologically smarter pure-play EV companies making it, and the rising public awareness around climate impact of ICE autos.
Leading, pure-play EV makers, with their smarts in clean-sheet design in hardware, software, its integrated functioning, zero legacy operations baggage and consumer-friendly direct sales model, appear to have a sizeable lead over the legacy makers in engineering and manufacturing of EVs; as Jim Farley, CEO of Ford candidly admitted [9], not too long ago.

Lower complexity Bill of Materials (BOM), a transformed product – Despite challenges in manufacturing[10] EVs at scale and attaining suitable margins, from a BOM standpoint, the EV is a simpler, and in key respects, a superior product too – beyond being fossil fuel-free. In addition, with the EV, the auto is going through a radical transformation – from a mechanicals-heavy to an electronics and software heavy product.

Very Bumpy Transition guaranteed– As this paper was going to press (early January 2024) the drumbeat of downbeat and dismal news from the EV industry reached a high pitch. Demand for EVs appears to be stalling in the near term, down substantially from the rising trend that was emerging over the last 2-3 years (footnote#1). Legacy ICE automakers who had previously made bold commitments to allocate substantial resources to EV capacity, are reducing their EV commitments, often substantially (GM, Ford, etc.).

A sizeable number of legacy ICE automakers are instead cranking out more hybrids at the expense of EV’s to achieve their reduction goals.

The underlying EV technologies, and other ICE alternatives need to evolve and mature significantly and swiftly. Yet, it is clear to the informed consumer, especially those that can afford it, that they do not need a power station burning polluting fuel under the hood as they go from point A to B – the case with IC engines. For legacy ICE auto companies with significant direct emissions[11], transition to EVs and other low-carbon options, is a looming imperative.

In fact, this can be stated with a high degree of confidence[12] –for all ICE automakers, except very few, who started on their learning curve of EV operations a few years ago, the transition to a cleaner automotive technology, is an existential threat, as the inevitable shakeout takes place.

Planning & Preparing for the transition

So, how should the auto industry prepare itself for this transition – both the traditional ICE automakers and their younger EV rivals? Following are 2 key takeaways based on Zyom’s research and direct industry experiences[13] even if transitions were not of the same magnitude:

Operationalize Long Range (5+ years) Planning – From operational standpoint, most long-range business planning cycles range from 12 to 24-month (hi-tech, electronics intensive industries).

In many industries, the range stretched out much more due to the choking of supply chains during the recent covid-19 pandemic, ongoing significant restructuring & retooling of supply chains, and altered goods flows due to strategic concerns over potential or actual lost capacity and resources

These stemmed primarily from the unpredictable conflicts impacting several regions – namely, Russia’s ongoing attacks on Ukraine (harness makers), China’s aggressive territorial postures towards Taiwan (semiconductor chips, rare earth/ other key EV raw materials), the Israel-Hamas war (OPEC majors’ region).

Our investigations indicate a longer time range planning process is required.

No, long-range planning cannot eliminate uncertainties caused by such unpredictable events. This leaves a big question –
how is this (long-range planning) different from Business Continuity Planning?

The key word here is ‘operationalize.’

Most long-range plans are basically of limited use, if not futile, since many of the key leaders who design and implement it – manufacturing and supply chain, sales, product-line management – realize, that planning for anything beyond 2 to 3 quarters, in rapidly changing, technology change intensive industries – is, at best a guestimate, in the worst case an output of little use – because plans beyond 2+ quarters are perishable, and it’s a fool’s errand to try and bring it back to life, or worse – modify those to utilize it in running operations.

Operationalize implies the ability of tying these long-range plans with plans in the tactical horizon (2-6 quarters out), ensuring these are not only tied with overall strategy, but also considers likely disruptions along various operating links, nodes, peoples, and evolving economics – macro and micro – across business cycles.

This is where a complete commitment to cross-functional knowledge, and capability sharing and collaborative planning is required across supply chain partners (product enterprise – auto OEMs, in this case, and their key suppliers – Tier1, some Tier2, and others upstream), and across functions within the auto OEMs (Product Line Managers, Sales and Manufacturing/ Supply Chain operations, and Cost/Value engineering).

Shrinking Window of opportunity – Legacy automakers, in the US and EU especially, need to make concerted efforts in operational long-range planning, since their “window of opportunity” to stay competitive maybe smaller than they think (case in point – Labor strife at the Big-Three[14] in the US resulting in a 25% labor cost increase[15], EU mandates for 100% EV production effective 2035).

Pure play EV manufacturers in the US, EU and Asia, except a few[16], may also have a rough road ahead, with a smaller and potentially shrinking “window of opportunity” versus legacy, ICE vehicle makers, due to the intrinsic capital-intensive nature of the industry (requires significant capital investment up front in plant and equipment), and extrinsic factors such as – intensifying competition from current EV leaders (Tesla world-wide, BYD of China), structural debt-intensive nature of recent macro-economic revivals (post covid-19 pandemic) – elevated inflation and higher interest rates, which has dampened EV demand based on the latest data (footnote#1). Large EV markets, such as China, are facing severe slowdown in demand.

In addition, unpredictable geo-political trade impasse (e.g., US versus China, EU v. China) also threatens to severely constrain critical raw-material inputs, and choke EV trade volumes.

Governments & the long view – A key contributor to long-range planning are governments and their productive engagement with new industries. In large, well-capitalized economies that are relatively free of state-control (the US, EU, Japan), private enterprises are driving most of the innovation, with some government support (example, loans to EV, battery and charging infrastructure makers). Automakers in the US, EU and mature economies that are currently leading EV adoption have benefited from this.

Chinese automakers’ selling price for EV is similar to the prices European automakers sell ICE cars for!

However, these automakers will find their hands tied as aggressive overseas competition heats up. Case in point – Chinese automakers’ selling price for EV is similar[17] to the prices European automakers sell ICE cars for!

A chunk of this anomaly can be attributed to the command-and-control structure of China’s (and similar) economies which enables national “champions.” However, governments and industry leaders in the US, EU and other free economies will be putting the economic success of their auto industries at grave risk without digging deeper.

What has benefited such an anomalous success in economies such as China, is a very long planning horizon[18] (10+ years). This has enabled companies in these economies to scale, often quite fast, capture a significant share of the nation’s market, and subsequently expand globally as well. Case in point – BYD, which started as a battery supplier in the late 1990s to mobile phone makers, and eventually expanded into making EVs. As of Q4, 2024, BYD is the largest EV automaker world-wide, having recently surpassed Tesla.

Market Demand Signals – Big changes are afoot in this area, especially driven by the pure-play EV automakers. From a channel only centered (i.e., dealership only) demand generation and fulfillment model, to an OEM driven demand-gen and fulfillment model (via OEM showrooms, e-commerce website, etc.). This has profound implications for the OEM, and its supply chain, despite resistance to move away from the dealership model by large players[19].

The new model lends itself well to a BTO (build to order), or CTO (configure to order) model of managing manufacturing supply chains. This can be a significant game-changer for the auto industry. Like many other channel-intensive industries[20], auto industry has traditionally suffered from excessive supply clogging in downstream supply chain nodes – at dealers and distributors, who are the preferred, and often the only way, to fulfill end-customer demand.

The new model lends itself well to a BTO (build to order), or CTO (configure to order) model of managing manufacturing supply chains; this can be a significant game-changer for the auto industry

With the ability to switch to a more BTO or CTO centric model, and tightly aligning or cutting out the intermediary (dealership channel), demand generation and, end-to-end demand through supply planning, manufacturing execution and final customer order fulfillment is now the purview of the OEM. This will lead to much better visibility and better controls over finished goods stocks, long lead-time parts and sub-assemblies’ supply, faster feedback loops for corrective actions to be taken to right-size inventory, and get closer to the product mix that is selling in the market.

In addition, the virtuous cycle of rapid feedback on product options (options’ desired/ not desired/ hated) and rapid flow of product gaps/issues into product engineering, will provide a clearer line of sight on customer needs versus automakers’ aspirations.

With a clearer picture of demand, the industry can shift away from ‘Build to Forecast’ and all its ills (including, working capital tied up in dealer inventory) towards a primarily BTO/ CTO approach, and its virtuous cycle (lower inventory, better fulfillment, better understanding of customers’ product preferences, and perceptions).

Any residual capacity, if available at the end of a plan period (quarterly, every 6-months), can be used to build products that are in demand, or need fewer price-reduction type actions to move the inventory downstream from “stocking locations” to customers, or the capacity can be held back for vital upgrades and maintenance, or just planned downtime (theory of constraints and its virtues). In fact, even with rising demand, there may be a need for proactive residual capacity planning (à la inverse of “yield management” used in the airline industry).

even with rising demand, there may be a need for proactive residual capacity planning (à la inverse of “yield management” used in the airline industry)

A singular opportunity – Getting this transition right

History has some datapoints for us. At the turn of the last century (1880s to 1920s) the personal mobility industry in the US was going through one such major change (from horse drawn carriages to cars). From over 200 automakers, the field collapsed to eventually 3.

How did the last 15-20 dynamic automakers fall, leaving the field to the Big Three?

Better marketing, better manufacturing processes (Ford’s mass-production lines), better mix management (no options or very few), others? That maybe a topic for industrial historians to dive into. What is clear is that the Big Three were able to scale up their production effectively, meet the demand of a growing base of new consumers (sales, re-fueling and service), and do it all while keeping price points attractive, bringing increasing number of customers into the fold, and achieving and maintaining healthy profits.

Today (circa early 2024 and over the next 5-7 years), both legacy ICE automakers and pure-play EV makers face big challenges as they navigate this significant industry-wide transition.

Neither the incumbent ICE automakers, nor the disrupting EV makers have an unsurmountable advantage over the other, although select EV makers – Tesla and BYD – appear better placed.

This transition, like any transition of this magnitude, promises to be full of peril and near-term pain. However, there is an extremely outsized opportunity of industry-wide leadership for those that ‘survive’ this transition, achieve target unit economics to attain profitability, are able to sustain profitable operations, and the many unforeseen and un-plannable macro-economic and industry-wide disruptions that may surface, and throw the transition off course.

The grand prize is to be in the Big “x” (EV) makers (“x” being the unknown – will it be 3 in cars? 3 in pickups? 3 among truck makers, etc.). These handful will dominate the electrified (or alternate energy) vehicle future.

Automakers that effectively utilize these ideas, stay laser focused on mid and long-term profitability (2 to 10+ years), and ensure that in all major decisions they stay the course on ‘real sustainability,’ will ensure that they remain a force to reckon with for years, potentially decades to come. They will also play a vital role in the world’s safe transition towards net-zero and net positive environmental goals.

For the road ahead – A unique opportunity to gain an operational advantage

The transition and resulting changes expected in the automotive industry globally over the next 2-10 years will be complex and fraught with risks. This transition will be anything but linear (maybe, sizeable transition from ICE to hybrids versus EVs comes first, EVs later).

Both legacy ICE automakers and EV pure-plays – will need to become more cost competitive, while doing a delicate balancing act – simultaneously ramping up volumes of some products (EVs, hybrids, etc.) and throttling down on other legacy ICE products, while meeting a myriad of other critical needs (investors, regulators, competitors, public and others).

This is a time for companies to lean on specialists.

Zyom specializes in providing the most cost competitive operations management support system that has directly supported companies in industries going through transitions. How?

Zyom specializes in providing the most cost competitive operations management support system that has directly supported companies in industries going through transitions

By helping companies effectively utilize their cross functional operations teams, starting with manufacturing and supply chain operations, pinpointing specific areas of operational improvement, and implementing the needed capability in full. In many cases, this has resulted in a significant operating advantage – making companies among the most cost competitive in their industry, while balancing the needs of being demand responsive with progressively increasing volumes.

Industry leading results – briefly

Utilizing Zyom’s capabilities, a networking infrastructure provider in a new vibrant industry segment, achieved 10x the scale (volume shipped) within 4+ years, while achieving and staying profitable, and becoming an industry benchmark for cost-competitiveness in the process.

A Fortune 100 electronics industry leader radically redesigned their cross-functional processes utilizing Zyom to minimize inventory related costs, in response to a single product transition resulting from new technologies that had cost the company $10s[21] Million.

Ready to get into the Driver’s seat?

What makes the set of capabilities that Zyom equips its customers with unique are its innovations in these distinct areas:

Closed loop operational planning and execution
Product and Operations cost optimization
Smart collaboration across functions and value networks

The capability set delivered is based on the specific transitions and changes the companies are planning for, or faced with, yet general purpose to evolve as needs evolve. Utilizing these, Automotive and other physical product companies can focus on specific, tailored capabilities to attain, maintain, or sustain profitable operations.

Ready to gain an operating advantage, or just get a copy of the Paper from which the above information is extracted, please reach out to the author via comments, or via https://www.zyom.com/contact.php .

Automotive companies, seeking profitability at scale, will gain a unique operating advantage, while navigating the ongoing transition – the twists and turns in the road ahead.

[1] As an early draft of paper went to press (Dec, 2023), news was pouring in about a potential slowdown in EV adoption in the US; click here for more: Why America’s Car Buyers Are Rethinking EVs, Bloomberg, Jan 2024

[2] IC = Internal combustion (as in IC Engine) or fuel-burning engines

[3] EV (or BEV) = Electric Vehicle (aka, Battery Electric Vehicles)

[4] GHG = greenhouse gases; the ones that trap heat causing climatic temperature rise over time

[5] Concerns about global phosphorus demand for batteries https://www.nature.com/articles/s43246-022-00236-4

[6] Although many geographies with limited EV charging infrastructure (see link in footnote #1 earlier)

[7] Some regions experiencing bigger shifts (e.g., California, USA, Norway/ other Nordic countries)

[8] Notwithstanding, near term slowdowns in the US (footnote #1 above)

[9] Jim Farley, CEO of Ford: https://www.cbinsights.com/research/tesla-disruption-legacy-automakers/

[10] Also servicing and maintenance costs are higher – many of these higher costs for customer are ‘unplanned’

[11] Emissions measured as Scope1, 2 and 3 per widely accepted industry guidelines from GHG Protocol

[12] Based on research & analysis of secondary sources (news, industry articles)

[13] Mobile phone industry’s transition – feature-phones to smart phones, others (Computing industry transitions)

[14] Big Three = Ford, GM, Stellantis

[15] Oct 30, 2023 UAW contracts with Big Three

https://www.cbsnews.com/news/uaw-strike-update-gm-tentative-agreement

https://www.cbsnews.com/news/uaw-strike-gm-stellantis-tentative-agreement

[16] A handful such as Tesla and China’s BYD have resources, developed channels & profitability to ride it out better

[17] Stellantis CEO Sees the Rise of Chinese Carmakers Fueling M&A, Feb 2024 Bloomberg/ Hyperdrive

[18] IEA Global EV; Outlook 2023 Catching up with climate ambitions ; https://www.npr.org/2023/07/22/1189580644/china-dominates-the-ev-battery-industry-can-the-rest-of-the-world-catch-up

[19] Toyota: Standing pat with dealers; Oct 2022 https://www.cnbc.com/2022/10/02/toyota-ceo-akio-toyoda-electric-vehicles-happy-dance.html

[20] Parallels with the channel-inventory intensive nature of Computing (PC) industry of 1990s are worth noting; Dell raced ahead utilizing a ‘Dell-direct’ model leaving larger incumbents – HP (Compaq) and IBM behind

[21] To find out value targeted and trigger event please reach out to Zyom https://www.zyom.com/contact.php

Operating Parts’ Supply Chain in Uncertain times – Key Learnings

Parts are super critical. For Product companies the sum-total of all parts is what ensures that the product using the part is ready to make and ship.

Many parts shortages can be painful – economically, and what your logo stands for to the markets it serves, and needs to be attended to quickly but carefully.

This article starts with a short story (fiction) based on real life events, of a major planning dilemma – faced at the onset of the pandemic in the auto industry, and weaves its way across Billions of dollars lost in a short period of time by many companies. Not so for a few other industry peers.

Why? What happened?

This article underscores the critical role of operations planning and execution, and highlights key elements that can be learned, and applied quickly to improve the supply chains of parts (components/ sub-assemblies), ensuring uninterrupted supply, no matter what.

Parts, parcels and people – these three words pretty much summarize the biggest and sharpest pain-points that have come in sharp focus as global supply chain convulsions continue in the aftermath of the onset of the covid19 pandemic.

Sometime missing parts can make a hole in your plans to ship product. However, if parts shortages are chronic and unrelenting, it inexorably leads to big holes in a company’s revenue. Left unchecked, it can get quite grim.

This article is focused on Parts and cursorily touches on the “people” aspects.

Parts are super critical. For Product companies the sum-total of all parts is what make the product whole, and ready to make and ship.
Parts shortages, especially those that have a big impact across many products are painful – economically, and what your logo stands for to the markets it serves. And it needs to be attended to quickly but carefully.

“A major Planning dilemma”: of wait & wants – A short story, an outsized impact

First let’s start with a story (fictional) based on real-life events.
Its Q1, 2020, and the pandemic has hit the world – first landing in a few countries, it soon spreads like a forest fire throughout the world. In its wake, it leaves ports, factories and other nodes and links of the global supply chain frozen out.

Now, let’s hone in on one industry – the Automotive industry – that’s been recently feeling the tailwinds of growing consumer demand.

Jill, (fictitious name) head of Materials (parts, raw materials) Planning and Tier1 Supply, is feeling anxious. She brings this up again and again with her supervisor – the SVP of Operations at AutoMax1 – a traditional automaker (OEM) that’s been turning its fortune around over the last year or so.
A simplified graphical representation of an extended supply chain with multiple tiers of supply is shown here for reference (Auto supply chains are extended, multi-tier manufacturing supply chains, excluding distribution-only nodes)

Jill – “..Bottom has fallen out of the demand .. what should we do with the open P.O.s to the Tier1 suppliers?”

After quick deliberations, spreadsheets and even looking at systems, a decision is made.

Managers (across functions) – “Let’s just cancel the orders”.

Jill – “All the open orders, or a few?”

Pause. More discussions. Deliberations.

Managers (with inputs from senior leaders) – “All”

All Q1 and a big chunk of Q2, 2020 turns out be worst case scenario for demand, as predicted.
Auto industry demand crashes.
Other peers of Jill, and the SVP Ops at other car companies largely take similar or same actions.
..

Its late in Q2, 2020, and an anxious Tier 2 chipmaker calls in and pitches a contrarian scenario –

Tier 2 chipmaker – “Demand’s picking up .. it may pick up too fast .. we don’t know yet. Do you want to reorder (your chips)?”

Again, long pause. Jill is not sure. SVP of Ops is torn. Even management is at sea.

Finally, they decide – “no Thanks .. we’ll wait”.

Not all agree, but they are not the assertive voice/s.

Its late in Q3, early on in Q4, 2020 and demand is indeed picking up.

Exciting news for AutoMax1 management? Not really.

Jill and SVP of Ops are super anxious. They may have shot themselves on both their feet with their decision a few months ago.

They have already been testing the waters, started communications with the Tier1s and some key Tier2 suppliers – the ones that make the microcontrollers, or get it manufactured by the Foundries. These are the chips that go into nearly everything in their cars.

Suppliers have NO inventory. Nothing meaningful for a very long time – months, probably quarters.

And the foundries are not heeding their (the Tier2’s) calls for help either.

AutoMax1 gets their COO (even the CEO’s ready) on the line with the Foundry chief.

COO – “You’ve gotta help us out .. we need to ramp up and need these chips now.. This can’t wait a week let alone the months that you are quoting us”.

Chip Foundry Chief – “Sorry, we are really super booked. We cannot even fulfill all open orders from (our larger) consumer electronics companies.”

“They came way before you .. placed hard orders, and reserved capacity”. In effect, giant chunks of capacity are now gone.

AutoMax1 COO – “what can you do?”

Foundry – “Nothing really in the near term .. nothing material for the next 2-3 quarters.. we’re nose to the grindstone getting these orders shipped .. we’ll call you as soon as we see capacity open up ..”

A Famine

And that pretty much sums up what happened to a giant chunk of the auto sector in the 2^nd half of 2020, and Q1, 2021, leading up to the President of the US and heads of state getting involved in ‘battling the Auto chip shortage problem’. Nothing helped. Not for the near to fuzzy midterm[1].

The chip industry, a notoriously cyclical industry, with high booms and terrible busts in demand and pricing, with its gigantic, capacity-intensive fabrication plants (fabs) were booked solid with orders from the consumer electronics industry, that came way ahead of these auto orders.

In fact, these competing orders had a higher priority for the right economic reasons – higher margin consumer electronics orders, that use leading edge technology, versus the Auto industry that’s been on the lagging edge for a while. Lagging, despite the move to EVs accelerating – with Tesla et al. clearly gaining ground in the auto-market through their simpler, super popular EVs. Anyway, that’s for a later write-up, not this one.

What happened next is quite well known. A mini-nuclear winter of sorts for the auto industry..

Thanks to chip shortages painful shutdowns ensued, first by car category (with lower or lower margin demand), then multiple categories, then manufacturing plants, then entire groups of plants and virtually most (traditional) auto-maker plants across giant swathes of the US and Europe.

A Feast (almost) in other places

Meanwhile, over in Japan, Toyota is humming along – and by the end of Q1, 2020 even guided a rosier shipments (Revenue) picture for the whole year.

Tesla, a tiny dot in the auto-manufacturing firmament a few years ago, is growing shipments every quarter – still small compared with traditional car industry volumes – but ramping up seriously (roughly 80% volumes year over year). And they seem to be unfazed too. In fact, Q4, 2021 turns out be eye-popping one – Tesla shipping way more than anyone would have predicted.

And that’s what brings us to the $500 Billion dollar question[2].

What happened?

How could Toyota, a large automaker, be resilient throughout 2020 and early 2021 (some of the pixie dust appears to have worn off since)?

It’s after all a traditional automaker with plenty of gas-guzzlers in its portfolio (i.e., cannot participate in the EV spike in market demand).

What has Tesla learned about making cars, parts and sourcing for their factories which their 100+ year rivals with their huge volumes (i.e., purchasing power) have not?

Learnings

First off – No, this article is not about the auto industry, the EV leadership of Tesla etc.

This article is about finer operating points (operations planning & execution) that many, even with decades of supply chain and planning experience, appear to have missed.

A clear disclaimer – what’s written here is a hindsight-based learning, a post-mortem, not specific to any industry. Sincere attempts have been made to remove all hindsight bias.

No claims are being made by the author (or teams he works with) that they could have done a better job at ‘predicting’ the rapid downswing in the ‘early pandemic’ days, and the rapid upswing in demand soon after, for those sectors that faced what’s been described above (including the auto industry).

This article focuses on some key supply chain operating principles and practices that may have to be dusted off, looked at afresh if not challenged outright, and other evolving approaches to managing manufacturing-intensive supply chains.

Here are a few –

Identify key parts – This is not a straightforward exercise of looking at your highest dollar parts.
What multi-variable analysis needs to be done to determine “key” parts?
What additional ‘decision filters’ should be applied?
Use “lean signaling” not lean inventory approach especially for key parts – Ideally disintermediate your supply chain (i.e., reduce number of tiers) at least for the newer products, if you can. In either case – with long, extended supply chains (Traditional automakers like GM, Ford, VW et al.) or shorter chain ones (like Tesla), ask this:
How can I rapidly collaborate (not just communicate) with my significant N tiers of supply (where N is 1, 2 .. whatever)?
What are best (if not optimal) inventory levels for key parts made by the TierN supplier?
Is there a better way than legacy tools (EDI, spread-sheets like MS-Excel, Google sheets, etc.)?
Are internet-based supplier portals adequate?
Determine inventory levels for key parts – Toyota built strategic buffers for their key parts where and when needed. Toyota instructed its suppliers to carry months of inventory where previously they used to carry weeks’ worth only, the latter being in line with lean principles that is core to Toyota operations.
How to determine what inventory levels are right? How & when to adjust?
What analysis needs to be done rapidly? Which analysis can have longer cycle times?
Build real ‘relationships’ with suppliers (Tier2 and their sources, as needed) – Component (part) makers would love to work directly with the product makers (the ones whose logo goes on the product). This could be especially critical for mid-size and smaller companies that cannot command part makers’ attention via large, strategic buys. They know full well that one such wrong decision can put them into a deep working capital hole for a long time, or push them into extinction.
Which component makers? What meaningful processes can you collaborate on?
What are “must-haves” to make sure collaboration works (data, process, decisions, metrics)?
Plan for business continuity all the time – Business Continuity Planning (BCP) is not just for isolated worst-case events, such as the Fukushima disaster that froze auto supply chains, Taiwan earthquake that rattled consumer electronics – including the large behemoths. BCP is an ongoing process effectively used by those that are succeeding to secure the supplies needed, no matter what.
How will you do this (process, people, parts, partners)?
What parts to focus on? Which products?
Which ones to defocus from?
Understand your key parts very well (passing acquaintance isn’t enough) – Get to know the technologies that go into your key parts, especially complex/ line-stopping ones very well (e.g., batteries for EV makers, microcontrollers for automakers, WiFi chipsets for wireless equipment makers, etc.). Build the technology skills needed so you can turn on a dime and change product design if a part’s supply shortage becomes persistent.
Which technologies (chip design, etc.)? What skills? How to motivate learning?
Design for resilience and responsiveness – Back to the story above:
Jill, the planning lead and her supervisor, the SVP of Ops were at a standstill and could not take decision to increase the supply even when the chipmaker dropped hints. There could be many reasons. Here are a few –
- Role of planning in the org: does it have the right level of visibility and sway with the executive team? i.e., could they have pushed a more aggressive supply plan without being worried about untoward consequences (i.e., losing faith of the management, or worse)
- Skills – Has Master Planning/ MRP/ Capacity Planning and related supply side operations planning skills been rethought through and retooled, especially for extended and evolving supply chains? Has demand planning been rethought through? Planning must be thought through for end-to-end Demand and Supply Planning. And then rethought through periodically in light of changes.
- People-centered Processes and collaboration – Did AutoMax1 have a comprehensive process (including S&OP) which they could use to avoid bias? How good was their supplier collaboration to ensure clear supply signals – strong and weak signals (e.g., chipmaker signals noted above)?
- Tools – What’s the burden of legacy? Were they going to war with bubble gum and duct-tape to put together their plans? Many legacy systems are a lot clunkier, difficult to use and error-prone, given cloud and internet-native tools can be designed and tailored for operations. And they suck up not only time but a lot of people too.
- System – Were they educated about responsiveness which is not a demand side or supply side approach but an end-to-end approach? End-to-end from Demand through to Supply planning – not as ‘islands of Planning’. Execution signals have to be inbuilt into Planning.
- Scaling mindset – A scaling mindset means looking at the future to be an opportunity to grow in a planned manner. How do planners avoid the “hunker-in-the-bunker” mindset that’s the default, especially in operations planning when faced with extreme uncertainty like what happened at the onset of the pandemic – circa Q1, 2020?

Question Assumptions

When faced with unprecedented uncertainty past assumptions have to be questioned.

Good planners know every plan has in-built assumptions.

Great planners know when to question those assumptions out aloud, so management gets it loud and clear. In the above case of Jill and AutoMax1, did they listen to the skeptical, dissenting voices among procurement and supply planners. The planners/ procurement team members may want to understand the signal better from the supplier/s (the chipmakers saying demand is ‘perking up’) before giving their procurement plans a massive haircut.

Great Operations leaders know Planning is a critical ongoing process that requires smarts and creativity, and focused attention of the top management (CEO, COO, Leaders of Operations and Sales, Products).

and,

The more inputs the better, especially from outside the 4-walls of the company, e.g., Sales channels, Suppliers, et al.

Most importantly, the age-old truism – not to be wedded to “a Plan”.

Plan, by its very nature is a point-of-time output of the process and needs to keep changing to support smart execution.

While nothing is better (for planners and senior strategists) than having a “run rate” product base to plan, those deep into planning and its subsequent execution, and have seen a few seasons (i.e., are experienced) know that ’stasis’ (standstill) is the absolute opposite of good planning – the wrong place to be. It’s after all a “rate”, i.e., change over time.

Companies that use this time of uncertainty to upgrade their team’s skills and equip themselves with better processes and systems based on learnings above will have all the pieces in place to go for a stronger rebound when demand turns around, and catch the downdraft in their demand much earlier, preventing grave preventable losses (E&O among others).

[1] Derivative of estimates the current size of the chip industry and the auto-industry losses

[1] Estimates vary from 2-3 quarters to 6-8 quarters out from late 2021

Acknowledgments:

The author would like to thank Colin Todd and Fred Harried for some of the learnings mentioned, and to all the (customer) colleagues at Cambium Networks for in-depth discussions and working sessions with Zyom on some of the topics mentioned in the article; All of the above contains copyrighted materials from Zyom Inc. Please acknowledge this when using any of the content.