non-linear automotive supply chain: covid-19 and beyond

Non-linear automotive supply chain: COVID-19 and beyond Non-linear automotive supply chain: COVID-19 and beyond 1

Non-linear automotive supply chain: COVID-19 and beyondNon-linear automotive supply chain: COVID-19 and beyond

Non-linear automotive supply chain: COVID-19 and beyond2

References

Pg - 24

Our contacts

Pg - 26

Tableof content

Response strategy: Now, next and beyond

COVID-19 disruption: Impact on automotive supply chain

Pg - 04How can EY help?

Pg - 18

Pg - 11

Inherent inefficiencies

Pg - 08in the traditional linear automotive supply chain

► What should be the organization’s response strategy during interim, start and scale

► How to deploy crisis management, governance and supply chain intelligence

► What should be the supply chain strategy for now, next and beyond

► Why embracing digital is the right tactical move, to minimize impact and enable long term

What should be done............................................................. Pg - 12

How should it be enabled......................................................

Pg - 12

Pg - 15Pg - 15

Pg - 14

Pg - 16


Non-linear automotive supply chainCOVID-19 and beyond


01

Non-linear automotive supply chain: COVID-19 and beyondAutomotive supply chain and manufacturing professionals have been evaluating the mid and long-term impacts of COVID-19 on procurement planning and supplier management, integrated sales and operations planning, manufacturing, logistics and distribution. The impact of this pandemic is deep rooted. It asks for a bottom up evaluation of one’s supply chain architecture and its vulnerabilities to externalities like COVID-19. EY’s Automotive Team has been helping multiple enterprises in their efforts to gauge the depth of impact, and further ensuring a robust supply chain strategy in place for now, next and beyond of COVID-19.

COVID-19 disruption: Impact on automotive supply chain

Prior to the Pandemic, to enforce ‘Make in India’, the current Union budget 2020-21, hiked customs duty on raw materials and inputs, imported by domestic manufacturers, by 2.5% - 5% and Completely Built Units (CBU’s) are hiked from 30% to 40%1 for commercial vehicles other than electric. The policies incentivize local sourcing and gradual reduction in dependence on imports.

worth of auto components2. The supplier base is currently not too diversified for majority of components. This was to drive volume based price efficiencies, however this strategy is highly exposed to risks coming from disruptions in the geographies supplying key auto components.

With major import nations under lockdown and long periods expected in the recovery process, Indian Automotive supply chain has come under intense stress. To manage the crisis and restart operations, Auto OEMs and component manufacturers are chalking out various scenario-based action plans.

Indian Automotive Industry imports for

$17.5 bn


Country wise share of India’s total Import-Export2

Country wise import of Auto components4

Export %

China 7 14

17

2

1

3

8

8

47 42

8

8

7

3

1

2

South Korea

United Kingdom

United States

Iran

European countries

Middle east (except Iran)

Others

Import %

USA 7%Japan 9%

South Korea 10%Germany 14%

China 27%Others 33%

India is one of the top 15 countries affected by the pandemic. A recent report by UNDP3 suggests that Indian automotive industry is one of the major suffering sectors.


These disruptions in Indian auto sector can be observed both in the supply side and demand characteristics.

The after-effects of these disruptions are multi-pronged

Demand volatility due to evolving regulations and low consumer sentiment

Indian Auto component manufacturers will be keen to upgrade their capability to cater to the domestic needs to secure the benefits of Make-In-India policies. While components such as castings, axles and wheel rings can the products that should see more of domestic production, India would be still dependent on imports for dependent on the import of the following components5 – steering, battery, braking, engine, electronics, rare-earth magnet for electric motors, alloy wheel, lighting system etc. For tires, local players are expected to benefit as Chinese imports (25-30% of the total tire imports) will drop.

There is high ageing inventory in the entire value chain across the segments. The upstream and downstream supply chain is expected to witness widespread disruption with shock on the top line and erosion on EBITDA margins.

About 45-55% of the workforce in Automotive is contractual. Both Auto OEM and suppliers rely heavily on migrant labor force for manufacturing and supply chain. With the outbreak of the pandemic and consequent prolonged lockdown, the workforce relocated base to respective home locations. Restarting operations post lockdown, will need the requisite workforce to return to work.

Source: Federation of Automobile Dealer Association (FADA), Hindu Business Line6, EY Analysis

Rapidly changing supply constraints (e.g., manpower, raw material

and transport)

Regulations forcing the shut down of all OEM and suppler plants for three

to four weeks now

45-50

25-3050-60

55-60

80-9060-65

Liquidity crunch and bankruptcy of a section of small and medium enterprises due to low capacity utilization and higher fixed costs

Migrated out contract laborers of the manufacturing sector

Continuing health and hygiene concerns

Possibility of future lockdowns (in case of a decentralized lockdown lift-up situation) jeopardizing the future business continuity plans

Dealers

PVCV

2W 2W

CVPV

OEM

Ageing Inventory Status


Traditionally in India, NBFCs have been catering to customers with small needs, and have had strong footprints in Tier 3 and rural micro-markets. The customers in those markets feel hesitant to approach the banks. This has acted as a double whammy as most of the vehicles sold in the rural market are financed by NBFCs6

2W30%

CV60%

PV70%

It is not only the links of the value chain, there are pronounced credit access issues that is causing a sustained pressure at customer end as well. The liquidity crisis faced by Banks and NBFCs contributed to falling Auto Sales before the outbreak of COVID-19. The pandemic has caused the lending institutions to consider making their lending norms further stringent.

Percentage of Vehicle Financed by NBFC


Inherent inefficiencies in the traditional linear automotive supply chain


02The automotive supply chain has built its foundations on closely knit linear links relying on seamless flow of money, material and information across the value chain.

The genesis of multiple tiers of suppliers across the globe can be attributed to specialization, opportunity cost, scale, unavailability of desired quality and quantity of raw materials and manpower skilled manpower locally.Cost efficiency from lowest cost of sourcing, minimum inventory and volume bargains for share of business were key considerations for supply chain design in most cases.

Key supply chain performance indicators are capacity utilization, inventory velocity, inventory days of supply, total cost to serve, return on working capital, return on asset, etc. Any buffer in these indicators are considered as inefficiency. This has been serving the industry in good stead in the past as it has derived efficiency with lowest cost of sourcing from vendors across the globe.

please see infographic in next page


However, some inherent vulnerabilities in the close-knit automotive supply chain are exposed by the COVID-19 pandemic.

Tier

4 S

uppl

iers

1

2

3

1

2

3

Tier

3 S

uppl

iers

Tier

2 S

uppl

iers

Tier

1 S

uppl

iers

OEM

2O

EM 1

Supply chain planning function is setup for margin optimization, not for business continuity

►Limited availability of near real-time information and agile distribution network to respond to volatile demand

Intermediate goods,

component supplier

Raw material supplier

Module / component supplier

System supplier

Liquidity/credit crunch further exacerbated by stress on the system due to pandemic

►Severely constrained ability of customer facing teams in performing business as usual (BAU) roles


Response strategy:Now, next and beyond


Foot in today Foot in future

Short term liquidity managemen

Supply chain risk assessment

Monitor and track possible supply chain disruptions to your business

Evaluate key suppliers’ health and capacity to continue to deliver

Create a mechanism for receiving feedback from suppliers WWon their concerns

Plan for contingency for critical supplies

Streamline Manufacturing bottlenecks

Supply chain reorganization strategy

Revisiting business continuity strategy

Evaluate alternative or back-up options for your most critical suppliers

Evaluate revenue and cost impact of the refreshed ways of working

Evaluate delivery pyramid in light of refreshed ways of working

Review contractual obligations around changing delivery models

03What should be done

Organizations need to consider how to restart business operations in the interim when the pandemic would still be around.One needs to consider start-stop operation scenarios and its consequences on production planning, buffer inventory, forecasting to suppliers and an agile chain with optimized cost.

The new normal to be visualized and communicated across stakeholder groups including the customer base along with ramifications on lead time, input cos, ware-housing and logistics, warranty and returns.

What should be the organization’s response strategy during interim, start and scaleTo tackle the disruption and ensure business continuity, Automakers need to balance one foot in today and one foot in the future


a. Evaluate cash conservation strategy b. Prepare proactively for post-lockdown period

Treasure plan for cash management►Setup crisis management war room, including design of relevant control tower dashboards – sales planning of vehicles, spares and accessories

Explore options for inventory liquidation or repositioning

Evaluate options of dynamic and intelligent constraint discoveries to discover and identify possible bottlenecks which may arise in the supply chain during the start-stop kind of scenarios during production resumption

Review receivables and payables across the value chain

►Develop standard operating procedures (SOPs) for practicing social distancing and infection proofing the manufacturing operations, things that can be done in operations to ensure disease spread mitigation and also at the same time optimizing cycle times, operations efficiency

►Drawing down on lines of credit and bill discounting facilities►►Develop new ways of working and training modules for staff at OE and dealers

Devise liquidation strategies for BS4 inventories, working with the government and registration authorities

►Review organizational structure and operating models (including SOPs and DOA)

Preparation of rolling cash flow forecast for the upcoming quarter and weekly variance monitoring

►Build forward looking scenarios and simulate alternative impact/response options

c. Protect market share and identify new opportunities

d. Identify and communicate with key value chain stakeholders

►Ensure speed of ramp up once recovery begins; exploit first-mover advantage to occupy shelf-space. Effective demand and forecast modelling for the ramp-up would be critical for vehicles and spares

►►Engage with key suppliers (particularly SMEs) and channel partners to prevent disruption due to financial distress

►Study competitors’ actions and evaluate the threats (e.g., entry of unorganized sector or other major players)

►Secure vehicle availability with key logistics partners – assess the capacity and SLAs in the new situation for realigning production and sales planning processes

Close watch on the sudden surge in demand in aftersales operations, with piled up pending repairs

e. Step up regulatory advocacy, wherever applicable

f. Conduct shutdown maintenance in plants, wherever possible

Build understanding of the evolving regulatory environmentConduct critical maintenance and repair activities, where possible, with the support of emergency staff

►Engage with industry bodies and government representatives (e.g., movement and definition of es-sential commodities, etc.)

Attend to facility maintenance (e.g., leakages, repiping, fittings, etc.)

►Create a closed cluster within each entity where regulatory impact on automotive supply chain can be discussed for effective downstream communication

Evaluate material flow/layout changes to increase efficiency

Review stock positions for critical spare parts


a. Assess supply chain risk Conduct an end-to-end risk assessment of supply chain covering demand and supply risks, operational performance, global trade implications, customer impact and people aspects. Keep a close monitor on future parts supply from related countries

c. Identify gaps in supply chainActivate existing crisis management policies and protocols in each disruption scenario to identify the gaps within the current supply chain model and quantify the impact

e. Build intervention business caseBuild intervention business case to implement validated crisis response triggers including requirements, solutions and value proposition

Currently OEM and tier-wise supplier base work in linear clusters and have distinct units catering to the specific business needs of the individual cluster. However, post COVID-19, a more agile approach needs to be put in place. While it will continue to work in specific clusters, there needs to be collaboration among OEMs and Tier 1 suppliers to ensure that end customer delivery preferences are met with a risk mitigated supply chain strategy

b. Define crisis scenariosIdentify crisis scenarios designed to stress test an operation’s ability to manage disruption and evaluate the severity of impact of current state gaps using risk assessment findings and data

d. Develop potential responseDefine potential response triggers to prevent the impact of crisis or enable agile response to mitigate repercussions; simulate crisis scenarios and validate response against established success criteria

Collaborative ecosystem

OEMs

Dealer

Mobility-players

Tier 2

Tier 1

Telecom

Tech players

Tier 3

A critical first step would be to identify the company’s key direct suppliers and their dependencies — both in the supply side and in the demand side. Mapping of their ability to meet supply requirements and respond during potential risk scenario needs to be carried out in depth. Encouraging transparency with required visibility to Tier 1 supplier inventory, production and order fulfilment status would help OEMs chalk out key dependencies. Also, allocation priorities in the event of inventory constraint situations will be another critical aspect to be mapped for reorganizing supply chain strategy. Once the capacity, capability and key dependencies are mapped; OEMs need to explore the ability of the key suppliers to fulfil orders from alternative locations. Charting out scenario based alternative sourcing plan and requirement of close communication are to be emphasized.

What should be the supply chain strategy for now, next and beyondA rapid assessment to gauge the impact of the disrup-tion and the impact on suppliers and customers would be a critical step to determine the list of actions re-quired to enable an agile supply chain in the interim, for restarting operations also for scaling up as normalcy returns


OEMs also need to have visibility of Tier 2 suppliers to the extent that it affects the order fulfilment constraints for key Tier 1 suppliers in various demand scenarios. The coverage should help OEMs assess requirement of alternative second tier supply routes to prevent any disruptions in desired production output even when the supply side scenarios change due to unseen external circumstances.

Many organizations who currently have oversight of Tier 1 supplier operations, may need to extend the visibility further deep into feeding chains going forward. There could be some additional requirements with lack of data and system currently to enable the desired linkages. It would be essential now to embrace efficient digital tools and systems to map the entire supply network with all dependencies. The suppliers in the chain needs to be aligned to feed information at all the nodes of the network. This will help reduce supply side risks and will deploy a much-demanded agile supply network.

B. How should it be enabledCritical success factors would be real-time visibility to critical data, enabling early warning signals and proactive management actions, i.e., control tower framework. Enterprises need to drive mindset change in supply chain planning to prioritize risk mitigation and business continuity over cost optimization, enabled through scenario based integrated planning.

Organizations that source material from suppliers having dependencies in some concentrated geographies, need to evaluate alternate supplier relationships

For those companies that have multi-sourced key inputs, it is important to move quickly to activate secondary supplier relationships and secure additional critical inventory and capacity. Shared resource pooling for raw material inventory is one approach that organizations have tried in the past during crisis situations. For those companies that have significant exposure to some limited geographies, it will be critical to evaluate a different portfolio of supplier with balanced mix of sourced quantity. While selecting alternative sourcing markets, it would be prudent to consider locations with cost efficiency and higher productivity (gross value added) of manufacturing.

How to deploy crisis management, governance and supply chain intelligencea. Route to market and channel strategy b. Integrated sales and operations planning

Dynamic district level demand sensing and response basis real time market situation

Mindset change towards risk mitigation and business continuity (not optimization)

Enable work from home for sales force through digital means

Reassess demand based on outbreak-driven market adjustments (e.g., new demand driven by supply constrictions, reduced demand from regions closing off from market)

Build and strengthen e-com relationships and shift focus to active channels and customer segments

Reassess supply constraints (i.e., plants, suppliers, transport, warehousing active capaci-ties)

Realigning after sales service to provide best feasible support

Assess Free Trade Agreement (FTA) related benefits on export/import

Agile sales team management through beat restructuring, recrafting of roles and clear communication

Establish scenario planning

Redeploy advertising, sales and promotion (ASP) spends to promote channel liquidity, channel partner loyalty and new channels

Create allocation and prioritization framework

Trade remembers — engage with trade partners through proactive communication and as-sistance

Reposition inventory in high potential threat areas, liquidate slow moving stock and evaluate pre-build requirements

Synchronize supply fulfilment per changing demand


Automakers must reinvent with a smart and intelligent supply chain using innovations such as AI, analytics, RPA, IoT, blockchain, etc.

Digital interventions across people, business process and data governance will underpin supply chain transformation.

Emerging technologies and innovations are also bringing agility as well exposing supply chains to new types of collaboration models. Automakers need to actively collaborate on product innovation, process innovation and business innovation for competitive advantage.

c. Logistics and distribution d. Manufacturing and plant operations

Ensure logistics availability for critical materials from first-to third-tier supplier locations to maintain operations

Review product handling, safety and quality and implement additional protocols to ensure no impact on employee and customer health

Evaluate delivery partners as truck availability may be impacted causing upswing in freight and transit time

Developing agile and flexible response for various capacity utilization levels-demand surge, contraction, etc. for both inhouse and contract manufacturing

Monitor regulatory requirements and approvalsDevelop manning scenarios for staggered and split shift working along with plans for utilities and support services

Consider alternative ports, transportation methods and trade routes based on assessments

Review inventory norms for spares to avoid plant disruptions

Import/export shipments clearance and or debottlenecking (handling capacities at ports, airports and clearing house)

Review all non-value-added activities to minimize physical movements/use of low-cost automation

Reevaluate freight contracts Reassess avenues for cash conservation through applicable state incentives or manufacture in bond concept

Review warehouse capacity utilization and staffing shifts

e. Procurement and supplier management

Open quantities managing systems set-up and manage priority reset/amendment

Automate supplier risk assessment to assess 100% of suppliers to deploy change over plan or financial support provisioning especially for SME (factoring tax touch points)

Identify alternate suppliers/markets with similar FTA/Tax benefits

Automate contractual obligation identification and managing systems enablement

Support suppliers with contract compliance and update where possible

To mitigate risk of internal organization management, consider consolidation of suppliers to gain better control over supply reliability

Why embracing digital is the right tactical move, to minimize impact and enable long term


To keep pace with evolving disruptions, the automotive supply chain is evolving from a linear function into a complex and connected ecosystem with digital reinvention as the foundation. On one hand, companies need to integrated silo functions (manufacturing, procurement, logistics), on the other hand, mature organizations should move from just doing short digital projects and making digital as its foundational operating model. Digital technologies provide the opportunity to reinvent operations and organizations need to balance its cost of investment with return towards its adoption.

Digital technologies

People

Advanced search engines

Blockchain

Self-learning systems

Cognitive technologies RPA

Mobile

Advanced visual

technologies Advanced analytics

Cloud

IoT

Process

Data

Evaluate current phase

1 2 3 4 5

Evaluate current phase

Draft plan for pilot

Expand and sustain

Deploy and integrate pilot

Undertake digital maturity

assessment where in evaluate current business process

and identify operational gaps

Define need for digital solutions

and results required (financialor non-financial)

Identify best practises/

technologies, conduct cost-

benefit analysis and create

implementation plan for pilot

Undertake ongoing maintenance and

system integration, and scale solution

to different functions and

processes

Evaluate impact (KPIs), scalability

and integration with existing systems


How can EY help?


04How can EY help?

EY has been helping multiple organizations sail through the COVID-19 crisis with minimum impact on business continuity and protecting the margin Following are some leading supply chain solution suite that EY has been delivering to multiple clients with proven credentials.

Procurement, sourcing and operations

Inventory Optimizer

ProCube

Proc. Control Tower

Collaboration platform

RCCP (Capacity Planning)

DCDRM (Dynamic Constraint Discovery & Response)

Prod. Planning Optimizer

IPO, Asterisk suite

Supply chain, sales, distribution and logistics

►Integrated S&OP

Export freight discovery

Freight optimizer

Load builder

Logistics control tower

Dispatch planning tool

There is no single path instead it would be imperative to focus on solving real problems by adopting right combination of deploying all required solutions and providing implementation support at the same time.


Solution Value Chain Element Value Proposition

EY ProCube Procurement Spend analytics solution

E Procurement ProcurementE-procurement aims to build a central cloud based platform for all procurement based activities

ELSA Chatbot ProcurementAI powered intelligent assistant capable of processing natural language. It can be used by procurement personnel to draw real time information

Supply Chain Accelerator (Catalyst)

ProcurementProvides extensive assessment questions across all supply chain elements & provides a gap report per practice

Blockchain Based Smart Contract

ProcurementBlock chain based ‘smart contracts’ transforms commercial transactions by implementing rules that prevent/ allow/ increase/ reduce payment if certain conditions hold

Logistic Control Tower SCMOptimize their logistics and supply chain performance through a single platform

Demand Planning Tool SCMThe demand planning tool helps us sense demand better thereby reducing volatility in supply chain and minimizing cost to serve

Dispatch Planning Tool

SCMRapid response based daily dispatch planning solution to align distribution to rate of sales. Dispatch planning and execution is automated with real-time visibility and control.

S&OP Control Tower SCMRapid design & deployment of control towers through a wizard like interface with pre-defined KPI library & visuals

Growing Beyond Borders

SCMIntegrating end to end process functions to enable whole of business value trade-offs to be made swiftly.

Product Classifie SCMProduct classifier solution to help segment product portfolio basis sales characteristics of products

Network Optimization Sales & MarketingThe Network Optimization tool improves cost-to-serve for institutional (B2B) and Retail (Distributor/ Stockist) demand

Sales Control Tower Sales & MarketingSales Control tower aims to improve sales force productivity while maximizing OTIF for clients


Supply Chain & Operation practice in EY India has a deep expertise and experience of more than a decade of running large scale Supply Chain transformation projects

1

Team Asterisk is a EY’s R&D and delivery organization for supply chain transformation projects.2We offer a suite of solution that can help your business build better predictive capabilities, seamless market connect & rapid response capability, thereby, create an aligned, tech-enabled supply chain organization

3

Team Asterisk has a product lead organization structure with capabilities around Supply chain domain & project delivery, Predictive and prescriptive analytics, Optimization & modelling, AI & machine learning, Software development, housed under the same umbrella.

4

With solutions development & delivery under one roof. We can help you with:► Delivery of project modules and analytics ► Development of turn-key technology enabled supply chain

planning solutions► Rapid-fire diagnostics and dashboards► Running the planning cycles on managed services

5

Now, Next and Beyond: auto factory of the future19

Solutions consist of a suite of 14 Artificial intelligence and machine learning enabled integrated planning solutions to build lean and responsive supply chain

How can EY help?

2. “ASTERISK”Supply Chain Planning SolutionASTERISK


Now, Next and Beyond: auto factory of the future20

Product Classifier

Network Design

Season Management Framework

ML / Statistics based forecasting & demand

sensing engine

Consensus planning module

Constraint discovery & resolution module

Demand driven production planning module

Production scheduler

Supplier collaboration

Self correcting inventory module

Rapid response distribution system & TLB

Build seamless market connect & rapid response capabilityBuild predictive capability

Integrated S&OP

Strategic elements

Operational elements

Critical enablers

ASTERISK COMPASS –Digital Bolt-On solution to help you Navigate through Covid19 disruptions and respond to market dynamics► Set of 9-interventions to augment your systems with E2E visibility and

analytics led insights ► Rapid deployment of the solution within 2-3 weeks by EY’s Team ASTERISK

How can EY help?

2. “ASTERISK” Supply Chain Planning Solutions’ consists of 14 integrated tech toolsASTERISK


How should the customer orders becaptured in the absence of on-ground sales personnel?1

App enabled tele-calling for order captureAnalytics to enable tele-calling, governanceAnalytics to transition into a hybrid future with mix of tele-calling and on-field presence

2 Which parts of the E2E supply chain network are broken?

Mobile apps to capture warehouse constraints and logistics availability

Supply collaboration platform to confirm material availability

Which parts should be fixed on priority?

Dashboard on prioritized list of constraints and its business impact

3 How should the orders be serviced and how much will be lost due to broken supply chain?

Dashboard for daily supply plan and visibility on lost orders

4 How will the demand vary as markets open in a staggered manner?

Demand collaboration platform for sales team to provide inputs on the evolving demand scenario

5 What is the readiness of supply chain under various demand/supply scenarios?

Real-time projection of finished goods (FG) stock-on-hand, material readiness and available production capacity under various demand/ supply scenarios


1 Union Budget 2020-21, EY Analysis

6 Hindu Business Line (https://www.thehindubusinessline.com/specials/india-file/the-worst-of-times-for-indias-auto-sector/article29262079.ece)

5 Economic Times (https://economictimes.indiatimes.com/industry/auto/auto-components/auto-parts-manufacturers-plan-diversification-of-supply-chain- in-the-post-covid-19-world/articleshow/75043178.cms?from=mdr)

4 Livemint.com https://www.livemint.com/market/mark-to-market/india-s-auto-industry-braces-for-a-hit-on-import-of-parts-11582481191524.html

3 https://economictimes.indiatimes.com/news/economy/foreign-trade/trade-impact-of-coronavirus-epidemic-for-india-estimated-at-348-million-do lars-un-report/articleshow/74487020.cms?from=mdr

2 Comtrade data Jan’19 to Dec’19, John Hopkins CSSE

References


Vinay Raghunath Partner & Leader, Automotive SectorM: +91-9899003024

[email protected]

Ashish NandaPartner and LeaderSupply Chain Advisory Service M: +91 9987005803

[email protected]

Yugesh Aglawe Supply Chain & Operation leader, Team ASTERISK – R&D & Delivery Org for Supply Chain M: +91 9819603988

[email protected]

Som KapoorPartner, Automotive Sector M: +91-9820024855

[email protected]

Debojit HoreManager, Automotive Sector M: +91-704232329

[email protected]

Nitin SethiAssociate DIrector, Markets & BD, Automotive SectorM: +91-9811907461

[email protected]

Reach out to us


Notes:


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non-linear automotive supply chain: covid-19 and beyond

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