Ensuring business continuation in the automotive sector: 3 pillars

Sep 05, 2022
  • IT
  • automotive

There’s no industry like the automotive industry: nowhere else is the relationship between OEMs (in this case: car manufacturers) and tier 1 suppliers so critical for long-term business survival. This unique dynamic poses a number of potentially business-breaking challenges. “To become future-proof and ensure business continuation, automotive players need not only to understand these challenges. They must also be able to measure their progress on specific KPIs,” argues delaware’s automotive expert Glenn Huybrechts, who developed a unique KPI framework based on three pillars.

A primer on the automotive industry

Consider the automotive industry as a pyramid, with vehicle manufacturers – also called original equipment manufacturers or OEMs – at the top. Next level down are tier 1 suppliers, who usually sell specialized assemblies or parts directly to the OEM. They purchase their supplies from tier 2 suppliers, who purchase from tier 3 suppliers, and so on. 

As a tier 1 supplier, you have previously bid on a request for quotation issued by the OEM. If chosen, these suppliers will likely make a significant capital investment in R&D and production assets to be able to supply this part for the duration of that specific car model (approximately 4 to 8 years). 

From costs to customer expectations

“Until recently, the automotive industry was a stable, very cost-driven vertical, with price as an essential differentiator. Since there exist only a limited number of OEMs (or potential customers for tier 1 suppliers), they could put a lot of pressure on suppliers to keep prices low while also demanding high-quality, reliability, and accurate delivery.” 

“Today, however, the focus has shifted from costs to meeting customer expectations and adding value,” Glenn continues. “Modern drivers are willing to shell out more for extra functionality, smart features, compelling experiences, etc. As a result, building strong partnerships and ecosystems that foster strong co-innovation and co-creation has gained importance in the OEM-supplier dynamic. At the same time, striking the right balance between reliability, quality, and accuracy remains as important as ever.”  

OEM as leader and coordinator

“Contrary to many other industries, tier 1 suppliers rarely get a long-term fixed price contract,” says Egon Nuyts, automotive expert at delaware. “Instead, the actual POs are issued on a short-term basis. This gives the OEM the opportunity to renegotiate certain aspects of the deal, like price, quality, quantity, and so on.” 

In addition, OEMs also have ‘general terms’ that are used for the procurement of manufacturing parts. These terms can include, for example:

  • Warranty provisions that determine the suppliers’ liability for design defects, intellectual property infringements, and the cost of recalls;
  • The suppliers’ obligation to deliver parts to the OEM for years after model production ends. This leaves the supplier with the cost of maintaining a production line without the chance to recoup expenses through high sales volumes;
  • Suppliers are expected to comply with stringent industry and OEM standards and guidelines. These requirements relate not only to quality, timing, location, etc., but also extend to financial reserves, efficient manufacturing operations, and other proof that they are running a healthy business. After all, the more efficiently a tier 1 supplier organizes its own processes, the lower the risk for the OEM.

“If these conditions are not met, the OEM can fine the supplier, who may also even end up losing the OEM’s business entirely. As a result, the safest bet for the supplier is to cater to the OEM’s wishes at all times,” Egon concludes. 

The three pillars of a solid business approach

Given all of the above, how can tier 1 suppliers strengthen their position and ensure business continuation in the long run? Glenn proposes a three-pillar model that encapsulates the most significant business aspects to focus on.

Illustration: how the three pillars of a solid business approach work reinforces each other.

1. Building a sustainable partnership

Glenn: “As a tier 1 supplier, your main ambition is to establish a long-term partnership with the OEM and become their preferred partner. To achieve this, you need to be able to deliver high-quality components, accurately and on time. Anything less can damage the supplier relationships and result in a loss of confidence, plus penalties or fines. Hence the importance of periodic supplier evaluations by the OEM, as well as internal, real-time follow up of KPIs on the supplier’s side.” 

2. Optimizing efficiency

Reliable delivery, though crucial, is not a guarantee for business continuation for tier 1 suppliers. “Supplier contracts typically last a fixed number of years, after which a new bidding process – with new competitors – is initiated. For the OEM, this is the perfect time to demand lower prices for the same services.“

“To remain competitive, a tier 1 supplier must continuously strive to optimize the efficiency of its internal processes: finding ways to lower operational costs while retaining the same output volume and quality, reducing scrap, etc. The goal here is to boost the company’s financial strength to facilitate low and competitive prices.”

3. Continuous innovation

But reliability and efficiency alone aren’t enough to gain certainty either. “Even when you do everything right as a tier 1 supplier, there’s still a chance that the OEM will stop making the car model you’re delivering specific parts for,” Glenn continues. “Or that new car models will require more sophisticated, electronic parts.”

“As a supplier, you need to make sure your production lines can handle such changes. In other words: you need to be flexible enough to keep up with the OEMs speed of innovation. Even more, if you want to be at the top of their list, you need to propose unique innovations, as well as an unmatched operational excellence.”

Here’s where a good score on the other two pillars plays an important role as well: 

  • If you’re the most reliable partner, the OEM will likely provide a heads-up on future innovations, objectives, or other changes.
  • If you’re the most efficient supplier, you’ll be able to invest more in innovation. 

Heading in the right direction

Since the 3 pillars mentioned are all interrelated, it’s vital for tier 1 suppliers to permanently keep track of each one in order to guarantee business continuation. On the other hand, OEMs also need to be able to review and track supplier accuracy, viability, competitiveness, innovation performance, etc. For this reason, our team of automotive experts has developed a specialized KPI framework aimed at both tier 1 suppliers and OEMs, including insights into the real-time status of operational effectiveness and customer delivery accuracy. This allows suppliers to prove their value to the OEM at all times, while also offering relevant insights into how the three pillars are balanced within the organization. 

Get in touch with Glenn

Get in touch with Glenn via email or LinkedIn to learn more about the KPI framework and how the delaware automotive team can help you obtain valuable insights.