In contrast to several other major automakers, including Ford and General Motors, forced to cut production this year because of the global chip shortage, Toyota expects to ship 9.6 million vehicles — almost a 6% jump from last year’s 9.1 million — as a direct result of how it manages its supply chain.
Companies will continue to struggle to meet consumer demand because of the new reality of component and commodity shortages. We’re anticipating shortages for raw materials, including residue, glass, rubber, steel and aluminum, and possibly other metals, to continue for the immediate future, which means that component shortages will likely hit any industry.
What exactly can supply chain leaders do now to avoid revenue losses due to stock-outs as the economy rebounds and we gear up for the 2021 holiday shopping season?
Effective inventory and demand management. The key to Toyota effectively navigating the semiconductor chip shortage is they are very closely integrated with their supply base down to Tier 3 and Tier 4 suppliers. As a result, Toyota was able to foresee and plan for the upcoming semiconductor chip shortage and spike in consumer demand, stockpiling crucial part inventory. A supply chain leader must ask their team several critical questions: How good is our visibility into inventory across the entire bill of materials for the products we manufacture? Have lead times been mapped out and confirmed with suppliers for the short and long term? How accurate are our forecasts, and have we thought about leveraging more sophisticated concepts, like demand sensing, to be receptive to any changes in the market or consumer purchasing behaviors? Has any thought been given to incorporating sentiment analysis into our demand models? As we go through a rebound of the economy and pent-up demand explodes, companies that have solutions to the aforementioned problems will land ahead of the curve. It is now essential to operate with cloud-based supply chain planning software in order to marry real-time data about your supply chain with dynamic forecasting of customer demand.
Supplier and component risk assessments. Neither all components nor all suppliers are created equal. Go back to the drawing board and conduct ABC analyses for both suppliers and commodities as soon as possible. Ask yourself, especially for those components that fall in the A and B bucket? Do all these components need to come from one supplier, or can I source from multiple suppliers?
After completing the risk assessments for all A and B suppliers, develop mitigation plans for any potential crises, especially cyberattacks, extreme weather events, and price inflations. In our current semiconductor shortage, auto chips are often low-margin and are not as profitable as ones designed for consumer electronics. The auto sector accounts for only 3% of TSMC’s capacity whereas 48% comes from smartphones, so suppliers are always going to prioritize the likes of Apple, Samsung, and AMD. To add more complexity to the mix, auto chips follow different production processes and have different manufacturing timelines when compared to chips for consumer electronics. As a direct result of automakers overreliance on TSMC and poor communication around demand from automakers mean the auto industry will lose about $110 billion in revenue in 2021, which would have been mitigated with risk assessments.
Securing supply and developing new suppliers. After uncovering the bottlenecks, scout for and secure supply to meet demand in the short term. Ask yourself, how savvy is my procurement team with hustling and negotiating for supply? Does it know what the materials/components “should-cost” or are we relying on three-bids? Have any alternate suppliers been identified and qualified?
Consolidation and single sourcing have been drivers toward shaving off costs in the past decade, but the last year has taught us the hard way that diversification is also a need of the hour and will continue to be for the foreseeable future — with an escalating number of cyberattacks to supply chains, geopolitical issues, commodity price increases, and extreme weather events. Investing the effort and money now to develop secondary sources of supply will pay off via improved security and price advantages down the line.
An example: Apple’s development of multiple mini-LED suppliers to service demand for the new iPad Pro line and for potential MacBook product lines in the future. Apple decided to develop, invest in and contract with multiple Taiwanese mini-LED manufacturers to ensure they have adequate supply for today with capacity for future growth, as well as resilience and backup options if tragedy strikes. AMD also recently renegotiated its contract with Global Foundries to lock in a minimum annual capacity so it won’t have to jostle with other companies for supply. Another smart move was removing any exclusivity contract terminology, so it is free to work with other foundries in case of a demand spike.
The three lessons described above may seem elemental and even common sense, but as real-world examples have demonstrated, these strategies have been ignored by the most experienced and sophisticated of global companies. As a direct result, companies that are leaders in supply chain fundamentals are now able to drive sustainable, profitable growth.
Ishan Sood is a consultant at GEP, a provider of procurement and supply chain solutions.
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