ManufacturingJuly 12, 2020

How can OEMs mitigate the effect of an economic slowdown?

One of the worst things an automotive OEM can do when the economy is going down is to react too slowly.
Avatar Anna Burschik

One of the worst things an automotive original equipment manufacturer (OEM) can do when the economy is going down is to react too slowly. While it is nevertheless true that some OEMs may develop a strong resistance to economic slowdown phases, others may get into a big trouble. Whether an original equipment manufacturer will manage this challenge well will depend on the precautions taken by its management team, such as setting strong foundations in terms of risk management strategies.

Looking to the past, when demand fell during the financial crisis of 2008, numerous firms were suddenly faced with a lot of overcapacity and struggled to right-size their operations in the short term. Challenges like this are often inevitable because network design and footprint decisions had been planned and implemented over the course of several years for a very specific demand scenario.

“The more concerned we become over things we can’t control, the less we will do with the things we can control.”

– John Wooden

Economic slowdowns reduce production volume but simultaneously creates opportunities that add value to long-term performance. Companies constantly have to scan the market for major changes in its specific market conditions or in the overall economic climate. By establishing early warning mechanisms using internal and external data, managers and planners can react more quickly and create alternative demand scenarios on a regular basis to be able to mitigate the effect of a slowdown.

Looking to the future, it is important that these companies proactively address demand uncertainty and create supply chains that are agile and flexible to accommodate a wider range of demand. An agile supply chain can be set up to efficiently provide output in different quantities and deal with fluctuations in regular operations. Management actions can include engaging in significant cost reduction and redefining footprints and networks.

original equipment manufacturer

Create new demand scenarios and collaborate in real time

The key process for matching supply to demand is the sales and operations planning (S&OP) process. If companies are using order history to forecast demand, they will be stuck with too much inventory. Companies that can speed up their S&OP process more quickly will be better positioned to deal with a downturn. Because forecasting demand is the starting point of all planning (including capacity, supply and production planning), it is crucial to understand true demand. OEMs need a solution that supports real-time collaboration between departments in their company. Only then can users have visibility of all business processes and can access relevant information, including supply chain parameters such as resource capacities and costs. They are immediately notified when changes occur at any stage, and enterprise-wide transparency is fundamental to smarter and faster decision-making as a team.

Align inventories

Reducing part and component inventories while still meeting 100 percent fulfillment to the assembly line has always been a key challenge. However, the limited availability of credit during an economic slowdown triggers a high interest in optimizing inventories, as firms are required to free up significant amounts of cash on short notice.

Significant changes in demand required all automotive companies to review and align their inventory policies, whereas order quantities had to be frequently reviewed and reduced. For example, one leading European automotive supplier changed the typical order size for a certain category from a full truckload to half a truckload in an effort to minimize cycle inventory during the last economic downturn.

As such, planners need to avoid surplus inventory intake. Although inventory managers have a few options to increase sales and the outflow of goods, it is essential that they prevent surplus incoming stock. Just as how companies have strict travel policies that balance travel approvals based on a business needs, they should review all material orders against their demand scenarios and check their supplier contracts for cancellation opportunities. Even if these contracts did not allow for order cancellations, companies can often successfully negotiate with suppliers to extend volume commitments over longer periods.

Use saved time for other actions

Because manufacturing processes in many countries have become more complex in recent decades, the importance of planners’ expert knowledge has increased significantly. Many companies reduce employee work hours to ensure that the given order book provided sufficient cover to retain key personnel. When this happens, it makes sense to create a scenario to evaluate the different options. A successful example is Germany’s automotive industry, in which many companies leveraged government-supported part-time work to avoid layoffs. (During the financial crisis in 2009, 1.47 million employees were operating under part-time government support compared to 0.05 million in May 2008.) The ability to retain talent enabled the firms to rebound as the economy began to recover.

Companies that successfully want to go through a period of economic slowdown must constantly challenge and test their ability to adapt to major changes in demand and supply. This is only possible with a fully integrated end-to-end planning solutions that works with other business functions to deliver value through both short- and long-term business strategies.

Learn more about the S&OP solution that delivers this so you can optimize your supply chain and future-proof it for economic uncertainty.

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