Customer demand has always been tricky, but recent years have made it even more so for automotive suppliers. Many different forces came together at just the right time to form a perfect storm. Demand destruction has been forecasted for 2024 onward due to economic headwinds, and the combination of pandemic-linked labor shortages, geopolitical conflicts, and high inflation have created supply uncertainty. More, the supply chain implications of transitions to battery electric vehicles (BEV) have layered on yet another unknown into the mix.
Regardless of whether your supply chain experts use their experience and intuition or a data-driven method to analyze forecast accuracy, they are more than likely struggling with the (un)reliability of demand signals coming from customers.
For many auto suppliers, the scenario is familiar: For a number of months, customers have not picked up the volume that they’d previously informed you about, causing inventory, production flow, shift schedules, and inbound/outbound logistics to go out of whack. In monthly S&OP meetings, there’s barely enough time to understand the implications of unstable demand on inventory. Do you need to carry more or less inventory in the next quarter? What would be the ideal inventory level in the next 18 months?
Auto suppliers need to figure out the best way to hedge against these uncertainties using levers like finished goods inventory, production capacity, raw material inventory, and expedited or premium freight. Alongside this, suppliers will need to determine how much working capital their organization is willing to invest in order to protect against potential stock outs versus partially fulfilling or delaying customer demand.
While you cannot change your customer’s demand, you can be faster and more informed in deciding what to do about it. Collaborating with our clients, we’ve learned valuable lessons along the way and have observed that faster validation and scenario analysis to inform decision-making, combined with faster execution, could improve service level by 400 basis points and increase gross margin by 5.5 percent.