Optimizing supply chain readiness and resilience will remain a top priority for the automotive industry in the coming year, as C-suite executives manage the convergence of political, economic and environmental risks that are negatively impacting production and profits.

During the third quarter of 2023, some supply chain managers were cautiously optimistic that disruptions caused by the pandemic were fading into history. Instead, s new set of circumstances emerged to wreak havoc, including attacks on commercial ships transiting the Red Sea, a slowdown in Panama Canal traffic due to low water levels, and muted consumer demand. In the case of the last, S&P Global Mobility is forecasting that worldwide sales of light vehicles will rise 2.8% this year, down from 8.9% in 2023. S&P says demand will be “challenged by elevated vehicle pricing alongside challenging credit and lending conditions.”

Most supply chain shocks are unavoidable. Extended disruptions can be especially harmful to a company’s brand, and both customer and supplier loyalty. Failure to adapt to long-term crises can also reflect negatively on management’s ability to adapt to ever-changing demands.   

For its part, the automotive industry has made significant progress in enhancing the readiness and resilience of supply chains since the pandemic. Companies have poured billions of dollars into automation technology to improve productivity. They have also invested heavily in tapping into new suppliers, to mitigate the risk of bottlenecks. In many cases, they have completely re-evaluated the overall supply chain with an eye to resilience.

With continued disruption, however, there’s more work to be done. Recent research by Horváth shows 70% of the top managers at automotive businesses rating their companies’ degree of supply chain maturity as low to medium. While there’s some acknowledgement of progress, respondents say there is still much opportunity to improve and optimize supply chains.

Following are four strategies that automotive industry leaders can implement to mitigate current and future supply chain risks.

Expand regionalization. Enhanced regionalization of suppliers can bolster the entire supply chain in two important ways. A more diverse supplier base can reduce exposure and dependencies on volatile markets, and speed production and distribution by shortening transition times. While there’s an associated cost with expanded regional focus, new technologies and capabilities developed during the last few years can offset these costs through productivity improvements.

Enter or increase production capacity in new target markets. While the move into electric vehicles has opened the door to new growth opportunities, it’s not without challenges. But it’s still a good example of how rethinking products and markets is important. And it’s not just about introducing new modes of transport —in many cases, new technologies can be applied to existing problems like fuel cells for propulsion or data-based services for safety. Any company not rethinking the markets during these challenging times is taking a big risk.

Optimize order processing end to end. Unexpected call-offs from automotive manufacturers can have a ripple effect throughout the supply chain. By identifying weak links in the purchasing process that slow the ability of businesses to adjust operations to call-offs, supply chain managers can limit the impact of unplanned order changes. The application of digital twins and artificial intelligence to develop scenario-based models of the end-to-end supply chain is one approach being used successfully.

Embrace the power of digital technology. The growing sophistication and ease of use of powerful data-management technology will be a boon to supply chain optimization. Digital tools that harness artificial intelligence, machine learning and natural language processing can not only model the supply chain for better forecasting, but also enhance performance by reducing friction and complexity through better decision-making.

Today’s supply chains generate the greatest value when the processes that link manufacturers, suppliers and logistics providers work seamlessly. Winning companies take a holistic approach to coordinating and working with partners – as well as the interconnected processes and systems – to optimize performance. When the ecosystem is operating at peak efficiency, all partners benefit in the following ways:

• Improved profitability. Frictionless processes can offset rising operating and working capital costs.
• Enhanced delivery capabilities. Flexible supply chain structures, relationships and processes can mitigate the impact of supply disruptions.
• Expanded growth opportunities. Diversifying supplier relationships through expanded regionalization can play an important role in entering new markets and expanding operations in existing and emerging markets.

Supply chain disruptions can happen at any time, and have a significant impact on a business's bottom line. A delay in one component can stop production in its tracks. Automotive leaders who implement these four strategies will be able to build a cost-effective supply chain that secures the financial prosperity and long-term competitive advantage of their businesses.

Tony Klimas is a partner and president of Horváth US.