Impact of Digitization on Procurement Managers in Automotive Industry

Traditional procurement as we know is coming to its definite end. Now the question is, how can those responsible for this function adapt its strategic role for long-term survival? 
Munib Ali

Automotive Industry in Turmoil. CPOs in Paralysis?  

This decade is facing one of the most disruptive transformations the automotive industry has seen in over a century. What makes this transformation so disruptive? All recent studies and trends are pointing towards four main factors changing the core of the automotive industry: electrification (EVs), autonomous vehicles, shared mobility and connectivity (Source: McKinsey, 2021). To date, the majority of procurement activities in the automotive industry have revolved around securing better prices, signing optimal (long-term) contracts, or managing the working capital of its firm. As automation rapidly transforms many industries across the globe, the day-to-day activities of procurement departments are becoming more and more redundant. At the same time, if procurement executives take on a decision too early, without analyzing all possible scenarios of the future, it can have dire consequences on the business today. So how do they ensure an optimal positioning today, without compromising the competitiveness of its firm in 10-years? This question at least sheds some light on why most CPOs may be in paralysis today. 

“No change is good or bad on its own. Change is simply inevitable. How we adapt to external changes is what determines our success or failure.”

In this article, we will cover how procurement teams can stay on top of industry trends and digital transformations, as well as how to align their departments today to secure a better place tomorrow. We hope to bring some insights by answering two primary questions: how to create a future-proof procurement department that works well in an agile and automated framework & how to establish an effective sourcing process in order to remain on top of the game. 

Figure 1: A brief history of the automotive industry in a timeline (picture source: Jadine Motors Group)

Positive or Negative Impact?

Before we dive into the frameworks that procurement teams can adapt to, let’s quickly define this “impact” to analyze whether it’s good or bad. A simple answer would be: mostly good. But as we know, nothing about the auto industry is quite simple. The uncertainty revolving around this disruption surely has gotten the incumbents on their toes. After all, their legacy is dependent on being the best in the market. The industry leaders have secured their position on the top by perfecting their production, assembly lines and supplier relations over decades. Now this transformation eradicates all that and opens up the market for new entrants. Perhaps this is the catalyst that Tesla has been referring to all this time. It’s not all lost though for the incumbents, as evident by the market. All industry leaders, including Porsche, Audi, BMW, Mercedes and even Ford have shifted their focus on creating EVs. 

With thorough planning and analysis of various future scenarios, this change or transformation can be mainly good. Good for the consumers. Good for the Earth. And good for the competitiveness of companies. 

“By embracing new requirements and technologies, procurement can reposition itself, assume different tasks and provide unprecedented value to the company." (Oliver Knaap, Senior Partner at Roland Berger)

Future of Procurement: Digital Value Chains

We understand that while some giant OEMs may have plenty of resources to invest in robotics and complex AI solutions, it is not possible for all automotive stakeholders to adopt similar strategies. Nor are we trying to focus on those advanced transformations in this article. The intent here is to outline some basic strategies that should improve your competitiveness while keeping the risk at minimal levels. Here are a few possible opportunities that Procurement managers can assess for their own organizations: 

  1. Build Strategic Supplier Relationships

Establishing strategic relationships with suppliers may seem like an obvious choice to make, but it’s more than that. It’s about maintaining relationships with them while diversifying your supply base to remain competitive in the market. More importantly, establishing real-time connectivity with all your suppliers is crucial to break traditional silos in a supply chain, enabling more holistic planning for your company. Investing in this step can not only assure competitiveness but also acts as an active risk management practice. Relying too much on a few key suppliers can have severe consequences whenever an external crisis hits. 

  1. Sustainability and a Transparent Ecosystem

The ever increasing focus on adopting sustainable practices among all industries is in fact one of the primary reasons for this disruptive transformation in the automotive world. There is still a common misconception associated with sustainable practices: it drives costs up. This is certainly not true. Adopting sustainable practices and ensuring end-to-end transparency of your supply chain can be a catalyst for profitability growth. Waste-reduction, improving efficiency of resources, decreasing machinery idle time, is all part of a sustainable value chain.

As data volumes increase and networks become more complex, it falls on procurement to ensure transparency along the entire supply chain across the different supplier tiers. In addition, procurement teams need to follow more agile methodologies to adapt constantly according to market changes.

  1. Margin-based Sourcing

Finally, automating and standardizing purchasing processes using pre-existing online B2B automotive marketplaces can ensure margin-based sourcing. Turning focus to managing and sourcing partnerships, cutting costs using digital marketplaces, and adjusting lead time for suppliers to adapt to modular production concepts can increase the overall competitiveness. 

Already numerous OEMs and suppliers are using 3rd party applications and software to manage supplier risks. Such apps can also provide advanced analytics and reporting that can be shared internally and externally to align other departments with procurement. 

Key Takeaways 

In conclusion, it's not necessarily just the automotive industry that has been impacted by digitization; procurement in general is facing significant transformation. The urgency to act now for automotive procurement has been mostly due to the sudden focus on electrification, autonomous vehicles, shared mobility and connectivity trends. 

The procurement teams need to accelerate digital transformation with a clear focus on integrated systems solutions, data management, and analytics to create value from data. There are several technologies, such as automation, real-time connectivity, machine vision, IoT, data management & analytics that will enhance operations across the value chain.

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Published on:
August 24, 2021

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