Uncover your supply chain risks

pragmatic approach to identify and assess supplier risks

If the last few years have taught us anything, it is that automotive supply chain risk is real. Companies need a structured process of supplier risk identification and mitigation: This is the only way to embed end-to-end supply chain resilience for the future.

The automotive supply chain is extended, global, complex – and fragile. The list of recent and current supply chain shocks and disruptions is already long. The Covid-19 pandemic, logistics failures, political turmoil and warfare have stressed existing automotive supply arrangements to breaking point, while new technologies and new types of suppliers are concentrating risk and supply dependency. There is no reason to think this volatility and risk escalation will end any time soon. Companies need to mitigate supplier and supply chain risk, and to do so they must quantify it.

Understanding the new supplier landscape

Where industrial supply chains are longstanding and the supplier base is rich and competitive, supplier risk may be limited. But where supply needs are developing rapidly against a background of global uncertainty and technology change then risk will inevitably rise. And that is exactly the situation the automotive industry faces today.

The shift to electric drivetrains, connected software-defined vehicles and mobility services have combined to create the greatest period of change the automotive industry has faced. Nowhere is this more visible than in the supply chain arrangements that are critical to automotive success. Change takes the form of increasing process and product complexity, rising demand for new resources and materials that in turn creates strong global inter-dependencies, and an irreversible growth in environmental awareness and demands.

The risks to resilience created by such changes are already apparent. Shortages of both raw materials and finished goods have already caused production stoppages and lengthening delivery times. These event-driven vulnerabilities have been exacerbated by extended global logistics chains, where a break in one link of the supply chain can disrupt the entire production process.

Meanwhile both OEMs and suppliers are struggling to meet the demands of increased product and process complexity. The skills needed to adapt to a digitized sustainability-first industrial model are in short supply, leading to a near-monopoly by some technology suppliers and increasing levels of dependency where risk can no longer be mitigated by multi-supplier strategies. As a result, analysis and mitigation of risk has never been so important.

Making risk visible

Despite clear evidence that supply chain fragility is a rising risk factor, many companies have not taken action to address the threat to their competitive position. According to independent research, some 37% of automotive companies do not have formal supply chain risk monitoring procedures in place. This should be addressed as a matter of urgency.

The Berylls risk approach allows companies to create a holistic yet pragmatic assessment of total supply chain risk. The approach includes a component- and process-related risk assessment, together with an event-driven quantification of political and logistical risks, including the risk of natural disasters, or political crisis.

Figure 1: Where is the risk?

In a complex supply chain, identifying critical suppliers represents a heavy workload. For many companies, supplier or risk management functions simply do not have the resources to perform detailed or sophisticated analyses of the total supply chain. So instead of trying to ‘boil the ocean’ at a stroke, companies should adopt a targeted and pragmatic approach to risk identification and mitigation.

The approach starts with a six-step Q&A process. By answering this simple set of yes/no questions an initial set of critical suppliers is identified, which can then be analyzed in greater detail to generate supplier risk rankings and precise mitigation measures.

Step one: Filter for critical suppliers by component / process criteria. This filter determines criticality according to characteristics of components, the supplier market, and the supplier’s value creation process.

Ask: does the supplier provide a component that cannot be sourced through a different supplier on short notice of four weeks or less?
Ask: has the supplier only recently entered the automotive segment?
Ask: is the supplier’s value creation process dependent on volatile parameters that are beyond its control?

Step two: Filter for critical suppliers by event-driven factors. This step determines criticality according to the buyer-supplier relationship, political factors, the logistics chain, and potential catastrophic risks.

Ask: is the supplier’s activity and supply to us significantly affected by political influence?
Ask: is the logistics chain volatile or hard to control?
Ask: are the supplier’s activities exposed to regions that are prone to natural disasters or war?

Figure 2: Rank suppliers by criticality

The result of the initial six-step review may be that many suppliers qualify as critical. Companies should then consider their own appetite for risk and raise the threshold for criticality accordingly, by assigning critical status only to those suppliers that generate multiple ‘yes’ answers in the initial review, or by assigning scores to selected answers.

From risk to mitigation

The six-element process determines supplier criticality, but determining actual risk demands more detailed analysis. Therefore, a series of further indicators are used to determine the level of supply chain risk for specific suppliers, which can then be ranked according to the need for mitigation. These include product and supplier indicators such as component characteristics, raw material scarcity, number and maturity of suppliers in the market, and supplier performance including cybersecurity performance. They also include market indicators such as technology complexity, costs and competition. Event-driven indicators include regulatory change, political pressures and infrastructure dependence, logistics performance and cost structure, as well as vulnerability to extreme events.

Figure 3: Doing the detail on supplier risk

Cooperation for risk mitigation

Of course supply chain risk management does not stop with identifying and ranking critical suppliers: mitigation measures need to be derived, launched and tracked. In our experience, the key to mitigation is cross-functional awareness. Companies need to be aware of their supply dependencies not only within their markets, but also within the wider business environment. Risks are identified faster and better when this understanding runs right across the organization.

Supplier risks are best mitigated through collaboration within the supply chain. Whether risks are related to logistics, or political stability factors, or carbon emissions, an understanding of a supplier’s operations, transparency, and a shared effort to eliminate risk is vital. The role of the procurement function is critical here, as it is closest to individual suppliers and most likely to hold the levers that are capable of managing risk.

Yet whatever the path to mitigation, the beginning and end of better supply chain risk management is knowledge. As investment professionals often say, the biggest risk you face is probably the one you don’t know about. The Berylls approach to risk identification and scoring is designed to be a pragmatic, low-cost method of eliminating the risk of the unknown.

Fritz Metzger

Fritz Metzger (1986) joined Berylls Strategy Advisors, an international strategy consultancy specializing in the automotive industry, in February 2021. He is an expert on automotive operations.

Since 2011, his focus has been on strategic alignment and operational efficiency improvement of automotive manufacturers and suppliers. He also advises top management in critical situations, including R&D and industrialization task forces and relocation and restructuring initiatives of plants and complete suppliers. The challenges of e-mobility are always in focus.

Before joining Berylls, he was a director at international strategy consultants PwC Strategy&, as well as a sales and project manager at a medium-sized supplier and mechanical engineering company.

Fritz Metzger is a trained industrial engineer with a degree from ESB Business School Reutlingen. He also holds an MBA from the University of Salzburg.

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Uncover your supply chain risks

Authors

Fritz Metzger

Hendryk Pausch

Eren Duygun

Understanding the new supplier landscape

Making risk visible

Figure 1: Where is the risk?

Figure 2: Rank suppliers by criticality

From risk to mitigation

Figure 3: Doing the detail on supplier risk

Cooperation for risk mitigation

Fritz Metzger

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