Automotive firms will need to realign supply chains, says EY India report

The Indian automotive industry will need to undertake a bottom-up evaluation of the supply chain architecture and its vulnerabilities against external factors like the pandemic, according to a recent EY India report titled ‘non-linear automotive supply chain — Covid-19 and beyond’, which has found that the impact has been deep rooted.

The automotive supply chain and manufacturing segment has been evaluating mid- and long-term impacts of Covid -19. These include procurement planning and supplier management, integrated sales and operations planning, manufacturing, logistics and distribution

Vinay Raghunath, partner and automotive sector leader, EY India, said: “The Indian automotive supplier base is currently not too diversified for majority of components. This was to drive volume-based price efficiencies. However, this strategy is highly exposed to risks arising from disruptions in geographies that supply key auto components.”
The report also highlights the impact of Covid-19 on the Indian automotive supply chain and its inherent inefficiencies. It outlines focus areas which could help its performance in the interim and beyond.

The Indian automotive industry imports $17.5 billion worth of auto components. Before the pandemic, to enforce ‘Make in India’, the government in the Union Budget 2020-21 hiked customs duty on raw materials and inputs imported by domestic manufacturers by 2.5-5%, and completely built units (CBUs) from 30-40% for commercial vehicles other than electric.

Traditionally, logistics costs in India have been comparatively higher than neighboring nations. The key challenge for the Indian automotive supply chain would be to manage the cost escalation year-on-year, driven by rising fuel costs. OEMs, therefore, need to explore the ability of key suppliers to fulfill orders from alternative locations.

According to the report, the critical first step would be to identify a company’s key direct suppliers and dependencies — both in the supply and the demand side. It requires an in-depth mapping exercise to understand its ability to meet supply requirements and responses during potential risk scenarios. This will enable the creation of a flexible ecosystem comprising suppliers and distribution partners. Increased and real-time visibility of their networks will result in better preparedness in case of disruptions to specific nodes or routes.

Som Kapoor, partner, automotive sector, EY India said, “Organisations need to consider an end-to-end risk assessment of their supply chain covering demand and supply risks, operational performance, global trade implications, customer impact and people aspects. These can be followed by simulating crisis scenarios and validating response tactics.”

Exploring agile and flexible supply and distribution networks could drastically reduce the risks associated with unpredictability of demand. Being highly dependent on a lowest cost supplier and minimal inventory might significantly impact the supply chain, as business environment deals with dynamic demand characteristics of the market.

Digitisation of the supply chain will also provide the necessary edge to address the changing needs of customers. There is a need to appropriately evaluate newer variables for designing the optimal supply chain model, basis the possible external scenarios.