The missing link in automotive contract manufacturing

In 1922, Henry Ford famously said, “Any customer can have a car painted any color that he wants, so long as it is black”.

Fast forward 100 years and a very different image materializes: the customer of the present demands variety. Fulfilling this multi-faceted demand has become a major challenge for car manufacturers, who have to deal not only with countless models and colors but also with an ever-increasing range of features and options.

Volatile customer demand can be bridged by making use of contract manufacturers. Contract manufacturing (CM) is a feasible way to add capacity and flexibility without investing in new facilities. Along these lines, Mercedes appointed AM General just about a month ago, to produce 12,000 of their R-class vehicles destined for export to China.

The outline of the deal is simple: Mercedes will manage the logistics and supply chain, while keeping their supplier network in place. All parts of the R-class vehicles will be assembled and painted on AM General’s production line in Mishawaka, Indiana.

So, what is the key to a healthy relationship between the original equipment manufacturer (OEM) and contract manufacturer? The answer is simple: Collaboration. As the scope is limited, we will present in brief 3 reasons why collaboration is a crucial enabler:

1. Collaboration creates end-to-end visibility

The automotive industry commonly deals with global supply chains: Globally dispersed suppliers and worldwide manufacturing facilities increase complexity. At the beginning of the year, I attended a Volkswagen keynote addressing their supply chain network. It soon became clear that end-to-end visibility had become an overarching catchphrase and a priority to their industry. Keeping this in mind – how could an OEM monitor their contract manufacturing relationship, if they did not first establish extended visibility over their own supply chain?

With collaboration tools, OEMs not only have access to data and information regarding their product, they can also retrieve meaningful information from their contract manufacturer to verify quality, timeliness or cost-effectiveness. A healthy CM relationship builds on the premise that a quality report, a shipping confirmation or real time inventory data is just a click away.

2. Collaborative planning assures delivery performance

Throughout the automotive supply chain setup, collaboration between dealers, OEMs, contract manufacturers and suppliers is crucial to delivery performance. By integrating and sharing data, forecasts can be generated directly at dealer level, aggregated through the supply chain and forwarded upstream to the various globally dispersed suppliers.After all, the network to produce one single car can include thousands of suppliers. With extended supplier networks such as those in the automotive industry, there is a strong need for real time information in order to assure delivery performance.

Partnering with a contract manufacturer intensifies the need for an integrated collaboration platform; daily disruptions are not only costly but need to be communicated downstream instantly. With the right collaboration tools, customer are proactively involved in case of late delivery and can be compensated with substitute vehicles or rebates.

3. Collaboration bridges the lack of control

Often OEMs are hesitant to make use of contract manufacturing relationships. Why? Because of the limited control they have over their manufacturing process.

In the traditional setup, the OEM controls every aspect of production within its plants. The addition of a contract manufacturer provokes uncertainty. Will the contracted partner prioritize the needs of the OEM? Or will he put the needs of other clients first? Once again, collaboration is key.

How does this look in practice?
The contract manufacturer needs to signal his priorities through committed volumes and capacities. Coming back to the previously mentioned deal between AM General and Mercedes Benz it quickly becomes clear that contract manufacturers are subject to the industry’s fluctuating demand, as they usually do not produce core models. Investing in committed capacity is a strong signal to the OEM, as there is no guarantee it will be filled.

Adding the missing link

Contract manufacturing is a feasible way to add manufacturing capabilities when an OEM finds his plants nearing full capacity. In order to overcome the risks associated with CM, a collaboration tool can act as an enabler: Through collaboration with the contract manufacturer, dealers and suppliers the OEM can generate visibility, assure delivery performance and generate control. There are many more aspects to this link, but we kept it brief and simple.