The continued growth in the number of components used by automotive manufacturers has spotlighted new opportunities for component distributors. There are many positives to the increased penetration of electronics in automobiles including improved safety, better fuel efficiency, navigation and infotainment. While consumers, semiconductor manufacturers and automotive OEMs stand to benefit from these advancements, these opportunities also come with significant challenges.
Supply chain solutions are in demand for the automotive industry and their EMS providers. On the front lines are the distributors who support automotive manufacturers' needs for cost savings, VMI programs, enhanced testing capabilities and strict quality assurances. While cost is a hurdle, the central concern for safety and quality is front and center. Understanding the major challenges to automotive manufacturers sheds light on some of the supply chain shifts and the demands that impact purchasing.
Cost savings still a hurdle
In a very real way, there are a number of supply chain events that continue to prohibit buyers and planners in the automotive industry from achieving competitive pricing. The driving factor behind this trend is volume demand. As the industry news reminds us weekly, there is ongoing, solid growth and a significant increase in electronic content in vehicles. However, what we don't hear about is that these numbers still don't represent a big enough market for some companies in the supply chain. Auto makers and their EMS providers have yet to convince semiconductor manufacturers to provide competitive pricing. Let's think about the numbers for a moment.
The most technically advanced car on the market today has approximately $3,500 worth of electronic components on board. However, the number of cars produced annually is a just a fraction of the notebooks, tablets, and smartphones that are being produced. Both of these markets utilize the same types of components. Consumer demand for the latest gaming device or smartphone heavily outweighs demand for the latest fuel efficient "smart" car. The larger quantity buyers will always receive the best pricing, therefore the automotive industry faces high pricing due to low volumes.
Automotive manufacturers are not only competing with each other, they are now competing against buyers in other markets for the very same types of volatile commodities such as DRAM, NAND flash, MCUs, MPUs, FPGAs, PLDs, and sensors. Larger quantity buyers, such as for consumer devices, will always receive the best pricing, that is a simple economic fact.
Successful solutions address the pricing and cost savings needs based on strategic sourcing opportunities. The most effective of these are customized bill of material (BoM) analyses that provide forward looking market strategies for purchasing components and approved alternatives. The key is to address the needs and provide cost savings through sourcing agility. The approved alternative components are particularly important because the automotive component replacement cycle is much longer than consumer cycles. This cycle mismatch poses additional problems (and cost issues) by adding the challenges of dealing with part change notifications (PCNs), last-time buys (LTB)s, and end-of-life (EOL) events sooner than ROI can balance out the testing costs.
Quality assurance reigns
Receiving quality components is paramount to the automotive industry because the alternative (nonfunctional or counterfeit) not only damages brand reputation, but could also endanger lives. The specialized testing processes for authenticity and counterfeit detection adds considerable costs as well as time for new product innovation and build cycles. Having strategic BOM analyses with alternative components reduces some of the pressures facing automotive manufacturers. Having sourcing options that safeguard quality and offer more flexibility is paramount to dealing with the challenges and increased market competition for components.
Supply chain managers in the automotive industry are tasked with making the decision to utilize suppliers that can not only supply product with full traceability to the original manufacturer, but also to partner with those who can test the components for functionality as well as authenticity. Outsourcing these "testing solutions" isn't new to the automotive industry, however the increase in the number of components that need to be tested have increased their overall cost of testing.
The longer lag time introduced by specialized testing adds to the challenges facing automotive manufacturers. These lags move the automotive manufacturers into a different (and slower) component cycle than the wider, global electronics supply chain. The more volatile (and faster) consumer-product manufacturers who are sourcing similar (or the same) components have greater sourcing agility and are able to stay abreast of PCNs and implement changes quickly as they have numerous alternative manufacturers and part numbers approved. As well as an abbreviated approved vendor list (AVL), the delays caused by intensive testing for automotive electronics present real challenges from a time and sourcing perspective. Not only does it mean that just as a set of parts are approved there may be a PCN or LTB event; it also means that early ordering and securing volume requirements may not happen in sync with competitors from other markets such as consumer electronics.
Beyond just the sourcing and pricing challenge is the latency we see in the infotainment systems themselves. For example, by the time the automotive industry has adopted the latest in-dash applications, and has tested and approved the specific component sets used to run these applications, the components' life-cycle may have ended. New revisions have been created due to a factory die shrink, or the part has become EOL and a "better" part with more density, or lower power consumption, or a faster processing speed has been released. And so the design and testing cycles must begin anew. Obsolescence is an enduring challenge for the automotive industry in no small part because of the time it takes to go through the necessary quality and extreme environment testing to bring smart cars to market.
In response to these significant challenges, automotive manufacturers are turning to service partners and distributors to develop customized strategies. These strategies are focusing on risk mitigation taking into account quality, safety and regulatory adherence while giving manufacturers critical alternatives and market information to get ahead of PCNs and LTBs. Support, through in-house testing and quality labs coupled with sourcing agility with ongoing support through the longer lifecycles that vehicles have over consumer electronics, provides some of the critical supply chain solutions for the growing automotive industry in demand now.
Jamie Treinen is a senior account executive for Smith & Associates