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Professor Dr. Ferdinand Dudenhöffer Full speed ahead to a standstill?

Supply-chain risks in the car industry

Corporate risks are complex.: from the right product decisions to financial ventures and possible cybercrime attacks. But there are also risks that are not obvious at first glance and that may not even directly affect a company in the first instance. One risk that is not always focused on is supply-chain disruption. In the automotive industry in particular – a pioneer of just-in-time and just-in-sequence – it is important to be aware of this risk. What happens if suppliers fail? How can this risk be minimised? In a conversation with Professor Ferdinand Dudenhöffer from the University of Duisburg-Essen, we look to highlight supply-chain risks in the car industry.

Solutions: Professor Dudenhöffer, in January 2017 there was a serious fire at the factory of a Daimler supplier in Most, Czech Republic. According to information from a Daimler spokesperson, a subcontractor manufactured films for dashboard panels there. Ultimately, there were days of standstill in production in Sindelfingen, but other manufacturers such as Volkswagen, BMW, Renault and Peugeot-Citroën were also affected by supply disruptions. Are car manufacturers actually aware of the supply-chain risks caused by such a fixation on a single-source supplier?

Prof. Dudenhöffer: That varies from company to company. As far as I am aware, BMW has a very flexible system and has already had supplier risk protection in place for 20 years. You often only notice that you have become too rigid when a crisis occurs. I have the impression that the Japanese also put a lot of trust in their chains and do not make much use of dual or multiple sourcing. As far as the Americans are concerned, they include risk estimates in planning. It is also partly dependent on how the company is constructed. If it is strongly driven by engineering, risk is mostly something that is difficult to depict. Dieselgate is an example where the whole company was driven into the ground.

Solutions: Is risk management better in America?

Prof. Dudenhöffer: I believe so. German companies are heavily product-driven. That is certainly a good thing and it has led to impressive performances. But being purely product-driven sometimes means paying less attention to other things. At BMW things are a bit more balanced, or at least that is my impression. You could say that the smaller players need to work in a balanced way. The Americans pay a lot of attention to corporate governance; they are trained differently. They know the risks and are conscious of them.

‘The Americans are trained differently – they know the risks!’

dudenhoeffer 1Solutions: Should it be recommended that European and German car manufacturers pay more attention to risk management?

Prof. Dudenhöffer: I believe this approach is more prominent among the French. Various crises at VW have shown that people were too fixated on the purely product world and should have been positioned on a broader base. Daimler is somewhere in between. At BMW, too, the product used to be very much in focus, but at this comparatively small company, other considerations have been added that were strongly influenced by production. They saw how to balance risks in the production sector and made a balanced factory a focus topic. They took care not to take on risks on the supplier side for the sake of saving a few euros, only to lose a great deal when things go wrong.

Solutions: Are smaller companies with shorter decision-making channels also capable of acting more quickly in crisis situations involving a supply-chain interruption?

Prof. Dudenhöffer: There are various stages represented in the automotive industry: the car manufacturers themselves, and then large and small suppliers. The large ones are globally active corporations. They have a decision-making chain from the top to the bottom. If there is a ‘fire’ at the bottom, it can take time for the information to reach the top – and the reaction is of course delayed. The bigger the company, the more complex it is. By their very nature, these large companies move more slowly than smaller ones that have few decision-making steps, such as the smaller suppliers that are often owner-managed.

Solutions: Should it be recommended that large companies take a look at their decision-making chains and amend decision-making powers for worst-case scenarios? For example, by providing key positions with authorisation to make decisions more quickly?

Prof. Dudenhöffer: It depends. VW had a highly hierarchical set-up, which is now being loosened so that the different brands are able to act independently. However, in big companies information has to reach the top first, and that simply takes time. It takes longer to react with 500,000 people. You have to keep an eye on the big picture, otherwise everyone does what they want until the chief controller ends up at a complete loss! There are also regional differences. The Americans are relatively fast, the Asians comparatively slow. Toyota is the perfect example: if there is an earthquake in Kobe, initially nothing happens at all. I believe the Chinese are even slower. Perhaps that is down to the Asian mentality of being more tied to authority and strong hierarchical structures. Americans have a more simplistic approach, and the Germans are somewhere in between.

‘Consciously look right down to the bottom of the supply chain!’ 

Solutions: Doesn’t someone have to make an immediate decision in an emergency situation in any case? What happens if a raw material that is only produced in one link of the supply chain is lacking?

Prof. Dudenhöffer: In 2012, for example, there was a fire at Evonik’s Marl chemical park. It produced pre-products required for fuel pipes. The manufacturer was a global monopolist – and the question then was whether a substitute could be sourced and how long that would take. That was relatively far down the supply chain. The OEMs were not aware of the concentration in manufacturing at one plant and the subsequent risks that entails.

Solutions: If the OEM did not find out about it, things must have been well organised?

Prof. Dudenhöffer: Yes and no. The OEM can say that they will source the fuel pipe from X or Y. But the subcontractors were probably not aware that Marl was the only location in the world with a manufacturer of a fundamental chemical. Things worked out, one way or another, but that was a situation in the automotive industry where anyone would say: ‘How can that happen?’ Of course there are always residual risks somewhere. That is why it is necessary to consciously look way down the supply chain, in order to recognise such relationships. The consequences are recognised in purchasing to an extent, but at the top levels of the company, where many other problems emerge, they might be neglected.

Solutions: Doesn’t risk management then have to say: ‘Watch out, we still need to be careful!’?

Prof. Dudenhöffer: Yes, they would say that – once things have blown up!

Solutions: Shouldn’t the conclusion then be drawn that single-source supply should be avoided completely?

Prof. Dudenhöffer: Of course, it is a big mistake for a car manufacturer to only look to single-source supply.

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Solutions: Can we quote you on that?

Prof. Dudenhöffer: Yes! As far as I can tell, they paid close attention to this early on at BMW, for example, and decided that single source is the wrong path! Risks are bundled in that situation and form clusters that can turn a company upside down. Whether it is a logistics strike in some far-flung country, a tool breakage or a fire at a supplier’s location – you have your back to the wall! If 70% of your value creation is dependent on suppliers, you need professional risk management.

Solutions: What options are there in that situation? You can’t wait until you feel the squeeze to act, can you?

Prof. Dudenhöffer: Of course, car manufacturers also have supply-chain monitoring to highlight risks. However, that is often managed via strategic purchasing. At car manufacturers, the desire is usually to significantly reduce the number of suppliers, and seek out the best ones in the process. If I previously had ten suppliers and now only want to approve three or five, I need to put together a catalogue of requirements: how innovative are they? That is a core discipline for car manufacturers. How cost-efficient are they, but also how good is their equity structure? That is also a form of risk protection – what crises could they survive and where is there a threat of major production failures? What does their categorised supplier range look like? Do they purchase globally or are they themselves at risk from single-source supply? It absolutely makes sense to carry out supplier qualification such as this via strategic purchasing. The bigger the supplier contribution to my turnover, the more developed my hedging strategy needs to be.

‘My recommendation: a stress test for the value-creation chain.’

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Solutions: Just-in-time itself comes from the automotive industry – specifically Toyota. At this point in time, would you say that the handling of just-in-time delivery in the car industry sets an example for other industries? Does it do something better than others?

Prof. Dudenhöffer: Just-in-time – or later just-in-sequence – was approached from a highly technical and economical viewpoint: you optimise the workflow, but you don’t necessarily optimise all the risks within that workflow. This ‘Toyota world’ is a mechanical one: how can I make the production line and suppliers even faster? In my opinion, people in that world did not take the risks and fractures that can occur seriously enough. Another aspect is cost. I believe that was the route VW went down: putting the blinkers on and placing too much emphasis on purely cost-based evaluations. These costs allow you to become the best. However, if you include risks in the assessment, you are better secured, but it is harder to become the best!

Solutions: Do you have a fundamental recommendation for the automotive industry with regards to just-in-time and risk management?

Prof. Dudenhöffer: The purchasing system is already relatively well developed everywhere. One recommendation would be to check again for hidden risks and factors that have not yet been recognised. That is to say, continuous risk assessment, ideally with management consultants or other external figures and not only the company’s own people. In principle, that would represent a genuine stress test for the value-creation chain, similar to the well-known version for banks. I have not yet seen that anywhere, or even heard about it. However, it could be an approach to uncover hidden risks in the supply chain in a targeted way and be better prepared for crises.

Solutions: Professor Dudenhöffer, thank you very much for taking the time to talk to us.

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