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RE-INVENT THE AUTOMOTIVE SUPPLY CHAIN Copyright: 2021 diconium GmbH | RommelstraÃ&#x;e 11 | 70376 Stuttgart

Abstract The pressure that players within the automotive supply chain are currently facing is a reoccurring topic in business news coverage. With the global outbreak of Covid-19 and the subsequent lockdowns, the pressure was merely amplified. We look beyond the influence of the Corona pandemic by conducting a comprehensive outsidein status quo analysis of the automotive supply chain. We use ‘Engine Ihr GmbH’ to depict a

worst-case scenario of what might happen, if they do not act right now. Furthermore, we introduce the ‘Trifecta Alignment Framework’, which illustrates the ideal status of a company that is ready to tackle the future. We explain where we find tensions within the framework and how to address and eventually ease these tensions properly in order to become more resilient and flexible in the future.

In the automotive industry the pressure can be felt strongly along the supply chain.

2. Understanding external influencing factors (PESTLE analysis) Within the political dimension, national legislations strongly influence a company’s willingness and ability to invest in new technology and foster innovation by providing political support and legal frameworks. With environmental legislations being on the top of political agendas due to the vast influence of UN emission goals, it is a balancing act for policy makers to enable industry investments in new technologies but to not neglect ‘legacy’ technologies. Innovating the automotive supply chain is currently slowed down by political decision-making in Germany. While innovation is usually a major topic for tier 1 – n suppliers due to the ongoing shift towards new mobility, it is very difficult for suppliers to follow a precise plan as legislation itself is still unsure on which course to pursue.

OEMs and have led to increased tax payments or limitations on sales numbers. This not only decreased the overall profitability of the automotive industry over the last years (~6%), but it also discouraged any investments being made. Socio-cultural factors revolve partly around the digitalisation of society and its influence on culture. In developed countries the notion of car ownership is shifting. While car ownership seemed normal, following generations question ownership necessity as the availability of multiple on-demand mobility solutions is gaining popularity. Mobility is turning into a basic human right offering lower prices and many options to choose from – not only going from A to B via car. This again pressures the automotive market and its suppliers: lowering prices while increasing innovation, customer experience, and adapting to new technologies.

In Germany, lawmakers are trying to push for e-mobility and somewhat incentivise buying or using electric vehicles. Sadly, while Germany is starting to boost such topics, it is by far not promising enough for suppliers to blindly commit every single resource into developing these areas. This uncertainty results in suppliers having to invest in improving current technologies such as the ICE (Internal Combustion Engine) and not being able to simultaneously invest in new technologies that will definitely be supported by legislation. Overall, the political efforts are too little and show too little effect.

The technological dimension is strongly influenced by the advances of tech companies into the automotive sector. With deeply rooted software expertise, tech firms are on the verge of obtaining a competitive advantage over traditional automotive companies. Traditional car companies and suppliers still figure out how to obtain software competencies, whereas the tech companies are already knee-deep in developing solutions. In order to cope with such difficulties, the supply chain is challenged with replacing outdated technologies and developing fit-for-future competencies. However, as minimizing cost is often the modus operandi, taking such measures is often disregarded and with that technological improvements as well. In addition, OEMs expect more and more from their suppliers, as technology within and

Within the economic dimension, recent trade wars between the US and China but also the US and EU have shown their effects. Sanctions increase material and therefore operating costs, which leads to declines in investments in home and key markets but also affects the success in emerging markets. Many bans or restrictions have been placed on

Environmental awareness has never been more prevalent and important than today. Corporate Social Responsibility (CSR) is unavoidable when succeeding in today’s society. The whole automotive market is pressured to oblige to those expectations as well, presented through government regulations and overall societal pressure. An example within the supply chain is the necessity of decreasing the amount of wastage in the production of lithium ion batteries for electric vehicles. It requires massive amounts of water and produces large amounts of CO2 to acquire the necessary mineral. But it doesn’t stop just there. It is very difficult to dispose such batteries as the minerals are very harmful to the environment. Thus, it is not only, but also the suppliers’ obligation to create new and innovative ways of dealing with such pollution, its minimization and possible prevention (to a certain extent).

around the car is increasing. This results in a much higher product complexity, which keeps increasing on a yearly basis. Finally, a prerequisite for technological improvements within the supply chain is the switch from a regular production facility towards a smart production facility (autonomous robotics) in order to elevate suppliers to smart suppliers (fully data-driven, automated, predictive maintenance included). When looking at legal factors, one major obligation comes to mind. The Paris Agreement, signed in 2016, aims at lowering the average global temperature increase to just 1.5 degrees until 2050 while simultaneously minimizing the CO2 output of industries all over the world. The automotive industry, as one of the largest producing industries, emits around 25% of global CO2 emissions. Therefore, it is crucial for suppliers and OEMs to fully consider on how to decrease such numbers. The only way for suppliers to achieve and support this goal in the long run is by investing into newer and cleaner technology. Hence, it is a must for suppliers to approach this early on, to be well-prepared for the future.

We created the fictional company ‘Engine Ihr GmbH’ in order to make the topics discussed in this paper more tangible and relatable. We use ‘Engine Ihr GmbH’ as an example throughout this paper to better illustrate their challenges and issues.

Engine Ihr GmbH Tier 1 automotive supplier

Regensburg, Germany

2,000

2019

Core Business ICE key components

3,000

Profit-losses due to OEM & innovation pressure

2 billion

Top-Down Hierarchy

Figure 1: Company profile ‘Engine Ihr GmbH’

Traditional

3. The Trifecta Alignment Framework Environmental factors

Political factors

Legal factors

n io

no va t

at m or sf an Tr

Core business & company‘s vision

Economical factors

io n

Strategy

Socioeconomical factors

Technological factors

Figure 2: The ‚Trifecta Alignment framework’

3.1 Ideal state of the TAF To further illustrate internal challenges and influences ‘Engine Ihr GmbH’ is currently facing, we developed the ‘Trifecta Alignment Framework’ (‘TAF’) (fig 2).

intertwined, meaning in our understanding strategy cannot be viewed isolated from transformation or innovation and vice versa. Strategy is the sum of all decisions taken in order to position your business successfully and to solve problems of your customers or clients in a better way than your competitors do. A successful strategy must be closely linked to the core of a company, as most strategies fail in part due to a missing alignment with the company’s daily business or being too fragmented. We do not separate between digital strategy or corporate strategy. For us, these two are interconnected, as no company can afford to neglect the importance of digitalisation on its business.

The core business and the vision of a company are located in the very centre, as it defines what the company does and what it strives for. The core is surrounded by the three main areas to conduct business successfully, namely transformation, strategy, and innovation. Yet, these main areas require to be aligned with the core business and the company’s vision. As transformation, strategy, and innovation are often understood differently across companies, we define each one of them according to our own understanding. Additionally, all three areas are

Secondly, we understand innovation as the process and the result of value creation, meaning the

that these activities, as crucial as they are, are only valuable to the company if addressed as a common company vision. Communication is therefore essential.

The final tension (3) identified is the missing alignment of a company‘s core business with the three outer areas strategy, transformation, and innovation. These tensions occur most frequently in three variations. Firstly, the digital strategy is not part of the corporate strategy or sometimes even completely missing. Secondly, investments into innovative activities are being done in wrong areas and at false times or skipped completely to sustainably foster growth alongside the core business. Thirdly, a clear and envisioned plan for internal transformation is not implemented to enrich the company‘s core business.

‘Engine Ihr GmbH’ has a CDO that was put in place to fuse digital and corporate strategy. He started several ideation processes of what could be done to ‘digitise’ the company and tried to implement these ideas to keep up with the innovation pressure the OEMs pass on to its suppliers. But as ‘Engine Ihr GmbH’ is a traditional company with an older workforce, not many employees are fond of all the technological changes and only a few really show enthusiasm for a mindset shift. Without tackling this issue, the new CDO started implementing massive changes in a short period of time, not giving proper training or allowing the employees to cope with these changes. This results in employees being not satisfied with the changes and unable as well as unmotivated to deal with the unknown. ‘Engine Ihr GmbH’ misses to align its strategic innovation activities with transformation – they need to communicate properly and involve as well as train its employees to transform the company as a whole.

‘Engine Ihr GmbH’ has invested into innovation activities over and over. None of these activities have proven to add the expected or hoped value, consequently all innovation investments have been stopped. Due to great experiences with their current operations, it was decided to focus on what they already have and milk it as much as possible instead. ‘Engine Ihr GmbH’ is aware of its lack of effective innovation but does not know how to go forward strategically. They might be able to survive in the short-term, but definitely won’t stay competitive long in the future.

Yes, transformation takes a long time, and demands huge organisational as well as individual effort but even under financial strain, it is possible. An approach rooted in the lean start-up methods offers help: discovery-driven digital

transformation 2. With this approach the gigantic tasks of agile and digital transformation are broken down into graspable and workable parts. Five steps guide this inside-out change process:

Operating Experience – Understanding the operation is crucial to change and there are no better sources of information than the employees. – By understanding what works well and for which processes there are workarounds in place, areas with change potential are uncovered to rethink operations.

Continuous testing & lessons learned

Discoverydriven digital transformation

– Formulate & test assumptions, and generate lessons learned are characteristically for the discovery-driven digital process. – The effects and results of any business activity must be measurable. – The guiding questions are: What have we learned? Was the time / money spent worth it in terms of quality of learnings?

Identify specific problems

Screen the competitive field

Achievements at scale

– Identify specific problems with differing magnitude to formulate first assumptions on the required changes, the expected outcomes and the metrics to measure the outcome.

– Understand who the main competitors are and extend this view to competitors in adjacent industries or product categories; turns a clear yet grainy picture of the competitive environment into a high-resolution image.

– Formulate assumptions on how knowledge and expertise inherent to the company can be utilized to scale the designated solutions in the organisation.

– This enables business leaders to formulate and test assumptions based on these observations and analysis.

– Assumptions based on the questions whether desired solutions offer potential to create a platform and further allow exploration of ecosystem indications.

Figure 6: The process of the discovery-driven digital transformation (McGrath & McManus, 2020).

HRB

Contact Kai Wershofen associate management consultant kai.wershofen@diconium.com +49 303 6428 2251

diconium strategy GmbH Mollstraße 1 10178 Berlin www.diconium.com

Philip Chhatwani management consultant philip.chhatwani@diconium.com +49 404 0113 1255

diconium strategy GmbH Große Elbstraße 61 22767 Hamburg www.diconium.com

Laura von Schultzendorff senior management consultant laura.schultzendorff@diconium.com +49 303 6428 243

diconium strategy GmbH Mollstraße 1 10178 Berlin www.diconium.com

Thomas Michael Holtz associate management consultant thomas.holtz@diconium.com +49 404 0113 1241

diconium strategy GmbH Große Elbstraße 61 22767 Hamburg www.diconium.com

About diconium Since 1995, we have supported industry leaders such as VW, Mercedes-Benz, Bosch, Allianz, Kodak Moments and Sick in exploiting the potential of digital transformation and offering millions of customers extraordinary experiences. As a strong partner, we accompany companies through the entire digitization process: from Innovation & Strategy, UX, Data & AI, Commerce and Technology to Building of Digital Units. One for all, all for one! More than 1.000 colleagues serve our clients from 13 locations worldwide: Stuttgart, Berlin, Hamburg, Munich, Wolfsburg and Karlsruhe as well as Bangalore, Detroit, Beijing, Lisbon, London, San José and UAE. What unites us? The courage to break new ground, mutual attentiveness, teamwork and the motivation to make a difference and create sustainable impact. diconium is a 100 percent subsidiary of the Volkswagen Group.

Re-Invent the Automotive Supply Chain | Whitepaper | diconium