Always a hot seat, automotive purchasing today faces an increasing number of challenges. New technology suppliers are entering the industry, testing the dominance of automakers and incumbent vendors, and adding new skills, technologies, and resources to the mix. Some of these new players have limited exposure to the industry, making automotive OEMs only a small customer account with limited own expertise and negotiation power to effectively manage this new type of suppliers. In fact, some tech players could literally buy car OEMs “out of pocket” (if they wished to do so). Among industry incumbents, traditional valuechain players will continue to consolidate, likely ending with a limited number of companies for each commodity that will increase the remaining players’ power to boost pricing levels. Also, sudden or planned production stops of components already designed into the vehicle (systems) become increasingly common. For instance, if a supplier moves to the next generation of its product in the middle of the car manufacturer’s production cycle for a certain model. Meanwhile, trade wars and tariff barriers will heighten protectionism and associated costs, while structural shifts and new industry standards pose challenges for late-comers. The increasing demand for new raw materials like rare earth metals will continue to roil formerly established markets.
To function effectively in this dynamic environment, OEM procurement organizations should consider the creation of distinct clusters in their purchased commodities based on four main criteria. The first focuses on technology maturity; determining if the commodity is new or a well-known technology, assessing the innovation potential and the degree of disruption the next generation in the innovation cycle will bring. The second involves the commodity’s strategic importance for the OEM; evaluating the criticality of the commodity in terms of the overall vehicle or system concept, as well as its differentiating potential for customers. Also, the automaker’s total volume of vehicles using this commodity plays a vital role in this dimension. Third is the OEM’s internal expertise with the commodity; addressing the link to the automakers core competencies and the availability of required talent with the knowledge to develop and/or produce the technology. Another part of the internal expertise evaluation involves the procurement organization itself and its specific capabilities for delivering performance in this commodity. Finally, the fourth category evaluates the competitive situation; measuring how many competitors exist and how resourceful they are both today and going forward. It also assesses the deals or partnerships already in place – for instance if a startup having a deal with a competitor. Together, these four categories will serve automakers as procurement filters. Depending how commodities shake out, they will typically fall into three buckets: strategic new functions, which as the name implies, represent rather disruptive innovations; “business as usual” commodities; and finally, those that will become obsolete in the future.