Optimization of inventories at a leading automotive supplier
Reduction of excess inventory while ensuring delivery capability
Our client is a listed globally operating European automotive supplier. The company develops and sells lighting technology and electronic components and systems for automotive manufacturers (OEMs).
Objective: Working capital and inventory optimization
The company was looking for support in re-evaluating its operational inventories, which in the meantime had massively overflowed and thus caused a high capital commitment. In the current situation, in which many companies are struggling with delivery shortfalls and higher price demands from suppliers, the aim was to maintain delivery capability and exploit cost advantages at the same time. The joint project therefore focused on balancing these three variables.
Approach: Adjustment of contractual agreements and introduction of Frozen Zones
At the beginning of the project, we conducted a detailed analysis of the inventory levels and identified four reasons for the excess stock:
- Due to the highly fluctuating, unpredictable call-off quantities on the part of the OEMs, inventory levels were difficult to plan
- Long-term, non-cancelable contract commitments with some suppliers
- Excess deliveries on the part of suppliers
- Limited transparency of contractual agreements in the systems
The analysis revealed that we could not just start our measures with our client’s suppliers. In order to achieve a real improvement, we also had to enter into an exchange with the OEMs and develop new guidelines for cooperation.
Above all, this included the introduction of a “frozen zones” concept. This was necessary because the phases in which no quantity adjustments could be made in the delivery quantities were very different. Whereas our client had agreed long-term purchase commitments with its suppliers, especially the chip manufacturers, the OEMs were able to implement quantity changes in their orders at very short notice. To mitigate this short-term volatility, we synchronized the frozen zones between our client and its suppliers, such as the chip manufacturers, with those to the OEMs. Through negotiations, we were able to fix these at 4-6 weeks. For future projects, these frozen zones will be a fixed part of the OEM contracts.
In the case of long-term, non-cancelable contracts with suppliers, the fulfillment of which had previously ensured overflowing warehouses, the first step was to create transparency, evaluate the contracts, and explore options for challenging these contracts together with the legal department. In the next step, we reduced inventories, for example by reselling semiconductors via brokers or by reallocating stocks. We were also able to shorten the frozen zones with some suppliers. For the future, we initiated the development of a risk management analysis for key products and suppliers, which should make it easier in the future to decide in which areas it makes sense to conclude or extend long-term contracts.
An important indicator for this is, for example, whether OEMs commit to the same quantities for the same period (“back-to-back” agreement).
Regardless of the contractually agreed quantities, there were always significant over-deliveries that our client had to store. The project team therefore set up a detailed rejection process for over-delivered quantities, including a tracking process and monitoring tool for integration into the data warehouse. Where possible, we also eliminated overstocks by reducing order quantities for over-delivered products on a one-time basis.
To ensure that the newly created processes in the warehouse function properly in the future, we created transparency across all agreements in an elaborate data analysis process and identified missing data fields and information in our client’s system. By synchronizing the order attributes and centrally storing all supplier and OEM contracts, the automotive supplier now has all the key parameters in the system that it needs to avoid surpluses and optimally synchronize delivery quantities with its partners.
- Establish transparency on contractual obligations of key suppliers.
- Rejection process defined and implemented: Inventory increase worth €15.9 million prevented
- Optimization of inventory levels and definition of a model to reduce inventories and to avoid surpluses (frozen zones)