Focus on cash, data and automation: these are the trends in the industrial supply chain

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The automotive industry is in crisis – and not just in Germany. Many suppliers are tied to the large manufacturers. What can they do now to guide their companies safely through the crisis? The 'Trends in Automotive Logistics' (TAL) conference of Aimtec, the digitalisation specialist, which took place in Pilsen in the summer of 2024, provided food for thought and inspiration on how the industry could prepare for the future.

The current situation: for a long time, it seemed that the large car manufacturers (OEMs) would come out of the sales crisis in good shape. In the meantime, however, share prices are falling, with warnings of reduced profitability and possible plant closures dominating the news.

The decline in manufacturers' sales is not without impact on suppliers. They are also facing a sharp drop in sales with negative consequences for their liquidity. The fall in their expenditure does not correspond to the fall in their income. On the contrary: rising costs, such as energy, are an additional burden. The long term effects have a further impact on suppliers' liquidity reserves.

As if it wasn't difficult enough to stay competitive in this environment, the conditions in customer relations are getting tougher. OEMs are extending due dates while expecting reliability of supply and on-time delivery, which means that suppliers have to build up larger inventories, which is costly and puts pressure on liquidity.

Businesses need to manage their liquidity prudently while keeping an eye on their profits. To achieve this, it is essential to organise supply chain processes intelligently.

What trends can be drawn from this? At this year's TAL conference in Pilsen (Trends in Automotive Logistics), discussions with Prof. Dr. Nils Finger, professor of supply chain logistics and regional spokesperson for the Federal Logistics Association, and Prof. Dr. Heinz-Jürgen Klepzig, professor of business administration/logistics, resulted in several recommendations on how companies can deal with a tense situation.

Trend: shortening the circulation time of cash

Automotive suppliers need more liquidity (cash) to invest in their future viability. When looking at their financial statements, German companies traditionally focus more on profit and loss statements and less on cash flow. However, if they consistently shorten the time between expenditures made to their suppliers and revenues realised from customers and keep inventories low, they will improve their liquidity by reducing the cash turnover time.

The necessary measures include a detailed analysis and targeted adjustment of incoming and outgoing cash flows as well as stocks and reserves, as shown in two examples. Intensive just-in-time production reduces capital commitments and improves cash flows. A high degree of supplier diversification, including international diversification (e.g. outsourcing to China), generally leads to lower acquisition costs. However, the pre-financing of supplies has a massive negative impact on cash flow due to long supply times. Companies should therefore put much more emphasis on liquidity.

Prof. Heinz-Jürgen Klepzig says: "Without liquidity, the company is dead. In the current economic situation, the emphasis on liquidity takes precedence over revenue. In many companies, there are deficits in its management." In short: liquidity is the most important thing!

Yet it is still a question of balance: while maintaining stocks is expensive and seems almost a luxury in volatile times, it is essential to be able to respond to problems. Reducing stock levels and not relying on a multi-sourcing strategy may be more profitable in the short term, but in the long term it poses too much risk.

It is important to take a closer look at a few key variables: firstly, DSO (Days Sales Outstanding): these are days when the goods are already with the customer but have not yet been paid. Next is DIO (Days Inventory Outstanding), i.e. how long the goods have been in stock, and finally DPO (Days Payables Outstanding), i.e. the time before the company pays its suppliers. DSO and DIO should be shortened; DPO needs to be lengthened to improve liquidity. Good cash flow is based on operational efficiency and well-functioning processes. The starting point for the future trend is automation.

Trend: automation and process optimisation

This is nothing new, but a targeted digital transformation towards a high degree of automation is now increasingly important. Every delay in the supply chain negatively impacts cash flow, which is missing out on transformational investments. For businesses, this means the following:

•  Consolidation of suppliers to reduce complexity and increase transparency in supply chains.

• Improving data quality to the point where a high level of automation can work in the first place.

• Eliminate as much manual activity as possible in component and raw material supply chains to shorten and efficiently organise processes.

• Intensify cooperation with external partners, including data exchange, to speed up processes.

"As companies live in an environment where volatility, uncertainty, complexity and ambiguity (VUCA) is the norm in the wake of the coronavirus pandemic, they must take steps to increase their resilience. This includes greater stability, enhanced digitalisation and automation. The fewer requirements there are for logistics processes and communication loops, the more resilient production will be," says Professor Nils Finger.

This threefold transformation focusing on digitalisation, stability and resilience is necessary from an economic point of view to further reduce costs and to avoid a growing shortage of skilled staff. This will increase significantly as the baby boomers retire.

Jan Stočes, Aimtec's Chief Growth Officer, adds: "This situation further increases the pressure on businesses as declining liquidity requires even more critical evaluation of digitalisation and automation projects. Increasingly, we are seeing large projects being split up in order to precisely control and manage costs. Increasingly, SaaS (Software as a Service) solutions are being favoured, which can significantly reduce investment costs in certain circumstances."

The transformation should have a positive impact on the circulation of funds and free them up for further investment. The aim of these investments is to achieve a better and improved level of processes. Artificial intelligence is a key tool here.

Trend: artificial intelligence as a tool for increasing efficiency

The implementation of the above transformation projects will lay the foundation for closer integration of automated processes with artificial intelligence. This is particularly true for complex processes that have so far been carried out by humans alone.

For these processes to run autonomously and intelligently, the data that the AI works with must be complete, up-to-date and correct. This includes information on orders, stock levels, capacity, pricing, resource usage, lead times, product quality, incoming payments, inventory, operating costs, and even CO₂ emissions. Only if this data is always up-to-date, transparent and available can a business react quickly, plan ahead, remain operational and remain profitable.

We have to add that artificial intelligence is not omnipresent. Many transformative projects are failing. There are reasons for this. In addition to data quality, transparency is also key to anticipating fluctuations in demand or optimising production processes. These are classic use cases for artificial intelligence, which must be part of a transformation strategy. It is advisable to work with a digitalisation specialist who will bring projects to a successful conclusion.

M2M (machine-to-machine) communication must also work smoothly within the enterprise as well as in interaction with suppliers and partners, as the potential for improvement in relationships with partners is vast. There is a visible trend towards a seamless exchange of data.

"Artificial intelligence is still uncharted territory for many companies, while electronic data interchange (EDI) has been around for decades and has established itself as a very stable and standardised method," explains Jan Stočes. "In particular,  in uncertain times, it shows how crucial up-to-date and reliable data is to make informed and fast decisions."

More and more employees prefer to use artificial intelligence in their work. Given the tight labour market, the demands required of employees with specialist knowledge will continue to rise. This applies to workplace equipment and to AI support. These in turn only add value if they work with high-quality data. Which leads to the next point.

Trend: Immediate improvement in data quality

It's important to start now. As confirmed by Professor Klepzig: "Start! Just to begin is extremely important. The first step is to improve the quality of the master data. Everyone involved should be aware that data quality is essential for digitalisation and automation. Existing quality needs to be recognised and examined in order to be improved. For top management, this also means addressing the painful issues head-on and digging deeper until the quality is right.“

This is confirmed by Jan Stočes: "Data quality has long been an important issue, but it is often neglected or not classified as critical. However, in the era of fully automated warehouses, autonomous transportation systems (AGVs) and AI-based solutions, accurate data is essential. Poor input data inevitably leads to poor output, which can lead to the collapse of entire projects," states the Aimtec manager. "Subsequent data cleansing following project shutdowns can be very costly. Conversely, companies that take careful care of their master data benefit greatly from the advantages of modern technology and achieve faster and more efficient results."

Conclusion: optimising processes to improve cash flow

Large automotive manufacturers have historically been successful in shortening cash flow cycles. Suppliers need to capture this trend and shorten the time between spending and revenue themselves to maintain liquidity. This can only be achieved through greater digitalisation and integration of the entire supply chain to streamline processes and eliminate capital-intensive inventory build-up. Clean and comprehensive data is essential.

Businesses must now analyse and consistently improve the quality of their data and the efficiency of their processes to survive the crisis. The time to start is now! Once a database is in place, productivity can be further improved with artificial intelligence and automation tools. As a result, employees can be deployed to higher value-added activities as repetitive routine tasks are performed by a machine.

All these trends are aimed at continuously improving the financial performance of the company. Because money comes first, after all. Especially in the age of VUCA!

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