Auto parts suppliers: Protect your margins through inventory and cash flow management
- Automotive parts manufacturers trying to overcome higher supply costs, labor challenges and a climate of economic uncertainty can leverage smarter inventory and cash flow management to become more agile and boost profitability.
- Strengthening your inventory and cash flow management typically involves taking data-driven insights into customer needs and internal business performance and using those insights to prioritize jobs that make the most sense for your balance sheet.
- You’ll also benefit from creating more flexible supply chains and working with your vendors or suppliers to navigate the changing automotive marketplace together.
Auto parts suppliers face pressures like high costs, economic uncertainty and ongoing labor challenges. Successfully managing inventory and balancing cash flow can help you navigate these disruptions and improve profitability via a reduction in working capital financing costs, but firms often struggle to do so.
Embracing data-driven insights backed by solid business practices can help automotive parts manufacturers regain momentum. Keep reading to learn more about how you can leverage new tools and strategies to strengthen your business and drive growth.
What are the big challenges for automotive parts manufacturers today?
Nobody knows what the next 12-18 months will look like. But it’s fair to say that tariffs, political uncertainty, changing automotive consumer demands and labor shortages will almost certainly continue to affect automotive parts suppliers. Slow decision-making among cautious OEMs will likely continue to affect downstream Tier 1, Tier 2 and Tier 3 suppliers as well.
Here’s a more detailed rundown on key automotive supplier challenges:
- Broad uncertainty: Politically and economically, the U.S. is in a period of significant uncertainty. Washington is unpredictable, consumer confidence is falling, USMCA will be up for renegotiation soon and most of the growth in the economy comes from tech and AI, raising concerns of a bubble.
- Changing consumer demand: OEMs don’t know where the market is going, because consumers themselves seem unsure. While demand for EVs seemed to be growing rapidly, it has now slowed, with more consumers eyeing ICE options instead. As a result, OEMs are hedging their bets by offering more variants, which can lead to reduced sales volumes for parts suppliers.
- Tariffs and rising costs: High tariffs have raised costs for materials and supplies across the board. Even U.S.-produced materials are often more expensive, as buyers compete over a limited supply, putting more pressure on margins and profitability. Costs are also rising for consumers, creating further pressure as more people delay or avoid purchasing a new vehicle.
- Labor shortages: Like most manufacturers, auto parts suppliers face an ongoing labor crunch. These include both costs and access to talent, with some positions difficult to fill.
All of these challenges put pressure on your margins. So how can smarter inventory and cash flow management help relieve that pressure?
How can automotive suppliers leverage better inventory and cash flow management to boost profitability?
Adapting your inventory and cash flow management practices can help you stay profitable in the face of today’s pressures. This typically involves a combination of better analytics and updated processes.
1. Understand exactly what your customer base is looking for
The more you know what your core customers want, the more efficiently you can deliver. But you can’t crack this case without the right data.
Focus on three areas here: your current customer forecast data, your historical usage trends and third-party customer forecast data. Any one of these sources is valuable, but you need all three to gain a comprehensive understanding of what your market looks like today.
2. Figure out what jobs make sense for your business
Once you know what your market looks like, use that awareness to help drive your planning. You should break down your production into runners (consistent jobs), repeaters (fairly common jobs) and strangers (unpredictable jobs) and consider which jobs, if any, are hurting your cash flow.
Are certain jobs requiring a disproportionate amount of working capital? Are jobs creating risks? Think about what makes sense for your business, with the ultimate goal of balancing volume and value to strengthen profitability.
You need to know what your true costs are: what you’re doing, what it costs and whether it makes sense to keep doing it.
3. Build manufacturing agility
Once you have a better grasp of your customers’ needs and know what makes sense financially for your business, you can start to make your actual manufacturing processes more flexible and agile to keep up with shifting customer demands. But this takes a team effort.
Your supply chain matters as much as your own processes here. Are you locked into rigid contracts, or can you adjust as your customers’ needs change?
To create more flexibility here, you’ll have to collaborate with your suppliers. Start conversations, discuss options and remember that during a difficult time for the automotive industry, a willingness to work together can help you all come out stronger on the other side.
What tools or processes do you need to strengthen inventory management and cash flow?
From an operational perspective, you’ll rely heavily on your enterprise resource planning (ERP) platform here, so it’s important that you have a good one in place. But beyond that, data management and visualization are key components that are often overlooked even by manufacturers with a strong ERP.
Also important is getting clear on where you are, where you want to go and the specific steps you’ll need to get there. Here, you’ll often benefit from an assessment by a third-party advisor.
An advisor can take a look at your financials, operations and overall flexibility to help you develop a clear path forward. This will often involve suggestions to strengthen your data analytics capacity and process improvements to drive more flexible production outcomes.
How Wipfli can help
We help automotive manufacturers and parts suppliers to strengthen their businesses and navigate change. Let’s talk about your goals and how you can achieve them. Start a conversation.
Let’s put your business on stronger footing
