How smarter inventory management strategies can help auto parts suppliers protect their margins
- Automotive parts manufacturers trying to overcome higher supply costs, labor challenges and a climate of economic uncertainty can leverage smarter inventory management strategies to become more agile and boost profitability.
- Strengthening your inventory 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. Adopting more effective inventory management strategies can help auto parts suppliers navigate these disruptions and improve profitability, but firms often struggle to make this process work.
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 smarter inventory management to strengthen your business and drive growth.
What are the major cost 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 affecTier 1, Tier 2 and Tier 3 suppliers face shrinking margins due to rising materials costs, tariffs, shifting consumer demand, and expensive labor. Here’s a more detailed rundown on key cost challenges:
- Rising costs and tariffs: 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.
- Changing consumer demand: OEMs don’t know where the market is going, because consumers themselves seem unsure. As a result, OEMs are hedging their bets by offering more variants, which can lead to reduced sales volumes for parts suppliers.
- 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 you implement smarter inventory management to help relieve that pressure?
What are the top inventory management strategies for auto parts suppliers?
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 are the benefits of a smarter inventory management strategy?
Taking a smarter approach to inventory management can help your auto parts business control costs and increase profitability. Key benefits include:
- More profitable jobs: By gaining a better understanding of your true costs and which jobs make your business more money, you can prioritize that work to boost profitability.
- Improved cash flow management: A clearer understanding of your customer patterns and historical trend data will help you avoid over-buying supplies or manufacturing excess inventory you may struggle to find buyers for.
- Greater resiliency: In an uncertain economic climate, smarter inventory management helps your business get more agile and flexible so you can adapt more quickly to shifting circumstances.
What tools or processes do you need to strengthen inventory management?
From a tools and process perspective, here’s the foundation you’ll need to improve your inventory management:
A modern ERP
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. The best ERPs are typically cloud-based and serve as a hub for understanding what’s happening in your business.
Better data management and analytics
Effective data management and visualization are key components that are often overlooked, even by manufacturers with a strong ERP. Ideally, you want to unify the data from the various systems you use and then run it through your ERP or put it into dashboards so you can track your inventory management in real-time.
Clear goals
Also important is getting clear on where you are, where you want to go and the specific steps you’ll need to get there. Establishing baselines and KPIs will allow you to work with more direction and focus.
Advisory support
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 to improve processes 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 lean on strategies like smarter inventory management to achieve them. Start a conversation.
Let’s put your business on stronger footing
