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OEM processes - suppliers under pressure

Suppliers to automotive manufacturers (or OEMs) face very special challenges: Their customers have precise specifications as to what communication and delivery should look like. In this text, you will learn more about the background of this special customer relationship and what makes the so-called OEM processes so special.

OEM - What is it?

An original parts manufacturer (OEM) is generally an original equipment manufacturer and thus the manufacturer of products which it does not, however, sell itself at retail. A reasonably well-known example is BSH Hausgeräte GmbH, which, for example, manufactures dishwashers sold by the Bosch and Siemens brands. 

In the automotive industry, however, the car manufacturer itself is called the OEM. The suppliers themselves are usually divided into different tiers. A supplier that delivers directly to the OEM belongs to Tier-1 or First Tier. Its sub-suppliers then correspondingly Tier-2 or also Tier-3. Suppliers who do not directly supply the OEMs also usually have to meet special specifications.

Why does the automotive industry have a special status?

Compared with other manufacturing industries, the automotive industry occupies a special position. According to the German Association of the Automotive Industry (VDA), the automotive industry generated sales of almost 380 billion euros in 2020, accounting for more than one-fifth of total sales in the manufacturing sector. According to the association, 15 percent of exports from Germany also come from the automotive industry.

Apart from this, however, the industry is also very important on the labor market: According to the VDA, almost 800,000 people worked in the automotive industry in Germany alone in 2021. The association estimates that 2 million jobs in Germany depend on the automotive industry.

This has consequences: While on the one hand the great political influence of the automotive groups in Germany is repeatedly criticized, they also occupy a special status in business relations: The relatively small number of automakers is contrasted by a large number of suppliers. In Germany, there are around 900 companies in the supplier industry.

Why are there special processes in the automotive industry?

To exaggerate, one could say that the automakers are taking advantage of this imbalance. They have a choice of many suppliers and can specify how processes are to be carried out - even though they are "only" their customers. The OEMs specify exactly what requirements the suppliers must fulfill, what processes must look like and how deliveries must be made.

The rapid cycle of car assembly means that car manufacturers have hardly any storage space: If automakers were to stock all the parts they need in all possible versions in their own warehouses as close to the assembly line as possible, it would be a disproportionate expense. So manufacturers outsource this task. It is therefore the duty of the suppliers to manage this.

In fact, it can be said that a large part of the automobile is not even built by the car manufacturer. To a large extent, the manufacturer assembles parts that have already been assembled. The German Association of the Automotive Industry (VDA) even states that three quarters of the added value of an automobile is created by the suppliers. 

What is the big challenge in OEM processes?

OEM suppliers face three major challenges:

  • Suppliers usually have to deliver their products in the right order. While logistics is fundamentally about getting goods to the right place at the right time, (in the right quantities and right quality (5Rs of logistics)), just-in-sequence delivery is also about getting the parts in the right order. This alone represents an additional expense that should not be underestimated.
  • Another challenge lies in the technology: Suppliers must be able to ensure communication to and from the OEM. Regardless of which systems the supplier has in use, it must be able to process, store and output the data again.
  • And last but not least, there are also additional specifications from the OEMs, such as special packaging materials or labels for shipping. Suppliers to OEMs must also take these processes into account.


What makes OEM processes so challenging for suppliers?

To ensure that OEMs can be sure that all processes run as desired, there is a closely timed communication process with the suppliers: Central to this is not only the precise specification of which parts must be delivered at what time. Above all, the electronic transmission of all data related to the request for parts and the confirmation of delivery is precisely defined - from the data format to the retrieval frequency and the information contained.

Even though there are guidelines, for example from the VDA, that specify these processes, the details vary greatly at each OEM. Suppliers must ensure that the specifications are met, even if their existing systems are not geared to this at all.  

In many cases, OEMs oblige the supplier to prove that it can ensure the processes even before the first order is placed. This ensures the basic ability to supply. Nevertheless, for many suppliers, complying with the specifications means an enormous amount of extra work. The existing systems are not designed for this and have to be adapted for each individual requirement. This does not always work smoothly: Even if the processes are basically set up, manual intervention is often required, and this can lead to errors time and again. On top of that, the operation, maintenance and expansion of the existing systems take up more and more resources as the number of OEMs to be supplied grows.

What happens if specifications are not met?

Due to supply chain problems, a lack of transparency regarding their own processes, or simply because of time pressure, incorrect deliveries or late deliveries can occur. OEMs usually acknowledge this with Penalty payments (contractually regulated), reviews with the help of audits, a poor supplier rating and, in the worst case, with a change to another supplier.

Where do the problems arise at the suppliers?

  • The incorporation of incoming data via EDI into your own system
  • Transparent data storage and processing in your own system
  • The transmission of the data back to the OEM via EDI
  • The operational process execution in compliance with all deadlines
  • The simultaneous consideration of various OEM specifications in the company's own processes and systems.

Here too there are exceptions

Stellantis Corail (which includes Fiat and Jeep, among others) provides its own web service, through which suppliers must independently retrieve all data!

OEMs operate very differently. In some cases, automotive manufacturers also have different specifications in different countries or even depending on which plant is to be supplied. At what point a supplier can run into problems therefore varies greatly.

Support from OEMs also varies: Some provide their suppliers with complete instructions explaining EDI mapping. Others leave their suppliers completely alone with the implementation.

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