Supply Chain Risk Management at ZF Friedrichshafen

KARRER ZF is one of the largest Tier 1 automotive suppliers in the world, with a purchasing volume in excess of €20 billion. Our Supply Chain Risk Management (SCRM) used to focus predominantly on financial risks, but a few years ago, political, economic and performance risks were also incorporated. Customers are demanding more in this respect, and want to be informed of risks at an earlier stage. Our status as a Tier 1 supplier is one of the main reasons that our customers have high expectations, but the size of ZF as a company has an impact here too. There is also greater sensitivity and interest among the wider public, particularly in respect of sustainability. In short, an expectation exists that the Tier 1 supplier will take responsibility for the entire supply chain, and that is why ZF has set the goal of establishing a low-risk, high-performance supply chain.

KARRER The ongoing globalization of the supply network results in increased volatility and complexity. That momentum is reinforced by the technological shift towards hybrid and electromobility solutions and also because of new players emerging on the customer side. Both Brexit and the trade dispute between the USA and China are also adding to uncertainty here. Apart from this, the scope of supply-related risks has expanded: In addition to traditional performance criteria such as supplier delivery reliability, quality and financial stability, considerations relating to social responsibility are also of great importance these days.

KARRER The main objective is to maintain a supply that functions as well as possible, which means the stability of the supply chain must be further strengthened. It is not possible to individually manage every single disruption though. Instead we need to design the network so that possible problems can also be regulated independently in such a way that no damage occurs. On this issue, ZF is pursuing a “from region to region” strategy to shorten supply chains, with the intention of using this approach to minimize logistical risks and customs disputes. Where in the past we tended to take a “firefighting” approach – that is, reactively applying solutions to problems – today the focus is on making structures resilient right from the outset, and that needs to be taken into account at the sourcing stage. In addition, inventory management has changed; it is not optimized purely on a cost basis as much as it used to be. We use targeted inventory management with supplier-serviced consignment warehouses in specific regions, to minimize supply risks.

KARRER One challenge that we are working on with specialized information service providers, is promptly identifying supply risks. The greatest challenge though, is to rapidly make the right decisions soon after the risk has been identified, and to take appropriate action. We could establish standard strategies here, but the fact is every case is very different – which is why we are skeptical about how effectively risk-related decisions can be automated. It is more useful to implement a process that facilitates quick decision-making. One issue faced by those responsible is that decisions must always be made in a situation of uncertainty: Active countermeasures aimed at minimizing risks cost money, and if the supplier manages to resolve a critical supply situation by itself, that money will already have been spent. It is important to weigh up the risks and expense against one another in this context.

KARRER Today we are using active escalation management to respond quickly to performance risks, and as a result the resolution process takes less than half the time, which saves hugely on costs – both internal and external. The area of preventive risk management has even better potential, since we have been able to reduce the risk exposure of our supply chain at a very early stage by means of well-balanced sourcing decisions.

KARRER Decisiveness and speed in implementing suitable measures are crucial. The person responsible for Supply Chain Risk Management (SCRM) must have direct access to the management or the management board, because risk management needs to be positioned centrally within the organizational structure in order for effective decisions to be made. The purchasing division must also bear the entire range of SCRM topics in mind, which means striking a balance between pricing targets and costs of risk. ZF introduced an effective process in case of damage within the supply chain three years ago, wherein at the highest escalation level at ZF, product group managers in the purchasing division also lead the corresponding Supply Chain Task Force. Before it is escalated though, the factory must itself try to solve the problem. This creates a sense of responsibility as early as the supplier selection stage, as well as ensuring the sourcing process is considered as a whole.

KARRER There is now a stronger focus on the risks because some manufacturers and large Tier 1 suppliers have had bad experiences in the past. Also, the topic is given stronger consideration in the IATF16949 (guideline for the global quality standard in the automotive industry); this means it carries a higher weighting in audits, and additionally leads to vehicle manufacturers more frequently querying which individual instances – for example a natural disaster – would affect the ZF supply chain and to what extent. This is because requirements concerning transparency within the supply chain have become much more stringent.

KARRER ZF is working more intensively on the areas of decision-making speed and efficiency in particular, as well as expanding the sustainability of the supply chain and preventive approaches. It is likely that the company will work with a smaller number of suppliers in the future, which will decrease the complexity of the supply chain and reduce risks.