How INVERTO is Helping Procurement of EV Parts

The demand for electric vehicles (EVs) brings new procurement challenges. Lina Tilley, Principal at INVERTO, discussed how its supporting supply chains

Procurement has a central role to play in the automotive industry’s transition from combustion engine cars to electric cars. However, significant challenges arise when shifting from procuring parts for combustion engines to parts for EVs.

The switch to EVs and 'software-defined vehicles' is a hugely expensive challenge for companies whose pedigree rests on a century of excellence in mechanical engineering.

The thousands of components required to make internal combustion-powered vehicles are being replaced by batteries, electric motors and software.

Analysis by Boston Consulting Group (BCG) shows that by 2035 only a minority of the global profits of the auto industry (US$231bn) will come from combustion and hybrid cars, whilst US$293bn of profits will come from EVs and related infrastructure.

INVERTO has built a six-part model to help the automotive industry face the challenge of shifting their procurement strategy to deal with the growth of EVs.

This model covers everything from the challenges created for manufacturers by the extinction of combustion engine production to the expected consolidation of back-end software suppliers.

Lina Tilley, Principal at INVERTO, part of BCG, spoke to Procurement Magazine about how they will help with this new range of challenges.

Could you tell us a little bit about INVERTO?

INVERTO is an international management consultancy and one of the leading specialists in strategic procurement and supply chain management worldwide. We’re a subsidiary of the Boston Consulting Group and we support companies from strategy development to implementation, for sourcing projects as well as wider procurement strategy projects.

Much of our work focuses on the optimisation and digitalisation of procurement, cost reduction and the establishment of resilient and sustainable supply chains. Our clients run from the biggest multinationals to mid-sized businesses and the leading private equity firms.

What are the biggest challenges involved with going from procuring parts for combustion engines to parts for EVs?

One of the biggest challenges of moving to procurement for electric vehicles – and later autonomous vehicles too – is the far-reaching change it will require in how automotive businesses engage with their suppliers.

In the past these relationships and contracts were often focused on managing input costs. They were based on an implicit power structure where many businesses throughout the supply chain relied very heavily on the original equipment manufacturers (OEMs).

The transition to EVs means the automotive sector is now dealing with different markets, different commercial models and different supplier relationships.

For example, the power balance with software providers can differ significantly to the kind of supplier relationships OEMs are experienced in operating within. OEMs are likely to make up a minority share of a software provider’s business and therefore, a whole different set of procurement levers and approaches are needed to engage this market successfully.

In addition, handing a large amount of control over their product’s differentiation to a software provider means supplier and technology selection processes will have to be carefully tailored to these markets.

How vital is procuring software for this operation?

As we move more into software-heavy vehicles and towards autonomous vehicles, the importance of software procurement is obviously rising very sharply.

The legacy manufacturers are having to move their procurement operation from one that is focused purely on mechanical excellence to one that is also able to procure the many different layers of software which exist within a modern vehicle effectively.

Many different components of a vehicle have their own software – seats, wipers, engine control unit, infotainment, the list goes on and on. That gives software suppliers a lot of impact on a vehicle’s differentiation.

What differentiates one vehicle from another is increasingly determined by software the automotive manufacturer, in many instances, does not make.

Again that means relationships with those suppliers can’t be ‘arm’s-length’. These need to be thoughtful and considered partnerships.

What issues could companies face when replacing software suppliers?

It really depends on who the OEM is. Younger pure-play EV manufacturers have been able to set up huge in-house software development teams and can address  this issue with a much greater level of control over the outcome.

For manufacturers who outsource most or all of their software, the cost and upheaval of changing a software supplier can be prohibitive.

In some cases it won’t be economically viable at all. A seat motor manufacturer will likely make its own seat control software – finding another software maker to do that specific job just won’t make sense financially or technologically. However some software is a bit more ‘fungible’ – for example, a weather app within the infotainment suite can be changed much more easily.

Supplier relationships and agreements will therefore need to be equally varied and leave the right amount of security of support and flexibility.

How difficult is it to run two different procurement processes for decades – one for new EVs and one for replacement parts for legacy combustion vehicles?

Automotive manufacturers have had to do this to some extent for decades. They have always had to procure both spare parts for out-of-production vehicles and parts for new vehicles being manufactured.

In the past a manufacturer might have had a single gearbox supplier that provided units for all its vehicles and the job of procurement was to manage the volume of each specific unit.

Now we’re on a journey where volumes of parts like gearboxes are going to be gradually decreasing. Suppliers of some mechanical parts are eventually going to be eliminated entirely, assuming they do not pivot into new product areas. That is a challenging process to manage.

On the other side of the equation, there are new supply chains being built for things like software and batteries. That means new skills and expertise are needed in the procurement teams and the volume of suppliers and parts they need to deal with have in some cases risen quite a lot.

How will you help to shape the future procuring parts for combustion engines to EVs?

One thing we are helping our automotive clients to do is adopt learnings from how procurement works in other sectors. For example, aerospace has long used the long-term partnership model in its supplier relationships. Automotive OEMs haven’t necessarily got as much experience in working that way. Our long history of working with aerospace businesses can help them quickly adopt that model.

We can also help automotive manufacturers understand how the skills in their procurement teams might need to change. Procurement in automotive has long involved deep knowledge of how to get high quality mechanical parts at a low cost. That meant understanding raw material prices and shipping.

With software, the factors involved are completely different. You now need to understand the complexities of software licensing models, for example.

We’re also very focused on implementation. We get our hands dirty and really get directly involved with the procurement teams to operate the new systems and processes we help to put in place as well as identifying, engaging and negotiating with the new supply chains which need to be built for all automotive OEMs during this time of unprecedented transition in the market.

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