Hedging Your Bets Against EDI Release Inaccuracies

For a decade or more, Automotive OEM’s have developed systems that score the performance of their suppliers – everything from “claw-backs” to “speedy points” and penalty fines are imbedded into the relationship so OEMs can ensure that they have the supplies they need to produce their vehicles.

But something has changed in the relationship. Automotive OEMs are embarking on an “arms race” as they pivot to Electric Vehicles. And their demand models don’t seem to have a clear picture of the consumer opportunities in front of them. As a result, their EDI Release process (their projected orders) has become notoriously inaccurate as the OEMs try to maintain product supply for their legacy vehicles while ramping up for the newer electric ones.

As a long-time Strategic iQ customer and executive told us, “With the addition of electric vehicle demand in addition to the existing ICE (“internal combustion engine”) vehicle forecasts, we have found that the OEM forecasts are much less realistic and cause additional issues when we negotiate our contracts.”

Which begs the question: is the inaccuracy of the EDI releases from the OEMs causing an undue burden on the profitability of their suppliers?

There does appear to be an emerging concern between the OEMs and their suppliers according to Plante Moran’s 2023 North American Automotive OEM – Supplier Working Relations Index® (WRI®) Study. The study indicates that there is rising tension related to short-term cost-recovery issues, production scheduling, and supply chain disruptions. From the supplier’s perspective, as they try to support their existing vehicle program commitments, they are also looking at making significant working capital investments necessary for them to adapt to the emerging electric vehicle requirements. But getting to the future requires profitability and cash flow in the here and now.

Unfortunately for the suppliers, these inaccurate orders are resulting in a drag on their profitability and cash flow, tied to unnecessary production, carrying and storage costs associated with surplus inventory. As another Strategic iQ Tier 1 automotive manufacturing customer recently told us, “I can’t wait for the year-end when I don’t have an extra million parts I don’t need.”

Can we Change this into a Two-Way Conversation?

OneStream Software and Strategic iQ have developed two complimentary solutions that have the potential to significantly enhance the suppliers’ ability to engage their OEM customers in a powerful conversation leveraging the use of sophisticated analytic automation and advanced forecast modeling.

Automotive Planning Factory (APF) – Strategic iQ has built an integrated business planning solution on top of OneStream Software which empowers automotive manufacturers with a sophisticated S&OP solution called Automotive Planning Factory. APF can help automotive suppliers accelerate their forecast speed by automating the input of EDI Release, IHSMarkit, Capacity, and any other sources of demand data. The solution can separate volumes, prices and costs and automatically generate variance and bridge walk analysis dashboards to give finance teams a picture of profitability by part, customer and ship-to. This solution helps companies evolve to a driver-based forecasting process and allows them to update their forecast whenever they want.

Sensible Machine Learning (SML) – OneStream Software has developed a powerful AI-based, machine learning solution for finance people called Sensible Machine Learning. SML can leverage years of historical data, user-defined factors and machine learning algorithms to generate thousands of data rich forecast projections AND help determine which has the highest likelihood of accuracy. In proof of value studies with automotive manufacturers, they demonstrated an improved forecast accuracy versus EDI releases by well over 10%.

The combination of these two solutions may be game-changing for the relationship between OEMs and their suppliers. With APF, new supplier forecasts can be generated in a matter of minutes, leveraging SML projections as one of multiple demand inputs. A variance chart can be generated automatically, including a historical point of view to show the gap in EDI accuracy versus actuals over the past year (or longer) and the anticipated gap going into the next quarter (or longer).

This combination of solutions can arm the suppliers’ account management teams with the ability to re-set the conversation with their OEMs around program performance and estimated demand. In addition, APF & SML can address two key take-aways from the 2023 North American Automotive OEM – Supplier Working Relations Index® (WRI®) Study:

Increased Importance of Sharing Plans – There is continued uncertainty across the Automotive landscape, which is heavily influenced by the evolution towards electric vehicles, continued disruptions in the supply chain, and the emergence of new technologies – all of which can dramatically change product plans. This means that manufacturing strategies require more accurate and detailed short and long-term forecasts. Presumably, this implies an improvement in the sharing of forecast information and assumptions, which APF & SML can deliver.

Reducing the Cost Burden – In addition, supplier cost reduction efforts should be supported by the OEMs. This includes better cost recovery initiatives, allowance for inflation-driven cost increases, and support for other substantial cost adjustments. Clearly, these cost reduction programs should benefit both the OEMs and suppliers and lead to consistent, institutionalized programs.

But the OEMs won’t evolve to this level of change without clear, fact-based intelligence and communication from their suppliers. Strategic iQ and OneStream Software are at least able to arm the suppliers with the data intelligence and forecast speed they need to present their case and improve their communication with their OEM counterparts.