Automotive Industry Supply & Value Chain

Most automakers use a business model that requires collaboration between different assemblers and parts supplier groups with a lean, flexible, and just-in-time (JIT) assembly process. In this article, we will discuss the business model of a typical automaker and the various stages from planning to final retail sale of the product.

Industry business model:

Most automakers use a business model that requires collaboration between different assemblers and parts supplier groups with a lean, flexible, and just-in-time (JIT) assembly process.

JIT relies on short supply lines that can deliver small batches of components to the assembly line on a regular, uninterrupted basis (often hourly, and sometimes timed to match a particular vehicle), coupled with the ability Immediately correct quality issues as they are discovered, and make routine changes to product specifications or volume requirements when needed.

Types of providers:

The modern automotive industry is a labor-intensive industry and creates differentiation through innovation and research and development (R&D). Structurally, the OEM supply chain is divided into three distinct, but sometimes overlapping, layers. Companies that sold finished components (such as a starter or generator) directly to vehicle manufacturers are “Tier 1” suppliers. Those sold directly to Tier 1 (copper wire or carbon brushes) are “Tier 2”. Those who provided raw materials to any of the above were generally referred to as “Tier 3”.

Supply chain model

As an “original equipment manufacturer” (OEM), the supply chain goes through the following stages:


The management team of a car manufacturing company plans overall concepts and ideas for new vehicles. These teams often involve suppliers at all levels as development partners.


After studying the wants and needs of consumers, car manufacturers begin to design models tailored to the demand of the public. In the past, this design process took up to five years. Today, however, thanks to the extensive use of computers, it is possible to develop prototypes, or “concept cars”, from sketches in less than a year.

OEMs design most purchased components, developing all product parameters in the process. R&D teams design the concept sketches of a new vehicle. Based on these sketches, a model is created. Product design engineers work with automakers to ensure that newly designed products can be successfully incorporated into a model’s design specifications.


Once the design is ready, a verification of the feasibility of construction is carried out. The Build Feasibility Check validates whether special options and specifications are feasible for production, and then determines whether special options and specifications are available for that vehicle on the market. Experts are consulted to resolve potential issues and perform thorough testing. Then a simplified model of the new vehicle, called a prototype, is built. The prototype is used to determine if the final design will be functionally feasible and cost effective to manufacture.

Supply of raw materials:

Once the prototype has been successfully validated, the next step is to source the raw materials for production and assembly. These can include rubber, glass, steel, plastic and aluminum. Parts are also purchased. Some examples of parts are tires, windshields and airbags.


Once a new product is successfully designed and prototyped, it can proceed to production for manufacturing. To ensure that the production stage runs smoothly, Tier One, Tier Two, and Tier Three suppliers work simultaneously to create key components and parts.

OEMs provide detailed plans to potential vendors and invite them to bid against each other for a contract, using an auction market model in which the two lowest bidders typically win a “build to print” contract for an agreed fixed price, for an agreed duration. Quantity, provided over a limited period of time generally not exceeding one year.

OEMs would pay for and retain legal ownership of any unique molds, tools, or stamping dies used to manufacture the products they designed. A third vendor was frequently selected for each item, held in reserve in case one of the first fell out of favor. Price was the dominant factor in awarding contracts.

Inventory management:

During the inventory management phase, logistical decisions are made regarding the transportation and storage of vehicles. Automakers keep production schedules and suppliers running smoothly by working with logistics service providers. These suppliers collect the parts from the suppliers, consolidate them and deliver them to the assembly plant on time. Vehicle distribution or outbound logistics is the process of transporting vehicles from the assembly plant to the dealer or end customer with large fleets. Outbound distribution logistics are still done by train, truck and ship.

Retail business :

At the retail stage, the finished vehicle is sent to retailers or dealerships. Here, focus groups test the suitability of the vehicle. Based on these results, the retailer’s advertising department creates a campaign for the vehicle. R&D teams also use focus group feedback to continuously improve or improve their models.


Dealerships and retailers distribute vehicles to customers, and the supply chain cycle is complete. Before a vehicle is released to customers, dealerships and retailers train service technicians to service the vehicle. Sellers receive accurate and reliable product information so they can sell the vehicle and answer any questions a customer may have. As motor vehicles have a multi-year life cycle, dealers and retailers ensure that a service network is available to periodically repair and maintain the vehicle after sale.