What is the procurement process in the automotive industry?

What is the procurement process in the automotive industry?

The procurement process in the automotive industry is the way carmakers and their suppliers buy parts for a vehicle programme. A supplier is chosen by RFQ and nominated long before production, proves the part through APQP and PPAP, then delivers against rolling EDI delivery schedules and call-offs, often just in time.

The general steps of procurement, from need to payment, are the same in every industry; they are explained in the procurement process. What changes in automotive is the weight of direct materials, the long time between choosing a supplier and the first delivery, the formal approval of every part, and the way parts are ordered once production runs.

Materials weigh heavily in this industry. In the US Census Bureau’s 2021 survey of manufactures, the transportation equipment subsector (NAICS 336), which includes motor vehicles and their parts but also aircraft, ships and railway equipment, had the largest cost of materials of any subsector: $577.5 billion, against $878.7 billion of shipments, or about 66%. That is why most of automotive procurement is about direct parts.

Who buys from whom: OEMs and Tier 1, 2 and 3 suppliers

The carmaker is called the OEM (original equipment manufacturer). It buys systems and modules, such as seats, brakes or electronic units, from Tier 1 suppliers. A Tier 1 buys components, such as castings, cables or chips, from Tier 2 suppliers, which buy materials and smaller parts from Tier 3. Each tier runs the same procurement process towards the tier below.

Rules pass down the chain through purchasing conditions. A published example: the purchasing conditions for production material of AUO Mobility Solutions Germany, a supplier of parts for motor vehicles (version 09/2023), require suppliers to run a quality management system that “at a minimum meets the requirements of ISO 9001” and to develop it to “conform with IATF 16949”. The same conditions set how call-offs are accepted and who owns tools, two subjects covered below.

What are the steps of automotive procurement for a new part?

How long steps 1 to 6 take varies by part and by carmaker; the APQP plan sets the dates for each part. The same steps apply to a Tier 1 buying from a Tier 2.

How is a supplier chosen: from RFQ to nomination

Suppliers first have to be on the list of those invited to quote. Vehicle makers run supplier portals for this. Scania, for example, tells new suppliers to register on the Volkswagen Group’s business platform for suppliers, which it uses “for sending out RFQ’s”; after evaluation a company may be added to the bidders lists for its material groups.

The request for quotation (RFQ) gives the drawings or specifications, the planned volumes per year, the timing and the quality and logistics requirements. The quotation usually separates the part price from the tooling price, and buyers often ask for a cost breakdown: material, processing, scrap, overhead, profit, packaging and freight. How an RFQ works in general is explained in what is an RFQ; how a buyer judges a cost breakdown is shown with a should-cost example in direct spend analysis.

The decision is the nomination: the buyer tells one supplier, in writing, that it will supply the part. The written form is often called a nomination letter. AUO’s purchasing conditions, for example, name “nomination letter, long-term agreement or other supply agreement” as the agreement that purchase orders and call-offs rely on, and require the supplier to deliver the ordered quantities and “the agreed capacities” set in it. A nomination is not a promise of volume unless the agreement says so; read what it commits each side to.

What are APQP and PPAP?

Both come from AIAG, the Automotive Industry Action Group, and are part of what the industry calls the core tools. Advanced product quality planning (APQP) is, in AIAG’s words, “a key automotive approach to move projects from concept to launch, minimizing lead times and startup issues”. It is the joint plan by which buyer and supplier develop a part and its production process: design reviews, risk analysis (FMEA), a control plan and checks at each gate.

AIAG announced the third edition of the APQP manual as available in March 2024. It adds “new sections on sourcing” and moves the control plan into a separate manual. AIAG said it was required by General Motors from 1 September 2024. Other carmakers set their own dates, so check each customer’s requirements.

The production part approval process (PPAP) is the formal approval of a part before series supply. AIAG’s fourth edition, from 2006, lists 18 elements, from design records and process FMEA to sample parts, and five submission levels. The summary document is the part submission warrant (PSW), signed by the supplier and approved by the customer. A new PPAP is needed when the part or its process changes. How buyers approve parts and follow defects is explained in supplier quality management.

For procurement, PPAP is also a commercial milestone. Nexteer Automotive’s tooling terms (2019), for example, say that unless agreed otherwise the supplier is paid in full for production tooling “after successful run-at-rate for the contracted capacity and Part Submission Warrant (PSW) full approval”.

What is IATF 16949, and why do buyers ask for it?

IATF 16949 is the quality management system standard of the automotive industry. It was written by the International Automotive Task Force (IATF), which VDA QMC describes as an international “ad hoc” group of national automotive industry associations and carmakers. The associations are AIAG (United States), ANFIA (Italy), FIEV (France), SMMT (United Kingdom) and VDA (Germany); the carmakers listed include BMW Group, Ford, General Motors, Mercedes-Benz, Renault, Stellantis and Volkswagen Group. The current version dates from 2016.

The standard is based on ISO 9001 and adds automotive requirements. The certification body NQA describes it as applicable to organisations that make components, assemblies and parts, covering “automotive production parts, service parts and related components”. BSI writes that certification “is mandatory throughout much of the global automotive supply chain”. Each carmaker also publishes customer-specific requirements, which a supplier must meet on top of the standard.

For buyers, the certificate is a gate before a supplier may quote for production parts. Some buyers accept ISO 9001 from a smaller supplier on condition that it works towards IATF 16949, as AUO’s conditions do. A certificate does not replace the buyer’s own audit of the specific process that will make the part.

How are parts ordered once production starts?

In series production, buyers rarely raise a purchase order for each delivery. The agreement for the part sets the price and terms; VDA 4901 notes that it usually states the expected quantity per part number for a period such as one year, which the supplier uses to plan capacity and to price. The buyer then sends rolling delivery schedules and call-offs by electronic data interchange (EDI). A delivery schedule gives planning quantities for the coming months (VDA gives six to twelve months as an example) that are not yet binding, so the supplier can plan; a call-off fixes what to ship, to the day or the hour. In Europe, the German association VDA publishes recommendations for these messages, based on the UN/EDIFACT standard, and Odette provides standards and tools for the European automotive supply chain. In North America, the ANSI X12 transaction sets are common.

Three rules from VDA 4901, the VDA’s introduction to these messages, matter to buyers. New call-off quantities replace those sent before, so the latest message is the one that counts. Delivery schedules carry net requirements: the buyer has already deducted what it received, and sends the cumulative quantity received so the supplier can check. And if the supplier cannot deliver what is called off, it must tell the customer directly; EDI is not the channel for that.

Purchasing conditions often add a deadline for objections. AUO’s, for example, say a call-off needs no confirmation and is deemed accepted if the supplier does not object in writing within one working day of receipt. The ordering logic is close to a blanket purchase order with releases; the despatch advice, receipt and invoice then meet in the three-way match.

What are just-in-time and just-in-sequence delivery?

Just in time (JIT) means the plant keeps no stock of the part, only a small buffer at the line, and the supplier delivers the quantities needed for current production. VDA 4901 is strict: JIT call-offs allow no deviation in quantity or time, and the supplier must warn the customer of any shortage. The call-off can be pulled by actual use, as in a kanban system, where an empty container triggers the next delivery, or pushed by a plan, as with a pick-up sheet for a truck that collects at fixed times.

Just in sequence (JIS) goes one step further: parts arrive in the order of the cars on the assembly line. A seat supplier, for example, delivers seats in the colour and trim of each car in the order the cars will reach the seat station. VDA calls these production-synchronous call-offs, and notes that the sequenced call-off is the binding one under the purchasing and delivery conditions.

For procurement, JIT and JIS change what is bought. The buyer is not only buying a part at a price, but a delivery performance: rhythm, packaging, labels and the supplier’s distance from the plant. The conditions say what a late delivery costs. AUO’s, for example, make the supplier liable for damage caused by a missed date in a purchase order or rolling call-off, unless it shows it was not responsible, and allow the buyer to end supply agreements after repeated delays and a prior warning.

Who owns and pays for the tooling?

Many parts need tools made for that part only: moulds, dies, jigs, fixtures and gauges. Nexteer’s tooling terms define tooling as items made for “the manufacture of parts for specific models, assemblies, or products” with a normal life of one year or more. They expect the supplier to own its own machines, but where the buyer pays for the tooling, “the Buyer will own the Tooling”.

• Ownership and marking. Customer-paid tools are marked as the buyer’s property and held by the supplier on a loan (bailment) basis. AUO’s conditions also ask that they be kept “visibly separate” from the supplier’s own assets.
• Care and scrapping. AUO’s conditions make the supplier service the tools at its own cost and forbid scrapping them without written consent.
• Payment. Tooling is often paid at a milestone; in Nexteer’s terms, after run-at-rate and full PSW approval.
• Life. Nexteer’s terms ask that tools last for the life of the part, including service parts after series production ends.
• Return. The buyer can recall its tools, for example to move the part to another supplier.

Keep a tooling register: tool number, part, supplier site, amount paid, ownership and condition. Without it, the buyer cannot move a part quickly when a supplier fails, because nobody knows which tools it owns or where they are.

How are prices managed over the life of a part?

The part price agreed at nomination is rarely fixed for the whole programme. Raw materials such as steel, aluminium, copper or resin move it up or down, often through an index clause; how such clauses work is explained in direct spend analysis. Engineering changes during the life of the model bring new quotations.

Some vehicle makers’ agreements also provide for yearly productivity price reductions. One published example: Commercial Vehicle Group, a supplier to commercial, construction and agriculture vehicle makers, states in its 2025 annual report that its arrangements with OEM customers “may provide for an annual prospective productivity price reduction”, calculated as a percentage of the previous year’s purchases. It says most of these reductions have been offset by its own cost reductions and help from its suppliers. Terms differ by carmaker and by part, so read each agreement rather than assume a rate.

Does automotive indirect procurement follow the same process?

No. Indirect purchases in a car plant, such as maintenance spares, IT, logistics services or facility services, follow the general process: requisition, purchase order, receipt and invoice, with catalogues for repeat items. They do not go through APQP or PPAP. Machines and production equipment bought for a new model sit in between: they are capital projects with their own acceptance tests. The difference between the two families of spend is explained in indirect procurement, and the analysis of maintenance spares in MRO spend analysis.