Environmental concerns and rising fuel prices mean that the automotive industry is facing fundamental changes. Chris Lewis reports on the impact these changes are likely to have on the supply chain.
Substantial markets have emerged in developing countries where none would have been suspected a decade or so ago, though almost all the manufacturing capacity to satisfy this demand will be in these countries.
The world car industry is facing almost the most fundamental change since the first mass-produced Model T rolled off the production line. Manufacturers are facing huge uncertainty. What sort of cars will consumers be demanding in five or three years time – or even in 2009? Are today’s models what they really want – or can afford to run, given soaring petrol prices? Will new technology like hybrids make today’s latest technology obsolete tomorrow? And will the really strong demand growth be in developing world markets like China or India?
It’s hardly surprising that many manufacturers are wary about building up excess stocks – and they are likely to want their supply chains to be even more flexible and responsive in the future.
Ralf Kalmbach, head of automotive at strategy consultants Roland Berger says that not only is there saturation and over-capacity in core markets but the industry is coming under ever greater pressure to produce cleaner – but at the same time cheaper – cars, perhaps incorporating entirely novel technology such as electric traction.
The industry’s structure, at least in developed markets, has given it a lot of problems and, with OEMs in increasing financial turmoil, pressure is building all the way through the supplier pyramid.
But at the same time there are opportunities, if only OEMs can realise them. Substantial markets have emerged in developing countries where none would have been suspected a decade or so ago, though almost all the manufacturing capacity to satisfy this demand will be in these countries. The fact that the motor car as we know it will have to be virtually reinvented is another opportunity – at least for these manufacturers willing to accept the challenge.
Miles Craig, general manager, manufacturing applications for Toyota Europe, says that with new markets for cars emerging in places like China or India, Toyota’s policy is to manufacture cars within the market where the cars are sold – China, India, Brazil, Russia, South Africa and Europe all have manufacturing or assembly plants.
He adds: “In terms of parts supply, conditions are becoming more complex; localisation of parts supply around the assembly plant supports the local economy and contributes to society, but is also beneficial from a supply chain point of view. However, it is impossible to localise everything, which is why we need global sourcing.” One example of this for instance is the Corolla, built in South Africa but with parts from South Africa, Japan, Europe and Turkey. “The main challenge in supply chain is to manage these extended supply and demand chains effectively.”
It’s also important, in a tightening world market says Craig, to grasp customer demand and adjust manufacturing plans. “We also have to have up to date information about the level of finished vehicle stock in the distribution chain, from which we can adjust our manufacturing plan” – so the manufacturing operation itself, including parts and components supply, needs to be flexible so that it can respond quickly to changes.
Flexible manufacturing linked to customer demand and with feedback of actual logistics conditions is key,” Craig adds. There is also need to support increased customer options, or ‘mass-customisation’, where customers can specify an individual combination of options, rather than only having certain ‘standard’ choices.
Stefan Bernhardt, head of IT at commercial vehicle makers MAN, sees not only manufacturing but development work moving to developing markets such as Russia or in Asia. “It’s not enough to just produce locally” – it is as much a matter of understanding the local culture as churning out vehicles, he says.
Another member of the Roland Berger team, Dr Martin Wittig, says that new generation product lifecycle management (PLM) systems have also made possible a much more dispersed manufacturing operation. PLM systems has been around a good ten years and while the earlier versions weren’t particularly user friendly, the best of them such as Dassault Systems’ latest version of Enovia allow designers on opposite sides of the world to play with 3D pictures of component designs in real time. As Dassault CEO Bernald Charles remarked at the conference launching Enovia’s PLM 2.0, adults are finally getting to play with the same sort of technology in the office that their offspring have been using in their Wii games for some time now. And as Walter Knoblach of German auto parts maker Schuler told the same conference, “we can now share work in progress in 3D, with one server working the whole system”.
Such design sophistication can only accelerate the diffusion of the car industry. Crucially, it could also allow slow and ponderous OEMs and their suppliers to speed up innovation in responsive to quixotic customer demand like the apparel or consumer electronics industries.
Joining up may not always be easy to do, but it is an area that car makers must address if they are to further improve the efficiency of their logistics chains. Increasingly, though, there are logistics service providers that can provide a complete service, dealing with all aspects of the automotive supply chain such as inbound logistics, in-plant logistics, the after market and even delivery of finished vehicles.
Paul Dyer, managing director of DHL’s automotive business, says that many manufacturers are also looking to pursue collaborative strategies for parts of their supply chain – hitherto unthinkable in this industry.
One factor that has this is global sourcing of components – the longer the distance, the more sense collaboration can make. Dyer continues: “In the past, most suppliers would deliver components themselves, with the logistics cost included as part of the component cost, but most manufacturers now take responsibility for collection themselves – it gives them greater control and visibility.” DHL operates many of those manufacturers’ systems, “and what we’re now seeing is a switch from dedicated collections to collaboration, especially in Europe.”
There is also a growing desire among manufacturers to look at their entire supply chain, including that for spares and finished vehicles, “putting the different parts together as we already do for Ford, Jaguar and Land Rover.” Some of this is coupled with growing environmental awareness, he adds. That might mean increasing the use of environmentally-friendly modes of transport like rail but also ensuring that trains and trucks run full both ways. DHL is working on new designs of handling equipment that might make this possible.
Another sector of the supply chain that could be ripe for collaboration are deliveries of spares to service agents. “Again, we’ve seen a real move in this area and we see ourselves as creating an industry platform.” One factor that helps is that, throughout Europe, car dealers and servicing garages tend to congregate in the same part of town.
DHL also has some specialist services including Tyreteam – the name mirrors DHL’s successful Tradeteam drinks delivery operation – and it now delivers around 40,000 tyres a night. Other areas ripe for such an approach include exhausts – DHL handles 90 per cent of deliveries of replacement exhausts in the UK – and replacement windscreens.
Another significant piece of work, this time specifically for Volvo cars, is in moving from a spares delivery system based on a single DC in the UK to a same day service based on six local delivery centres, each within a two-hour delivery time of all dealerships. On the face of it, this would increase spares inventory levels slightly, but it makes for far happier customers – no more 24-hour waits while a spare part is delivered on the overnight service.
Experience with other parts of the Volvo network in Germany and Sweden has also shown that there are hidden benefits in that dealership areas previously given over to spare parts stores can be used to increase sales space or servicing bays. It could also reduce the tendency for service agents at the end of long supply lines to squirrel away spare parts ‘just in case’ they are needed.
While this is very much a Volvo scheme at the moment, other manufacturers are interested in the concept.
At Menlo Worldwide Logistics, Steve Dean – senior director of global business development for the automotive industry – says that there is now a definite trend towards 4PL among major manufacturers and Tier 1 suppliers. While the concept has been talked about for the past six or seven years, he says. “We now have systems that have the ability to wire together the various 3PL providers and provide one view.”
It’s likely to be a long process but many tenders are looking for more comprehensive logistics management.
The recession has made car makers think hard about many aspects of their business, not least how to shorten order-to-delivery cycles. The less time materials, components or finished vehicles spend in the supply chain, the less opportunity there is for demand forecasts to get out of kilter. “I think also the approach has changed in that before, you thought in terms of doing this project saves X per cent of your cost, that one Y per cent, but now manufacturers are looking at a much more collaborative approach in how they can compress order-to-delivery times.”
The sudden surge and continued volatility of oil prices have also had a profound effect on the US car market, more so than in most other parts of the world. Smart cars are becoming a common sight, unthinkable when gas was still under $2 a gallon. Steve Russell, sales director at NYK Logistics UK, which works for many of the world’s car manufacturers – including prestigious marques or specialist manufacturers like Aston Martin or JCB – says that he doesn’t envisage manufacturers moving out of established markets like the UK entirely but plants will be fed increasingly globally. “The migration of manufacturing to Eastern Europe has now been overtaken by developments in places like India or China. At the same time, there’s been a move away from the ‘supplier park’ model (whereby suppliers set up plants at or near major car plants) in favour of a more globalised supply chain.”
There has been talk in the industry of the ‘five day car’ for some time now, says Paul Nurse, chief executive of supply chain software specialist, ProAct International. The true five-day car is still probably some way off but there is a definite move to push sub-assembly work either further back up the chain to suppliers or downstream to dealers or 3PLs, he says, and this, together with more dispersed manufacturing capability is making the industry much more flexible.
“To get to the five-day car, you need smaller, more flexible manufacturing plants,” he explains. “Almost it amounts to making cars to order on a production line.”
Huge plants churning out tens of thousands of identical cars have probably had their day, or at best will be in low-cost countries, though many of Europe and North America’s car makers will have to go through some painful processes to reach that point. Massive volumes are no longer the answer to the industry’s problems. Inbound sequencing into car plants needs to be slicker and on a more just-in-time basis.
ProAct offers car makers the ability to stitch together the outbound supply chain, which in the past has often been quite fragmented. “At the moment, there are a lot of different carriers passing information to each other and if there is a break in the supply chain, that information can often get lost.
“One service provider might not know of problems further down the chain – and also, these days, manufacturers often want to change the destinations of cars while they are still at sea,” says Nurse.
The supply chain itself will have to become more flexible and better at moving smaller batches of vehicles. Shipping specialist Wallenius Wilhelmsen Logistics’ chief executive Arild Iversen called at a recent conference for more “intelligent” ocean transport with ships designed not only for greater fuel efficiency, but also more cargo flexibility.
Often, in the car industry, it’s a matter of improving performance indicators such as delivery accuracy from, say, 98 per cent to 99 per cent – no easy task, says John Hammann, business development manager for manufacturing at SAP UK & Ireland. Currently, a lot of the effort is going into making the use of systems more intuitive, allowing operatives to focus on the real job in hand rather than wrestle with an IT system. “There’s also more use of mobile technology and also things like sensors in drums of fluid than can re-order automatically,” he explains. “At the same time, there’s more emphasis on accuracy of delivery to the lineside – bear in mind, car plants can be over a mile long.”
Car makers will continue to tweak their supply chains and look at new ways of doing things, particularly in new markets or where new technology is involved. “For instance, in some of the eastern markets they increasingly import as much of the basic car as possible but do as much configuration as late in the process as they can.” Novel technologies will probably increase the amount of outsourcing to even greater levels than today, which in turn will drive greater precision in areas such as synchronisation and sequencing. The need to share information with partners effectively will become imperative.
The automotive industry can be likened to a pyramid with a single OEM – a BMW, or a Ford, say – at the top with Tier 1, Tier 2 and Tier 3 suppliers producing components and assemblies of decreasing complexity. Lean practices and electronic systems are gradually percolating through the industry, though it is taking time to reach the smaller companies, particularly those based in the developing world.
Part of the problem is a tendency to over-complicate things and for designers’ complex ERP systems to try to scale them down for smaller enterprises. The results are not always satisfactory, says of Martin Blackburn, group IT manager at the Magal Engineering Group – four UK-based small companies supplying a range of parts to the automotive industry, with two French-based engineering and production facilities, and one in India.
After a false start with a larger, more complex ERP system, Magal finally selected WinMan business software supplier SSL began which not only could provide all the core functions needed in a Windows environment, but also virtual kanban. What the company needed was a lean-based business software solution that also offered flexibility, affordability, order traceability, and manufacturing-focused functionality, which is essentially what they got with Winman SSL.
“Kanban systems are essentially very simple systems, but finding an ERP system that will support it is surprisingly difficult,” says Martin Blackburn. What Magal needed was a system that could be used by people on the shop floor without the active intervention of IT specialists.
“The more complex systems do have their place,” adds Blackburn. “But some of them are so complex that the tail can end up wagging the dog.” l The true five-day car is still probably some way off but there is a definite move to push sub-assembly work either further back up the chain to suppliers or downstream to dealers or 3PLs.
The sudden surge and continued volatility of oil prices have also had a profound effect on the US car market, more so than in most other parts of the world. Smart cars are becoming a common sight, unthinkable when gas was still under $2 a gallon.