Motor manufacturers are reeling from the aftermath of the Japan earthquake and its impact on component supply chains worldwide. How damaging are the plant stoppages? And how are supply chains reshaping to mitigate risk? By Nick Allen.
After the worst economic set-back for the automotive sector in many decades the impact of the global recession is now easing. According to the “Global Auto Report” published by Scotiabank Group in March, car sales in Western Europe climbed one per cent in February, reversing ten consecutive months of year-on-year declines. In the United States car purchases soared 27 per cent above a year earlier to an annualised figure of 13.4 million units up from 12.6 million the previous month and in Russia, sales surged 80 per cent year-on-year last month.
However, just as the situation showed signs for optimism the industry has been hit by the repercussions of the Japan earthquake. Automotive assembly operations around the world particularly those with Japanese parentage have been adversely affected by shortages in the supply of key components. In April, Toyota set out plans to limit production at plants around the world. Production at North American plants is to be suspended on Mondays and Fridays between 26th April and 3rd June, and production from Tuesdays through to Thursdays will be just 50 per cent of normal. Similar arrangements have been made for plants across wider geographies and other manufacturers Honda, General Motors, Nissan, along with many more have had to introduce similar measures.
Michael Storey, director of business development Europe at Yusen Logistics Europe a supplier of inbound logistics services for Nissan, Honda, and Toyota, says: “This is not a demand lead problem but a supply one, so in theory they will aim to recover their supply at a later date by working additional hours.” He points out that some manufacturers had alternative sourcing from other locations.
Storey says that, in general, there is a continuing supply of components but not enough to sustain full manufacturing volume over a sustained period. However, there is a lot of collaboration with suppliers and most OEMs are confident they will be in a position to recover production losses. Some issues faced are with sub supplies, items that are made into sets, and this complicates the situation for alternative sourcing.
“We are certainly having to run very flexible solutions at present as a lot of these car plants are supported by quite long supply chains of which only some of the componentry is missing,” he says. “Other models that may be built at a location may still be running if they are not based on the same componentry so you have shared activity, shared resources, shared networks that have to keep going. Although some lines will be in a depressed stage others will not, so we have to be very flexible.”
Expectations are that there will be some lost time in May but from June onwards time should start to be recovered. But then Storey points out that: “Most European manufacturers go into a period of planned shutdown for vacations in July/August, so you can see volumes being rebuilt post August September time.”
There are possibilities some manufacturers may wish to attempt to keep plants open through the summer but a lot will depend on the complexities of dealing with labour issues.
The question is will people be as reliant upon such long supply chains in the future? According to Storey, the geography of supply is still moving away from NW Europe, but then the trend for building cars is moving that way too, so supply chains are potentially getting shorter but shifting further East.
Not all automotive supply chains have been affected by the Japan earthquake. For Jaguar Land Rover (JLR) about 60 per cent of aftermarket parts are sourced from the UK with 25 per cent coming from continental Europe. Aftermarket support for Jaguar Land Rover is handled by Unipart Logistics on a global basis.
According to Chris Roberts, global account director for Jaguar Land Rover at Unipart Logistics: “We’ve come out reasonably unscathed, largely because we don’t source a lot of our components from Japan. However, there can be situations where our primary supplier has had an issue with a sub component from a distant supplier.”
Roberts explains that for Unipart Logistics, the main concern over the Japan earthquake has been its distribution operation in Japan for JLR, ensuring that the warehouse and customer service teams continue to support the dealer network efficiently and are able to cope with the challenges presented by the damage to Japan’s logistics infrastructure.
Over the past two years expansion into overseas markets has been a preoccupation for Unipart Logistics’ automotive division, in particular China where the company is supporting the massive growth of JLR. “There has also been growth in Russia although somewhat dampened by the recession and we are starting to see the first signs of growth in the Indian sub continent,” says Roberts.
“But China has been our main focus, where we have gone from no presence in the market at all, working through an importer network, to establishing our own logistics infrastructure and customer service operation to support Jaguar Land Rover,” he says.
“We have been working with them on issues of getting compliance resolved so that we can import into the market establishing a bonded warehouse so that we can support the whole of the Asia Pacific region out of China.”
He goes on to explain how China has grown to be the third largest market for JLR after the USA and Europe, adding: “In two years, we have gone from having no presence at all to having four warehouses and a fifth opening in January next year. We started in Suzhou, near Shanghai, where we have a bonded warehouse and a non-bonded warehouse, then we opened a warehouse in Beijing, and more recently, this year, we opened a warehouse in the South, in Guangzhou. In January we will open a warehouse in Chongqing.”
Operating in unfamiliar markets and at such a distance presents its own set of issues. “The challenge is, because it’s a new market, you have to go through establishing relationships with government, customs authorities, and customers, etc. We assume that the world is largely flat, shipping product to Germany is very similar to shipping to France, so we expect shipping product to China to be very similar. However, you find out that the propensity for supply chain disruption is much higher. Consequently, you need tight control of your lead times and an understanding at a detailed level where product is getting stuck, why it’s getting stuck and then resolving those issues.”
When it comes to customer expectations Roberts sees a significant change taking place. “These days customers [OEMs] expect a slick supply chain and low inventories as a given. But what they are looking for is more added value services, greater innovation that results in an improved customer experience or lower costs. This may involve taking steps out of the supply chain, perhaps by packing much closer to the customer to reduce freight and storage costs and taking cost out of the packaging operation,” he says.
A major innovation set to transform the automotive aftermarket is the establishment of hub warehouses in metropolitan areas that give a higher level of parts availability with 24hr or same-day delivery, and at lower inventory levels. Unipart Logistics has been running a same-day service for JLR in Beijing since the new warehouse there went live. Roberts says that they will be piloting “Metro centres” in other markets this year. Customers will be able to order a part at 11am and get it delivered by 2pm, enabling them to satisfy the end customer by having their car ready the same day.
Michael Storey of Yusen Logistics Europe outlines another recent trend. Manufacturers are now interested in getting vehicles to new markets very quickly by moving knock-down kits and assembling in the market they wish to sell an activity particularly prominent in the Russian market. This enables a swift move into a market while avoiding restrictive tariffs.
With automotive manufacturers operating in very wide geographies and wishing to gain a foothold in new markets quickly, communication between different operating units is critical.
Cloud-based B2B environments, such as GXS Trading Grid, have been used to bring manufacturing plants in remote regions online much more quickly. According to GXS, a cloud-based approach to extending automotive firms’ IT has given OEMs a flexible means of integrating different departments or trading partners and has enabled them to scale their business according to market growth.
The reverse logistics process is an area which is gaining particular prominence in the automotive sector. Kristin DeBates, corporate marketing manager at UPS Automotive Segment, suggests that reverse logistics is not limited to the warranty parts return process. As manufacturers continue to adopt sustainability programmes, refurbishment and recycling of parts like high-voltage batteries from hybrid vehicles will grow in importance.
The same can be said for the responsible disposal of parts that could be considered potentially hazardous if not disposed of correctly or parts that have residual value like transmissions. She points out that the advantage of an efficient returns process becomes even more apparent during stressful situations such as recalls.
This is not a demand lead problem but a supply one, so in theory they will aim to recover their supply at a later date by working additional hours.