In an era of globalisation, change is a commonplace of supply chains, but few have undergone such a 180 degree about-face as the chains compromising the inbound flow of materials and components into the automotive industry. Until very recently, the precepts of ‘Just in Time’ seemed to dictate that major component and assembly suppliers would be located as close to the assembly plant gate as possible, to ensure that components and assemblies arrived at lineside in precise sequence, on a schedule calculated to the minute and with the minimum of inventory in the supply chain.
The ‘supply parks’ are still there, but increasingly they are occupied by logistics companies, while manufacture has scattered to low-cost sources around the world. The pressure on logistics costs and efficiency remains as intense as ever, but, says Graham Stevens, a specialist in PA Consulting’s automotive practice, the characteristics have changed. There are now global networks of diverse suppliers, which implies that the lengths of supply chains and their attendant risks have increased greatly. The new complexity means that assemblers are dependent on multiple logistics providers, as no one player is able to support the full set of requirements, but shortening product cycles and the need for an agile response to the market mean that buffer stocks in the chain are as unwelcome as ever. ‘The dominant issues are those of optimising flows to ensure on-time delivery whilst securing economies of scale, and of managing deviations and disruptions which are likely to compromise vehicle assembly’. And this has to be achieved working with partners in countries where basic logistics and supply chain concepts may be barely understood.
Mark Seager, who is managing director, EMEA for Exel’s automotive business, says that globalisation is as advanced in the automotive supply chain as it is in fashion or in fresh foods. The driver of course is the lower cost of production and the enablers include the dramatically lowered logistics costs enjoyed over the past few decades, tariff reductions, and reduced costs of currency exchange.
The move to sourcing from Eastern Europe, the Far East and elsewhere is having a big impact on the logistics market, he says. ‘The need is for lean supply chains with constant visibility of materials – so the days of shippers just putting boxes on boats are fast receding. OEMs demand a door to door service, not just port to port, and visibility at part level, not just consignment level. There are relatively few logistics providers [of which he would claim Exel is one] who can offer the geographical breadth and the depth of integrated services to manage the whole flow doorport- port-door and if required right up to the side of the production line’.
John Love, Industry Consulting Director at G-Log, points out that globalisation isn’t just about individual parts. ‘Focused production has been gathering strength for some years and is now on a global, not just a regional basis. The implication is that you may have just one plant supplying say engines to assembly plants across the world. A revision to an engine can cost hundreds of millions of dollars so you don’t want to do that in too many places. Focus tends to happen therefore on ‘high cost of development’ components. By contrast, plastic mouldings can be produced anywhere, but the location will often be related to raw material availability, so here you need to look at the supply chain right back to the raw material’.
Low cost country sourcing undeniably amplifies supply chain risk, and so there are increasing demands on the supply chain provider to mitigate those risks. Technology such as web portals can help by allowing clients to track parts through the chain, but as Seager points out ‘Most OEMs have developed systems with their suppliers that theoretically allow track and trace – but in practice compliance with Advance Shipping Notices, late updates and changes is generally poor, so the OEM is blind. A principle task for someone like Exel is to step in and ensure that product is properly handled in an emergency’.
RFID could also help although there are few applications as yet in automotive, principally, says Seager, because of the lack of general agreement on frequencies. ‘It is not yet cost effective over global distances, he says’. (Gwyn Thomas, Director of Internal Logistics on NYK Logistics’ contract with Ford Premier Automotive Group, says however that contracts specifying RFID are ‘on the horizon’ and that ‘when it comes it will come very quickly’).
Increasingly, though, trucking and tracking seem almost to be trivial parts of the logistics provider’s role, as they pick up ever more tasks that were once the responsibility of OEMs or component manufacturers. NYK for example has won Ford’s TS Award for manufacturing and is about to take charge of ‘body in white’ operations at Halewood. Gwyn Thomas says ‘Going forward we will be taking on more and more manufacturing and sub assembly operations, as well as, for example, the management of warranty stocks’. Says Seager ‘There has always been a certain requirement for assembly and configuration, but it is a growing trend. There is an increasing demand by consumers for more choice and customisation, and the vehicle manufacturers respond by demanding ever later configuration. The assemblers can’t afford to stock ‘one of everything’ but the suppliers need the economies of batch production and bulk shipping. We end up running final configuration plants as near as possible to the assembly plants’.
This is also the experience of Bax Global, whose European account director Ulrike Rowbottom who says ‘Increasingly, vehicle manufacturers, first and even second tier suppliers are putting more and more onus on service and lead logistics providers to do the jobs that used to be done in-house while they concentrate on their core capabilities. Often the LLP has staff within the plant providing services and this is a tremendous shift away from the dominant automotive model. In addition, the logistics supply base itself is becoming very consolidated so that one LLP is managing what was done by 15 suppliers, including finances, invoicing, customs clearance and a host of other activities’.
The key role for the LLP, according to John Love of G-Log, is to ‘glue the supply chain together with technology to give certainty. Physical movements are almost a given – what OEMs are looking for is precision of delivery and that relies on precision of data.
‘So they are also outsourcing the whole supplier compliance and goods receipt areas, so it’s the LLP’s responsibility not just to move the box but to guarantee when it will arrive and what components it contains’. Love says that a typical LLP contract may have around 100 ‘billable services’, many of which have very little to do with transport, ranging from specialist administration and paperwork to the procurement of insurance cover, even ‘delivering ships mail’!
‘The LLP is where it all comes together. OEMs wouldn’t describe it this way, but it is the LLP or a group of logistics service providers that ‘owns’ the supply network. The people closest to the network are the best placed to manage it’.
This wider role for the LLP may help the industry overcome its endemic ‘silo mentality’ whereby buyers, for example, chase ‘low cost’ sources without considering increased logistics costs and risks, or transport managers make savings on their budget by using deep sea shipping without a thought for the financial consequences of greatly increased inventory levels. Interestingly, Rowbottom believes that the automotive sector is probably now one of the leaders in using cross-functional teams to evaluate and implement projects. She cites truck-maker Scania (where Bax Global recently won a major contract to manage inbound logistics from Brazil into Europe): ‘Purchasing, production, warehousing and so on all came together to design a solution combining all our skills, and looking at all the costs. A very good exercise’. As extended supply chains become riskier, this approach will become ever more critical. ‘Forecasting is not often right, the capability of suppliers to deliver on time can be questionable. Security issues are at the forefront but there are also risks like the SARS virus in China. Systems planning is in constant flux, and you are always having to implement contingencies. A lot depends on your business continuity capability and your risk management capability. Serious risk assessment and contingency planning has to be in the system from the outset’.
Seager sees encouraging signs that the automotive industry is prepared at last to learn new logistics approaches from other sectors – electronics, hi-tech, even retail. ‘For many years automotive had the supply chain operations that others aspired to and it was easy to become arrogant and believe that we know all about lean production, but with the new velocity of change, there is much to be learned from elsewhere. For example, it has always been a challenge to manage prototyping and pre-production within the usual supply chain – but in the mobile phone industry this is entirely normal. The assemblers can also learn from each other. As a lead logistics provider we see what they are good at (they’re all good at something) and what they aren’t so good at’.
This could imply a higher level of collaboration between supply chains but in effect, says Seager, a lot of OEMs are already collaborating ‘unconsciously’ through their choice of logistics provider. ‘They won’t pay for a completely dedicated logistics service so the logistics providers have to consolidate material flows. What does come as a surprise to OEMs is when they identify a tactical opportunity for collaboration and the service provider doesn’t come forward with a huge price reduction – because the collaboration is already going on in the background!’ Thomas of NYK notes that customers are surprised at the ability and willingness of rival logistics providers to work together – for example NYK on PAG’s internal logistics working closely and harmoniously with Exel on the inbound flows, but he says ‘We are all big enough in the industry to do this, and no-one wants to be seen as the one who isn’t being collaborative’.
The automotive logistics market will become increasingly polarised, Seager believes. ‘Those that have the global reach will prevail in the extended supply chain. OEMs want to work with suppliers they know in emerging markets, not with unknown local providers – but only a few major companies will manage to create all the infrastructure, obtain the appropriate licences and so on. There will always be some role for regional specialists but this will diminish. We are seeing this trend in Europe – increasingly firms are using East European carriers, managed by global service providers, so a lot of, for example, German logistics firms, with high costs but without the global reach, are getting squeezed’.
Survive and thrive
Those that survive and thrive will have invested not just in infrastructure but in relationships, says Vasile Damian, a director of Geodis subsidiary Calberson GE, which links suppliers in Eastern Europe and Russia with the likes of Renault and BMW. He says ‘Bigger companies than ours have made investments but have forgotten the most important thing – the human element. Relationships are the most important thing in Eastern countries – it’s really important to have people who speak all the languages, to have your own people (not agencies) dealing directly with clients and suppliers, to have good relationships with the drivers at the carriers we use. You have to be in the country, not at the end of a phone’.
Logistics companies also have to be educators, Damian says. ‘Talk about JIT to Eastern companies and you enter the twilight zone – they don’t know what it means. We have to explain carefully why it’s important to do something when the client wants, because of its importance to the rest of the supply chain. We are getting good results once we have explained, but customer service is still a strange concept. Old habits die hard, but the younger generation is very quick to learn’.
It doesn’t look as though this period of rapid change will be followed by a new supply chain stability. Production and operating costs in Eastern Europe are beginning to converge on Western rates, so firms that have established in say Poland are looking elsewhere: to Turkey, Russia, Azerbaijan. (The picture is similar in the American market, as companies in Mexico look further south for lower costs). In Russia itself activity is flowing eastwards (and in China, similarly, westwards) as infrastructure improves and more remote regions exploit their cost advantages over more developed areas such as Moscow or Shanghai.
At the same time, the car manufacturers are looking at these areas not just as sources but as markets, setting up manufacturing to meet local demand. Often there is a requirement to use local components. For the logistics providers this raises some interesting opportunities and challenges, operating not just export flows of components, but complete internal supply chains.
Given the diverse and global nature of the business, it may seem surprising that automotive logistics is still dominated by firms with a heritage in trucks and sheds (even if they now deal more in bits and bytes) rather than the global consultancies or systems houses. But Dominic Regan, G-Log’s Strategic Marketing Director, says ‘OEMs are a pretty conservative bunch and they take a long time to build up trust. They want logistics providers with their feet on the street and a familiarity with the operation. In many logistics providers nearly all the key people have come from the major clients as OEMs have outsourced internal expertise. Many of them know more than the OEM itself about how the network operates. The automotive supply chain is turning into a global technology business, but the OEMs want partners who have a real deep knowledge of operations, and the ability to build systems and networks in the broadest sense – networks of suppliers and relationships, not just of technology’.