The automotive industry is in the middle of a difficult period, with over-supply and declining demand. On top of that, the industry faces great uncertainty – what will the car of the future look like, and what will power it?
The supply chain that powers the car manufacturing industry of the future will also look different to that of today. In some segments of the market at least, there will be more emphasis on bespoke products and more model variations. At the same time, supply lines of components, assemblies and raw materials are becoming more extended and increasingly cars are being built in a greater number of places than ever before.
The industry has made huge strides with its supply chain – though progress is patchy – and pressure continues ‘to reduce costs and make it even leaner’, says Phil Shankley, MD of Gefco UK, part of the giant French-owned PSA car group.
‘We now operate on very narrow margins, with 15 minute delivery points in some cases,’ says Shankley. ‘But one area where there still is opportunity is inventory. In some cases, the buffer stock psychology still prevails. Buffer mentality has a number of causes but chief among them is the normal human reaction to risk. Our job as a 3PL is to try and provide psychological comfort, making sure that we’re giving customers evidence that we are performing.’
Stocks are constantly being taken out of the supply chain, says Shankley. ‘Ten years ago, there were stocks everywhere at Ruyton [PSA’s main manufacturing base in the UK]. But inventory is much reduced now.’
The debate continues over whether the car industry is moving toward build to order. In some ways, the shift towards low-cost production in far-away Asian countries is providing a counter-pull at the cheaper end of the market, though in the middle sector there is a lot of customisation that can be done at pre-delivery inspection (PDI) centres of the type operated by Gefco on behalf of its clients.
But another trend is the move toward much shorter model lives.
Power of the internet
Capgemini, in the seventh year of its reports on the car industry, says the internet is now the prime source of information for car buyers. ‘Three years ago, the proportion was 20 per cent, now it’s 60 per cent,’ explains global automotive leader Nick Gill. He adds that ‘wired’ consumers also use the power of the internet to look at many more models of car than they did before, particularly in the 18 to 25 age bracket. The end of car dealers’ block exemption might also have boosted the degree of inter-brand competition, though otherwise the effects of the ending of the exemption are less than expected, he says.
The proliferation of car types means that supply chains must be more flexible but this has been largely addressed by reducing the number of vehicle platforms.
Capgemini also notes big differences in car buying patterns between countries, again with implications for the supply chain. ‘The differences between Germany and France are great, and growing,’ says Gill.
The French, for example, are turning from a nation of patriotic buyers of Renaults and Peugeots into one of the more fickle groups of consumers, especially the young. The French are also more likely to buy second-hand (they tend to amass fewer kilometres than the Brits or Germans) and France has never been a fleet market so new car sales are relatively small.
In Germany, the car is seen very much as an extension of the personality – which is a recipe for more customisation. ‘At the same time, they have a lot more dealerships – as many as in the whole of the US – to whom they’re very loyal,’ says Gill. ‘But at the same time, the German consumer is more demanding and price-sensitive.’
However, in terms of the way the car industry itself manufactures, it is very much a regional, and indeed global, industry points out Bruce Arlinghaus, Ryder’s director of supply chain solutions, Europe. ‘It’s not a French, German or a Spanish market any more. Components are coming in from Eastern Europe and from China.’ There is,’he says, ‘tremendous pressure forcing Tier 1 and 2 suppliers to be become more integrated into OEMs’ supply chains.’
The differences become even more pronounced in some of the newer markets such as China, says Gill. By Western standards, car ownership is tiny and while it has been every manufacturer’s favourite country for start-up manufacturing operations, production is beginning to outstrip supply. ‘I think that China will become a net exporter of cars and by 2010 production will be twice that of local demand if the lines keep moving the way they are now.’
Following a couple of decades in which Japanese manufacturers increasingly relied on their European manufacturing operations to satisfy demand here, could cars soon be shipped en masse from the Far East again? It might even lead to the emergence of the truly low-cost Chinese-made car. Cheri has been courting dealers in Europe though, as Gill says, it is difficult to judge how successful the nascent company will be.
Supply chain disconnects
To some extent, the car industry is a victim of having been around for over a century, though some of the serious supply chain disconnects that Capgemini noted in its earlier reports have been fixed. ‘They’ve put a lot of time and effort into fixing some of the gaps that existed between manufacturers and dealers and they now realise that the only way to succeed is to work closely to improve the flow of information,’ says Gill.
While the “super dealer”, capable of taking on a large number of the customisation jobs previously handled by manufacturers has yet to emerge, Gill says he can envisage this development.
Cary van den Avond, VP sales automotive at i2, sees a trend toward global OEMs taking supply chain management – but not execution – back inhouse. ‘With the move towards globalisation, companies now look to logistics as an integral part of their supply chains. Companies are thinking much more strategically and bringing analysis and decisions back into the organisation, leaving the actual execution to their 3PLs.’
Toyota uses i2’s Demand Planner to streamline its often complex accessory demand and installation procedures at its network of post-manufacturing centres in the US. Previously, the manufacturer used spreadsheets to manage this but ‘we were looking to improve the system that was in place’, says Joe Cammiso, accessory supply manager at Toyota. ‘We recognised that other companies were likely to be working with more advanced systems than we had in place.’
Toyota used i2’s sophisticated planning forecasting software to get a better handle on what was needed, and develop a demand pull as opposed to push approach. ‘The result is that Toyota’s people spend more time analysing data than gathering and punching it. This allows them to get more deeply into what their intended function was always supposed to be.’
Back at i2, Cary van den Avond says that while earlier expectations were that 3PLs would take all the management decisions, these are now seen as being too strategically important to leave to a third party, however competent. ‘Moreover, with globalisation, the impact if something goes wrong is so much greater.’
This globally-spread supply chain needs much greater visibility and this is where i2 comes in. Around eight of the major 3PLs in automotive are its customers, along with many OEMs and Tier 1 suppliers throughout the world.
In van den Avond’s view, OEMs are at different stages in their globalisation strategies. The main Asian-owned OEMs have always taken a global view while US and European firms still tend to think regionally and, frankly, are struggling to move their business models to a more global level. Though they have made great strides in producing product platforms that are suited to different regions of the world, the global supply chain element is missing. ‘Most have regional, not global supply chain chief executives.’
However, that should not necessarily be taken to mean that the US and European manufacturers will create a mirror image of their Asian rivals and set up plants in the Far East. Most have too much excess production plant capacity back home. Somehow they will have to gear that capacity up for manufacturing and exporting to distant overseas markets.
All OEMs are moving toward fewer but larger and more globalised suppliers though van den Avond sees some ‘swinging back and forth’ in terms of how much extra responsibility OEMs want to give to their suppliers.
Certainly, the trends when it comes to globalisation are not always clear cut. In one small corner of Europe they have torn up the globalisation model and replaced it with something much more intimate and localised – and arguably more effective. The Welsh Development Agency is about to complete a five-year programme to improve the Welsh supply chain. This is Accelerate Wales which, although not aimed exclusively at the automotive industry, has a strong car manufacturing element. It may come as a surprise but Wales is home to some of the big names of the industry like Ford, Bosch and Visteon along with a host of smaller, often quite specialised suppliers. Somehow, it has managed to create this hotbed of automotive activity – 430 firms at the latest count – without actually possessing a major car assembly plant.
Keith Thomas, project manager at Accelerate Wales, explains that when companies outsource parts from low-cost countries they often fail to take account of a host of hidden supply chain costs. ‘You can’t be responsive if you’ve got 10 days’ worth of stock here, another 10 days’ worth there and so on.’
A central part of the Accelerate Wales programme was to provide supply chain champions to local companies and to get companies to talk to each other. What the programme did was help identify the hidden costs of overseas sourcing and to challenge some of the traditional thinking in major corporations’ supply chain and purchasing departments. It has created a total acquisition cost model to back up its arguments and to counter ‘the unseemly haste to outsource to places like China’, according to Thomas.
You have to be realistic, of course. A light item with a heavy labour input like a wiring loom for a mass market car will still be cheaper to source in a low-cost country. ‘But there are a lot of niche products where Wales can still be competitive,’ says Thomas. He reckons that with supply chains costs averaging 65 per cent of the total, there is plenty of scope for local producers to compete.
The tightly-knit group of Welsh automotive manufacturers are in the south-eastern corner of the country and are well positioned to offer the sort of responsiveness that modern car manufacturers need, with their degree of customisation and product differentiation.
Thomas acknowledges though that getting large firms to change their mind can be an uphill battle at times. ‘It can be very difficult to access OEM buying departments and this is not helped by the fact that, in the UK, there are now very few decision-makers in automotive companies. Nor do manufacturers measure total acquisition costs. If a procurement process involving a distant overseas supplier goes wrong and managers have to be flown out to deal with the problem the expense may appear in the company travel budget, not the cost of the components themselves.’
Nevertheless, Thomas is convinced that the game is not yet up for home manufacturers, pointing out that it was not so long ago that everyone thought that the future lay in Asian tiger economies like Thailand before their spectacular fall from grace. And who knows what pressures might eventually be brought to bear on the Chinese over labour conditions, human rights or environmental issues?
Cec Jones, at Northern Automotive, one of the firms that has been involved in Accelerate Wales, says the programme had helped both directly and indirectly. ‘In particular, it had been instrumental in helping the company gain the motor industry TS16949 accreditation standard which is becoming essential for doing business in the automotive industry,’ he says.
Northern Automotive makes aluminium-based decorative trim for car interiors, typical of the highly specialised firms found in the Welsh automotive sector. In fact, some of its product is even exported to China. Under the TS16949 programme companies are also expected to cascade best practice to suppliers. In fact, Northern Automotive has sponsored one of its partners, PIM Flowtech to also achieve TS16949. And under the programme, partners reduced the number of operations needed to manufacture trim, which has in turn improved time to market.
The motor industry is a long-term user of telematics and RFID, having used such devices to keep track of tote bins and stillages for many years. But such simple devices can bethe ideal platform on which to build more complex functions, says John Camilleri, markets development director at BT Transcomm. ‘It’s basic stuff that gives the logistics manager a window on what is happening or what has happened but it can yield enormous benefits. And systems that, for example, help loading bays get ready 10 to 15 minutes before a vehicle arrives all add up,’ he says. ‘Telematics could play a huge part in improving vehicle security, notifying management of unscheduled stops or trucks’ doors being opened.’
Having got some form of RFID or electronic tagging in place, the next stage for the automotive industry might be delivery vehicle manifests and then maybe proof of deliveries. That might be as far as the industry needs to go, at least for the time being. Marrying up the logistics system with back office systems could be a huge task, and in any case even extending telematics through the logistics chain is likely to be a big enough task in itself.
And developing a logistics system does not preclude a wider application of RFID later on. ‘We can put down a platform now and build on it later,’ says Camilleri.
Beyond the conventional
While RFID and wireless are often used as all-embracing terms, there are some interesting sub-segments of the technologies, says Jim Schoenenberger, business development director at consultants, The Generics Group. ‘Zigbee, for example, offers a low-bit transfer version of the well-known Bluetooth technology which will work in situations where conventional RFID will not. Several big companies in the US are using Zigbee to monitor the state of temperaturecontrolled goods before they are unloaded from the truck. Zigbee uses a mesh network whereby a transponder that is blocked off from the receiver can piggyback via other devices in the vicinity,’ he says.
Schoenenberger postulates that the technology could similarly be used to monitor shock sensors for fragile automotive parts. Again, the benefits of being able to accept or reject a shipment without unloading it are potentially enormous. Zigbee offers the same data-richness as RFID, he believes.
But, as with any technology, it’s important not to get blinded by the science. ‘Ultimately it’s about what fits with your existing business process and whether it’s cost-effective.’
The outsourcing of manufacturing and aftermarket logistics in the automotive sector continues, with Cat Logistics’ recent assumption of three aftermarket distribution centres for GM (Opel) – two of them in Germany and one in Rome – through a joint venture with the car maker.
Cat Logistics does a lot of work in automotive. It has been involved in the sector since 1987 and, as spokesman Chad McClaskey explains it has many characteristics similar to the industrial sector in which the company has its roots, handling the aftermarket supply chain for its parent company Caterpillar. These include sporadic, difficult-to-predict demand, the requirement for superior inventory management skills and service criticality. Cat Logistics uses proprietary mathematical algorithms to devise optimum inventory levels. ‘Obviously, there can be a trade-off between not carrying too much stock and a customer experiencing unexpected delays,’ says McClaskey. ‘But in many cases, we find you can decrease inventory without a negative impact on service standards. It’s about having the right inventory in the right place.’
The service supply chain has been identified as an area for savings as firms come under increased competitive pressures. ‘That’s why a lot of companies in automotive, industrial, aerospace, technology, and consumer products are coming to us,’ adds McClaskey. ‘That way, they can concentrate on manufacturing. We also find, with a lot of companies, that once you sit down with them and analyse their aftermarket supply chain, they are often surprised how much it is costing them.’
In some cases, Cat Logistics does not have the luxury of starting with brand new systems or facilities on greenfield sites, except in developing markets like China or Russia. That means meshing in with existing infrastructure, which, says McClaskey, can often be a huge challenge. ‘However, we’ve found over the years that by working with clients and applying six sigma methodologies, we can minimise risk. Yes, there are problems, but it’s a question of how quickly you can overcome them.’
McClaskey forsees growth in automotive – either manufacturing or aftermarket – for many years to come as major manufacturers continue to outsource. In fact, most of the automotive manufacturers’ supply chains are so huge that some part or other is always being worked on, and different parts of the supply chain may be outsourced to different logistics providers. ‘Even within the same company, you can find several different entities.’
There is no standard solution, either. In some cases, Cat will take over an existing logistics centre, in others it may suggest setting up a brand new facility. This is especially true in emerging markets like China where Caterpillar has been since the mid-1960s, initially to provide earth-moving equipment but increasingly getting involved in the nascent automotive industry there. It will be one of the first tenants of the Lingang logistics park near Shanghai.
Truly global players
Paul Kavanagh, MD (Europe) for automotive logistics at NYK Logistics – which works for several manufacturers including Aston Martin, Land Rover, Toyota and Jaguar – says the logistics operators are following the industry OEMs in becoming truly global players. ‘Increasingly, you find yourselves up against the same half a dozen or so players whereas five to 10 years ago, you might still have found a few big national operators. Now it’s almost all multinationals.’
Bruce Arlinghaus believes that the future lies in the lead logistics provider approach. Companies that can provide a mixture of their own assets and third party providers are increasingly common in the car industry. ‘Despite the huge investment in Europe in logistics, despite even the consolidation that’s taken place, no single logistics provider can do everything, everywhere.’
Meanwhile, the pressure to keep costs down is continuous, even in the face of rising fuel and wage costs, says Kavanagh. ‘Nowadays we employ more planning and process people than truckers. It’s all about “intelligent collection” from the vendors, visibility of the whole supply chain – and getting staff to tune in to that.’
NYK Logistics is even doing sub-assembly work. After all, it’s only a short step from the highly sophisticated sequencing operations it is asked to do to putting the parts together. This can be expected to grow as OEMs exploit postponement techniques to the maximum.
This now has to happen across continents. NYK has an advantage in being part of a major Japanese-owned shipping and transport giant. As such, it has long been familiar with the issues of transporting material from the Far East, but now it is seeing an increasing move towards eastern Europe. ‘The OEMs are setting up there, and the Tier 1s and others are following,’ says Kavanagh.
One of the consequences of the car industry’s ultra-lean supply chain is that if things do go wrong, they tend to go wrong very expensively indeed. Penalties on suppliers for stopping a production line can be e30,000 a minute, says Brad Brennan, director of specialised logistics company, Evolution Time Critical. Founded five years ago, it specialises solely in helping car manufacturers and suppliers retrieve themselves from emergency situations, which could include a transport disruption like a dock strike or motorway blockage, or glitches in the manufacturing operation.
Brennan explains, ‘The supply chains in automotive are so finely tuned now, it can be a comfort for manufacturers to know that we’re there as a safety net.’ ETC has control centres at East Midlands Airport in the UK and now in Dusseldorf, Germany, manned 24 hours a day, seven days a week. It operates throughout eastern and western Europe and, indeed, worldwide.
It can – and does – call on an exotic range of transport resources, not only chartered aircraft but even helicopters. Such services do not come cheap but they are cheaper than the penalties that might otherwise have to be paid. If it keeps a multi-million pound production line moving, it is worth chartering a helicopter to save an hour.
Like it or not, automotive manufacturers are going to have to think deeply about the environmental impact of their activities. The logistics arm of Volvo, as might be expected of a Swedish-owned company, takes such matters very seriously – to the extent of appointing an environmental coordinator – Caroline Sjoberg – and has instituted a comprehensive environmental policy among its suppliers and transport providers.
Having more clout
As the lead logistics provider for one of the world’s largest and most diverse automotive groups, Volvo Logistics Corporation (VLC) has perhaps more clout in this regard than others, and it claims to be the only such operation in the world able to offer a complete logistics service from subassemblers to the dealer or end customer, along with the movement of packaging.
Much of this is concerned with the environmental performance of the trucks, ships and other equipment used but VLC is also concerned with issues such as vehicle rates.
Asked whether there is a trade-off between environmental concerns and the demands of lean manufacturing, Sjoberg suggested that the demands are not necessarily mutually incompatible. While lean manufacture suggests small part loads and premium express freight, VLC nevertheless ‘still sees a clear trend toward full pallets’. In fact, its truck fill rate on inbound legs is around 86 per cent.