Many concepts now commonplace in other industries like lean manufacturing, quality management and JIT, originated in car making. It is one of the most globalised industries in the world and has led the way in seeking out low labour cost countries. It has also been one of the first to restructure manufacturing operations, with sub-assemblers doing much of the actual work of producing cars.
Unfortunately, this innovation has not always led to profitability, at least in the older markets of Europe and North America. Despite a series of mega-mergers, producers are grappling with assembly plant overcapacity estimated at around 35 per cent and the problems aren’t going away. While markets in the developing world will be some help in getting it back onto its financial feet, the industry will have to consider more radical restructuring yet — with implications for the supply chain.
Joost Bosma, senior project manager at Celerant says a process still working its way through the industry is ‘vertical disintegration. ‘Ten years ago OEMs did everything themselves, even casting their own parts. Then came the tiering of the supply chain. But the big thing that has not been done is actually making it all work — that is, understanding the consequences of what has been done.’
Similarly, some of the big tier ones haven’t yet decided what role they should play; a low cost manufacturer making parts as cheaply as possible, a systems integrator managing complex material flows to make items like seats or cockpits (not necessarily manufacturing them) or a maker of high value technology like engine management systems.
‘The tier one to three suppliers haven’t defined their roles. People are reluctant to make decisions because it means stopping doing certain things.’
For MatrixOne, 30-35 per cent of its business is automotive, making this its second biggest sector after high tech. The industry faces two big challenges, says VP sales for Europe, Andy Kofoid: ‘One is speed — OEMs are always looking to get product to market quicker and shorten product development time. The other is to reduce cost in product development and in the supply chain.’
There’s a tendency to get the supply chain involved at an earlier stage of the development process. ‘With something as complex as a car, the sooner you can get the supply chain involved, the better,’ says Kofoid. And another area is in direct material sourcing. ‘OEMs are dealing with hundreds of suppliers and RFQs and the whole process can be inefficient. It’s a cost issue because one or two per cent of $80bn is a significant amount of money.’
Until now the OEMs have been using what amounts to brute force on suppliers, forcing them out of business at the rate of five per cent a year. Now though they are levering technology to squeeze more efficiency out of the process. The internet offers potentially huge savings in time and accuracy.
Meanwhile, many of the tier one firms — the real brains of the automotive industry — are looking to differentiate ‘and it’s not always about price’,
says Kofoid. He also believes globalisation and offshoring will continue. ‘Look at VW, where management has been demanding wage concessions or threatening to move to Poland.’ Many OEMs have also poured huge investment into China.
At TNT Logistics North America, general manager automotive logistics Bill Sheeran sees the Chinese in particular breaking into the tier one manufacturing market, along with India. ‘You wouldn’t necessarily want to relocate an engine plant from, say, Detroit to Malaysia but Asia-Pacific will at some point require its own tier one suppliers. These could also be in a position to export to Europe but much depends on international trade politics.
A report by Frost & Sullivan — just published — says Europe is rapidly emulating the US in outsourcing vehicle interior modules to tier one suppliers. ‘Interior modules and systems are increasingly being outsourced in the European market with cockpit modules and seating systems leading the way,’ explains Frost & Sullivan programme manager Anil Valsan. Frost & Sullivan estimates the European market for interior modules and systems, worth around €23.7bn in 2003, could grow to over €56.2bn in 2012. Currently, seating systems account for two-thirds of
the market but by 2012 these will be replaced by complete cockpit modules, with almost all major European manufacturers adopting this strategy.
It has been said that tier ones could one day break into final assembly, until now a sacred cow for OEMs. Should the latter perhaps adopt an IBM-style role and stop making or assembling things altogether and concentrate instead on marketing and know-how? This already happens in some niche markets like the Porsche Boxster while the Nedcar plant (which used to produce the little Daf models in the 1960s and 70s) now
turns out Mitsubishis and Mercedes.
Flexible supply chain
If assembly ever is outsourced it will create a much more flexible global supply chain, Bosma believes. It would make it easier to switch production of a model from one place to another, possibly across continents as there would be more assembly plants to choose from. This might not be quite so easy to do for bodyshop plants though as the machinery tends to be robotised and highly specialised.
But already there are signs that OEMs are taking a more flexible approach. Most of the megaplants that used to churn out a million cars a year have been replaced by 2-300,000 unit operations.
If final assembly becomes more fragmented it could have implications for the lower tiers as they may have to be close to the place of final assembly. However, this will be less true for more knowledge-based car components because the assemblies tend to be lighter and have a high enough value to stand the cost of airfreight. It will be more important for these firms to locate close to university campuses or technical colleges. ‘These sorts of firms tend to have sticking power,’ explains Bosma. ‘I know of a firm that makes manifold castings using some fantastic process technology — and it’s in Canada, hardly the centre of gravity of the world auto industry.’
While world industry has got used to cheap ocean shipping, it’s risky to assume the over-capacity of the past two decades will be repeated, warns TNT’s Sheeran. ‘I don’t see any of the vessel capacity issues we see on the Asia-US route being resolved in the near-term’ — sentiments that would be echoed by logistics managers involved in the Asia-Europe trade. In fact, with many of the world’s major consuming areas set to come out of recession at the same time, the shipping squeeze could be greater than ever. Auto manufacturers must build long-term relationships with ocean carriers, he believes.
Logistics specialist Christian Salvesen, which does a lot of inbound and outbound logistics for the automotive sector — GM, Ford or Unipart, for example — says its shipping activities are growing. More activity now takes place in places like India and Latin America and there has been a corresponding decline in the amount of collections from suppliers in European countries.
How much can still be squeezed out of the automotive supply chain? ‘Again, it depends on what your role is,’ says Bosma. ‘In the Anglo Saxon car industry, and to some extent the European one, there’s a tendency to squeeze ever more out of suppliers, and quickly.’ But the industry would do well to learn from the Japanese competitors’ more subtle approach. ‘Toyota has a differentiated approach. For low cost manufacturers, finding the most economic solution for a part probably is the best approach. But for higher added-value components squeezing cost may not be
the best solution, especially if they’ve got technology you can’t readily get elsewhere.’ Here, a longer term partnership approach may pay off as it will result in a better-engineered product. Avoiding the need for further product development or costly work to iron out bugs in vehicle electronics could make for lower costs as well as happier customers.
There are some limits to globalisation. A lot of the car manufacturing process is still done fairly close to the point of consumption, often for good
reasons, even in a country like the UK which has shed more manufacturing capacity than most.
‘There’s a perception the industry has moved offshore but that’s completely inaccurate,’ says Christopher Macgowan, chief executive of the
Society of Motor Manufacturers and Traders. The number of vehicles produced in the UK is close to 1960s levels if the production of ‘kits’ for overseas assembly (a practice which has ceased almost entirely) is excluded from the figures.
The UK market remains strong, having moved from being the fourth-largest to second-largest in Europe since 1997. ‘This at a time the market
in many sister states is heading south,’ says Macgowan.
However, raw material prices are rising, particularly steel and plastics, the latter affected by the huge hike in oil prices which could also trouble certain segments of the car market, notably four-wheel drives — being targeted by some city governments in Europe including Paris, Athens and Rome.
Graham Broome, chief executive of the SMMT Industry Forum, identifies the supply chain as one of the main areas where the UK industry can achieve results relatively quickly to make cost and quality improvements. ‘Supply chain groups will continue to address the offshoring threat in 2005 but it is important that the industry does not throw up its hands in despair,’ says Broome. ‘Moving offshore is only an option for a manufacturer, not an inevitability.’
While car industry chiefs usually highlight labour cost and productivity as the key difference between one country or region and another, Broom
is convinced the supply chain holds the potential for some big wins — and ones that are perhaps more immediately realisable. ‘There is still waste in the chain but the more global your supplier chain is, the less waste there is in it.’
Globalisation also means specialisation, adds G-Log’s industry consultant, John Love. ‘V6 engines are sourced from Australia because that’s where they’re produced for the world market, for example.’
Over the longer term, Love sees car producers making greater efforts to integrate inventory and transport. ‘If you go back to the late 1990s there
was a big emphasis on supply chain management with a planning-centric view of the world.’ For a time, people lost enthusiasm for this type of
approach, but now Love sees renewed interest in supply chain execution. ‘It focusses on managing execution rather than planning. Because people understand execution better and have a lot more data on it they can now revisit inventory. It could be called ‘managing from the real world inwards’.’
So G-Log has added inventory features to an essentially transportation piece of software, arguing that this is where inventory information is most
needed rather than at head office. ‘Trucks have got expensive, so you need to know the relationship between transport costs and storage costs, and we’ve got a model that does that. This kind of thinking impinges on the automotive industry because of its sheer size.’
The other fixes that could squeeze more out of the supply chain are technological. The automotive industry is unusual in that it does actually use
RFID to manage some parts of its day-to-day operations, albeit in a limited way.
There are issues to consider before RFID can gain widespread acceptance, says Chris Hopper, Printronix’ EMEA RFID product marketing manager. Sometimes suppliers in Europe can’t read bar codes on items supplied from the US and vice-versa. There are also still technical issues to sort out, like the tags’ behaviour when close to metal or liquids. Much progress has been made in areas such as antenna design
though the technology will have to become more widespread before a full picture of the technical issues emerges. Unlike a food retailer’s distribution chain, moreover, the motor industry is truly global with material and subassemblies being passed between continents as well as countries. It may well require a gorilla-like manufacturer to persuade all the different factions to work together on RFID, ‘but it has happened in other areas like Odette or EDI.’
The other problem, adds Hopper, is that ‘until recently, there hasn’t been the equipment out there to support RFID, like readers’. A likely solution, at least in the interim, is combined RFID tags and bar codes to allow both technologies to run side by side and without obliging all supply chain participants to make the switchover simultaneously. Each system could also back up failures in the other.
Says Hopper: ‘Bar codes have long been used in the industry but were difficult to get to work in an often greasy and dirty environment. However, a lot of internal boxes are now bar coded using the Odette system of unique codes for each box and I see RFID replicating that over time. I also see RFID being a good solution for the management of closed loop movements such as specialised racks — they can be quite high value items.’ It’s not just that these racks are high-value, they’re also a vital part of the production process. ‘If you’ve got all the axle racks and your supplier has none, the entire line stops.’
Reluctance to jump
But as in other industries, nobody’s quite ready to jump into the RFID pool yet. ‘Everyone’s looking at what everyone else is doing.’ As in retailing, perhaps the industry needs a monster like WalMart to force people into action. ‘One of the problems with all this new technology is that those who are expected to pay for it aren’t necessarily those who benefit from it.’ In other words it’s often the lower tier component producers who have to bear the cost and upheaval for a process that streamlines the OEM’s supply chain.
Colin Tanner at Consult Hyperion says the durability of RFID technology in oily or dirty environments is better than for bar codes; the problems lie
more in interoperability. ‘If you buy cards and readers from the same manufacturer they should work. If the readers come from different manufacturers from the cards they may not work immediately though they probably will with a little tweaking. But if cards are coming from different sources and readers too, the chances of everything working are pretty slim — even though the technology in automotive is slightly
Some of the prices being claimed for tag costs are also optimistic. ‘All suppliers claim that volume will bring prices down, but some of the claims are outrageous.’ Claims of five cents per tag are probably not realistic, says Tanner.
True, there are savings to be made in the logistics chain though advocates of RFID systems tend to blur the distinction between savings resulting from switching from bar codes to tags and those that are a result of better systems — which would be achievable with the old technology. Something else that doesn’t seem to have been considered is the possibility of thieves getting hold of tag readers — and if they can clone a cash-till surely this will not be beyond them. Imagine a device that tells the crooks which truck contains the expensive car stereos — down to the exact model number.
Technology must be increasingly flexible in a fast-changing industry. Michigan-based TRW Automotive, one of the world’s top ten automotive suppliers – braking, steering and suspension in 11 countries – wanted to improve its inventory management through automated data capture, explains Sam Harrison, production inventory control manager. One of the key requirements was to improve traceability. It eventually selected a package from OrbeSoft (distributed in Europe by Cemos). ‘We chose it because of the reasonable cost and especially because we liked the idea that once we had got OrbeSoft up and running we were free to do what we wanted with it in terms of programming our own process improvements. This flexibility is important to a business such as ours,’ say Harrison. Karen Strand, TRW’s systems engineer adds that ‘IT is no longer a barrier to rapid change’.
The automotive industry may not have the greenest of images but it probably leads the way in its use of returnable packaging. G-Log has done a lot of work for Volvo Logistics, the Swedish car giant’s subsidiary which operates 3PL but which has since won other business within Ford group.
G-Log’s Love says one area where automotive is definitely ahead of the game is in developing reusable packaging, whether plastic bins or crates or part-specific boxes, such as boxes designed to give parts like headlamps maximum protection.
‘The car industry itself considers itself only quarter of the way toward adopting reusable packaging but it’s still probably well ahead of other industries.’ In the ‘blue box’ or KLT, the industry has become a leader in pooled packaging.
Ford has now entirely removed all the cardboard boxes and other materials that used to litter production floors, says Love. Increasingly, close loop packaging is model-specific and creating it and getting it in place forms an important component of a new model launch. There’s also an increasingly strong link between design and logistics, driven in part by globalisation of the industry and the need to move components over longer distances, say Love.