People have been talking about build to order (BTO) in the car industry for a long time ‘and yet somehow they are still saying it’s five years away’, says Joost Bosma, senior project manager in the supply chain practice at Celerant Consulting. ‘Some of the structural characteristics ofthe industry make it impractical to realise.’
Automotive is an industry still searching for the right formula for profitability. Ford recently said it will not rule out the closure of its UK operations as it restructures its subsidiary, hit by a sharp drop in US sales. And while Chrysler claims to have turned the corner following its merger with Daimler, this follows three years of painful restructuring and a $1.1bn loss in the previous year.
But making cars is not like Dell assembling computers. Many of the components are too large and expensive to stockpile at manufacturing plants and there are myriad combinations of colours, technical specs, fabrics and finishes. The car, while a consumer product, is a mighty complex one.
This complexity should not be an excuse for inaction. As is pointed out in Forrester Research’s latest report, ‘Making Auto Retail Lean’, the automotive demand chain remains ‘obese’ and, ‘despite acres of cars on dealer lots, only 54 per cent of buyers find what they want in inventory’. In the US, new vehicle inventory turns only 4.8 times a year – which compares unfavourably with some of the industry’s suppliers. Johnson Controls, for instance, manages 23.8 times a year, says Forrester.
However, it would be naïve to suggest that this huge industry can switch into BTO mode overnight. It’s also doubtful whether the mass-market is ready for the idea. ‘There’s no conclusive answer – it’s certainly not proven,’ says Bosma.
There is one other over-riding reason why pure BTO may not come about: ‘Customer demand will never be completely flat and that’s a problem for car manufacturers. They have a high fixed cost base and their workforce is also largely fixed-cost. So the only way they can maintain their margins is to utilise capacity. They haven’t got the luxury of flexing capacity.’
As a Tier 1 supplier, Delphi is on the front line of OEMs’ efforts to improve the industry’s responsiveness. ‘It’s especially true in Europe,’ says director of production, control and logistics for EMEA, Tony Humpreys. ‘Here, there is a tradition of the customer being able to choose from a large number of options. An Asian manufacturer might offer, perhaps, five. The BMW catalogue runs to 50 pages.’
While many OEMs are pushing BTO-type concepts, not all are. Toyota’s approach is to offer a large number of options as standard, reducing the need for many model variants.
Some components give manufacturers and suppliers more problems than others. Wiring harnesses tend to cause the biggest headaches. These take up a huge amount of space and tend to be model-specific so there are large numbers of variations. They are therefore manufactured and delivered in sequence, to the OEM’s exact requirements.
But whatever happens, carmakers will continue to become more responsive, to cut lead times and to further increase the number of different models andoptions – the latter having already increased dramatically. OEMs will also increasingly pool the stock allocated to different dealers while some suppliers will continue to set up shop close to production sites, particularly those involved in the production of complete modules, in order to be able to offer sequencing and JIT delivery with fewer problems.
And, as Norman Jones, solutions consultant at software specialist PeopleSoft says, industry in general is ‘moving away from building to forecast when forecasts are almost always wrong’.
Some car companies are still dominated by their forecasts and some of them will have to move away from that. The supply chain will have to become more joined-up and more automated. The internet is a powerful tool in achieving this, although being a mature industry there is still a lot of EDI in the automotive sector.
Car building must also move away from being akin to a command economy to a more collaborative business with OEMs and suppliers giving ready access to each other’s data. This may not be easy.
Bosma points out that more basic components will increasingly come from all over the world and typically from low cost-base countries like South America and China. Managing this distributed manufacturing model will be an increasing challenge, particularly for the Tier 1 suppliers of complete assemblies.
Fluctuations in volume
As cars become more sophisticated, more suppliers of technical components and assemblies such as complete engine management systems will emerge. These will have less need to be close to assembly plants because what they produce is relatively compact and easy to ship, and also because these items are not usually customer-configurable. ‘The challenge for them is how to handle fluctuations in volumes, especially in view of the heavy R&D investment. With more car models, and with demand lower and less predictable for each model, these suppliers will look for opportunities to create commonality of design. While all OEMs say they have commonality programmes, the degree of success is mixed, partly because most of them still source according to car model programmes and it’s not often that they get together to source, say, a fuel injection system.’
Call for collaboration
Delphi chief executive JT Battenburg recently urged the car industry to rethink its business and in particular called for more collaboration among OEMs and suppliers to create true collaborative designs.
Bosma finds that supplier-OEM relationships can be quite adversarial especially in the Anglo-Saxon world, though traditionally less so in continental Europe and Japan.
But there are good reasons why manufacturers are so specific in their demands, points out Delphi’s Humphreys. They tend to design an engine block with space for six cylinders but only insert four in the less powerful models. Why carry all that extra weight around for the car’s life, consuming extra fuel in the process? Or what about designing a standard wiring harness, rather like the arrangement found in many computers? The unused connectors and wires would be a sure source of breakdowns in future. Also, as Humphreys points out, open up the bonnet of your car and you’ll probably notice that there’s little spare space in there.
However, there are other ways of approaching the problem. It’s been a few years since Ford dubbed its Mondeo a ‘world car’ and since then manufacturers have continued to globalise production. While the US and European variants may look quite different, those differences are often more apparent than real. DaimlerChrysler is perhaps the prime exponent of the shared platform, says Humphreys.
What this brings is flexibility and lean production, he adds. ‘More and more, manufacturers are moving away from large investments in single facilities to something more scalable.’ Hence BMWs, for all their Bavarian associations, are being built in South Africa as well as Germany.
Delphi, for its part, tries to make its tooling, production and workforce as flexible as possible. Lean production is also one of the best ways of coping with the ups and downs of demand, he adds.
The producers of the most basic components – what Bosma calls the ‘build to print’ suppliers – work entirely to their customer’s specification and their challenge is, essentially, to produce as cheaply as possible. They may locate close to cheap labour or raw material sources.
Faced with the challenges of becoming a systems integrator, capable of managing this complex supplier base, Tier 1 suppliers will have to make some tough choices. Many of these firms, often spun off from the OEMs, have inherited a varied product mix and transition is not always easy, which is where Celerant offers its expertise.
A lot of suppliers will have to think closely about their position in the supply chain. Certainly, Delphi has seen growth in its manufacturing operations in places like East Europe and Mexico and, more recently, in Asia, says Humphreys. Sometimes Delphi locates based on OEM supplier parts, especially where it is supplying large and complex assemblies as opposed to single modules; otherwise it tends to locate where there is the right infrastructure and, not least, good universities.
Delphi, as well as being one of the largest Tier 1 suppliers to the automotive trade, offers one of the broadest ranges of modules says Humphreys, although even it has moved out of highly specialised areas such as glass and seating. Delphi itself also encourages its own Tier 2 suppliers to locate near its plants. ‘It improves responsiveness to the end-customer and helps us manage the supply chain.’
While sub-assembly by Tier 1 and Tier 2 suppliers is extensively used in the car industry and is increasingly being put out to rework agents, it has until now been quite rare for third party logistics providers to do such work. NYK’s Premier Automotive Group is an exception, explains general manager, Mike Storey
The company produces a 24-piece moveable backlight assembly for the Jaguar X-type estate.
However, a more substantial trend has been for NYK and other 3PLs to get involved in internal plant materials handling where the synergies may be more obvious.
Long distance sourcing
NYK Logistics, which works mainly with UK-based car manufacturing plants, has seen an increase in the length of supply chains as manufacturers seek more distant sources of supplier. The more labourintensive assembly operations, for example, tend to go to places like Eastern Europe or North Africa.
A relative handful of 3PLs have become lead logistics suppliers to the big car plants. As Storey points out, the actual number of car plants in Europe is not that high, so it tends to be a fairly specialised business.
Delphi’s Humpreys agrees. So far, in his view, Exel has been making much of the running and although he would welcome more truly global players, he acknowledges the huge strides automotive logisticians have made in the past five years and that automotive is a complex business. Delphi has 69 manufacturing locations in Europe alone. ‘At Delphi, we don’t yet have a single 3PL or 4PL but we are having a re-think and we wouldn’t rule it out as we move towards lean logistics.
Another big player is TNT Logistics which is active in automotive markets all over the world including, as operations manager Jeroen van Oekel explains, managing the worldwide network for GM’s inbound materials. The manufacturer is in the process of completing a huge reorganisation of its worldwide supply chain choosing to split operations along functional rather than purely geographic lines. It has also set up a 4PL called Vector.
TNT runs two consolidation points in Europe, one in the US and others around the world and also acts as a single point of contact for suppliers. As Oekel says, ‘this means sophisticated IT to pull everything together and give customers constant visibility.’
While car demand is unlikely ever to be completely stable, with the right partners it should be possible to introduce a degree of stability and predictability. ‘We’re working on various techniques for automated, standardised ordering from suppliers. And finding the right logistics partner will be critical to that process.
Technology will be important, too. Rene Schrama, director of supply chain technology specialist Zetes UK, points out that RFID systems, far from being new technology, have been used in the car industry for 10 to 15 years. Volkswagen, for example, uses RFID tags to keep track of stillages and other manufacturers hang RFID tags inside cars so that they can be tracked as they move around the plant.
‘What is new is that we’re just beginning to see more open systems as opposed to closed loop operations,’ he says. ‘The big challenge is to get some measure of interoperability. Most applications of RFID until now have been in spot applications to solve specific problems. However, I’d be surprised if interoperability didn’t come, because there is potentially so much cost-saving.’
RFID could potentially fill the black holes in the supply chain where parts and components are lost between the despatching and receiving points in the often complex automotive supply chain.
At technology firm Airespace, EMEA director Marcel Dridje says that RFID has developed to the point where it could be ‘almost GPS-like’ and will allow managers to see what is going on within production plants or even whole supply chains as never before. The cost and size of tags is coming down, compatibility issues are being addressed and power and precision of tracking have improved to the point where, he predicts, companies will be integrating RFID into systems like SAP or Oracle by about 2005.
As always, carmakers are asking their logistics firms to do things for them better, more quickly and more cheaply. This is focussing concentration in the logistics industry, says Dominique Negre, chairman of auto industry specialist STVA UK. There is also more interest in rail as the train operators in Europe become more entrepreneurial and restrictions on road transport such as the Working Time Directive begin to bite.
Another big change is the shift in the centre of gravity of manufacturing to Eastern Europe. Negre says, ‘Certainly, in the logistics business, you must now be adaptable, and you can’t afford to specialise in just one mode.’ STVA, a long-established land transport operator, for instance, is looking closely at short-sea shipping co-operation.
Negre adds that while the car industry has been outsourcing logistics for a long time, there is a new realisation that logistics operators and car manufacturers must co-operate more ‘and we as logistics providers need to go to manufacturers with solutions and innovations.’
Needless to say, any logistics solution needs to be supported by an efficient track and trace system so that any car can be tracked anywhere along the supply chain. This is key to being able to offer manufacturers the sort of tight lead-times they demand. ‘You need to know where the vehicle is at any time in order to be able to react quickly enough,’ says Negre.
The outbound logistics supply chain has perhaps been a little behind the inbound in offering this sort of service but it is catching up fast, he adds.
So can we expect any shrinking in the vast compounds that seem to be an essential part of any automotive supply chain these days?
Negre says, ‘In principle, build to order reduces the need for storage. Having said that, there is a limit to what any system can do. Cars cannot usually be allocated direct from the production line to the dealer and there is still the need to concentrate cars somewhere – though one change is that dealers are able to access cars from a single place rather than different depots. What I see happening is more a reduction in the number of platforms than in the total amount of storage capacity.’
Concentration in a hub is also important for predelivery inspection, fitting or accessories and all the other added-value activities that now form such an important part of logistics providers’ operations. The ability to quickly swap cars from one dealer to another will also be important.
The manufacturers themselves must also consider where they carry out certain manufacturing operations. Indeed, says Negre, ‘One of the main values of the logistics provider may be its ability to ‘tune’ cars for each specific market in its hub. They may also look to their logistics providers more to provide things like in-factory movement.’
Automotive is becoming a true world industry. China is already beginning to manufacture cars for export to Europe and is of course emerging as a massive market in its own right.
Countries new to car manufacturing could have an advantage in that they can set up greenfield operations. South Africa is now home to four of the world’s biggest car producers – Ford, Nissan, Fiat and BMW – and the industry has essentially all grown up in the post-apartheid era.
The Gauteng Economic Development Agency was able to locate its new automotive supplier park so that even the most distant manufacturer – Ford – was no more than 35km away and the other three within 1-3km. That would be harder to replicate in many of the older-established manufacturing nations but emerging manufacturing nations like China or Brazil could follow suit. Maybe one day there will be automotive clusters in strategic parts of the globe linked to their main markets by fast and frequent car shipping services.
However, the older manufacturing centres should not be written off just yet. Carmaking is as much a matter of brainpower as machine tools and in many locations car plants and universities or technical schools feed off each other.
As a spokesman for Delphi says: ‘This industry isn’t just about chasing low-cost labour around the world.’