The automotive sector is as determined as the rest of industry to trim as much fat from its operations as possible. The pressure on costs in a business that continues to suffer from over capacity is intense and the response of most OEMs and suppliers has been to wring the last ounce of efficiency from increasingly lean supply chains.
For years auto makers have striven to boost production levels while minimising inventory. The quest to maintain margins in the face of these twin objectives has spurred the globalisation of the industry with supply chains snaking around the world in search of the lowest cost sources of components. Despite the distances involved, OEMs and suppliers are determined to keep inventory in those extended supply chains to a minimum and moving as fast as possible.
IT has been critical in this enterprise. Many automotive companies want to cut the overall time to market from an average 48 months to 24 months or less. However, to achieve this they must communicate more accurately and quickly across the entire supply chain. A change in customer orders or production schedules must be passed rapidly from OEM to tier one suppliers, to tier two suppliers, to logistics providers and so on down the line.
Accurate and timely forecast data is critical. Shortcomings in this area can result in scheduling delays, excess inventory and out of stocks. Companies therefore need to minimise their reliance on forecast data and provide real time communications and visibility of actual demand. ‘I don’t think it’s rocket science,’ says Darren While, senior consultant at automotive IT services company gedas. ‘If we can get the forecasting right, then the lead time is not significant.’
Many industry players have invested in planning and forecasting tools from SAP, i2, and Manugistics to improve forecasting and management of inventory. Many of these products now work in real time, relying on voice recognition systems, radio frequency identification (RFID) systems and bar coding to gather data about the whereabouts and movement of goods through the supply chain.
Lack of visibility in business processes and material movements can result in added costs, lower quality and poor supplier performance ratings. Automotive manufacturers and suppliers must be able to track shipments and key documents, that is why offthe- shelf warehouse management systems and transport management systems from companies such as Manhattan Associates have an important part to play in tracking inventory across the supply chain.
Business process visibility and alert management can help companies identify transaction problems within the supply chain and execute a resolution. In order to shorten order to delivery cycle time, manufacturers must be electronically linked to their entire supply chain, enabling them to work much more closely with trading partners, involving them earlier in the design and product planning process; exchanging information more rapidly and more openly.
At Ford, which is attempting to capitalise on a clutch of brands, including Land Rover and Jaguar, executives are developing a common supply base. The company wants suppliers to react to its requirements on a daily basis. Typically, Ford gives them four hours notice that parts need replenishing, but some suppliers are expected to react on a minute-by-minute basis.
Hour by hour
Toyota Motor Corporation too practices supply chain accelerators such as cross-docking, which involves dividing four pallets into 12 to 14 smaller orders in order to minimise inventory at its plants. This means more frequent pick-ups of small lot levels done hour by hour. ‘Our management initiatives involve increasing delivery frequency, reducing inventory, and accommodating the five-day car (from order to delivery). We are also being more proactive in order to absorb changes or uncertainty on a daily basis. At the same time, we are reducing costs, which is a necessity’, says Walter Palen, manager strategic planning at Toyota Manufacturing North America.
High levels of integration between OEMs and suppliers like this are critical to innovations such as mass customisation (providing customers with personalised vehicles) and of the five day car. Both initiatives depend on reducing complexity in the product and the production process.
Nissan has done more than most to cut down on complexity by reducing the number of part pieces in its models and by using the same components in as many products as possible. On the production line, the company has designed plants that allow it to manufacture different vehicles on the same assembly line, enabling the company to respond more flexibly to market demands.
OEMs and Tier 1 suppliers are now investigating so called configure to order strategies. Instead of building to stock against forecasts from OEMs, Tier 1s are being asked to respond to orders as their products are used on the production line in filling customer orders.
‘There is much more emphasis on standardising processes and financial flows,’ says Scott Molidor, group vertical manager over automotive for Global eXchange Services (GXS) the business-to-business exchange formerly owned by General Electric. ‘The extent to which companies can embrace this will determine their market leadership. Leaders such as Toyota are going to have to propagate their best in class (business) processes throughout the supply chain. A tremendous change needs to come about; it might even involve OEMs sharing rewards with suppliers.’
However, not everyone is convinced that the auto industry has ‘got’ IT yet. ‘Existing in-house systems are far from being fully leveraged or integrated for companies to make critical decisions based on real-time information,’ says a recent report from consultancy PricewaterhouseCoopers.
‘Lack of standardisation, even in samebrand software packages, prevents companies from taking advantage of process improvements throughout the value chain. Suppliers that review and validate strategic direction, integrate systems, agree on standards, and improve information flow will realise cost reduction and improved return on investment (RoI).’
The automotive sector has much to learn from the high tech sector where developments such as the Rosetta Net organisation, which devises Internet standards for the electronics supply chain, have speeded the adoption of collaborative IT solutions. Other innovations pioneered by high tech firms that are now being taken up by auto makers include co-location, the practice of suppliers siting facilities close to OEM plants, and the kanban system in which suppliers are allocated dedicated warehouse space at OEM sites and manage their own stock.
Molidor points to the Far East where Chinese auto manufacturers, such as China Automotive, have been particularly quick off the mark in adopting common processes as a means of tackling new markets. As leading Chinese OEMs have said, ‘these standards for high technology have some use for us,’ Molidor comments. ‘It speaks of the need for integration and standardisation; especially if they want to get into new markets.’
Meanwhile, OEMs and suppliers are recasting the vehicle development process by shifting more responsibility for system design and manufacturing downstream onto the supplier community. While this provides OEMs with the benefit of supplier innovation and a lower cost structure, it has increased the risk of delivering a high quality product to the marketplace with shrinking windows of opportunity.
Identifying and implementing business processes and technology infrastructure that can further reduce costs and facilitate communication up and down the supply chain has become a top priority for the entire automotive industry.
Product lifecycle management (PLM) software-designed to help manage the processes and information flows involved in the more creative side of the automotive industry – has the potential to increase innovation dramatically, according to Holger Walter, director for PLM for LogicaCMG in Germany. Walter tells the cautionary tale of Karmann which parted company with its main client Volkswagen, for whom the company had designed the legendary Karmann Ghia, after submitting old product information and being unable to locate the up-to-date documentation within the company.
‘The OEM wants innovation, so the supplier has to respond with new products,’ says Walter. ‘PLM is one technology that helps suppliers be more innovative.’ LogicaCMG estimates that 34 per cent of a designer’s time is spent handling administration, 31 per cent in communicating with work mates in meetings and so on, 24 per cent waiting for decisions and looking for information, which leaves only 11 per cent of work time to actually produce the all-important designs.
‘Our goal is to double productivity in the design area from 11 to 25 per cent,’ says Walter. ‘If you only reduce waiting time and the time spent searching for information you can increase productive time. Companies can use the time saved to reduce costs or increase quality by doing better work.’
The sheer numbers of organisations involved in vehicle production and the volume of documents that have to be generated, distributed to participants and then kept up-todate, sometimes threaten to overwhelm teams working on new vehicles. The latest version of the VW Golf, for example, involves 420 suppliers. If they use several different systems then the chances of information going astray is much increased.
Many automotive companies operate what Walter calls ‘Nike networks’. They literally have people running between offices collecting and delivering data. ‘Replication has to be driven by a PLM system that underpins these processes and provides workflow management. Engineering change requests cost a lot of time. A project manager equipped with a PLM system can improve the time it takes to complete a project by between 50 and 60 per cent.’
Pressure on companies to deal with more complexity is only likely to increase. With mass customisation, greater use of software to control critical components such as gearboxes and increased electronic testing of vehicles, the problems of version and change control are only likely to multiply. Distributing the correct diagnostic software to onboard systems designed to monitor performance and report back on faults is in itself a major logistical problem.
A recent initiative by Toyota Motor Corporation in Thailand called e-CRB is typical of the kind of networked information systems that will become increasingly commonplace in the auto industry. Toyota has set up an online link between dealers and customers that employs a built-in onboard terminal to connect car users with navigation, news, weather, entertainment and e-commerce services among others. e-CRB will mainly provide information related to buying and owning a vehicle.
However, so far, few auto companies have been prepared to invest in PLM. It is not a matter of cost or problems with the technology, maintains Walter, but the fact that executives cannot spare the time to do the analysis and preparation required to introduce the technology. ‘It’s a question of collaboration between divisional managers. They need to be incentivised by measuring their performance on the introduction of a new PLM system,’ Walter concludes.
LogicaCMG has already done its sums on the savings that might be possible from PLM. The company bases its calculations on a €225 million per year revenue company of 1500 employees, 400 of whom work in development. If the developers earn an average €60 per hour then shaving one-and-ahalf hours per day off their administrative workload translates into an €8.6 million saving per year. Even with 100 developers, a company could save €2.15 million annually, Walter points out.
One of the big technology questions for the automotive companies is how best to communicate with one another. For 30 years electronic data interchange (EDI) has been the standard method of exchanging business data. The technology is reliable and well understood, but it depends on the comparatively expensive software and value added networks developed by service providers. EDI costs much more than the Internetbased alternatives that rely on Web services and the XML language; the higher price of EDI has tended to discriminate against smaller companies. That is one reason why ebXML a business version of the XML language, is gaining ground as a more convenient means of integrating applications and communications.
‘While the rest of the world is speeding ahead with XML and business-to-business exchanges, the heartland of the automotive industry is EDI-based,’ says Nick Rawls, director of product marketing EMEA for PeopleSoft’s EnterpriseOne ERP system. ‘I have been asked about the future of EDI for three or four years. EDI is not going to go away. It will become more reactive over time and reincarnate itself.’
However, experiences from the e-business boom of a few years ago have made executives wary of the net. Expensive crash programs to get on-line and prepare their organisations to do business in the new economy where build-to-order, modeled after the Dell computer company, and supply chain management modeled after network firm Cisco, promised savings of as much as €3,700 per vehicle and significant efficiencies within the supply chain.
‘Unfortunately, many overestimated the status of their current environment in terms of both technology and process efficiency,’ PricewaterhouseCoopers points out. ‘In their haste to move to the head of the pack, they also failed to adequately assess the technology or the effort necessary to integrate the external suppliers or customers with their internal processes and standards.’
The challenge for the automotive industry is to remold the traditional supply chain as a strategic value chain that is capable of sharing economic value among partners.