The big talking point, and the significant unknowable, in the outbound side of the automotive supply chain is the impact of the lifting of so-called ‘block exemption’.
This was the rule under which the automotive industry was exempt from some aspects of EU competition law, allowing the manufacturers to insist on exclusive dealerships and restricting the ability of non-franchised dealers to sell, service or repair their vehicles. Ending the manufacturers’ stranglehold will have some effect on the way in which new vehicles are delivered to dealers and customers and a much more profound impact on the logistics of the automotive after-market.
On the block
The effects of lifting the block exemption on vehicle delivery, says Phil Shankley, managing director of Gefco UK, have not panned out yet. ‘There is an anticipation of a greater need for collaboration – but the economic case for that exists anyway,’ he says. Gefco is interested in the possibility of direct-todealer delivery which, says Shankley, is always the dream. ‘Some of the Japanese firms are already aiming at reacting to customer orders by moving the vehicle effectively non-stop from producer to consumer.’ Collaboration also suggests benefits. Currently, Gefco is running around 70 per cent of its trade as imports to the UK and 30 per cent as exports (from Ryton). ‘There must be scope to improve this balancethrough collaboration’, he says.
A possible way of improving the logistics of new vehicle delivery is suggested by Peter Ward, European Director of P&O Nedlloyd Logistics, based on his company’s experience in shipping Kawasaki and other Japanese motorcycles to European dealers.
Ward says that extensive systems investment over the past two years, in back office systems that give genuine end to end financial accountability, and in the LogNet customer facing visibility, tracking and tracing system, have provided ‘a real opportunity to go to the marketplace with a real 4PL offer, end to end, linking with the maritime element from our mother company, full order visibility, and destination warehousing and distribution working with best-in-class providers. We manage the supply chain and its KPIs through web-enabled systems that allow complete visibility to originators and recipients.’
With concepts and performance proven in the motorcycle business, P&O Nedlloyd Logistics is now eyeing the automotive sector proper. A particular opportunity, believes Ward, lies in containerising cars in the same way that motorcycles are shipped. ‘If we can increase the loadability of cars into shipping containers we can attract automotive outbound business on the same premise as motorcycles. Containerised, the flow of cars can be speeded up and slowed down at will – you can stack containers in Singapore, for example, which will help get more JIT into the delivery of the finished goods.
‘A lot of built vehicles use ro-ro at present but with containers you don’t have to ship 4,000 at a time just to store them in the open on a disused airfield with all that means in terms of damage and deterioration. Containers, with our sophisticated supply management tools, offer the possibility of shipping direct from overseas to the dealer.’ Indeed, technically there is no reason why a containerised vehicle shouldn’t be shipped direct to the customer although in reality vehicles will still have to go through a dealer for pre-delivery checks, number-plating and so on.
The customer’s choice
As dealers start handling multiple franchises from typically limited forecourt space, the number of vehicles of any given marque that they can keep on site will reduce and it will become even more important that a dealer can know of the customer’s choice of vehicle within hours of placing the order.
But although the end of the block exemption will have some impact on new vehicle delivery networks the principal effect will be felt in the after-sales market, albeit slowly. Only in May did the UK’s Office of Fair Trading strike a deal with car makers including Citroen, Ford, BMW, VW, Peugeot, DaimlerChrysler, Renault and MG Rover to ensure that cars can be serviced by an ‘independent’ without invalidating the warranty, provided of course that service schedules are followed and OEM parts or parts of equivalent quality are used. This was against the background threat of action under EU competition law and in supply chain terms it means that if independent dealers and servicers can’t access parts at similar prices and service levels to those available to official dealers, that could be construed as a breach of competition law. Extending the after-sales supply chain is thus not optional, but essential.
Chris Senior, director of European operations and international marketing at TNT Logistics says: ‘Ending block exemption breaks the link between vehicle sales and after-sales. Dealers are thus more likely to use the right [which technically they have had since 1985] to use non-genuine parts in servicing and repair. With a less tight bond to the vehicle manufacturer, the latter will have to work much harder to hang on to the lucrative parts business.
‘Over the past two years there has been quite a lot of movement in the marketplace. Dealers now place parts orders every day, where it used to be once a week for stock plus emergency orders as they arise. This trend started in the UK and is spreading marque by marque and country by country.
‘Some marques are even offering two or three deliveries a day – interesting but costly. The question is – can they afford the cost, or can they afford not to offer that level of service? Frankly, nobody knows how far the market will go in this direction. Some companies hope daily orders will be enough. Others believe it won’t be.
‘If costs are not to balloon out of control we must combine emergency and stock orders which implies techniques like overnight delivery with electronic proof of delivery and receipt confirmation. You can use GPS or a simple bar code scanner. Smart tags may have their place but at present the systems look a little expensive.
‘The position of the ‘independent’ is crucial. Vehicle manufacturers are opening up more and more to the independent dealers and workshops. In EU law they have no choice! They are looking to take over delivery of parts to these workshops. But the further you go down the delivery chain, the lower the discounts available and the greater the temptation to source good but non-genuine parts from local suppliers. The further the manufacturers themselves can reach down this chain, the better their chance of hanging on to the parts business.’
This is a classic conundrum – the certainty of incurring big expenses versus the likelihood of losing lucrative business.
Senior says that TNT Logistics is trying to get into all the elements. ‘We have a network across Europe capable of handling all types of auto spares on a daily, within the day, or overnight basis with full track and trace.
‘We are involved in pilot activities with six or seven manufacturers aimed at getting distribution out to the independents and authorised workshops. This brings in all sorts of new areas – for example, combining flows from different dealer chains into the individual workshops. And that in turn raises some significant systems requirements.’
Increased collaboration between manufacturers and between logistics providers should be part of the answer although Senior describes this as ‘a delicate issue’ given that the industry has only recently been exposed to the full glory of EU competition law. But he points out that the vehicle manufacturers aren’t actually competing for the spare parts business against each other so there should be scope for collaboration to improve what the Italians call ‘capillarity’ – the ability to penetrate to the furthest levels of the distribution chain. The obstacle, both for the branded manufacturers and for their ‘non-genuine’ competitors, is that low volumes of business have to support these increased logistics costs.
Senior adds: ‘In response there is a discernible tendency for vehicle manufacturers to try to make their own distribution more flexible. Most tend to think that a big central parts warehouse is part of their core competence but they are tending to open up the next tier of distribution.
‘They recognise the need to be more flexible and give themselves more options, and more are looking at outsourcing warehouse and distribution functions that used to be done inhouse. Fiat has been an aggressive pioneer in this, completely outsourcing its first-tier distribution. Everyone looked at them as though they were crazy – but now others are following suit.’
Leighton Morgans is European business development director at Servigistics, a systyems vendor which, although relatively new to the European market has been working successfully on aftermarket systems in the States with the likes of Subaru, and has a global deal with Volvo AB Parts supporting total management of the after-sales network in a 100 per cent web-based environment. The European background, says Morgans, is one of a flat market and overproduction leading to ten years of continuous decline in profitability. As a result, he says, ‘Vehicle manufacturers have become more interested in managing the dialogue with the customer from purchase through to repurchase. A good relationship makes it more likely that the customer will buy that marque again, and as in any industry, it is cheaper to retain an existing customer than to attract a new one.’
But how to maintain the dialogue? ‘During the three-year warranty period, the manufacturer, through the dealer, has the chance of a good relationship. The moment the vehicle goes out of warranty the level of dialogue drops dramatically for one reason or another – service is cheaper or the workshop location more convenient. The client goes elsewhere. And since the block exemption rules changed, taking away the manufacturers’ monopoly on the supply of spares, the ability to maintain a stranglehold on the dialogue with the customer has been further reduced.
‘In addition, the OEM suppliers to the vehicle manufacturers now have the opportunity to go to the dealers direct, offering better margins and quite possibly better service. So the automotive manufacturers have to rethink their whole strategy of service to dealers and clients if they are to defend what has been an increasingly important revenue stream,’ adds Morgans.
Private label parts, he notes, have been increasing market share considerably: ‘Quality is considered equivalent to that of an OEM part so is no longer an issue. Price and value for money are, for the dealer and the customer.’
If manufacturers are going to keep the dealers on-side they have to demonstrate value-adding ways of supporting dealers. ‘For example,’ says Morgans, ‘they can use enabling technologies to help plan the stocks dealers have to hold more effectively. Traditionally, manufacturers have looked at supply chain efficiency at the central and country levels – they haven’t really looked at helping dealers serve customers more effectively and profitably. Now they must deploy a level of expertise in planning the inventory that is at the disposal of dealers. Why, after all, should a dealer carry parts stock for a marque when some local factor stocks equivalent parts and offers better discounts?’
Morgans suggests that some pretty radical thinking is required. Consider, for example, customer price expectations: ‘While the vehicle is under warranty the customer doesn’t basically care what the price of parts is: he or she isn’t paying. The owner of a five-year old car has different price expectations. Should manufacturers and dealers not be considering some sort of differential pricing?’
Similarly, how are manufacturers going to support dealers in the multi-franchise environment? There is, says Morgans, the possibility that some manufacturers, with robust logistics, could provide the networks through which other manufacturers’ parts reach dealers and workshops. Equally, manufacturers will be going out to recruit the independents as certified or accredited service points. ‘Manufacturers could not just maintain their revenue stream on parts but increase it through a multi-marque service, and by using their own suppliers to provide branded inventory. Attempts so far have been halfhearted. There is a need for a more aggressive, dynamic approach.’
Indeed, for many logistics providers, the effects of lifting the block exemption have been slow to work through. Steve Russell, director of strategic marketing and business solutions at Christian Salvesen, says: ‘The impact is not yet as great as people would have thought. We have seen a 10 to15 per cent increase in the number of delivery points but no increase in orders. We are hipping smaller consignments to more dealers and this has obviously had an impact on revenue.
‘We are continuing to develop a shareduser overnight network whereby manufacturers and suppliers pay for the space they use, not the whole resource. We think this is going to be a continuing trend’.
There will, Russell believes, also be an effect on the location of the manufacturers’ major parts centres: ‘One or two companies have been establishing major European centres like the VOR centre for Volvo UK, entirely replenished from Gothenburg. But I think they are going to go back to more local provision, reintroduce local distribution centres. From an international centre you may deliver to a location every five days. The need to protect the brand in the new marketplace and withdraw stock from dealers (which reduces their capital requirement and improves their profitability), means you need local provision for three or four deliveries each day.
‘How you manage the after-market will be a significant, consumer-driven, differentiator,’ adds Russell.
The ultimate after-market logistics challenge is of course the impending End of Life Vehicles Directive which will force manufacturers to take responsibility for recovering and disposing of old vehicles. Little is yet known about how manufacturers will deal with this unwelcome responsibility – a lot will depend on the detailed regulations which are still being drafted.
Gefco, for example, has no immediate plans for or involvement in the ELV situation but, says Shankley, ‘logically it should be part of our supply chain’.
And Russell says that the ELV rules will create a whole new sub-set of problems but that the activity is not of itself new. ‘We have been recovering axles, engines, brake pads for clients for a long time,’ he says.
‘The physical aspects of vehicle recovery are not difficult but there are big issues around systems, control and tracking. Where is the vehicle or component from? What is it? Do I have to test for anything? Can I sell it back to the manufacturer? Are their credits involved? What is the disposal route and how do I prove that route has been taken? The issues are about tracking, not physical movement. We already do this sort of activity for one organisation and we see definite opportunities.