Danger ahead

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The retailing of cars in Europe faces a huge shake-up with the two-stage dismantling of the ‘block exemption’ rules, says Professor Martin Clarke, managing director of predictive modeling specialist GMAP Consulting. And if that happens, the supply chain could be shaken up, too.

Some of the statistics surrounding car retailing make for interesting, if somewhat alarming reading. For instance, something like 30 per cent of the price of a popular car is accounted for by post-factory gate costs. Or that the average Swiss car dealer in 2002 sold just 63 cars – little more than one a week. The European average is an unimpressive 176 a week, though UK dealers manage 435 a week. And there are more car dealers in Germany than in the whole of the US.

Many dealer networks owe more to history and habit than business principles. After all, if Ikea can service an entire country with around half a dozen stores, why does a car dealer feel the need to be represented in every market town?

‘Another conundrum in the car industry is that systems are very inefficient,’ continues Professor Clarke. Unless the customer is prepared to wait, they are almost certainly not going to get the exact combination of features, colour and specification desired. This is partly because of the small size of most dealer sites.

Manufacturers are still far wedded to a ‘push’ manufacturing system and, despite numerous studies such as the three-day car concept, tend to resort to traditional – and crude – price-cutting techniques whenever the going gets a little rough financially.

One problem that has been widely identified is that a customer wanting, say, a medium-sized estate car, will have to visit several manufacturers’ dealerships instead of a car dealer that specialises in mediumsized estate cars of all makes.

Comparison with the US is interesting, but there are important differences. There, dealer sites are huge and often multi-franchise. Customers will make long journeys to visit them. However, bureaucracy in most European countries often makes it impossible for customers to drive away with their new purchase and concepts like car supermarkets have so struggled to catch on in Europe.

With the end of the block exemption, Professor Clarke is predicting a shake-up in the dealer networks. With existing dealers struggling on thin margins and in a weak position when it comes to raising venture capital, the way could be clear for large investors from outside the industry to get involved – perhaps the banks or other financial institutions. It’s quite possible that these new dealers would go for large, greenfield sites rather than take over existing operations, so the opportunity might exist to shake up logistics operations as well.

Logistics to retailing
There is also the opportunity for firms that started out as logistics operators to get more deeply involved in car retailing, Professor Clarke believes.

For the firms that move finished cars to customers, German lorry tolls could be the straw that breaks the camel’s back. By the time this article appears, Germany should have put in place a scheme to charge all trucks using its roads a per-kilometre tax.

All trucking operators are dismayed at the charge, but particularly the car logistics firms with their waferthin margins, says European Car Transport Interest Group (ECG) president, Richard Lawson. He calculates that the charge will add around 18 per cent to operators’ costs, an increase that cannot possibly be absorbed by increased efficiency. Supply chain efficiency gains are measured in single percentage points.

So far, the logistics firms have had little success in persuading the car manufacturers to let them pass on the increased costs, or at any rate have not obtained a clear consensus. This could have serious consequences for the future of the automotive supply chain.

There is little more that the logistics companies, many of whom have invested heavily in infrastructure and IT, can do, says ECG vice president Kay Ewaldsen, to squeeze more efficiency out of the supply chain. What has tended to happen, in recent years, he explains, ‘is that while lead times from end of production line to customer have been cut, in achieving that the supply chain has actually become less efficient’; more assets are needed per car shifted.

Better collaboration with clients is the answer, but there are factors over which the logistics firms clearly have no influence, such as number and location of dealers, opening times and, indeed, number of cars ordered. Working with portfolios of manufacturers can help, and this nowadays is almost universal practice, but most of the potential gains have already been realised.

Added value or technical services are certainly an important part of the activities of companies like Walon UK, for whom transportation accounts for only a relatively small percentage of total turnover, says managing director, Russell Brown. ‘Many people assume that when a car rolls off the production line, it’s in the condition in which they will actually drive it, but manufacturers in Japan may be building cars for any right-hand-drive market. For instance, Toyota have five variations on the MR2 model, only two of which are sold in the UK.’ Variations can be in seat material – cloth or leather – alloy wheels, in-car entertainment – the fitting of which is increasingly being left to specialist operators. Walon, for instance, runs large centres in Bristol docks as well as selected inland locations in the Midlands and in central Scotland.

The market is increasingly moving towards ‘build to order’ so being able to handle customising nearer to point of sale is particularly important to manufacturers in the Far East, whose products may be 30 days voyage away from the end-consumer. Being able to customise in this way ‘also cuts out a lot of waste and the wrong models being pushed onto dealers,’ explains Mark Morgan, marketing manager at Walon UK’s holding company, AutoLogic.

This trend will continue as manufacturers centralise production and build for more than one market at a single plant. Another trend that has nudged the industry further towards the technical specialist is the dismantling of the dealers’ block exemption in Europe. Dealers know that they can now expand outside their traditional territories but are unlikely to want to create dozens of small operations, perhaps initially handling only a small number of cars, so contracting out to a specialist could be the way to go.

Pan-European groups like AutoLogic are best placed to cope with the fluctuations in the market, Brown and Morgan believe. With operations in the UK, France, Spain, Iberia and Benelux (as well as a stake in the Groupe CAT joint venture) the company can often dovetail transport peak demands in one country with those in another. UK demand peaks, for instance, are now March and September whereas French demand tends to top out in July.

Knowledge is power in the automotive supply chain. But in an increasingly globablised and fragmented world, how do you make sure that that knowledge gets to the people that most need it? And with many suppliers no longer conveniently on the main plant’s doorstep in Stuttgart or Birmingham, the issue has taken on global dimensions.

This is a process that has been going on for some time, and the major car producers were one of the pioneers of computer and EDI links. This has left them with ‘legacy’ systems which were fine – if a little outdated – as far as communications with other company plants or the major suppliers were concerned but which do not lend themselves to an increasingly diverse supplier base. Moreover, with the ending of al,’ Griffiths explains. One advantage of his company’s service, he says, is that it can find answers to questions like ‘How do you find a casting company in Poland?’ and can also overcome language barriers in places like China (‘We have a lot of linguistic ability,’ he adds.)

Far and wide
OEMs have cast their net far and wide in the search for suppliers for many years now. The days when everything used in the British Leyland factory at Longbridge came from within a few miles of Birmingham are well and truly over. Now, though, the same sort of thinking is filtering down to Tier 1 and Tier 2 suppliers. China, for instance, is being considered as a source of supply by many producers, although admittedly there are problems with long lead times in what has become a fast-changing industry. But it is significant that it is even being considered.

Steve Scala, senior vice-president of business process outsourcing specialist Global exchange has also witnessed a move to global outsourcing, though there is still a long way to go at the Tier 1/Tier2 and below level. The industry has certainly moved on from the days when Henry Ford used to grow his own rubber and is increasingly looking further afield for specialised manufacturers that can make components ‘cheaper, better or faster’.

Various figures have been quoted for the percentage of a car that is outsourced, ranging from 25 per cent for a Ford Explorer to over 50 per cent for BMW’s latest sports utility vehicle.

Rather like the food industry, the car industry has had to take on increased requirements for traceability, all of which is grist to Global eXchange’s mill. Take the Tyre Act in the US, which ensued from a spate of consumer claims after new tyres on certain Ford models failed unexpectedly. Europe has not quite followed the US down this particular path but the end-of-life vehicles directive will impose similar strictures.

Gedas started life as the IT arm of Volkswagen but now markets IT services, including supply chain, to many other manufacturers such as BMW. Headquartered in Berlin, it has subsidiaries in other car-producing regions such as Asia, Mexico and North America.

Juergen Heinrich, head of supply chain management in the UK, confirms that, in motor manufacturing ‘the world is getting smaller’ and just like the OEMs, Tier 1 and 2 supplier are looking farther afield. While OEM-Tier 1 supply chain automation is not complete, particularly at the bottom end of the OEM range, the process is gathering pace and there are strong signs that it is happening at the Tier 1-2 level.

One factor that held back wider adoption of IT among suppliers was the perception that large-scale ERP systems were expensive and troublesome to install, but now lower-cost alternatives such as Microsoft’s Axapta are available.

Mike Hoey, account manager for automotive for CGEY, sees some of the industry moving overseas for at least some of its purchasing. ‘This is a mature industry and, faced with the need to maintain market share, the OEMs are looking to drive down costs. We’ve already seen organisations dabble in this area – for example, wiring harnesses used to come from Portugal, then Egypt and now China is developing as a centre of manufacture.’

The challenge, when faced with this trend, he adds, ‘is how to maintain a total cost view.’ On a piece part basis, the savings offered by overseas manufacture are impressive, though perhaps less so when the total cost to supply is taken into account. You also need to factor in the cost of not getting that vital item or material to your production line on time. ‘So you need to make sure that you look at all the criteria – it’s bigger than just a piece part.’

One interesting challenge for the industry, though, will be how the Tier 1 suppliers will manage their own Tier 2-3 suppliers to both maintain build quality and ensure that operations aren’t hit by sudden shortages, ‘and if there is a move to lower cost areas, manufacturers will want to make sure that stocks held “on the water” aren’t supplemented by stockholding over here’.

To avoid this, OEMs are going to have to get much better at forecasting, not only of demand for the basic car model, but for add-ons and options. The need for this will become even more urgent as customers make more use of the internet and become ever more demanding and sophisticated.

So where now? E-procurement has come a long way in five short years. Covisint, the online exchange established by DaimlerChrysler and other OEMs, is still in existence, albeit after many changes of management and strategy. There have been attempts to build similar on-line marketplaces for the lower-tier manufacturers, such as SupplyOn. Reflecting the change in thinking, private exchanges are nowadays often referred to as supplier portals.

‘We are seeing more marketplaces reaching profitability, although it is a struggle’ says Juerg Maybach. Although it works in many sectors, including oilfields, Commerce One has done a lot of work with car manufactures and their suppliers and, in November last year, signed a deal to automate commerce processes at Magna Steyr, a subsidiary of one of the world’s leading suppliers of automotive components. Covisint also uses Commerce One technology.

Outbound focus
Much of the focus up to now has been on the inbound supply chain, but with packages such as Conductor now available, many producers are turning their attention to the outbound supply chain. In fact, he sees OEMs increasingly divesting direct inbound responsibility to Tier 1 suppliers.

Commerce One has helped the Tier 1 and lower suppliers address specific pinch-points, such as managing delivered costs. The Tier 1s themselves are consolidating and are now in a better position to manage the operation. In fact, there are signs that they are moving into final assembly in some cases. Magna Steyr, for instance, assembles BMW recreational vehicles in Graz and delivers them to the OEM – an approach that many others may increasingly adopt for the their lower-volume models. BMW, of course still manages the design and concept and, crucially, the outbound dealer network. According to some estimates, other manufacturers only handle around 10 per cent of the value-adding process in their own plants.

With Tier 1 suppliers increasingly taking charge of the inbound supply-chain, the OEMs will be able to pay more attention to the customer facing outbound chain, says Maybach. ‘The real challenge is bringing the delivery time from a customer order to delivery from around 23 days at the moment to not more than three days.’ Even at three per cent interest rates, the potential savings for a one million cars a year manufacturer comes to hundreds, even thousands of millions of euros. ‘Obviously, that’s a huge motivation.’

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