Motor manufacturers are under pressure to balance production concentration with local customisation. It’s being described as “going glocal”, says Alex Whiteman.
China, once seen as the production house of the world, has been losing status. Rising costs in the East Asian giant have given companies the time to pause for thought and to consider whether the costs and practicality of having their businesses spread out globally is really the best way forward.
Fathi Tlatli, president of the global automotive sector at DHL Global Customer Solutions & Innovation, says that the main challenge for automakers currently is to find the right balance between two important trends: parts standardisation and production concentration into mega-platforms allowing scale savings; and product customisation and local production to better meet local customer demand and product requirements.
“To achieve both, automotive players are putting a lot of pressure on their supply chains to become more ‘glocal’, which also means they become more stressed,” says Tlatli.
Recent years has seen a rising trend towards near-shoring with automotive manufacturers bringing production closer to the customer. A survey conducted by Versapak of 1,100 business managers in UK headquartered companies found that 46 per cent had considered manufacturing in China. Of this 46 per cent, 67 per cent of respondents said that they would consider returning manufacturing to the UK if market forces were right. And a further 38 per cent of these were in discussions to do so.
According to Tlatli, automotive manufacturers approach sourcing and manufacturing differently, depending on the market they are catering to.
“Premium players that build brand image on quality aren’t keen to change their supply base and usually rely on historical tier one suppliers based in mature markets,” he says. “They are, however, starting to develop their assembly capacity locally.”
In contrast, Tlatli, says mass-market manufacturers are often looking to save costs along the supply chain, from production to after-sales. As such, they are more likely to adopt a more localised model for both sourcing and manufacturing.
“It is however important to note that OEMs’ willingness to localise production is not only driven by logistics savings potential,” he says. “Nowadays, more and more emerging markets are adopting protective policies for their domestic markets (Brazil, India, Russia, Malaysia) aiming to ensure that a certain level of value is added locally.”
Tlatli believes that through the localising aspects of value added assembly operations OEMs can achieve important tax savings that can be turned into decisive competitive advantages.
“To achieve this, OEMs tend to rely on ‘hybrid’ assembly solutions thanks to CKD/SKD kits,” he says. “Beyond the fact that production is more and more localised, we tend to see the relocation of other functions such as R&D and design centres. By doing that, OEMs hope they’ll better understand local requirements and customisation needs through proximity to the final customer.”
Les Brooks, CEO of Oliver Wight, says that near-shoring requires careful consideration on service, cost and the ability to configure: “It is a case of judging the benefits versus the cost and quality.”
A spokesperson for the Society of Motor Manufacturers and Traders said: “Clearly cost savings associated with local sourcing has driven the trend. However, there are numerous benefits, including reduction of risk, reduction of GHG emissions, and improved communication between suppliers. While location has become a more important factor, cost, quality and reliability will always be decisive.”
In the after market sector, Jaguar Land Rover is pursuing a strategy of near-shoring, according to Richard Hankinson, Unipart’s global account director for Jaguar Land Rover. This is driven by demand.
“By 2020, we have aspirations of selling 800,000 vehicles globally,” says Hankinson. “As such, manufacturers are looking towards local investment in manufacturing, a course to temper levels of disruption.”
Vehicle manufacturers, Hankinson says, are now considering the whole cost of production and the potential disruptions that may hit supply chains.
“This means moving away from considering the lowest piece price to the lowest logistics price, and taking in mind the price afforded by piece of mind,” he says. “If you’re sourcing from China you have to consider outside factors and maintain a buffer stock or face severe disruption to supply.”
For the mass-market manufacturers though, the pressure is on to achieve market share without sacrificing sustainable levels as they partake in an environment of intense competition. It would seem obvious that an effective logistics solution is therefore crucial. Vehicle assembly requires components to arrive at assembly plants at the right time, in the right quantity and in perfect condition.
“In spite of its huge scale and complexity, the inbound logistics process doesn’t bring value through the eyes of the final customer,” says Tlatli. “Automotive players are therefore willing to compress as much as possible the costs of inbound logistics services.”
Tlatli says that while manufacturers may not be investing in inbound logistics to a necessary degree, they are, however, boosting aftersales services.
“Efficient aftersales services are very visible to customers, and bring a lot of value in their eyes,” he says. “More and more OEMs are therefore willing to focus on the quality and reliability of logistics services rather than on the costs.”
Hankinson agrees with this, noting that the logistics side of aftermarket services has to be able to cater to a growing range and diversity in products available to customers.
“Typically, as an example, you would offer seats in black or cream. You’d sell 50,000 cars with a 50/50 split,” says Hankinson. “So you’d need support to cater for just two variations, but now the colour range has expanded despite still only selling 50,000 cars, as such the scope for disruption has increased.”
September recorded the 31st consecutive month of growth in new car registrations, with 425,000 new vehicles hitting the road. However, globally, the production output of new vehicles has been above customer demand, and as such motor manufacturers, such as Ford, have been rationalising their operations to cut excess capacity.
Following the financial crisis, a trend ensued to reduce excess capacity across the production line. According to Tlatli, American OEMs were the first to do this, with Europeans quickly joining suit.
“Cutting production capacity has a strong impact on the supply chain, especially on the inbound side,” says Tlatli. “Indeed, production capacity reduction is usually achieved by closing plants, assembly lines, or through production shifts. When this happens, material inbound flows must be completely reengineered and, very often, production tools must be moved to other locations.”
In rationalising manufacturing operations, OEMs are not only cutting capacity, they are also required to relocate production volumes to improve utilisation rates across their various plants and production lines. This improvement of capacity utilisation in turn brings with it new supply chain challenges, says Tlatli.
“Additional volumes may require adding a production shift, which means the demand for night-time services increases,” he says. “And with more models sharing the same assembly line, complexity is increasing in terms of postponing operations and sequencing activities.
“Additional inbound volumes must be managed sometimes without an in-plant storage extension,” he adds. “The focus must then be directed towards just-in-time delivery and efficient in-plant logistics.”
This sort of operation can lead to plants working around the clock, 24/7, according to Tlatli. As a result, there is no leeway with which to deal with further supply chain disruptions.
“OEMs must then closely monitor their supply chain risks to avoid costly line stoppage due to inventory shortages,” he says.
The SMMT spokesperson says: “This increases the importance of just-in-time delivery from suppliers, which has a knock on effect throughout the supply chain. If everything runs according to plan, the whole supply chain can make notable savings. However, any unexpected delays become amplified.”
Brooks says industries have suffered recently because people in charge have been shy on making the right call at the right time. However, he says removing excess capacity needn’t be an issue if aligned and co-ordinated with the long-term in mind.
“The impact of Ford’s reductions is that suppliers will also be slow to respond to changes, reducing flexibility within the total supply chain,” says Brooks. “It may be pertinent to consider whether there is likely to be a ten-fold increase or ten-fold decline before reaching capacity.”
Though at the forefront of all automotive and manufacturers’ minds must be quality and maintaining brand reputation. And yet, these essentials have been hit in recent years with various recalls across numerous brands. In a two-week period dovetailing September, more than a million cars across brands including Ferrari, Ford, General Motors and Vauxhall were recalled.
The bulk of these recalls were the fault of various problems at the manufacturing stage, bringing to light questions surrounding the quality of components sourced from across the globe and along the supply chain.
By the beginning of October, General Motors had issued 75 separate recalls of more than 30 million vehicles worldwide, and in February, Aston Martin recalled 17,000 cars after it emerged that a supplier based in Hong Kong had used a counterfeit plastic in the construction of a throttle pedal arm.
Brooks says: “The many product recalls in recent years has led people to be more cautious when it comes to the decision to move; quality is a key consideration. Companies need to first ensure they retain brand reputation through quality products, then they can begin to analyse supply chain costs and consider optimisation.”
In a letter to US regulators, Aston Martin set out just how far along the supply chain the problem arose. A tier one supplier manufactured the complete throttle pedal in the UK. A second tier supplier in Hong Kong manufactured the pedal arm. This tier two supplier appointed a sub-contractor in Shenzen, China, to mould the pedal arms – the tier three supplier. And the counterfeit material used by the tier three supplier was supplied by another company in China. All in all, the episode highlighted areas of risk management and visibility along the supply chain.
Primarily, automotive manufacturers are looking to retain a global brand that operates at a consistently high standard on a universal basis, while remaining local and customised, says Tlatli.
“And that’s because the industry is global, and our customers are looking for us to have in place appropriate processes and quality standards wherever they have their operations,” he says. “Also, automotive players are keen to continuously innovate in their product, market, and manufacturing strategies. Because of intense competition things are moving very fast and so do the logistics requirements. The logistic set-up must therefore be quickly adapted to support their strategic moves.”
DHL backs Blue Sky award for a better electric vehicle
DHL has launched the Blue Sky Transport Design Award, which calls on established and aspiring designers to design an electric transport vehicle suitable for private, public or commercial use.
Based on the vision of the FIA Formula E Championship, the entries will be judged by Formula E and DHL executives alongside design and transport experts. Chairing the jury will be transport designer and founder of Priestman Goode, Paul Priestman.
Ken Allen, CEO, DHL Express said: “Our hope is that the Blue Sky Transport Design Award will engage the public and promote Formula E’s electric agenda, while also attracting great ideas on how transport can develop and become more sustainable in the future.”
Submissions are open until 27 April 2015, with the designs to be evaluated based on criteria including originality, functionality, aesthetics, and commercial feasibility and potential to solve the problems they are intended to address. A shortlist of five designers will then be invited to the FIA Formula E Championship race in Berlin on 30 May 2015, to present their concepts to the jury.
The award will be presented at the final race of the inaugural Formula E championships in London on 28 June 2015. The winning designer will receive a £10,000 grant.
CASE STUDY: Compliance in the aftermarket
The automotive after-market is facing what Richard Hankinson, Unipart’s global account director for Jaguar Land Rover, describes as ultimately the same issues faced by the business’s production side, key among which is the increasingly complex area of compliance.
“We ship parts to well over 100 countries, each of which has its own unique requirements and forms of documentation,” says Hankinson. “A universal approach to this aspect of business is the ideal, but ultimately an unlikely prospect.”
While the European Union has achieved standardisation and harmonisation in this area, China, the Middle East, Russia, South America, and to some extent North America, have their own varying requirements.
“This represents a huge potential client base,” says Hankinson. “And this level of increasingly complex global compliance obviously impacts the supply chain. It is up to firms to make sure they have a resilient supply chain that they are able to rely on.”
As manufacturers have considered the disruption caused to their supply chain by compliance issues, so too have they considered global events that have disrupted supply chains.
On 11 March 2011, Xirallic, a pigment used in automobile paints to provide sheen became unavailable. The pigment was solely produced by German chemical firm Merck in Onahama, a Japanese coastal town hit by the tsunami that caused severe damage to the Fukushima Daiichi nuclear power plant. As a result of damage caused, the plant was out of operation for two-months, with regular output not returning for a further month. Just one example of over-reliance on single-source providers.
Hankinson has said that events such as the Japanese tsunami and the closure of the Merck plant has lead to a change in the way people think about their supply chains, with the emphasis changing from a single source of low-cost supply to multiple sources.
Originally printed in Logistics Manager 11/2014