Automotive logistics has long been recognised as leading the way in advanced logistics concepts, particularly with inbound flows. The industry was very much pioneering in the move to JIT supply with short inbound lead times, minimal inventory and tier 0.5 suppliers. As the automotive industry moves forward, we see continuing challenges in maintaining inbound performance. Supply lines are becoming longer caused by the significant growth in East European production and a move to low cost suppliers based in Eastern Europe and the Far East.
We are also seeing a switch in focus to the outbound supply chain. There have been significant increases in product complexity recently as OEMs increasingly allow customers to tailor their cars. This has led to an emphasis on the planning and outbound processes as they supply more make-to-order vehicles with short lead times to the customer.
Taken together, these changes will make it a difficult time for logistics service providers who are expected to come under further margin pressure as OEMs focus on price.
In considering, firstly, the expansive nature of supply networks, the trend to more global supply chains across industries is well understood and automotive companies are no exception. While the move of finished automobile production to the Far East/China has not been as large as industries such as textiles, there is a much more significant trend to move assembly to Eastern Europe and take advantage of labour costs that are some 80 per cent lower than Western Europe. Thus new car production in Eastern Europe is predicted to increase between 2004 and 2008 by 10 per cent a year against just three per cent in Western Europe. As part of this trend, Peugeot recently announced the closure of the UK Ryton plant and movement of their new model to Slovakia.
Managing Asian supply
Another key issue is with managing Asian supply. As automotive companies look to minimise material costs, they have been moving the supply of low cost parts to Asia. While Asia has attractive ex-works product costs, sourcing from further a field has dramatic implications for the flexibility, complexity and cost of managing the inbound flow of parts. Many companies have suffered when they have moved production but failed to manage an effective supply chain. In a recent example, logistics costs were over a third of the delivered cost in Europe – and this was before the costs for emergency shipments were included.
Third party logistics companies are well established to manage the physical movements but managing the supply chain and the inventory is much harder. New offers are emerging from 3PLs that can now supply more integrated solutions but they will never be as effective as a local supplier just down the road.
Taken together, these geographic relocations are driving major changes in inbound automotive supply chains. For example, effective JIT requires short supplier lead times with high reliability. In Western Europe, this has been achieved by building supplier parks around the car plants and sourcing from local suppliers. In Eastern Europe, suppliers are not as developed which leads to longer inbound flows and more difficulty in meeting the JIT requirements. Automotive companies are therefore working with suppliers to develop local supplier parks.
Another consideration is the supply of engines; while the car plants are relocating to Eastern Europe, much of the engine and transmission supply is still in Western Europe. This again is extending inbound supply chains. Automotive companies therefore continue to look at the mix of road and rail to optimise the flows. With the increasing deregulation of rail, this is seen as an opportunity to enhance the reliability and competitiveness of rail – although this is still to be proven.
As a result of these geographic changes, inbound flows tend to be getting longer and more complex to manage. At the same time, there is the rising challenge of managing the outbound supply chain as product complexity is increasing significantly. Even mass production car companies are now looking to undertake more make-to-order. While a few years ago customers were offered a relatively small portfolio, and much of the supply was to local stock, now the focus is on supplying a custom order in a short, reliable lead time. This is placing a heavy emphasis on the outbound supply chain.
In looking at the total lead time for customers, it is apparent that the time to produce and ship a car is not the major issue, the time to place and schedule the order is much more important. In a review of the times involved, it can take three or more weeks to schedule and start the production.
Aligning demand with production
Automotive companies are therefore focussing on reducing the front end time to handle orders and have typically launched programmes to improve the alignment of customer demand and production. Some examples of the programmes underway are:
BMW is focusing on complexity reduction at the engineering and parts level, decoupling manufacturing scheduling (introduction of a ‘painted body buffer’ to assemble customer orders quickly, supporting late order amendments). This is supported by an integrated order and production information system that provides transparency and real time information across the supply chain.
Ford has undertaken to focus on the early stage of the process (variances de-proliferation, forecasting, responsive production), targeting inventory reduction. Ford’s goal is to create a real-time, web-based communication network between manufacturing, suppliers and customers.
The focus at VW is on continuous improvement of existing practices targeting delivery reliability through real-time IT and higher manufacturing flexibility – known as the ‘Breathing Factory Programme’.
While all the programmes are different, they have some common themes in addressing the whole supply chain by creating overall visibility, focusing on the endcustomer and replacing inventory with information. There are, however, two different overall strategies that seem to be being adopted.
Firstly, there is the approach directly addressing those areas that account for the major parts of the lead time, such as minimising the order bank and scheduling time. Here OEMs are looking at areas such as advanced forecasting techniques that generate highly specified orders close to market demand and thus facilitate the scheduling process and support the ‘locate-to-order’ ability. This is linked to enhanced Order Prioritisation and sophisticated constraints management to assure optimised degrees of freedom for the scheduling process.
Lead time reductions
Secondly, there is the strategy which looks to achieve lead time reductions through changes in product development and manufacturing. Here the focus is more on modularisation-driven product development and modular manufacturing to reduce the number of components in final assembly and thus enable more flexible scheduling and sequencing (given that there are fewer supplier constraints). This enables improved responsiveness of manufacturing, which in turn enables an accelerated flow of the order through scheduling and sequencing (having removed constraints)
At the same time that these planning changes are undertaken, automotive companies are also having to manage the changing product size. Cars are expanding as new vehicles get wider and longer to meet the increased NCAP test with, for example, side impact bars. However, while these issues affect logistics, of greater importance is the increase in vehicle heights. For example, a Ford Escort in 1986 was 1.35m high, today a Ford Focus is 1.48m high. This is pushing car transporters to replace or transform their trailers as they often can not handle the increased height with the same load factors.
Against the backdrop of a continued focus on costs, logistics service suppliers will find their margins under further pressure. In a recent survey of the key success factors, price scored 10 out of 10. Other factors, such as service levels scored highly but against the backdrop of consolidation among the OEMs and the relatively low score for the scale of suppliers, this suggests difficulty for suppliers to maintain market share and profitability. There are, however, a number of opportunities open to suppliers:
For new vehicles, personalisation services at compounds instead of dealer premise (dealer resistance to be managed). This may be linked to the potential to reorganise the compound structure with a European versus national footprint. Further, maximising volumes between large regional compounds would also create opportunities for the use of block trains.
Refurbishment and repair services to rental and leasing companies
Operating rail for long distance and high volumes as long as prices and services are competitive – OEMs expect that liberalisation will improve the service quality of rail
Additional flows of high volume parts to support the new Eastern European plants
Small value-added activities such as consolidation, sequencing or even small manufacturing processes due to the complexity of the inbound flows.
In summary, the automotive industry is undergoing major logistics challenges as it looks to move to reduce costs through using lower cost Eastern countries for both component supply and production. Add in the challenges of the increased product complexity and the desire for more make-to-order and the industry will be an interesting place for logistics in the coming years.
Charles Davis is a partner at AT Kearney and looks after Supply Chain. He has extensive supply chain experience across a range of industries and has recently been working in Eastern Europe helping factories to improve their performance. You can contact him at charles.davis@atkearney.com
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