While the global car industry was showing its latest products at the nearby Geneva Motor Show, 240 of its top logistics specialists met in Montreux for the 6th annual Automotive Logistics Europe conference, held from March 4th to 6th, 2008.
The implications of global operations were top of the agenda for the majority of delegates, including carmakers struggling to meet the exploding demand for their vehicles in Russia and elsewhere, and the logistics service providers who are helping them build robust and flexible connections with emerging markets.
Unprecedented changes in the structure of the world’s car markets and the location of car making plants and supply bases are creating novel challenges for those charged with managing the flow of components and finished vehicles. In the words of one delegate: “We all underestimated the effects of globalisation.”
Comments from the industry
“Still the top-of-class conference in Europe. Excellent networking/setting.”
Bruno van Damme, Volvo Logistics
“Outstanding opportunity to network & gain the latest insight information + opinions from both the OEMs and suppliers”
David Mayo Director Key Accounts CHEP Deutschland
Cleaning the supply chain
The industry has proved to be flexible and innovative in its response to the new economic environment. However, with shipping capacity stretched to the limit, particularly in transporting finished vehicles, the exploration of alternatives, including long-range rail links between Europe and the Far East was of major interest to delegates in the dedicated Finished Vehicle Logistics stream.
While capacity constraints may be a big concern today, the environmental impact of logistics operations is a looming challenge for the future. Transportation produces nearly as much CO2 as automotive manufacturing operations. As carmakers respond to customer pressure and seek to stay ahead of increasingly likely environmental legislation, many are now turning their attention to ways of cutting emissions from the supply chain. Increased efficiency promises to be a key part of the solution here, and progress on collaboration designed to exploit supply chain assets were discussed in several sessions.
The automotive industry is determined to meet continued change. John Berry, Principal Administrator at the European Commission’s Directorate General for Energy and Transports discussed the EC’s growing interest in logistics as an industry. The term “logistics” he admitted, has only been in widespread use within the EC for the past 18 months or so. Before then, the commission had thought about separate transport modes and about policies aimed at shifting users from one mode to another. Today, said Berry, there is growing realisation that logistics needs to be considered as a holistic enterprise, using multiple transport modes to shift goods from place to place. Freight transport in the EU will grow by 50 per cent by the year 2020, he said, accounting for 13.5 per cent of GDP in the region and up to 16 per cent in some Scandinavian countries. Among the raft of initiatives to emerge from this new attitude are programmes for the development of ‘e-freight’ standards – single documentation standards for all types of transport used in the logistics chain. Larger truck standards are also under discussion as one way to balance demand growth with the need for 20 per cent or greater cuts in CO2 emissions.
Standardisation in information architectures is one area where the EC feels it can bring significant benefits. Standardised technology for road charging systems will be a reality within a year, said Berry, allowing trucks to use the same hardware to operate the road pricing schemes in several countries. Further developments of the scheme could include a single standard on board electronics unit to fulfil road pricing, tracking and tachometer functionality in European vehicles.
Lean practices for performance
John Patullo, CEO of CEVA logistics, the company formed last year by the venture-capital driven merger of TNT Logistics and Eagle Global Logistics, was one of several speakers at the conference to emphasise the increasing importance of lean practices in logistics operations. CEVA, he said, has hired expertise in the form of ex-Toyota personnel to drive the growth of lean skills in the organisation. So far, the company’s lean programme has produced 57 specialists and trained over 2,000 other staff members. Benefits of the programme so far include O17m ($26.8m) in savings.
Improving performance in the automotive sector, which forms a third of CEVA’s business, is extremely challenging, said Patullo, as the sector is already highly sophisticated compared to other industries.
In addition to the lean programme, CEVA is hoping to drive better performance for its automotive customers by investing in a very sophisticated database and data-mining capability, and by improving its in-house engineering expertise to improve the quality of dialogue with carmakers.
Lean approaches were not universally popular among conference speakers, however. Several attendees expressed concerns that too much focus on inventory reduction had reduced flexibility and increased exposure to supply chain risks, particularly in long-distance sourcing arrangements. Dr Jurgen Henschel, CEO Distribution and Logistics at Tyco Electronics Logistics, described his own organisation’s restructuring of its production planning in order to maximise flexibility. New sequencing approaches at Tyco have actually increased inventory levels, but the company and its customers have been rewarded by better capacity utilisation and a 50 per cent reduction in production lead times.
Bruce Airlinghaus Director, European Supply Chain Solutions at Ryder was another speaker to express concerns about companies that take the concept of inventory reduction too far. The problem, he said, was one of “lean versus anorexic supply chains.” Loss of flexibility and robustness, might, he suggested, be too high a price to pay of the cost savings delivered by low-inventory supply chains. “Even if you build the perfect solution, you execute it in the real world, and real world execution is a very sloppy, very human kind of process.”
The EC certainly believes that improved data exchange standards may be a key driver of efficiency in the logistics sector, but the automotive industry has already achieved much in the development and promotion of such standards. John Canvin, Managing Director of Odette, the European automotive industry-owned standards body, emphasised that logistics were and are a major focus for his organisation. Developments by Odette include standards for web-based EDI, transport labelling and performance monitoring for carriers. According to Canvin, the changing structure of the industry is putting increasing emphasis on the development and adoption of global standards for information exchange. Odette, he said, is helping in this area through joint activities with organisations representing the US and Japanese car industries, and by reaching out directly to the emerging industry in the countries “at the borders of Europe.”
In these countries, including Romania, Turkey, Slovakia, Poland and Morocco, work by Odette has revealed a need for significant training in the importance of standard processes as well as their application. The organisation has developed a basic standards training package for these regions to help new entrants to the industry get up to speed.
Capacity constraints are a perennial challenge for the automotive logistics sector, and they were an important topic of debate at the conference. Michael Berger, key client director at Maersk Line, the world’s largest container shipping organisation, gave his firm’s view on current and future capacity challenges. Container shipping has grown extremely rapidly on the back of rapid global economic expansion, he noted, and that growth is expected to continue, albeit at a slightly slower rate in the immediate future given the US economic slowdown.
While shipping lines are investing in increased capacity – overall capacity in the container sector is forecast to grow faster than demand by 3 per cent – other factors will continue to put a strain on available resources. Among these, said Berger, are increasing trade imbalances, which reduce capacity utilisation, and slower streaming in an attempt to overcome high fuel prices. Fuel costs today, he noted, represent around 50 per cent of the cost of container transport, up from 25 per cent a few years ago. Demand on shipyards for the production of other vessel types, particularly tankers, may also affect the amount of new container capacity reaching the market.
However, the availability of ships will probably not be the primary bottleneck in the net few years according to Berger. Congestion at ports and limited inland infrastructure may have as significant an impact on supply chains. The biggest limits in Europe, according to Maersk, are likely to be Rotterdam, which will remain congested until 2015, and St Petersburg, which will present significant challenges for the automotive sector with little sign of a solution in sight.
Carriers such as Maersk are likely to invest more in inland infrastructure in order maximise the efficiency of their end-to end offerings. Improved flexibility in operations – such as overnight collection from ports – will be as important in many cases as additional land transport capacity, according to Berger.
High and heavy
One part of the automotive logistics industry that feels capacity constraints particularly acutely is the world of trucks, buses and construction equipment. These high and heavy cargoes are, by their nature, even less flexible than conventional automotive cargoes. For the first time this year, the conference included a session dedicated to high and heavy logistics issues. According to Joannes Van Osta, Group Transport and Logistics Manager at JCB, many logistics providers, particularly in the ro-ro sector, consider heavy product to be ‘the icing on the cake’ of their core automotive offerings. As a result, he said, they often find capacity used up by conventional automotive cargoes.
Different market structures also create problems for heavy vehicle makers. Demand for trucks and construction equipment typically precedes demand for private cars in emerging economies. JCB, for example has an 80 per cent market share in India, but according to Van Osta, the region has been “largely ignored by ro-ro carriers.”
The rush to Russia
According to Andrea Eck, General Manager Multi Brand Functions at Volkswagen Logistics, Russia presents the most pressing current logistical challenge for the German group. VW imports finished cars into Russia through Finland and has a new CKD plant inside Russia producing vehicles domestically. The company’s sales in the region have doubled in the past two years, a rate that “astonished” VW at the time according to Eck.
The drive today, she said, is for better inland infrastructure, primarily truck transport links, but also rail. VW is also planning inland consolidation centres. As the Russian market moves east and the vast areas beyond Moscow open up, they too will need to be accessed. This, she suggested, will require “new concepts” in logistics.
It was only an exceptionally mild winter last year, he said, and that allowed the import route via Finland to operate as successfully as it did. “We were all wrong when we looked at globalisation a few years ago,” said Kraass. “We underestimated the dynamics, we underestimated the trends and we now face shortages of capacity.”
Konstantin Skovoroda, General Director of Russia Transport Lines, described his own organisation’s efforts to build a finished vehicle transport infrastructure in Russia. As the Russian economy evolves, growing car ownership will be an important part of the country’s economic transformation, he said. As a result the Russian automotive sector should see several years of sustained growth, despite tough economic conditions elsewhere in the world.
The business environment in Russia, meanwhile, is stabilising, said Skovoroda. It used to be very difficult for companies to take the “cooperative steps” required to build effective logistics systems in the country. Today, it is still difficult, but becoming easier. “There was ignorance and fear. We need to move away from that and a new generation of managers is going to help us do this.”
Russian consumers, said Skovoroda, will expect the same levels of service as their counterparts in the West, but slow infrastructure development and skills shortages will make this difficult to provide. Overcoming these limitations will be the region’s biggest challenge in the next few years, he said, and went onto suggest that cooperation, both between domestic firms and with foreign companies and education establishments would be essential in order to fill the gaps.
Rolling stock in Russia
Rail transport promises to be a key part of the solution to the challenge of moving vehicles around Russia. Rene Varek, Commercial Director at RailTrans Auto, the new automotive transport group owned jointly by the Russian state rail company and private investors, described his organisation’s investment in state-of-the-art car carrying rolling stock. It plans to have 1,000 Russian-designed wagons available by the end of the year. The company has three auto terminals in operation today, with more planned.
RailTrans Auto aims to expand its current services in the West to support the expansion of markets East of Moscow in coming years. According to Varek, the trans-Siberian rail route from the Far East is also likely to be an increasingly important link in the future. His company is scheduling a service that will go from ports on Russia’s Eastern seaboard to Moscow in just over ten days.
Other delegates, such as GM’s Elliot Swiss, expressed concerns that rail transport through Russia, while it proved to be effective, is still too expensive to be a competitive alternative to other routes. GM uses the route today but only for emergency shipments he said.
Varek noted that new pricing policies are now coming into effect, with discounts of up to 50 per cent on many rail routes designed to encourage carmakers to adopt the new services.
Problems with the People’s Republic
The logistics implications of sourcing from China are becoming an important issue for many delegates. According to Maersk’s Berger, many of the shipping line’s customers are “shocked” when they discover the financial implications of placing “low-cost parts on high-cost vessel slots.”
Tony Humphreys, Director of Corporate Logistics, EMEA, at Delphi described his own organisation’s challenges in shipping components from China, particularly in the final quarter of the year when “all anyone wants to move is toys.”
For VW’s Eck, too, increasing transportation costs are having an impact on the carmaker’s strategy. While the organisation operates a global sourcing strategy today, shipping parts long distances to assembly sites world wide, she suggested that it was likely that a regional strategy would evolve in the future, with components produced for consumption on the same continent.
LSPs and local talent
Getting the most of the China opportunity has been difficult for carmakers and Tier One suppliers, but has also presented its own challenges for LSPs. Peter Reinshagen, Coordination and Development Manager at GEFO, described his own organisation’s work to build an effective service in China. The company established a joint venture in China in 2004 and when regulations changed last year to allow foreign-owned firms to operate without a JV partner it became the first LSP to do so.
Today, GEFO runs inbound, service parts and imported finished vehicle logistics operations in China. According to Reinshagen, operating in a low cost environment has been particularly challenging, as has recruiting and retaining suitable qualified personnel. “You work hard to train people, then your competitors come and poach them,” he reported.
The company is working hard to build its local talent base, in order to provide a sophisticated logistics engineering capability at Chinese costs. Reinshagen remains convinced that foreign LSPs like GEFCO have a compelling offering for the Chinese market thanks to their knowledge of international best practices and their ability to optimise processes across the entire international supply chain.
Kai Kraass of Wallenius Wilhelmsen Logistics described the unexpected effects that growth in China was having on his company’s operations. While demand for ro-ro capacity from China to Europe had not yet expanded, as much Chinese vehicle production is for local markets today, demand in China has dramatically affected fuel prices, raw material costs and shipyard capacity. As a result, new ships today cost nearly twice what they did five years ago. Thanks to this and other factors, said Kraass, the cost of shipping will go up for everybody in coming years.
IT take up
Several organisations active in China today expressed enthusiasm about the rapid development, growing technological sophistication and willingness to embrace changes that characterises many indigenous Chinese firms. David Read of RFID specialist Intellident, described his own organisation’s recent implementation of an RFI-enabled, returnable asset tagging system for a Chinese customer. Not only the was the company happily using state-of-the-art IT infrastructure, he reported, but it was also capable of conducting the demanding process of physically tagging hundreds of thousands of returnable containers in less than a quarter of the time Inellident originally expected. It achieved this thanks to an ability to deploy large amounts of relatively low-cost labour very quickly – one of the original Chinese advantages that remains compelling to this day.
While outsourced models are very much the norm for most finished vehicle supply chains, Michael Nelson – National Manager, Highway Transportation Logistics, Toyota Logistics Service, part of Toyota Motor Sales in the US, described how his organisation operates its own fleet of trucks in parallel with a number of external service providers. Toyota’s own fleet consists of 100 trucks and five facilities in the western US. It ships around 15 per cent of vehicles destined for US markets. According to Nelson, the in-house carrier gives Toyota a powerful insight into the cost base of its service providers, provides a platform to evaluate new technologies and acts as a performance benchmark for the company’s other carriers.
Among the technologies developed on the Toyota transport fleet and rolled out to other providers are soft tie-downs to replace hard chains in securing vehicles to trucks. The new nylon straps have helped to reduce damage in transport to record low levels and have now been installed on nearly 900 of the 1,000 trucks that Toyota uses across the US.
The trucking situation in Europe was described by Fritz Mehrtens, President of industry body ECG. A shortage of drivers, he reported was a pressing issue for many fleet operators. This was driven by a reduction in the availability of trained ex-military personnel, a traditional source of driving staff. Tighter regulations on the employment of non-EU nationals was another contributing factor.
Franz Blum, CEO of Vega International Car Transport and Logistic, echoed Mehrten’s concerns, noting that the need for special permits in order to employ Russian or Ukrainian drivers, created difficulties for his organisation, particularly as the training process for new drivers is today a costly and time-consuming activity.
The looming prospect of significant pressure to improve the environmental performance of automotive supply chains was everywhere at this year’s conference. Record-breaking fuel prices aside, few providers today have made significant changes to their practices on environmental grounds, but several speakers made it clear that demand for better environmental performance was just over the horizon.
Joannes Van Osta of JCB said that his organisation expects to pay a CO2 price of O80 to O100 per tonne and is planning for the future accordingly. Dr Bert Bong of Ford noted that the CO2 emissions from transportation are equivalent to those produced in manufacturing, but far less easily eliminated. Ford’s Cologne plant, he said, has recently switched to an energy supplier that uses hydroelectric power. He said the plant had reduced its CO2 emissions to zero at a stroke, making the emissions from transportation seem all the moreimportant.
Solutions to the green challenge will test the industry, but several delegates pointed out that conventional good practices are also, very often, good for the environment too. Better asset utilisation improves energy efficiency substantially, for example, as does regional sourcing rather than long distance trans-continental supply. Other changes that could have a big impact on transportation efficiency include the adoption of larger truck standards, although these may be contentious for other reasons in many regions
Ocean freight is a significant contributor to the CO2 produced in the supply chain. Peter Menzel, General Manager, Car Carrier Group at K-Line Europe, discussed some the technologies now being employed by the shipping lines to reduce their environmental impact. These range from better cleaning regimes and improved anti-fouling paints to keep ships slipping easily through the water, to the use of better fuels, new additives and particle traps to reduce a variety of unpleasant emissions.
Forewarned is forearmed
Better forecasting would make many manufacturing and logistics processes easier, but accurate forecasting is notoriously difficult to do. Two professional forecasters, Michael Robinet of CSM Worldwide and Arthur Mayer, Head of European Forecasting at JD Power, were both able to give some insight into the processes they use, and the predictions that their sophisticated models have produced for the industry over the next few years. In the US, said Bobinet, the largest vehicle categories are likely to decline substantially as US customers increasingly turn to European-style mid-sized vehicles. In Europe meanwhile, the trend to smaller vehicles will continue, although the shift will not be so pronounced as in the US.
By far the biggest changes will occur, perhaps unsurprisingly, particularly in India where increasing domestic incomes and a new generation of low cost vehicles is likely to drive a mass transition from motorcycles and scooters to four-wheeled transport. Emerging market manufacturers are expected to be the fastest growing car companies too, with India’s Tata and China’s Cherry both expected to grow hugely in the US market.
In logistics terms, Bobinet’s forecasts echo the statements of several of the carmakers present. As regional sourcing strategies come into effect, regional short-haul transport routes are likely to see the largest growth.
Within Europe, meanwhile, market growth will continue to be strong in the medium term, said JD Power’s Maher, but carmakers are likely to take steps to trim excess capacity in some of their Western European plants, particularly as new capacity in lower cost Eastern European markets comes on stream.
Supply chain-centric car making
Perhaps is should be no surprise that a conference of logisticians should be keen to increase the importance of their own role in their industry, but discussion of a move away from a manufacturing-centred to a supply-chain-centred approach to car production was supported by examples of a change in mindset from several delegates.
Ralph Hattler, Director Of Logistics and Plant Structure at BMW Oxford, explained how his own organisation has “a new orientation” which has been designed to facilitate a much smoother and lower cost supply chain. By combining purchasing, quality and inbound logistics into a single function, BMW hopes to take a more holistic view of its supply chain, one that will allow it to optimise the flow of parts into is final assembly facilities. The long-term objective, said Hattler, it to reduce throughput time by 50 to 70 per cent.
The need to think more carefully about the way the supply chain was organised from end to end was echoed by Dr Bert Bong, Manager European Vehicle Logistics at Ford. He used the example of outbound rail travel to illustrate the opportunity for huge improvements in efficiency and delivery time to the customer. Efficient supply chains commonly produce vehicles that then sit for extended periods on rail cars, waiting for the train to be filled, or for the crew to arrive “when we are bearing all the material and labour costs,” he noted. An alternative approach would be to move from a situation where factories pushed product onto outbound transport to one where the downstream logistics processes acted as a pull signal to the factory. “The train could arrive and the factory could spend that morning producing the 250 cars to fill it,” he noted.
The concept of final assembly or modifications within the supply chain was also discussed by some of the LSPs at the event. Anaud Cauchy of GEFCO described the increasing popularity of post-production operations by many carmakers. Either completed by the dealer or at regional distribution centres, these operations include such activities as the installation of sunroofs and in-car entertainment systems. LSPs, he suggested could offer economic benefits to carmakers by ‘industrialising’ such activities and combining them with pre-delivery inspection procedures.
While there was general agreement that the benefits of modifications close to the customer are real, some delegates questioned whether LSPs were likely to be the most logical supplier of such services, when specialist contract manufacturing and assembly organisations operate in so many markets.