On the face of it, the topics discussed at the 2009 Automotive Logistics Europe conference in Montreux could not have been more different from 2008. Last year, manufacturers and logistics service providers worried about the escalating price of fuel and raw materials, the lack of capacity across all transport modes for moving finished vehicles, congested border crossings in Russia and how to keep the supply chain running at full tilt. This year, amid the sharpest drop in vehicles sales and production in a generation, and freight rates as dramatically low, many of these topics are obsolete or, as is the case with commodities like oil and transport capacity, completely inverted.
But at the heart of the matter, the warnings that we’ve heard again and again in the recent years of growth, including the lack of communication and cooperation between carmakers and LSPs, as well as poor visibility and planning in the supply chain, are now proving to be even more damaging to stakeholders during the downturn. With the focus of the past years on global expansion, supply chains have become unwieldy, unmonitored and inefficient, issues that were perhaps less apparent – at least at senior or board levels – when volume was high. The good news is that manufacturers, no longer overstretched by demand, have begun to improve their processes, whether by redesigning networks or using better IT systems.
Supply chain communication breakdown
Transport providers and suppliers criticised OEMs for not being more transparent as the financial crisis decimated vehicle sales. According to Vega’s Franz Blum, even when commercial vehicle sales had dropped from 26,000 to just 600 in one month, providers were not informed. “The word ‘partnership’ is ridiculous,” he said. “It’s a sunshine friendship. There is no communication left with the manufacturer.”
Manuel Formis, from tier-one supplier Honeywell, said that the industry does not have the mindset to deal with a drop in demand. He noted that when carmakers delay new model launches, they do not always communicate that along the supply chain, leaving suppliers producing or shipping parts needlessly.
Clearly, however, short term or narrow thinking has not only been the domain on carmakers. Dominique Monteux, from Renault Nissan Purchasing Organisation, revealed that when container shipping rates were high, she was rebuffed by carriers when attempting to seek long-term agreements on price. So market-based commodity pricing was now working in her favour.
The supply chain must react daily
Formis said that his goal was that logistics cost become 100% variable in line with demand, not 70% variable as now. To achieve this, manufacturers and providers will have to become more responsive, and increase communication in the supply chain whether the purpose is to react better to demand or mitigate the risk of suppliers on the brink of collapse. Michael Druml, from contract manufacturer Magna Steyr, said that his team was doing this, though he was most worried about the implication of suppliers going into receivership. “In that case, an official receiver could come in, increase prices 80% and change the payment terms to cash on delivery,” he said. “I’m not even sure our IT systems could handle such a transaction.”
Emmanuel Arnaud from Gefco said that the supply chain must become more responsive to quick and immediate change. “We are spending four times as much time redesigning routes and transport networks now,” he said.
Likewise, Cary VandenAvond, from IT supplier i2, said that manufacturers and LSPs would have to change their forecasting and planning processes from monthly to weekly or even daily updates. Hauke Harnisch, who recently left Lear to start Dualprolog, agreed and noted that building a better IT infrastructure would be an effective way to do this. “We should have done it before,” he admitted. “Because today investments are very difficult.”
Where will the change be?
There were signs that some of the industry’s sacred cows could be slaughtered. VandenAvond presented research indicating that manufacturers will look to shorten and reengineer their supply chains, which were often created by chance rather than design as companies expanded. Harnisch said that while he didn’t expect global sourcing to end, in Europe there would be less focus on buying in Asia and more on Eastern Europe because of currency, quality and transport risk.
Sean Doherty, from the World Economic Forum, noted that there could be a shift away from the emphasis on just-in-time production and logistics apparent in the past years. “The need for speed has, to some extent, been artificially created,” he said. “There might be a shift to more definite-time systems rather than JIT.”
And while many manufacturers and LSPs often point to the collaborative logistics with other tier suppliers in order to reduce cost was not the answer – “we’ve tried it and it doesn’t work,” said Formis
But, as ever at an Automotive Logistics conference, there was no definite consensus on these issues. Kevin Wall, from Jaguar Land Rover, said the carmaker was looking to source more parts from India, since parts in Europe and the UK had a 30% cost disadvantage. “Such sourcing was not a directive from our new parents, Tata Motors, but it makes good business sense,” he said.
Stephen Harley, from Ford Europe, noted that the industry would not benefit from just one kind of solution. “We need definite-time systems and JIT, we need rail solutions and road and inland waterways,” he said. “The waste is the inventory that is tied up in the supply chain.”
And while Honeywell’s Formis said that he felt collaborative networks and groupage solutions were not the answer, at least for tier-one supplier needs, Gefco’s Arnaud said that these were precisely the kind of solutions that the company was exploring for its customers.
Opportunities and improvements in a difficult market
There were also positive projects outlined by carmakers. Anne Laure Mirabaud described how Renault had lowered inventory this year and improved cash flow by synchronising logistics and production, being more disciplined in forecasts and schedules and improving in-plant logistics. Among the solutions was the removal of kitting from the production line, since there are more constraints on the process there. She also noted that Renault was looking to extend the partnership with some transport providers, including allowing drivers to unload at the plant in Japan, as Nissan does in Japan. The carmaker also wanted to increase milk-run frequency, and develop import centres around Europe for parts.
Wall, alongside DHL Exel Supply Chain’s Paul Dyer, described how Jaguar Land Rover had successfully outsourced logistics to the LSP in the past two years across all three of its plants in the UK. DHL Exel is now responsible for all of the carmaker’s manufacturing logistics operations, and Wall said that the project, done against the backdrop of a change in ownership and the economic downturn, has been a great success in terms of cost savings, efficiency and reducing carbon emissions. “During the changeover, we didn’t lose a single car,” he said.
There are even some opportunities in the market as well. IT systems, though expensive, remain in demand since many manufacturers and providers have seen first-hand the higher cost ofa lack of visibility. Aftermarket logistics for spare parts, with its high profit margins, has also been a “ray of light” for the industry, according to Ceva’s Bruno Sidler. An anonymous survey at the conference also showed that 36% of participants believed that the aftermarket would prove the most resilient during the recession, while the second most votes went to asset-free 3PLs, at 24%.
John Merry, the former CEO of UK-carrier Autologic, who has recently founded Quantum, rejected a high-asset led approach without a contract that guaranteed a return on investment. But he also noted that it was a good time to buy distressed assets, as banks were looking to sell off the assets of struggling companies to mitigate losses.