Cost measurement comes of age in building responsible logistics

BONN 4 MARCH: The Automotive Logistics Europe conference held this week revealed an industry caught between flat regional sales but surging global growth, with plenty of opportunities for logistics in between.

Total cost supply chain management, rising oil costs and globalisation dominated discussions among the 300 delegates. Along with the increasing exchange of material across continents, these issues continue to offer significant opportunities as well as challenges, as Europe moves towards an era of logistics in which all the true costs and inefficiences are revealed, write Christopher Ludwig and Marcus Williams.

(Left to Right) Colin McDonald, Hans-Bert Bong, Matthias Wellbrock

The conference theme was ‘Are you developing a responsible logistics strategy?’, and with oil prices hovering above $100, there is yet again another imperative to find efficiencies in the supply chain. For example, shipping lines, whose bunker costs are now in excess of $630 per tonne, are seeing added cost of around $10,000 per day, according to UECC’s Bjorn Svenningsen.

With eight weeks advanced ordering, by the time our parts arrive they’re not the one we need: Jeffrey Morrison, GM.

Manufacturers such as General Motors, Renault-Nissan and Iveco discussed strategies in which they were integrating logistics planning and engineering earlier in the vehicle development phase, as well as taking more direct control of their logistics operations and networks.Jeffrey Morrison, director of logistics for General Motors, emphasised the importance of GM’s ‘total enterprise cost’ strategy in Europe. Morrison explained that such an approach means aligning supply chain engineering with purchasing and manufacturing, particularly in the earliest phases of product development. It also means quantifying the costs of obsolescence and premium freight charges when sourcing new material, for example.“When we order parts from overseas, we will typically need an eight week-lead time,” Morrison said. “But by the time the parts arrive our build schedule may have changed and the parts we ordered are no longer the ones we need and we’ll have to fly in others to avoid a stoppage. That happens often.”Morrison pointed to areas that the company is now planning and considering further in advance, such as whether or not to sub-assemble certain products, or packaging design for parts.

Colin MacDonald, head of Alliance Logistics Europe for Renault-Nissan, gave a case study of the ‘total delivered cost’ approach that Nissan took for its Sunderland plant in the UK several years ago, which is now being rolled out across Renault factories in Europe.

He revealed that total movement cost, from parts purchase to the end delivery of the finished car, was 13.6% of total vehicle cost at Sunderland (10% for inbound, 3.6% for outbound), which was more than double the manufacturing costs. The cost of buying parts was the largest portion at 80%.

This analysis, on which he was complimented by JCB’s general manager for logistics, Joannes van Osta, for being so open, revealed the opportunities to take cost out of the supply chain. MacDonald said that typically the plant had functioned in the traditional silos of manufacturing, purchasing and logistics. It took two years to get the purchasing department to accept that they needed to look beyond simple purchase price and at the cost models which logistics suggested, he said.

Today, similar inputs described by Morrison – such as the trade-offs between sub-assembly and pack density – that weren’t considered before are now being optimised. The new approach brought a closer look at new factors, including the involvement of packaging designers early in the parts procurement process. Considerations were also made for Nissan’s global sourcing, which includes parts from Japan, India and Thailand.

Even for a plant which is famously efficient in its manufacturing productivity, “this approach really works,” said MacDonald. “It helped ensure the survival of the Sunderland plant (when it was threatened with not winning new production), and helped us gain new models. Today we have a backlog of orders of around 60,000.”

Taking control of your logistics destiny

Other manufacturers described their own efforts to improve supply chain efficiency, including a trend among commercial vehicle manufacturers and tier suppliers to change their network delivery terms to ex-works/FCA, rather than keeping logistics as the supplier’s responsibility.

Guido Maina, Innovations and Benchmarking Supply Chain Manager at Italian-truckmaker Iveco, described his company’s efforts to make this change. Iveco has an extreme amount of complexity and variation its supply chain, as its 23 plants in 10 countries build vehicle ranging from light commercial vehicles to heavy-duty trucks and buses. Under DDU or DDP delivery terms, Maina said that the plants were each looking after their own costs, with very little regard or visibility for the larger network and possible efficiencies between factories. Iveco, together with its lead logistics provider, Ceva Logistics, redesigned the whole flow, with efforts to also bring more accountability and visibility in the supply chain.

The company found a good deal of low-hanging fruit. Maina gave an example where Cabs were being sent from Italy to Spain, while another factory was delivering heavy batteries along a similar route. “Just by putting together the cabs and batteries, we were able to save a full truckload every day,” he said. “This is not rocket science, it is just a matter of controlling your flows.”

Maina admitted that there was internal resistance from Iveco’s purchasing department, but that eventually such differences were put aside when the case was made for benefitting the entire enterprise. Other manufacturers that are currently undergoing similar transitions also expressed frustration with the financial and legal difficulties that they were facing. TRW’s Holge Woebke, head of logistics for EMEA and Asia Pacific, said that his company is also trying to get his delivery terms changed to FCA, but that the company’s legal department is struggling to get TRW’s suppliers to sign its compliance forms, as there is concern on the suppliers’ side about the ownership of the inventory and who ultimately would take responsibility for the risks involved. For example, should TRW order material that is held in an outsourced warehouse, but eventually go unused by TRW, suppliers are worried that the tier one would not pay them for it.

Maina pointed out that taking on this responsibility means that these risks have to be born by the manufacturer, but that it should be built it into the new piece price for the parts.

Continental’s Wolfgang Michel, head of Customs, Transportation and Packaging, also said that his company is going to change its delivery terms. However, Continental needs to invest in a transport management system at its plants, and will also need more advanced shipping notification (ASNs) from its supply chase, if it is going to be able to make the change.

Premium freight: fact of life or failure?

The risk of premium freight costs are an important consideration for making sourcing decisions under ‘total enterprise cost’ models as well as for determining piece-price reductions under ex-works/FCA delivery terms. According to Morrison and Elliot Swiss, Opel/Vauxhall’s director of supply chain operations, the carmaker has now developed an algorithm to help it consider premium freight in its sourcing decisions, the costs of which can be considerable. Morrison estimates that premium freight represents about 5% of the carmaker’s logistics budget.

But the figure ranges much higher for some carmakers. Continental’s Michel revealed the staggering fact that the tier supplier spent about $200m last year in freight and services that could be classified as premium or emergency freight–a number that is about equal to its general freight costs.

Graham Little, of critical delivery specialist Evolution Time Critical, pointed to increasing volume moving through the limited infrastructure of emerging markets, extended supply chains from Europe and low levels of inventory as factors contributing to higher levels of premium freight. But Little also suggested that carmakers were also wise to build plans for premium freight into their supply chain models, since unexpected disruptions will always take place.

“We did a study for a carmaker choosing between several sourcing locations, and we showed them the drawbacks about the locations that had only one flight a day or one every two days, which could mean having to wait longer to get time critical parts to the line or else having to charter aircraft.”

Likewise, Andrew Austin, chief executive officer at premium freight provider Priority Freight, pointed out that a certain amount of premium freight could be seen as an acceptable trade off against the total cost of sourcing parts from lower cost countries. “In that way, premium freight can be embraced more as a fact of life rather than as always a failure,” he said.

Global march forward

Premium freight is of course a natural part of increasing globalisation in the supply chain. Swiss said that GM sources 5% of the volume of its material for Europe from low cost countries, but that represented 11% of the parts value, 20% of total inventory cost and more than 50% of all premium freight costs.

Guy Lederer, International Logistics Executive Manager for PSA Peugeot Citroen, described how the French carmaker continued to transition from a predominantly European player to increasing sales and production in markets in Asia, South America and Russia. The increase in global platforms for PSA has also been leading to more material exchanges from France and Europe to elsewhere.

Together with its logistics subsidiary, Gefco, PSA has been designing new logistics flows to support this global expansion. Peter Reinshagen, Gefco’s PSA International Projects Manager, described one example in which Gefco had developed a rail leg for parts moving from France to Russia. The train runs as seven block trains a week between France, Germany and Poland, and five block trains between Poland, Belarus and Russia (owing to longer train lengths in Eastern Europe). “This train leg is part of our effort to reduce trucking such long lengths,” said Reinshagen. “We have also applied for Marco Polo funding [a subsidy aimed at moving freight off road and onto intermodal options] from the EC for this project.”

Gefco has also setup international logistics platforms in Shanghai to collect parts sourced from China, where they are consolidated and will then be shipped to global production locations in Argentina and then Russia.

According to Ledere, PSA’s international freight volume will have grown from 35,000 TEUs to 70,000 between 2010 and 2012.

Limited investment for vehicle logistics

Dedicated sessions on vehicle logistics revealed signs that OEMs have a limited appetite for investment in the sector and need to take a better overview of the whole outbound process. A lack of visibility and supply chain communication was one such factor, since supply chain managers can only plan their order-to-delivery cycles accurately if they have reliable information. Rolf Baumann, GM Europe’s manager of Logistics Europe overseeing Vehicle Planning and Intercontinental, pointed out that the earlier providers and OEMs could get information to each other, the better. Stability in scheduling and build sequence is helpful, while the use of RFID can provide real time visibility on the outbound process, particularly if there are disruptions. But outbound logistics is all too often local and fragmented, he said, with a lack of real investment and a resistance amongst carmakers to get involved in the same way they do for inbound.

Unnecessary vehicle movements can result in an average 25-calendar day delivery time, according to Richard Barker, CEO of Sovereign Business Integration. With inventory interest rates at around 6%, a large carrier moving more than 1m vehicles would face added costs of €152m over four days. Woburn Consultancy Group’s chairman Peter de Roussett-Hall did his own sums and noted that every day of delay in delivery could cost the European industry €60m in interest.

Rousett-Hall insisted that out of touch OEM managers often leave too much of the outbound process to LSPs that are governed by their own agendas for moving cars through the network. As GM Europe’s Baumann admitted, the company doesn’t have accurate information that tells them when carriers are collecting the vehicles other than the established windows, which can be missed. “There is no IT to make this visible,” he said.

Ford’s Bert Bong added that the company loses 10% of transport capacity because the systems the company used were not smart enough.

However, help could be on the way as GM Europe has signed up to a German government funded project called RFID-based Automotive Network (RAN), that is working on establishing RFID standards. Ford is also planning to roll out the RFID project it has trialled successfully at its Cologne plant to its other plants in Europe.

Ship capacity and costs

NYK Line’s Phil O’Reilly pointed out that there are more exports from Europe than imports into it, something that has never happened before, and is causing some imbalances in the network. O’Reilly said that the export growth from Europe will grow by 80% by 2015. Imports into western Europe, on the other hand, have been dwindling, not helped by the strength of the yen and exacerbated by the huge demand for high and heavy equipment in Asia, as pointed out by JCB’s Johannes van Osta, general manager for Group Transport and Logistics. Fifty per cent of the company’s global market is in China, widening the gap between the demand in Europe and the supply of ships fed in from Asia.

Extra capacity in the form of new builds is prohibitive, as costs have doubled in eight years while freight rates have not. And the recent spike in bunker prices due to the spread of political disruption in North Africa is causing real concern, an issue returned to throughout the conference. Bunker prices climbed 18% in two weeks to around $630 per tonne, and ECG president and Grimaldi logistics director, Costantino Baldissara, warned that the rise was putting finished vehicle providers at real risk. He suggested that an extra diesel bunker cost revision would be necessary if serious compromises to businesses were to be avoided.

But carmakers were mainly unwilling to compromise beyond the fuel surcharges that are already part of their standard contracts. Mathias Wellbrock from BMW was quite strong in his demand that carriers take some of the burden of the fuel increases by decreasing empty returns routes.

“We need to have some activity in the next few years to compensate for the fuel increase. We are not willing to pay more as you can imagine.”

He also said the company was reactivating the bonus/malus provision–a performance-related pay scheme for its contracts, which had been suspended for some carriers during the crisis–on a case by case basis and emphasised that LSPs must meet their agreed lead times.

Mazda Motor Europe’s Jorgen Olesen went further and suggested that, during his 25-year career in the shipping industry, shipping lines are often able to make money out of their fuel surcharges, and that if anything these might needed to be revised down or compensated in rates. “That would suggest that the shipping lines might actually owe OEMs a reduction in rates,” he said.

But UECC’s Svenningsen countered that this was not true in general, and said that some fuel surcharge clauses were fairer than others. “But the fuel issue needs to be raised in the industry so that we are aware of it,” he said.

Kai Krass, COO at Wallenius Wilhilmsen Logistics, added to the concern with the sugggestion that if the crisis continues in the Middle East, bunker prices could rise to as much as $800 per tonne in two weeks, which would mean a very costly situation for both WWL and its customers. But he added that even if the crisis subsides, and the current price cools, bunker prices are going to go up over the long term and it was time for both shipping companies and their customers to work on ways of lowering consumption overall.

Out of balance packaging flows prevent pooling

Imbalances in global flows are one of the reasons that the industry is not moving more strongly to pooled packaging, according to a Deloitte survey of OEMs’ practices, which was commissioned by Chep. Marcelo di Benedetto, the company’s  vice president for automotive, reported to the conference’s workshop on packaging that, for Europe, annual exports of $28bn of parts was not balanced by the $21bn of imports, meaning that someone had to fund the return of the difference if there was to be re-usable packaging.

In fact, because Europe’s flow of parts is imbalanced – in favour of exports to tNorth and South America, and in favour of imports from China (with shipments to and from Japan/Korea about equal) – the gap between exports and imports is actually much bigger than the arithmetic suggests, at some $15 billion.

The study also revealed some interesting differences in regional attitudes to packaging. In North America it is not seen by OEMs as a core investment, said Benedetto, while in Europe it is seen as vital to ensuring part quality while reducing transport costs. Both regions identified the high disposal costs of non-returnable packaging. 

Kameha Grand Hotel

Domestic shipments employ mainly re-usable/returnable packaging, while international flows are predominantly one-way, in cardboard boxes. Despite the different attitudes, however, most people are aware of the problems and want to do something about it, said the study.

“Only a fully out-sourced pool resolves the issues while driving costs down”, said Benedetto, “but the barriers include the fact that current costs are not clear, that current practices seem OK, and that there is a risk of creating new problems from today’s solutions.”

One OEM using completely bespoke packaging is Honda in Europe. Richard Marlow, senior staff engineer in the logistics division of Honda Europe, told the workshop that there was no pooling within the company, let alone outside. His Swindon, UK-based operation develops packaging itself “and that will continue”.

However, almost 100% of the packaging in his supply chain is returnable, including back to Asia/Japan, he said, and added that the European operation had achieved “zero waste to landfill” during 2010, so that all packaging is re-used or re-cycled.

Swindon is Honda’s only European plant (aside from a small site in Gebze, Turkey) and is currently operating at 140,000 units a year, on one shift, against capacity of 250,000, producing the Civic, CR-V and Jazz plus two engine types.

Honda is, however, co-operating with Toyota and others in developing standard sizes for totes, bulk containers and metal racks so that they can be stacked, reported Dan Roovers, vice president for automotive sales at Orbis.

Roovers also predicted that the ‘Chinese standard’ pallet of 1140x980cm may become a world standard after the AIAG, the US association of carmakers, issued guidelines – though not, said Roovers, a recommendation – to that effect.

As for pooling, Roovers said that Honda is in fact pooling with GM and Chrysler in the US, and “making a very good job of asset control.” By contrast, he said, Toyota, Ford and Nissan had relatively high loss rates in the US. He agreed that outsourced pooling was the inevitable strategy for packaging.

Supplier risks are down at Tier 2 level

Workshop sessions focussing on the tier suppliers’ own supply chains were a key strand of the conference. And so, inevitably, was the focus on the global challenges of capability and risk at the tier two level.

The issue had been flagged by Elliot Swiss, the director of supply chain operations at Opel/Vauxhall, at the plenary session at the end of the first day of the conference. “We and the other OEMs and the tier ones do a great job of coping with the unexpected,” he said, referencing the disruption caused by the Icelandic volcano in April 2010. “The real challenges are the ones we don’t know about, and that includes the tier twos”.

He revealed that only one shift had been lost at GM Europe’s plants because of the volcanic disruption, and that the cause was tracked back to component shortages from an Asian supplier to a German tier one.

Michael Druml, director of supply chain management at Magna Steyr, made the same point in reverse, in one of the workshops, with a reference to likely future challenges to car production in China. “Localisation of car assembly will make materials flow go the ‘other way’ (ie from Europe to China),” he said. “It’s OK for the tier ones to manufacture out there, but the tier twos onwards will find it tough to move. It makes sense for them to ship to China, and there are already huge percentage increases in materials moving that way.” Yet that exposed car production there to the same risks currently experienced in Europe.

The risks are exacerbated by the trend to global platforms, said Davide di Domenico, one of the principals at management consultancy Booz & Co.

Druml also lamented the supplier changes brought by newer technologies being used within cars and their components. “We are facing a new supplier base, new locations, new people, in some cases with no experience of automotive logistics,” he lamented. But tier ones will have to get used to it; some 25% by value of current cars is electric/electronic, rising to 30% for a luxury vehicle.

Inexperience is also a challenge for tier ones relocating manufacturing to lower-cost (the jargon is now ‘best-cost’) countries. Avon Automotive’s supply chain manager, Baris Dogan, reported on her company’s experience of setting up a joint-venture manufacturing plant in India.

“You might think that it’s natural because of low cost and expanding markets,” she said. “But set-up and transfer of knowledge has taken all of top-management’s time, and it will take not less than a decade for the local management team to produce parts for a global platform.”  Meanwhile, she had been forced to return some manufacturing output to the Czech Republic.

It’s all-new logistics for Tesla, if it stays as an OEM

Newcomer Tesla Motors may have attracted huge publicity for its pioneering roadster, to be followed in 2012 with an all-electric saloon, but it is still at first base in its logistics operation, says the company’s European director of logistics, Harry Doms.

“We don’t have a logistics operation at all, we have to set it up,” he told one of the supplier workshops. “But we want to have one in our culture, not an automotive one.”

Somewhat strangely, he went on say that Tesla wishes to set up as a 4PL, using a 3PL partner “which we need to choose”.

The challenge the company faces is its low volumes – a target only 20,000 units per year of the new vehicle, of which 7,000 are destined for Europe – which means that tier suppliers are not interested in changing their production for Tesla. “So 25% of our parts are sourced in China which”, he said, “is a disgrace.”

It’s also a burden. The company has 429 suppliers in China/Taiwan, said Doms, of which only 60% are on regular contracts. “We need a logistics operation with a global LSP to handle that,” he said, and added: “I was interested to hear [at the conference] about eliminating premium freight. I am only premium freight.”

There may be doubts that Tesla will remain an OEM. While it has Panasonic as a principal investor in its battery technology, and builds powertrains for Daimler’s Smart and Mercedes A-class, and for Toyota’s RAV4, it is unable to leverage these relationships when dealing with tier suppliers, said Doms. “We need another model to be an auto manufacturer,” he commented.

At heart, he said, Tesla works in a Silicon Valley mode, where things have to happen now, and is still defining whether it is an automotive company or an IT company.

Future concerns

Looking forward, carmakers and providers expressed concern about pending environmental legislation. WWL’s Kai Krauss pointed out that the coming requirements for the Emissions Controlled Area between Europe and the US, which will mandate lower sulphur fuel by 2012 and even stricter by 2015, would mean a 50% increase in bunker prices from current levels.

“The industry is going to have to work together to re-engineer its networks in order to mitigate these price rises. We will have to go slower at sea but that will not be enough,” said Krauss.

Colin MacDonald and Ford’s Matthias Schulz, head of MP&L for Ford Europe, also expressed concern over the coming regulations and cost rises. “We need a step change in the industry,” said Schulz. “It cannot come only from the OEMs, as we will need help from LSPs and the European community.”

Such collaboration was again a buzzword at the conference, including calls from tier suppliers and LSPs to work closer together. Delphi’s Tony Humphreys, director of Corporate Logistics EMEA, said that he had seen very little signs of such collaboration between tier ones in his career. “But the LSPs are perfectly place to find ideas in which we can work together,” he said. “However, I’ve never really heard any ideas from them about it.”

Vehnet’s Steve Jones called for a global-level association for automotive logistics that could help bring together the international industry, and he expressed hope that this would happen. He also expressed concern that the industry could sit down and speak together without having to worry about anti-trust violations.

Pawel Stelmaszcyk, directorate-general for mobility and transport at the European Commission, offered some hope on this front as well. He raised the idea, for example, of an electronic database that could store non-competitive information between the logistics and manufacturing community, which could help providers and carmakers root out inefficiencies in the network. Renault-Nissan’s MacDonald, was among the OEMs to express the most enthusiasm for such an initiative.

The collaborative spirit and collect relief for having seemed to come through the worst of the crisis was among the more positive signs at the event. However, nobody seemed too willing to dwell too long on success or recovery. Altan Aytaç, supply chain director for Turkey’s Tofas–a joint venture with Koç Holdings and Fiat–suggest a Turkish saying on the subject, where one should only whisper about the recovery, for fear or waking up the crisis once again.

The next Automotive Logistics event will be in Shanghai 18-20 April (www.automotivelogisticschina.com).

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