Better times in North America but uncertainty still dominates supply chain
The 11th annual Automotive Logistics Global conference held this week in Dearborn, Michigan confirmed an automotive industry very much on the rebound from the economic downturn with more than 330 delegates in attendance. However, it also revealed how macro-economic forces continue to shape automotive supply chain management, with manufacturers carrying less parts and vehicle inventory, while providers continue to operate under very tight transport capacity.
The North American market has continued to recover in the first nine months of the year, with sales tracking about 10-15% higher than those sold in 2010. Peter Weiss, head of worldwide transportation and customs for Chrysler Group, told delegates to get ready for a very exciting three years in the North American automotive industry. “Particularly with Chrysler now joined with Fiat, you will see more cross shipping going on, and also shared platforms,” he said. “Certain components will not just be produced locally but need to be shipped around the world. Meanwhile, we will be launching 16 new models. Get ready for it.”
Sales are on track to reach around 11.5m units in 2011, and though Weiss suggested that pent up demand from the downturn could lead to a sales spike, the days of 17m units of sales and production per year do not appear to be in the short- to medium- term forecasts for many carmakers or providers. Rather, supply chains need to be adapted to leaner, smarter models. “The push production model is gone,” said Toyota’s Mike Nelson, responsible for highway transport of vehicles. “Dealer inventories are lean and balanced, as we carry fewer vehicles in inventory and maintain lower incentives.”
Ford’s Stephen Harley, global executive director of material planning and logistics, implied that the entire supply chain needed to adapt across the entire order-to-delivery process, where carmakers like Ford have reduced complexity, increased global platforms and parts sharing, while simultaneously pushing down component and vehicle inventory levels.
Michelle Braun, director of North America inbound logistics for General Motors, emphasised the need for the carmaker to break through its silo structures and to work across departments to better control costs and manage its global sourcing and logistics networks. Braun demonstrated how GM’s focus on ‘total enterprise cost’ had led it to think earlier and more holistically about its supply chain. She provided case studies that showed how a total enterprise cost analysis helped the company make decisions on the movement of parts – in one case, it was found that numerous truckloads could be saved by breaking down a bulky part into numerous parts rather than shipping it in one larger container.
Information must be shared
As automotive players make tentative steps forward over an uncertain economic terrain, the need for collaboration was called for at the event even more than in years past. Tompkins International’s executive vice president Gene Tyndall spoke for many when he said “we don’t have enough collaboration” and backed the point up with figures from a study showing that 68% of shippers were looking for more of it, as were 80% of logistics service providers. But the industry seems to remain its own worst enemy. “There is not enough evidence of OEMs sharing knowledge with LSPs,” said Tyndall, in large part because many are precious about the knowledge they have and consider it a proprietary asset. Many still need to learn, however, that there are ways around the sharing of sensitive information.
This was something picked up in one of the 12 breakout workshops at this year’s conference that focused on the different requirements tier suppliers and carmakers have when it comes to supply chain management. Automotive players need to be less protective of their internal information and forecasts, especially as suppliers are now being challenged to obtain an OEM level of control over inventory movement while supply chains are still largely being managed separately, according to Ceva Logistic’s senior vice president, Jeffrey Hurley. But he said there was scope for integration, with suppliers sharing OEM supply chains and collaboration through the OEM crossdock network - something Ceva has had success with - managing to reduce cost and improve transit times in the process.
Michael Meier, lean supply chain manager for Lear Corporation, discussed in depth the seat supplier’s efforts to work more collaboratively in its supply chain. Not only does it currently share a crossdock with Ford in Romulus, Michigan, with consolidated providers handling freight inbound and outbound of the facility, Lear has also sought to take over the logistics operations for several of its own suppliers down the chain.
“We took data from our top suppliers, looked at their costs for freight, packaging, etc and then took three suppliers as a pilot to integrate into our logistics network to show them how the cost savings would be significant,” Meier revealed.
The trial has been successful and has helped Lear have a better visibility on the cost of logistics. He admitted that there were still contractual and legal issues to work around – such as who would bear responsibility for premium freight costs as they arise – but Meier was confident that such issues could be settled.
Collaboration at portsFurther examples of the success of collaboration was provided by John Marion, head of vehicle logistics at BMW North America, who talked about the working relationship the company has with German competitor Daimler for distribution through the east coast port of Baltimore to dealerships, as reported by Automotive Logistics earlier this year.
As the industry moves forward from an operational standpoint BMW is able to process vehicles at the port at a lower cost than it was able to do previously. “The fact that we are sharing delivery equipment in [Baltimore and Brunswick] enables us to get a higher load factor and, in some cases, still provides us with those low rates that we negotiated last year,” said Marion.
The relationship between BMW and Mercedes is the product of an initiative running in Munich and Stuttgart, that has brought the company significant savings.
“On the parts side we knew the players and who was involved and we said if you take our business and theirs can you give us both a better price,” Marion continued. “We didn’t get involved in what their price was and they didn’t know what ours was but the fact they were going to the same place meant the synergy was dramatic and in some cases it saved us as much as 50%.”
Tier supplier challengesNew to the programme this year, the conference included a series of workshops dedicated to the tier supply chain, revealing the unique challenges facing suppliers. Patrick Bauer, global director of MP&L for Visteon Corporation, discussed the various difficulties of managing a global supply chain for a tier one. Visteon, which emerged only this month from bankruptcy, is likely to see Asia Pacific become its largest region by the end of this year, with production in China, India and South Korea, among others. “Our goal is to support global platforms for our customers, and to do that we must have a global supply base in each region to serve that production,” said Bauer.
But he admitted that he was spending too much time managing freight forwarders, and that the global network suffered from a lack of communication, poor visibility and no truly global provider. His biggest headache, for example, was for Mannaus, Brazil, for which poor infrastructure and customs issues caused consistent problems.
To help control and understand costs, Bauer said that Visteon had developed a cost model called “cost of distance,” which attempts to measure variability and risk. “We calculate the probability of premium freight and how often it will occur, for example, and we also integrate the costs of customs and other expected delays,” he said. “These measurements help us to think more carefully about sourcing decisions.Mike Silvio, director of supply chain management for Cooper Standard, added that while his company tried to factor in every cost, he admitted that the company’s long term considerations for price changes – such as for labour or material costs – did not necessarily look out far enough in the future.
Manufacturers called for innovation in the aftermarket supply chain. Speakers discussed cross-sector horizontal collaboration on shared volumes including a recent attempt by Toyota to work with Nike in Europe to fill out empty space in weight restricted automotive cargo with lighter retail fashion products. In the end this didn’t work out, however, and the sector revealed conservatism when it came to working with other industries. Both Ford and BMW expressed concern that there are still too many risk factors with such cross-sector integration, including conflicting demand spikes and the distances added to already vast geography.
More realistic considerations lay in the integration of spare parts pick ups with manufacturing material, as outlined by Ceva’s business development director, Charles Roth, and Ford’s combination of service parts networks in the US and Canada which has saved the company $8m a year according to its director of parts supply and logistics, Helmut Nittman.
When it came to packaging the message from Chrysler’s engineer Camille Chism was “sustain, standardise and streamline”, with an emphasis on moving away from packaging that is unique to each part and toward an industry standard, which is cost-driven, and redefined as an asset that is purchased for long-term use. Given that the number of containers used in automotive is far higher than in other industries, the emphasis on using less corrugated plastic and expendable dunnage, a priority indicated by Mitsubishi North America’s manager Carl Schini, is pertinent and he outlined how the company was looking for reduced container variability of 20%.
That said, Tim Nickel, Visteon’s global manager of packaging engineering, was careful to stress that it was also important to know when not to standardise and cited a figure of $5m saved by the company achieved by knowing when not to standardise. The company found savings just a week before when it traced lost packaging being sold by an employee to a recycling company, emphasising the importance of tracking. Loss rates for packaging in the US are similar to those in Asia, with 8% a year across regions. For pallets it is treble that figure. Outrageously, GM found 60,000 of its containers in a cave in the central US.
Chism pointed out that 2 billion pallets are produced in the US across all sectors every year with current figures putting the use of plastic here at just 5%. But the majority of plastic is used by the automotive industry, something that is increasing every year.
Pooling of those pallets and containers, which is not a mature sector according to Tim Nickel, was nevertheless a hot topic at the company and a good way of gaining economies of scale. The benefits weren’t lost on Ceva’s Jeff Hurley, who wondered why it wasn’t being embraced in a bigger way by suppliers and manufacturers.
Finished vehicle trucking capacity
The breakout workshops for finished vehicle logistics were dominated by discussion over capacity. Both Walter Lowe, manager of North American vehicle logistics for Ford, and Steve Tripp, head of worldwide vehicle transportation for Chrysler Group, expressed deep frustration with the lack of truck capacity and reduced service for railways. “I’m saddened to see the adverse effect that this lack of capacity – which is causing longer waiting times – is having on the customers that pay for my livelihood,” said Lowe. “I’m perplexed because I don’t understand where the capacity is gone and why we can’t get it back.”
Tripp added that the industry would have to find a solution that was not necessarily going to involve making massive investment. “People think that the way to fix it is to throw money at it, but we are in a 0% inflation industry right now,” he said. “We can’t afford to pay anything more and pass on costs to our end customers.”
In figures, Toyota’s Mike Nelson revealed that the number of car transporters in the US dropped from 13,000 in peak volume, to about 8,000 trucks in use this year. “Aside from maybe a 1,000 units, these trucks are not sitting on the fence in storage – they are gone, and there isn’t enough financing and investment out there to get them back quick, especially if we see a sales spike,” he said.
For railway, Union Pacific’s Julie Krehbiel said that the headline reduction in fleet capacity for railways was only around 3%, but she admitted that in practice the real impact on service levels was greater than this. Nevertheless, most railway capacity that is not in service appears to be in storage, rather than scrapped, which mean the railway are facing less of a challenge in regenerating fleets than are the trucks. However Steve Tripp suggested that the industry could face an impending shortage of tri-level wagons.
Mike Rigs, from Jack Cooper Transport pointed out that banks currently do not want to lend to car hauliers, as these companies suffered significantly in recent years. “There is at least about $1 billion needed by the industry to finance new rigs,” he said. “I think that groups such as the AIAG should be targeting equipment financing. Lenders that are looking the recent credit history of the car haul sector will not like what they see.”
Neither providers nor carmakers could offer a short term solution to the current capacity problems, as sales – although improving – are still relatively weak. But numerous providers pointed to the long term necessity of advanced planning and shared long-term forecasts to help them plan capacity. “The most important thing for us is forecasting and advanced planning…the better you at forecasting, the better we can plan capacity,” said WWL’s John Felitto. “I’m not just talking about 3-4 month forecasts, but rather I mean 2-3 years or longer.”
On a positive note, however, a survey conducted at the event revealed 51% of providers said they would be investing in new capacity as well as new staff in 2011.
A related capacity issue that was expressed by both inbound and outbound providers was a shortage of truck drivers. “We have a driver shortage, but not just for car haul,” said Robert Farrell, executive director of the Automobile Carriers Conference. “Next year the trucking industry in general will have a shortage of 400,000 drivers. Younger people just don’t want the job.”
On the inbound side, Ryder’s Jim Moore revealed that his company currently has more drivers who are older than 65 years old than it does under 30 years, suggesting a major shortage to occur over the next five years as older drivers retire. Meanwhile, Moore and others pointed to pending legislation, including the Comprehensive Safety Analysis (CSA) that aims to reduce the amount of hours that a driver can work as well as create other safeguards. But truckers worry that these measures are going to completely change the shape of current logistics networks. “The CSA and hours of service legislation will mean, for example, that we have to redesign all of our milkruns, and the costs will increase by 25%,” said Moore. “It is not a ‘maybe’ that this will happen.”
Ford’s Stephen Harley said that automotive logistics sector would have no choice but to find a way to innovate and find better efficiencies to increase its capacity. But he also acknowledged that the industry would have to do some heavy lobbying to convince legislators that the timing may not be right for all of the pending regulations. “There is nothing wrong with the regulations out there, and indeed we have to make trucking a better, safer profession,” he said. “However we have to do some serious lobbying out there to make sure that we take control of the transportation industry.
Ryder’s Moore, meanwhile, suggested that companies have to consider new ways to find qualified drivers, such as partnering with training schools to help sponsor new drivers. He also suggested that the industry should also look at immigration, including sponsoring visas for Mexican drivers to come work in the US.