Chain reactions getting harder to manage

Supply chain functions are evolving to encompass greater integration, new technologies and more sophisticated strategies. 

Automotive supply chains are always getting harder to manage. Unpredictable economic conditions and the growth of new markets make demand more difficult to predict. The 2008 recession, on top of decades of lean evolution, stripped much excess capacity out of the market, particularly in the tier supplier base, reducing the margin of error a company can have in its planning. Global sourcing means parts supply can be unwieldy and more frequently exposed to disruptive events. Accelerating product launch rates and the rise of global car platforms mean carmakers must build and manage complex new supply chains at an ever-increasing rate.

Carmakers and their service providers are evolving their supply chain management (SCM) processes in response to these challenging conditions, adopting new technologies, new forms of organisation and new management strategies. Companies are also increasingly taking tools and techniques developed in the centre of their production and supply networks and then applying those further out across their inbound supply chains and global distribution networks.
 

A good example can be found at Turkish carmaker Tofas, a joint venture between Fiat and Turkey’s l a rgest industrial conglomerate Koç Holding, where Altan Aytac is supply chain director. Tofas builds around 300,000 cars and light commercial vehicles per year for Fiat, PSA Peugeot Citroën and Opel. “We are a flat organisation and the supply chain function reports directly to the senior management steering committee,” he says. “That’s the only way you can run the function truly effectively. Hav ing supply chain report to some other part of the organisation, like industrial or commercial, just doesn’t work.”

Reporting lines

As the supply chain is recognised as a strategically vital function, so its stature is increasing in management structures. Some OEMs have adopted an integrated supply chain function in which the lead executives report to a senior level – even board member – rather than the more typical practice of reporting to the heads of manufacturing, purchasing or sales.

Providers say they are enjoying the benefits of this rising recognition, too. “We are seeing a move towards more strategic partnerships, as OEMs are increasingly recognising that their ability to control and manage risks in their supply chain is improved when they use a less fragmented provider base,” says Mike Valentine, regional vice-president for automotive, Americas at logistics provider UTi Worldwide.

At Tofas, Aytac points out that horizontal integration of the supply chain function is just as important as its vertical position within the organisation. “Our supply chain function is integrated all the way to the dealers,” he says. “That is vital as it means we achieve very close integration between order management and production planning. We can share information both ways, which allows us to respond earlier to changes in the market, and to use our knowledge of production capacity to guide the sales process if we need to.”

Early warning is important, says UTi’s Valentine, but responding effectively to major disruptions, like floods and earthquakes, still requires the right organisational response. “Managing events properly is not a technological problem, it is a human and organisational problem,” he says. “To deliver the right service we have to understand how we get the information we need from each customer’s supply chain and, when issues arise, we need to get the right people into a room to work out the available options, then communicate those options quickly with the right people in the customer organisation so we can make decisions and take action.”

Strategic benefits of SCM

To fas’s supply chain responsiveness was tested in 2009, says Aytac, when the Turkish government announced a deep cut in vehicle sales tax to stimulate demand. “At the time, we were in the middle of preparing for a slowdown and suddenly we had to push the gas for a short period to meet the new demand,” he recalls. “Because we had good external flow management and our suppliers had capacity, we were able to respond.” Just because supply chain flexibility exists, however, doesn’t mean it is always sensible to use it. “You have to spend to boost capacity, and there needs to be business case logic behind your decisions,” says Aytac. “Sometimes it makes sense to run after the demand and sometimes it doesn’t.”


"If you reduce the complexity of your supply chain, you cut logistics costs and inventory. The best moment to do that is at the begginning of the product development  process" – Altan Aytac, Tofas


The continuous improvement underlying advances in manufacturing performance in recent years is also now firmly established in supply chain thinking. Tofas, says Aytac, has a dedicated supply chain development team, responsible for process improvement and the implementation of world-class manufacturing methods like lean flows. The elimination of waste is helped, he notes, by the integration of the supply chain function, which means that material flows are managed all the way from the supplier to the lineside.

For the future, Aytac says that increasing the role played by the supply chain function in new projects is a priority. “We’re trying to ensure that supply chain issues are an intrinsic part of sourcing decisions,” he says. “We battle to reduce variety and rationalise part counts. If you reduce the complexity of your supply chain, you cut both logistics costs and inventory requirements. The best moment to do that is at the beginning of the product development process.”

Supply chain insights

If companies are increasingly confident about their own risk management capabilities, they are less convinced about their understanding of risk deeper into the supply chain. Dave Andrea is senior vice-president, industry analysis and economics, at the Original Equipment Suppliers Association. His organisation regularly surveys its members – large supplier companies operating in North America – on a variety of topics from business confidence to their own capabilities.

We ask our members about their supply chain risk management capabilities,” he says. “And in our latest survey, while 80% of them say they have a good understanding of their own throughput capabilities, only 40% are confident that they can validate sub-tier capabilities, and only 33% say they have a good understanding of sub-tier financial viability.”

Capacity risk is more important, says Andrea, as utilisation is high in North America – above 90% in some companies and component categories. “We think the nature of supply chain risk is changing,” he notes. “[It has moved] from financial and supplier-failure risk five years ago, to operational risks as the industry works to cope with rising production volumes and the introduction of 50 or more new vehicle models.”

Visibility is power

While rising complexity and volatility have made automotive supply chain management more difficult, the weapons supply chain managers have at their disposal have become more powerful too. Principal among these is modern supply chain IT. More than most functions, effective SCM requires IT systems that can share data seamlessly within an organisation and beyond. The emergence of modern data interchange standards and the communication infrastructure to support them has made this a reality in recent years.

“A few years ago, the IT landscape was very product-centric,” says Dominic Regan, senior director, EMEA supply chain applications at software provider Oracle. “Today, companies can take a process-centric view, planning and sharing information across the business.”

Fathi Tlatli, president of global automotive activities at DHL Customer Solutions and Innovation, echoes this point. “We have seen huge improvements in software, particularly the underlying software platforms in recent years, and that is key to global supply chain visibility.”

Today, says Regan, the challenge is not about getting the right data, as it once might have been, but about analysing that data more effectively, w ith new tools helping managers make faster, better decisions. He cites the sophisticated alerting systems now being integrated into supply chain management software as an example of the way software can provide more effective decision support, monitoring parts in the supply chain for exceptional events, or for the non-occurrence of expected events, and then alerting supply chain managers to allow them to pick the most effective response.

Service providers and software companies alike are also increasingly combining software and management capabilities into packaged offerings to suit specific, but common automotive needs. At UTi, for example, Mike Valentine describes the development of a ‘Launch Readiness’ offering, designed to help carmakers build the ‘plan for every part’ they need at the beginning of a new model programme. Discussions with carmakers are underway, he says, with a view to supporting new model launches scheduled for 2015.


"We have seen huge improvements in software, particularly the underlying software platforms in recent years, and that is the key supply chain visibility" – Fathi Tlatli, DHL


Total recall management

DHL, meanwhile, has developed a packaged recall management system with web-connectivity that allows dealers, car manufacturers and suppliers to manage the details of the recalls in their area, with full integration across all partners in the supply chain as well as a direct feed to the car owners. Such systems, says Tlatli, allow dealers – who he calls “the ambassadors of a brand” – not only to manage recalls more efficiently, but to take a more proactive role in organising the process, improving the customer experience.

Among the additional management challenges created by increasingly global supply chains is the need to manage large flows of parts or materials through customs borders. This expensive, error-prone and often frustratingly paper-based process is a key target improvement for many players. At Tofas, Aytac says that there is a project underway to reduce non-value-added activities and paperwork requirements for a lean flow in foreign trade operations. “We are working towards a point where we share no paper with customs,” he says.

According to Tlatli, DHL has developed a global customs management solution, allowing it to act as a single customs broker for customers’ shipments anywhere in the world.

Ford’s central supply

chain planning The aftermarket is another area in which a combination of advanced IT capabilities and greater integration promises to bring significant benefits. Michael Czach is global inventory planning strategy manager for Ford’s Customer Service Division, responsible for implementing the company’s n e w supply chain management solution in the remaining global markets. This new supply chain software was developed together with software provider SAP and with Caterpillar. It has been completely implemented at Ford of Europe and is currently being rolled out in the US. It includes a host of advanced features, including automatic forecasting model selection, the ability to segment inventory planning into hundreds of different slices and manage each differently, and a built-in supplier report card.

Over time, the SAP system will allow Ford to move to a central tactical supply chain planning solution. In this model, says Czach, “a single planning team is responsible for the global forecasting and inventory planning of each part, with the output being a release. It is then the responsibility of the operational planning groups – typically located in the time zone and language of the supply base – to ‘bring home’ that release.”

As the commonality of components in Ford’s global product range rises, such an approach has the potential to dramatically reduce the inefficiencies that occur when different regions plan and manage parts separately, Czach suggests.

Cross-sector possibilities

In the longer term, some logistics operators see important opportunities for automotive manufacturers to adopt and adapt supply chain techniques pioneered in other sectors. “Automotive has pioneered techniques like lean and TQM [total quality management]” says DHL’s Tlati. “But other industries have pioneered things like outsourcing or postponement. There are plenty of opportunities to learn from each other.”

To this end, he says, DHL has established a customer innovation unit, which brings different industry specialists together to explore opportunities for cross-fertilisation. Early outcomes of this effort include the use of monitoring technologies developed in the life sciences industry to track the transport conditions of sensitive automotive products, like batteries for electronic vehicles.

At Oracle, Dominic Regan cites the way that consumer goods companies are making use of social media technologies to engage more directly with their customers and to get earlier insights into potential issues or concerns that might be developing. The same techniques have significant potential in the automotive sector, he suggests, for example by providing earlier warning of potential reliability problems or other issues in the aftermarket.