The business case for premium freight in the routine supply chain.01 July 2011 | Christopher Ludwig
For many years, the automotive industry has set the standard in lean supply chains. The motivator for this level of efficiency is necessity; automotive manufacturers are in a challenging position, producing a highly advanced product at a low cost considering the technology content. Car prices have not increased in real terms in the past 20 years, whereas the vehicles have become incredibly complex, necessitating a tiered network of suppliers that has extended both geographically and numerically.
An enabler for this practice is premium freight and specifically emergency logistics. A customer recently told me “If I don’t use emergency logistics, my supply chain isn’t lean enough,” which is a tribute to both the leanness of automotive supply chains and the trust placed in emergency logistics. This trust has allowed manufacturers to take more stock out of the supply chains, speed up response times and lower sourcing costs by being more adventurous in their purchasing.
Since Evolution Time Critical was founded 10 years ago we have seen a huge shift, not only in the use of premium freight, but also in the trust placed in logistics providers. If manufacturers and suppliers know that we, as a sector, are reliable then they can factor our service into their strategy. I read an article a few years ago which called emergency logistics the automotive industry’s ‘dirty little secret’; it has now become its enabler.
Another recent development is the use of premium freight specialists as consultants during the design process of a manufacturing plant. When assessing a new location, a knowledgeable emergency logistics provider can analyse its vulnerability to logistics failure; this now includes a review of alternative techniques that could be employed if and when difficulties are experienced.
Even though the supply chains are extraordinarily reliable, every process is fallible; although manufacturers experience a failure rate that is often as low as 0.2%, at up to €1m an hour for line stoppage, 0.2% is a lot of money. In this scenario, the answer is to turn to emergency logistics as a ‘life-saver’.
Deeper in the supply chain
Another trend we have seen over the last ten years is that smaller component suppliers worldwide are increasingly benefiting from the routine use of premium and airfreight in the supply chain as proven by their larger customers. A review of our 2010 bookings showed that second and third tier businesses are now applying the same principle of using premium freight to enable ultra-lean supply chains and a reduction in stock levels. Since 2008 we have recorded a steady year-on-year increase in this kind of work with tier two suppliers. Before that time, work was mainly confined to tier ones and OEMs.
One recent development is that since the disaster in Japan, manufacturers have become more conscious of the frailties in their supply chains. The trend away from localism certainly looks set to continue, but as the volcanic ash issues of a year ago and the events in Japan have made clear, even the best planned supply chain can encounter issues beyond anyone’s control. As the geographical size of the supply chain extends, manufacturers are increasingly relying on premium freight to minimise the impact of these natural disasters.
The use of premium freight in the routine supply chain is a trend that is growing in frequency and breadth of use. Where once premium freight was seen as a ‘last resort’ reserved for the largest manufacturers, it is now seen as an efficiency aid which saves money throughout the supply chain by reducing the levels of retained stock and enabling greater asset flexibility and responsiveness. Emergency logistics has become strategic.
The automotive industry is exceptionally good at managing very robust supply chains that do not rely on contingency stock. Instead they rely on rigorous analysis and the use of premium freight, allowing substantial savings. When I look at many other sectors, I realise that there are proven lean techniques that could be usefully applied to help other industries work more efficiently. In premium freight and especially emergency logistics, the automotive sector leads the world.