Many OEMs and tier suppliers are today focusing on localising their supply chain at least in part because they have to. Those manufacturers that signed up to Regulation 166 must have annual unit capacity of 350,000 vehicles by 2016, with 60% of the vehicle’s content sourced from the local supply base. In exchange, manufacturers benefit from zero import duties. Furthermore, there is also regulation 566, which sets localisation targets for certain commodities produced by tier suppliers in exchange for lower duties.
These agreements continue to push global manufacturers in Russia to localise, said Peter Layer, director of Global Purchasing and Supply Chain Russia/CIS at General Motors Russia. But while Layer said that localisation was a good thing for supply chain costs, he said that turning to local suppliers was not simply as obvious as reducing logistics costs. While he provided figures showing delivery costs from Western and Central Europe to St Petersburg to be about five times costlier than it would be for moving parts from other automotive clusters within Russia, he said that it was a cost difference that could easily be erased if the quality of the parts and their delivery were insufficient. “We could end up spending $1,000 a day if we receive parts that were manufactured with defects, or if they were to be damaged during delivery in Russia,” he said.
Layer said that poor road infrastructure and inconsistent standards for trucks, drivers and other logistics equipment in Russia meant that delivery reliability was often much lower than would be for imported material. An underdeveloped trucking network has also limited GM’s ability to cross-ship parts and material between its plants or supplier locations. Layer said that, therefore, it is not enough to aim to localise in Russia. “It’s important where you localise. We find that, whereas in North America or Europe you can move parts long distances within the region, in Russia the logistics and infrastructure limits mean that localisation really works best when the suppliers are based close to the plant,” he said. “The less a part has to be moved, the less risk you have in terms of quality and accurate delivery.”
Layer said that the need for such proximity would be lessened if Russia’s logistics network could be developed further. He pointed both to the need for better infrastructure, but also for more advanced logistics and routing services, such as consolidation centres, crossdocking and milkruns. “That would allow us to move parts around more efficiently and to cross-ship,” he said. “We currently do very, very little of that in Russia. Our parts are either imported and come straight from the port, or about 70% of the remaining suppliers are based next to the plants.”
The need for more advanced trucking and routing was also shared by Russian manufacturers, including commercial vehicle and contract manufacturer Gaz Group, which has 13 plants in 10 regions across the country.
“We are getting better but we have a long way to go,” said Gaz Group’s director or purchasing development, Eric Barenthein. “Part of that is about central purchasing and distribution. A lot of work still needs to be done in the regions. We have tried more milk runs but it depends on data and it’s been a challenge to consolidate that.”
When it comes to the choice of bringing along an established global supplier or using an indigenous supplier, Layer said the major foreign brands continue to prefer their established suppliers in other regions. But for the future it was important to bring local suppliers up to global standards.
“The supply base is developing but they are having to learn very fast so it is hard to move forward,” said Layer. “We need to help to educate the Russian supply base for them to be successful.”
This is something Gaz is pursuing keenly, according to Barenthein, by providing training in production systems and lean processes, including in collaboration with leading universities.
Barenthein said that it is crucial to communicate standards, set clear measurable targets and provide the resources to reach them. He stressed the need to constantly follow up on both.
Echoing Layer, Barenthein said that using the local supply base had the advantage of avoiding high transport costs and tariffs. While Gaz is importing more global parts in certain cases, he pointed out that Russian suppliers, while they often lacked the quality standards of established global suppliers do, were better at improvising and adapting to problems. Those Russian suppliers found a way to work when Gaz was struggliing to pay them before its turnaround in 2010. Barenthein said that an important code of trust was built up, which is important to doing business in Russia.
“The benefits to Gaz are trust based on history, understanding of local bureaucracy, location and integration, all which limit supply chain risk,” he said.
