PSA Peugeot-Citroën’s evolution from a European carmaker to one which sells and builds vehicles in global markets has been under way for some years. But as the pace accelerates and its supply chain becomes more complex–with more shared platforms and increasing parts exchange–so too has the need arisen for a more rigorous and coherent logistics architecture.
Guy Lederer, PSA’s executive manager of international logistics, leads the department that develops the standards and processes for global flows, including packaging engineering and procurement, material flow, parts ordering and forecasting. Lederer has responsibility for material movement from Europe to South America, China and Southeast Asia, Russia, Turkey and Iran, but also the growing interchanges emerging between such regions. In 2010, PSA shipped 35,000 TEUs of freight globally, a figure Lederer anticipates to reach 70,000 TEUs by 2012 with significant volume increases planned in South America, Russia and Asia. In September, PSA also announced plans to build a fully-integrated factory in Sanand, Gujarat, in northwest India, which will have an initial capacity of 170,000 cars a year, as well as engines and gearboxes, with a large supplier park alongside.
PSA’s volume for complete-knockdown kits (CKD) actually declined in the first six months of 2011, down 13% to 208,000 following a record 477,000 in the full year 2010. The drop is not surprising as PSA shifts global factories from knockdown kit assembly to part-by-part production and indeed, international freight is forecasted to grow in spite of increasing levels of local sourcing in each region, according to Lederer, because increases in volume and new intercontinental exchanges will drive the overall material freight upwards. PSA sales grew well during the first half of the year in global markets where it produces vehicles, including China (up 10%), Russia (up 65%) and in Latin America (up 22%).
In Russia, for example, a migration from semi-knockdown kits (SKD) to CKD production is not expected to lead to a decrease in material flow. PSA runs a train of SKD material between Vesoul, in central-eastern France to PSA’s plant in Kaluga, south of Moscow, together with its logistics subsidiary Gefco (which recently won Marco Polo funding from the European Commission for the project). The train carries more than 300 containers per week and Lederer says that forecasts call for rail volumes to grow as the plant increases production and eventually expands capacity. “Even as you increase localisation, the higher production volume helps keep the rail flows steady or growing,” Lederer says.
PSA’s sales outside Europe reached 38% of the 1.86m vehicles sold in the first six months of 2011, rising from a 33% ratio a year earlier, although stable from the 39% for the full year 2010. The figure was around 27% in 2007. Along with increases in sales and production volume, global platform engineering is also driving growth in international volumes, with increases in reverse flows and new regional exchanges. A car such as the Citroën C4, for example, is built in Europe, Russia and Latin America as well as China, while the Peugeot 408, engineered specifically for China, is now built in Latin America and will be launched in Russia (but not in Europe). As a result, PSA is seeing growing material exchange from China to South America, Europe and Russia, as well as from Argentina to Russia.
To facilitate these exchanges, PSA has developed a network of international logistics centres that collect, consolidate and package parts for export. In Europe, PSA has such facilities in Vesoul, as well as near the French port of Le Havre together with Gefco; it has others in Vigo, Spain and locations close to powertrain plants. PSA has also opened such centres in Argentina and Shanghai, where local parts are delivered for consolidation and export. Lederer says that if vehicles engineered in other global markets outside Europe become interesting for other global flows, then centres will be opened in those markets too.
A total rather than ex-works cost analysis
When building supply chains around such strategies, Lederer points out that an extensive total logistics cost analysis must be put in place. “We now have a midterm, 3-5 year vision for what the flows should be, where our supplier will be located, the cost of diesel and what solutions would be the most cost-effective and environmentally friendly,” he says.
Lederer points out that since PSA switched to a “total logistics cost” analysis, the lowest global price is no longer the driving force of its supply chain, suggesting an end to the previous pursuits of low cost country sourcing. “Since we changed our approach, lowest purchasing cost is no longer a priority,” he says. “Decisions cannot be made in a micro-economic way alone. We might be able to save €1 on an alloy wheel or a colour if we were to source it in a low cost country for other locations, but from the total cost point of view it would be a mess. I don’t want to disturb production in Brazil or Argentina because the plants were unable to get some coloured part. You have to think about the flexibility that you want.”
Global exchange will increase, therefore, as parts production is centralised in certain regions because of specific expertise, regional development and logistics efficiency rather than piece price alone. “More and more we are saying that we want to produce vehicles for regional and local markets,” Lederer says. “Each of these regions will get some specific parts and if these vehicles are to be produced in other regions you have to make global decisions on where you integrate, including logistics cost, air freight risk, obsolescence, quality, tax evolutions, etc. That is why we have set up a further localisation in China, for example.”
Such localisation is critical, particularly at a time of high raw material and supply chain costs, as well as the evidence of ongoing supply chain disruptions from the Japanese earthquake. In its half-year financial report, the company reported increases in raw material costs of €366m and a negative impact from Japan of €147m, which contributed to the automotive division’s 23% drop in profits after six months, at €405m.
The costs related to Japan were largely attributed to having the wrong product at the wrong time as customers faced longer waiting times for certain models following production shortages, which lead to poorer pricing. Likewise, the company also pointed to higher vehicle inventory costs for carrying a larger number of models that are in less demand.
With the potential for rising costs and disruptions to continue, along with a volatile and weakening market, PSA warned that it may see operating profit fall into the red in the second half. As part of a drive to protect profits and increase competitiveness, the company has already announced plans to improve manufacturing productivity by 20% over the next three years, signalling that total logistics cost metrics will be more important than ever.
In a global supply chain, understanding total logistics cost and ensuring flexibility requires integration between supply chain planning, forecasting, transport procurement and operations such as consolidation and packaging. PSA’s approach is unique in part because of Gefco’s role as provider and integrator, but Lederer asserts that it is PSA driving the systems and standards that make the supply chain tick.
Gefco’s roles are clearly defined–PSA is the principle architect and Gefco, in most cases, is responsible for execution and transport procurement. This means that, for global parts flows, Lederer’s department manages parts ordering and programming, scheduling and forecasting. PSA also maintains control over supplier development, including monitoring delivery times, KPIs and quality control over parts. Gefco, on the other hand, manages transport providers directly. PSA also keeps control over export-related packaging design and procurement because it is so closely linked to the part design, according to Lederer. His team is responsible for everything from wooden boxes to specialised pallets and metal racking.
“Each time we tried to outsource this type of packaging we lost time and money,” he says. “The overall carton box is not an issue but when you are exporting specific parts, such as hoods, you need very precise packaging and it is essential to have in-house control.”
While Gefco has responsibility for consolidating and packaging material at certain international logistics centres, such as in Le Havre and Shanghai (centres closer to production plants, like Vesoul and Vigo, use PSA employees), Lederer points out that it is PSA that engineers the standards, such as those that maximise the use of container space.
“We are switching from an individual packaging vision to saying that even if one kind of pallet is very effective but you cannot stack it beneath another pallet, for example, then forget it,” he says. “We still have a lot of work to do in this area but we are getting better.”
PSA plays an essential role in the transport procurement, too. Gefco bundles together transport packages, such as sea and rail freight, and presents them to PSA’s logistics division, but Lederer believes that the order forecast his team provides is an important tool for Gefco in negotiating contracts. “Gefco procures transport correctly so long as PSA gives it the right input,” he says. “Even on services in which we are a major player, like Europe to South America, you cannot get competitive tariffs just by offering rough forecasts. This has been a major project for us.”
While Lederer is clear about the division of labour between PSA and Gefco, he does stress that Gefco is increasingly involved earlier in product development to help determine logistics costs. Gefco employees work closely alongside those from PSA at logistics centres and management offices–there are Gefco employees based near Lederer at Poissy, for example, and Vesoul, where a significant part of PSA’s international logistics team is based.
But importantly, Lederer sees Gefco as a company that should be held to benchmarks and strive for improvements together with PSA, even though it is the group’s dedicated provider. “We cannot just to stick to the old fashioned way of doing business,” he says. “PSA and Gefco have the same shareholders and we need to be competitive. So far our approach is working well.”
In some areas, particularly outside Europe, Gefco even competes with other providers for PSA business, says Lederer. This is the case where PSA has partnerships with other carmakers or joint ventures, such as in China. In Wuhan, for example, inbound logistics activities are divided between Gefco joint ventures and Dongfeng’s own logistics joint ventures. “In those cases, Dongfeng-PSA is the customer, so it has benchmarks that Gefco would have to meet,” he says.
He adds that for the new joint venture PSA is starting with Chang’an in Shenzhen, discussions over how logistics will be handled are under review. It is possible that Gefco could take on more responsibility, although nothing has been decided.
Forecasting global part orders
Lederer identifies several major projects for his team, related in particular to forecasting and packaging.
For international parts ordering and forecasting, Lederer acknowledges that the process is different than for regional ones, where the bill of material is created for the specific parts needed following an actual customer or dealer order. But for international parts the orders themselves are forecasts. “For international parts, it is not the material for the cars you need to produce in a few days, but rather the sales department gives you a guess about a part that the company will maybe need a few months later,” he says.
Lederer says that PSA understands the difficulties suppliers face if actual orders vary tremendously from forecasts. “We can no longer ask our supply base to deliver 1,000 units on Monday, 1,300 on Wednesday and then 700 on Friday. We need to maintain a more stable schedule,” he says.
PSA annual forecasts are provided twice a year and updated on a weekly and monthly basis. This information is provided to all suppliers and to Gefco.
To develop a more precise forecast, PSA is currently working on one global system, Corail, that integrates vehicle forecasting, parts ordering and production planning. “I have a significant team working on the intercontinental parts ordering process for Brazil, Argentina, Russia and China, for example. It is something we need to go a step further with regarding our efficiency,” Lederer says.
While Lederer admits PSA can improve, he believes that better forecasting has already gone a long way towards keeping premium freight from increasing, even with more international freight. He also credits this to PSA holding the right level of inventory. “Our understanding of lean production is not to get the inventory so low that you end up pumping tonnes of kerosene into the air,” says Lederer. “But rather, with a good ordering and forecasting system, the lean approach means that you keep inventory stable with demand.”
Lederer says that refining these forecasts is an important part of managing capacity around material shortages. While for other parts facing potential shortages, such as engine components, he says that it is important to have forecasts beyond one year. “It is difficult but we are now organised to give this visibility to our suppliers and we meet regularly to discuss these trends,” he says. “It works quite well.”
Lederer admits that such forecasting is more difficult for certain electronic-related components in short supply–not least in the wake of Japan disruptions–although it is harder for tier suppliers, since PSA sources parts that already have electronics integrated into them, such as navigation equipment. “Our tier ones may be facing more challenges [than us] with premium freight and electronic capacity management,” he says.
Lederer considers packaging among the most important areas of his responsibility. He says that if packaging and design are considered at the earliest stages of development, there is the possibility for PSA to extract considerable savings downstream.
“For example, in our cost estimations we might be able to determine that we could switch from one large, stamped part to two or three and we can then add a local welding which might be less interesting at the local level but which will have a substantial savings when applied across the globe,” he says, adding that PSA makes this analysis only for major components.
Lederer says PSA is looking carefully at using reusable and returnable packaging where it makes sense. “I don’t have any religious position about whether packaging should be reusable or one-way, but it depends on each flow,” he says. “On the other hand, for high volume parts we’ve found that it is possible to have reusable packaging even for long distance flows.”
Lederer gives examples that include returnable packaging for motors that are sent to Brazil and Argentina. He adds that the idea of a shared, container-pooling system for international flows is something that PSA would also be “very interested in” but that he has yet to see a compelling business case.
“[Global] pooling is like global sourcing–it is a very interesting idea but once you get it into practice, it often doesn’t work,” he says. “If you can find me someone with plastic boxes full of fruits coming from South America, for instance, who is willing to come back with my parts in them, then great, but so far we haven’t found any. But we are looking at it.”
Tearing down the castle of the French
While Lederer’s team works in one of the most dynamic areas of the supply chain, he does not expect a “revolution” in supply chain flows in the coming years. Rather, as mentioned, volume will steadily increase on the major flows out of Europe and should also grow from new trade routes.
In future, he says, there could be a rationale to build distribution centres in the destination markets of imported international parts in a market like Brazil or China. Lederer says that such facilities are “within our models” but that there would need to be a concentration of plants to justify such an operation. Even in China, where the new joint venture will open PSA’s third plant, Lederer says that Shenzhen and Wuhan are simply too far away for such an integration to work. “We use completely different ports and networks to move parts to these ports. What you would gain by integrating the logistics, you would waste ten times in domestic transport,” he says.
Otherwise, Lederer sees the biggest changes to come as those based more around building a multi-cultural, multi-lingual team–almost precisely the same challenge described by Gefco regarding its own global expansion. To understand s and move with both localisation and new global flows, Lederer insists that his team had to leave the confines of “the castle of the French”.
“On the operational and management side, managing these different nationalities and languages is a big part of my job,” he says. “After all, if you don’t understand your Chinese partners, then you are in a real mess. Hopefully we are nowhere near that!”
