Tier one suppliers face many challenges in making the most of their supply chain IT, but new offerings by suppliers and a new openness in the industry may deliver much.
It is quicker, cheaper and easier to move information than parts. This simple fact lies behind every effort to improve supply chain performance through the use of IT. That doesn’t mean, however, that effective supply chain IT is quick, cheap or easy to implement. For tier one suppliers, effective IT integration presents particular challenges, positioned as they are between highly sophisticated and demanding customers on one side, and a supply base on the other that may include companies that are small, unsophisticated and a long way away.
The basic, day-to-day engine of automotive supply chain IT is EDI, and the system works quite effectively, according to the tier one executives we spoke to. The decreasing cost of IT means that, in established markets at least, the majority of lower tier suppliers can afford their own EDI backbone systems, and those that cannot will now often make use of low cost web-based interfaces provided by their tier one customers.
According to Craig Russell, logistics manager at International Automotive Components (IAC) in Detroit, it has been his company’s express intention to get 100% of its suppliers on to EDI. “We have some small suppliers that may produce niche products that make them valuable from a supply chain perspective, if not in dollar value,” he says. “EDI might not make financial sense for them, so we use an interface that allows us to send EDI messages, which are pushed to a web link. The supplier can go on-line, see releases and send us acknowledgements back.”
As automotive supply chains increasingly make use of suppliers in emerging markets, effective communication becomes more challenging, both because small suppliers in these regions may be less likely to have a robust IT infrastructure of their own, and because distance, time zone and language barriers make communication problems particularly difficult to fix.
According to Jeffrey Richards, International and Asia Pacific logistics director at Delphi, 3PLs have an important opportunity to add value in this environment. “A key IT initiative that we are working on globally is the integration of all 3PLs, suppliers and operations so that all partners see the same forecast and material pulls,” he says. “3PLs could help us here because they could take our EDI data and manage the communication with smaller suppliers. The 3PLs are in a good position to do this because they could share their investment in a single link between multiple customers.”
Like any IT system, however, the effectiveness of EDI communication is limited by the accuracy of the data used to drive it. While IAC may be able to share EDI messages with its entire supply base, the percentage of those messages which is entirely accurate can be somewhat lower, something that Russell is always seeking to improve. “Our aim in supply chain communication is to be 100% accurate, but we can’t claim to be there yet with all our suppliers,” he says. Even internally, notes Russell, it isn’t always possible to guarantee accuracy. “You always have the potential for scanning errors, or production issues that require manual intervention.”
At IAC, says Russell, there is also a significant on-going effort to improve the quality and efficiency of the data used in production. “We look every day at improved methods for receiving, storing and moving materials inside our plants. For example, we’ve just been looking at the possibility of using 2D bar codes with our existing scanners. The greatest thing about IAC is that we are always looking for opportunities and improvements.”
Greater transparency, says Russell, is critical in driving improved efficiency. “It is an on-going process,” he says. “You fix one problem, but that uncovers five more as you now have visibility into what is really going on in your systems. But that is a blessing in disguise as it drives efficiency, forcing people to understand what is going on and helping them to make good decisions, for the company, the industry and the economy.”
At automotive supplier ZF, Dr Horst Pfeifer has just been appointed vice president, IT for SCM, a new role in which he will, from the beginning of 2011, be responsible for supply chain management applications across the entire corporation. His role has been created, says Pfeifer, because ZF recognises the value of improved consolidation among supply chain applications across different business units. This consolidation, he notes, is an extension of an on-going harmonisation process of all the company’s IT. “Historically, we had around 20 different SAP implementations and even some other ERP systems in some subsidiaries. Today we have 15 and are going to consolidate those into five systems, according to different types of business.”
ZF has systematically built its new IT architecture from the inside out, starting around ten years ago with the introduction of a corporate product lifecycle management (PLM) system which holds full data on all the company’s products, down to the bill-of-materials level and which links directly the company’s SAP systems. Its goal in supply chain IT is to bring the same level of detail and consistency to bear on supplier operations. “Only when we have clear information on supplier performance, can we set the right goals and targets for our suppliers, and work with them to improve that performance,” says Pfeifer. “For example, we told our suppliers that our definition of on-time, in-full delivery was going to be delivery within one day of the requested data and within 10% of the request volume. When we introduced that metric, most suppliers started with 10% delivery performance, but they quickly adapted. Now most are close to 80% and in good locations we are above 90%.”
Another goal for ZF’s supply chain IT is improved flexibility. That flexibility was tested during the crisis when the company had to react very fast to huge changes in demand, says Pfeifer. “That meant we had to change everything, from procurement practices, to supplier orders, to internal kanban cycles.”
The technical infrastructure to do that was “in pretty good shape,” says Pfeifer. Even so, the company had to make some adaptations to its systems in the crisis, and the ability to manage a future crisis of a similar magnitude has now become part of the on-going requirements for IT system evolution.
Overall, however, says Pfeifer, the crisis hasn’t changed his internal customers’ attitudes to IT infrastructure. “Of course, people are cost-sensitive but they always say to me, ‘whatever you do don’t sacrifice the service’.”
Shining light into a black hole
Another company that is enjoying the tangible benefits of better transparency in its supply chain is seat component supplier CRH, as John Begg, the company’s director of North American Logistics explains. “Until recently, in our US operation, WIP was basically a black hole. We have a fantastic SAP enterprise system but it wasn’t being used to really analyse our production processes. Now we’ve started switching on the modules that give us a much better view of what is going on internally. If you have areas in your production process where you lose visibility, you will end up carrying more inventory to compensate. With better visibility, I can focus my resources where it will have the greatest financial impact, rather than relegating it to my ‘best guess’.”
CRH is also applying the same approach to its supply base. “We have, in our negotiated terms with our supply base, a clause that calls for them to have five days of finished product on site. However, this had never been effectively monitored. Instead, we just carried our own safety stocks as a precautionary measure,” says Begg. “Now we have our suppliers report their inventory levels every week. Because we are confident that they have what they should, we were able to cut our own inventory significantly.”
In the post-crisis environment, the emphasis on effective IT certainly remains, but the demands placed on firms’ supply chain IT systems may be subtly changing, says Kelly Thomas, SVP for discrete manufacturing at software provider JDA. “Before the crisis there was still significant overcapacity in the automotive industry,” he notes. “And a lot of efficiency issues are masked by overcapacity.”
Now that overcapacity has gone, companies are having to find new ways to ensure they can fulfil demand as it recovers. “For the first time we are discussing capacity constraint issues with our automotive customers. In this environment, if you can find ways of increasing throughput in a supply chain by 2-5%, that is a huge value proposition,” says Thomas.
Automotive customers are even asking about options that were previously the exclusive domain of semiconductor clients and other industries where demand regularly exceeds supply. “In semiconductors we help many customers solve allocation problems, deciding which customer should be allocated limited production capabilities,” says Kelly. “Until recently, we didn’t have much demand for that from automotive clients.”
As IT systems become cheaper and simpler to implement, systems that were once only an economic option of the very largest companies become sensible for smaller ones too. Matthias Berlit, vice president, manufacturing logistics at Inform, provides a range of supply chain optimisation solutions to help companies manage loads, truck movements or the routing of parts within their plants. While the major OEMs have long been important customers for Inform, uptake of its solutions by tier ones has been somewhat slower, with a few exceptions, among the very largest international suppliers. Today, however, that situation is changing.
“If a solution cost half a million euros a few years ago, today it is sometimes available for maybe €100,000 ($130,000). And with a pay-per-use licensing, the initial investment can be spread even more” says Berlit. “That makes things a lot more accessible to smaller operations.”
The cost of integrating IT systems is coming down too, thanks to a combination of new technologies and efforts on the part of software and equipment providers. Michael Mulligan, director, global automotive solutions management at barcoding and auto-ID specialist Zebra Enterprise Solutions, says his company has invested much in writing easy-to-use application program interfaces (APIs) to allow customers and other providers to write links to Zebra’s software offerings. “The more integration, the more efficiency, so we have tried to develop systems with external integration in mind from the start. As a result, less work is required when you deploy them.”
The alternative to buying, managing and maintaining your own supply chain software applications is simply to rent them from a third party. The software-as-a-service (SaaS) concept has received much attention in recent years. Proponents say that the approach has numerous advantages, turning software from a capital investment into an operating expense, and relieving companies of the need to worry about the technicalities of software administration. In the supply chain area, moving software out of a single company and onto the online cloud has other potential advantages too, offering different supply chain players equal access to important data and fostering the free exchange of information.
Andy Stinnes, managing director of GT Nexus Europe, is a vocal enthusiast for the network benefits offered by the internet. For a decade, his company has offered an online supply chain management service, focused on the challenges of long-distance, global supply chains. “In our system, we build a virtual model of the entire global supply chain, including customers, suppliers and logistics partners,” he explains. “Every piece of data is represented exactly once in the model and every participant can access the data, update it and be notified when it changes.”
The system has been designed so that even participants with very limited IT capabilities can make full use of it. “Our big customers integrate directly with their ERP systems,” he says. “But we have also built interfaces that mean small suppliers in Asia can just click on a link in an email. The system records the event in exactly the same way, no matter how it is created.”
The GT Nexus system gives companies full visibility of their assets as they move across the world. So far, the approach has been more widely adopted in non-automotive manufacturing sectors, like construction equipment. Stinnes sees a number of reasons for this: “In construction equipment we do a lot of work on the outbound and service parts side. When you are talking about individual machines that cost hundreds of thousands of dollars, it can be extremely critical that you know exactly where your equipment is.”
As automotive supply chains increasingly move towards global sourcing, however, Stinnes says customers have become much more interested in the potential for his company’s offering. “If your OEM customer changes their order at short notice, forcing you to charter a 747 to bring parts over from Asia, you want to be pretty sure that a container full of the same parts isn’t going to turn up at the docks tomorrow.”
Rules built in the GT Nexus system help companies to identify and manage supply chain issues in real time. “The challenge in managing a complex supply chain isn’t the 2,000 shipments that go according to plan every week, it is the 12 that don’t,” says Stinnes. “We have invested a lot in building the capabilities to spot those anomalies and alert our customers, so they can collaborate to find the best solution.”
Another advantage of the GT Nexus system, he says, is that it provides a consistent record of supply chain events, helping companies to agree, for example, who is going to pay for expedited freight when last-minute changes demand it.
Cloud-based computing isn’t going to be the answer for everyone. As Paul Bender, an independent automotive consultant who specialises in supply chain issues, points out. “With Software-as-a-Service you can become competitive, but it means your supply chain IT will never be a strategic advantage.”
At ZF, too, Horst Pfeifer suggests that there is more value to be extracted by building really tight integration between the company’s own systems, something that is made much easier if those systems are controlled and managed in-house.
Some in the industry question the very idea that there is an advantage to be gained by the use of in-house IT systems in the supply chain. Georg Gradl, director of OEM and supplier solutions at the automotive manufacturing industry business unit of ERP giant SAP, is one. “The idea that in-house systems somehow provide a competitive differentiator isn’t really valid,” he says. “There are few areas where it might make a difference, for example, the most sophisticated proprietary strategic vehicle and option planning and forecasting systems. But in other cases, such as managing inbound logistics, we see companies clinging to legacy systems because they think they provide something special, when really they don’t.”
In practice, suggests, Gradl, the very fact that many tier one suppliers have not invested in their own costly legacy systems may be an advantage today, helping to ease the adoption of more modern, sophisticated offerings from the open market.
Overall, providers are excited by the current climate for supply chain IT in the automotive sector. JDA’s Thomas sums up the feelings of many: “At all levels in the automotive supply chain, we find that companies are much more receptive to new ideas than they were a few years ago. You no longer hear people claiming that ‘automotive is different’. Frankly it is a lot more fun out there then it has been for a long time.”
