Automotive Logistics: The Upside of Resiliency
Assembling supply chains that are both lean and resilient helps carmakers steer through risks and disruptions without taking a hit.
In 2011, the Fukushima tsunami and nuclear meltdown in Japan shook international supply chain networks, particularly for carmakers. The global automotive industry was already busy recovering from the U.S. financial meltdown, dealing with a European market hobbled by the Eurozone debt crisis, and scrambling to meet demand in exponentially growing markets such as China and India.
Toyota's manufacturing was affected by the compound disaster in Japan. But some of its suppliers were devastated, including Japanese semiconductor manufacturer Renesas, which makes about 40 percent of the chip controllers that power today's new cars. Through its just-in-time (JIT) operation, Renesas delivered chips to the Toyota supply chain with a six-minute gap.
But at the time, Renesas only made the chips in one factory in Japan. When that factory was decimated, Toyota immediately shut down manufacturing all over the world. The automaker literally couldn't get its hands on the processing chips to run its new cars.
General Motors (GM) faced a similar kind of supply chain exposure, with one critical difference, explains Andrew Zolli, author of Resilience: Why Things Bounce Back. GM had built sufficient redundancy into its supply chain, so it was able to dynamically reconfigure its supply and value network to ensure continued manufacturing of its most profitable vehicles.
As a result, in the third and fourth quarters of 2011, GM reported that the disaster in Japan would have no impact on the company's earnings. Even though it had roughly the same supply chain risk exposure, the tsunami cost Toyota nearly $3.5 billion, and knocked the company from its position as the world's top automotive manufacturer.
Wake Up Call
The automotive industry woke up to the fact that while its JIT business model and super lean, highly interdependent supply chains were wildly efficient, they were also brittle—susceptible to disruption on a potentially massive scale. Simply put, traditional JIT automotive supply chains were not resilient and, as a result, were at increasingly high risk of failure.
Acting on this knowledge, the auto industry and its supply chain partners have embarked on efforts to craft a revised operating model: Supply chains that are simultaneously lean and resilient. This model retains the principles of JIT and lean manufacturing, but adds controlled redundancy and contingent options to improve resiliency and protect against failure.
The evolution toward this hybrid supply chain model is ongoing. Automotive companies are rebalancing their supply chains to build in carefully managed tolerances for volatility. The goal is to build a supply chain that can tackle conditions of systemic volatility—good and bad, ranging from the ordinary to the unthinkable—while preserving or enhancing profitability.
The new resilient automotive supply chain recognizes the need for collective, rather than sequential, risk management; and facilitates collaboration on the new scale that is necessary for survival. It is built on true supply chain partnerships that create agility and contingent scale/capability, delivered in an "on-call" model.
These partnerships span all players in the sector: original equipment manufacturers (OEMs), suppliers, and supply chain service providers. They embody what Zolli refers to as the two defining aspects of resilience: the ability to maintain a core purpose, and the ability to restore core purpose in the face of a disruption.
An Industry in Flux
To understand this new hybrid automotive supply chain, it helps to consider the industry's market dynamics. Four major trends are reshaping the sector:
- Global growth and emerging markets. Despite the drag effect of the debt crisis on the European market, global automotive production is forecast to hit record levels each year through 2017, with emerging markets driving the growth.
- Getting closer to the customer. Auto supply chains are now inextricably linked to supply chains outside the traditional automotive circle—for instance, consumer electronics.
- Relentless cost pressure. Logistics costs are typically equal to five to 10 percent of automotive manufacturing revenues. To be more competitive, companies must use every trick in the book to reduce costs and improve market share.
- Mega-plants and multiple platforms. Automakers are investing heavily in building mega-plants in overseas locations such as China and Mexico. "These mega-plants—based on the concept of building to a common engineering platform—produce up to six different vehicles in one location," says Mike White, senior vice president, global automotive sector, DHL Supply Chain. "This improves capacity while reducing the need to build new plants."
As OEMs build mega-plants in new geographies, they are asking component suppliers to follow them into supplier business parks to provide greater support.
A Supply Chain Hybrid
Building a supply chain that is both lean and resilient means creating a new hybrid that balances the need to reduce costs with effective use of redundancy, contingent scale, and capacity. This is no easy task, and the solutions depend on multiple variables that differ by customer, geography, and provider.
In the automotive sector, however, the following attributes are emerging as the hallmarks of this lean-resilient supply chain hybrid:
Globally agile execution. Supporting the automotive supply chain—with its need for leanness and responsiveness—requires a new level of tactical logistics agility across a global footprint. The days of knowing what will occur 30 days out are gone. Third-party logistics (3PL) providers that support the automotive industry have to build supply chains that can switch gears at a moment's notice, but not break the bank in doing so.
As the entities charged with daily execution of the auto supply chain, global lead logistics providers (LLPs) need a portfolio of solutions, expertise, and systems to deliver this tactical logistics agility.
The benefits of using an LLP that holds deep expertise within the automotive industry include: agile and adaptive supply chain execution; supply chain event mitigation and contingency solutions; in-country and global supply chain expertise and relations; end-to-end supply chain visibility; established continuous improvement cost management; consistent, reliable, and cost-effective transportation and delivery; demonstrated supply chain best practices; and supply chain risk assessment and management. These factors combined provide the automotive industry with the edge it needs to take on the unknown.
Contingency planning. It is impossible to plan for every specific natural disaster or major supply chain event, but companies can develop contingency plans around types of supply chain deficiencies.
To build these contingent solutions, best practice 3PLs perform extensive what-if scenario modeling on a broad range of events and situations. Using such modeling scenarios, the LLP can test different solutions geared to specific auto companies, see what works, and learn how to best respond to minimize impact and responsibility.
Real-time, multi-tier visibility. Supply chain resiliency is impossible without accurate real-time supply chain condition information. "Visibility reduces uncertainty, and enables businesses to achieve a demand-driven supply chain," explains Martin Christopher, emeritus professor of marketing and logistics at the Cranfield University School of Management in Bedford, England.
"It also reduces supply chain risk through shared information, both upstream and downstream of operations," he adds.
Best-in-class global LLPs can provide what amounts to an on-the-ground sensor grid in their countries of operation, geared to monitoring supply chain condition continuously. Their supply chain software solutions deliver visibility into supplier production, inventory, and in-transit goods. Using this information, the LLP develops a supply logistics plan for every part, all the way to the production line.
This plan incorporates cost per unit, which the LLP uses to understand how a given supply chain deficiency impacts the auto company's costs, and the cost for alternate supply chain solutions. The LLP then evaluates how that expense impacts the auto company's overall supply chain cost structure.
Innovative partners. In the automotive sector, resilient supply chain management is based on partnerships, particularly with the LLPs that implement the on-the-ground solutions. These are not the transactional buyer-vendor relationships of old. They are more akin to a marriage.
Manufacturers have recognized that the old approach of squeezing vendors on price does not support their objectives. Instead, it is more about partnering to develop an innovative continuous improvement plan, backed up with the cost trade-off business case. An important component of this partnership is a mutual understanding of enterprise-wide value at risk.
Under this approach, the LLP and automotive company can assess supply chain risk in the context of what value is at risk if some or all of an organization's capabilities were destroyed and it had to start from scratch. They determine which market and product or service they would focus on first, and how they should shape the supply chain network to support the company's priorities.
The automotive industry's journey toward creating supply chains that are simultaneously lean and resilient is still in its early stages. The lessons learned from disasters, disruptions, and high volatility levels over the past few years make several points clear. Supply chain vulnerability is a network-wide issue, and must be addressed on a network-wide basis. This requires higher levels of information sharing across the supply chain, particularly with the LLPs charged with executing the collective 3PL supply chain operations.
Best practice companies are partnering with global LLPs to rebalance the automotive supply chain, enabling it to respond to volatility of any kind—be it an unexpected sales spike or a fire at a major supplier. This means building out capabilities, strategies, and tactics that:
- Deliver agility, appropriate redundancy, and contingent capacity that can be switched on at a moment's notice.
- Develop cost-effective alternative solutions and scenarios to market or operating developments, such as re-routing shipments during a port strike.
- Improve visibility across the supply chain via robust IT architecture and close linkages into supply chain partner systems. Visibility enables a control tower view of supply chain events, complete with proactive alerts for existing or potential problems.
- Partner for mutual benefit by collaboratively focusing on metrics and continuous improvement.
The LLP's job is to understand the unknown, and engineer a portfolio of fully costed alternatives and solutions that can be rapidly deployed across all automotive supply chain parties. This means having the people, systems, processes, capacity, and tools in place to deal effectively with volatility.
Automakers that embrace the new normal of continuous—and sometimes radical—supply chain volatility and risk, and put processes and systems in place to better manage both, regularly outperform their competitors. Companies that ignore or lag behind in addressing supply chain volatility do so at the peril of their bottom lines and shareholder confidence.