Driving Efficiencies in Automotive Logistics

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Automotive manufacturers find the key to squeezing operations costs: establishing strong partnerships with their 3PLs.

January, 2004
Driving Efficiencies in Automotive Logistics
Automotive manufacturers find the key to squeezing operations costs: establishing strong partnerships with their 3PLs.

Automotive manufacturers continue to lead the charge in developing innovative methods to squeeze costs out of their manufacturing and production operations.

"The automotive industry places increasing emphasis on rebates and low-financing packages," says Dick Lancioni, Ph.D., professor of logistics at Temple University. "That can cost manufacturers up to $3,000 a unit, and they've got to get those costs back from someplace. That's why they go back into the supply chain—to gain more efficiency there."

Automotive manufacturers establish strong partnerships with their third-party logistics (3PL) providers to help them achieve the efficient metrics they need. By inventing new ways to move materials, manufacturers were able to deal with the cost equation that came about in the 1980s and 1990s due to increased levels of complexity in automotive production processes.

"These complexities required us to move from whittling away costs a little at a time to inventing new processes to handle density reductions, increases in shipping requirement times, and increased demand for on-time deliveries because of reductions in inventory levels," says Ed Sprock, director of logistics for the Chrysler Group. "Funding inventory became far too big a drain on companies' balance sheets."

"The supply chain is an integral part of the entire manufacturing process," says Tim Connearney, materials director for Saturn Corporation, Spring Hill, Tenn. "A large part of that process is running millions of miles to hundreds of suppliers, so a lot of dollars are expended in overall vehicle production. That means we have to find ways to eliminate waste in the supply chain."

"Automotive manufacturers deal with what is probably the most complex menu of items of any industry," says Bill Naples, transportation manager for Ford Customer Service Division (FCSD), Livonia, Mich.

"For example, we see a transmission not as a whole part, but as hundreds of boxes of parts of all different shapes and sizes, each with its own part number and its own location in warehouses we have to manage," says Naples. "As a consequence, we have to be more innovative in maintaining an affordable business structure. In our industry, customers enjoy free delivery of their orders."

The biggest change in the industry is how manufacturers and their 3PLs tackle challenges holistically by optimizing pickups between a supplier and several manufacturing plants, says Kevin Mixer, research director for automotive and heavy equipment, AMR Research. "To be more efficient, an auto manufacturer might have more velocity of inbound parts and smaller shipments picked up and delivered more frequently to keep inventory low."

Pilot initiatives have already achieved a few million dollars in savings, just through changing the frequency of inbound parts, Mixer notes.

Inbound Logistics looks under the hood of three operations to see how two automotive manufacturers and a customer service division use 3PLs to keep them nimble and efficient. The accompanying sidebar outlines a trend in the industry—manufacturers utilizing the particular strengths of more than one third-party logistics provider.

Toyota's Abnormal Management

At the heart of everything that happens within Toyota's four walls is the Toyota Production System (TPS). Based on the concept of kaizen, or continuous improvement, TPS depends heavily on a well-oiled supply chain management and logistics system.

"Logistics is a key foundation of our production system, because if we don't move material efficiently and in small lots we might lose many of the benefits our production system principles stand for," says Glenn Uminger, general manager of logistics at Toyota Motor Manufacturing North America Inc., based in Erlanger, Ky.

Toyota practices one critical production system principle via what the company calls abnormal management. "This is a system Toyota lives by," Uminger says.

"When you are running lean, there's not a lot of room for mistakes, because if something goes wrong, it doesn't take much to shut our plant down," Uminger says. "This keeps us aware of weaknesses and opportunities, and allows us to eliminate waste."

VASCOR Ltd., one of Toyota's major LPs (logistics partners), fully understands and embraces these principles. VASCOR (Value-Added Service Corporation), with headquarters in Georgetown, Ky., is a joint business venture between APL Logistics and Fujitrans Corporation, the two controlling partners.

"At Toyota, we don't need to hear that everything is running normally," says Uminger. "On the other hand, if a truck is running late or if a problem arises with a supplier, we need to know immediately so we can react to manage the problem. Knowing about an abnormal situation too late could mean we have to shut down the plant."

One Piece at a Time

VASCOR route drivers are extremely critical to the successful operation of the TPS, which incorporates kanban, a highly efficient ordering system.

The theory behind TPS is one-piece movement at a time, says Uminger. "Of course, you can't do that efficiently so we focus on small order lots. There are 24 order possibilities in one day of two eight-hour shifts," he says. "How we use those 24 order slots depends on the supplier, the volume, the distance and the efficiencies."

The 24-order network gives Toyota the flexibility to shift frequencies in response to volume changes. Frequencies are based on any number divisible by 24.

The optimum shipment model is 24 times a day. This means 12 times a shift, 40 minutes worth of material in one order flows into a plant. "We always build in some buffer or safety stock, so if one shipment is missed for any reason, the line won't shut down. But if two shipments are missed, it could mean stopping the line," Uminger says.

Heijunka, or level flow, is another major part of TPS. Heijunka is a principle driving the entire supply chain—from supplier to crossdock through the production chain to the production floor. "There are equal intervals of time between shipments—otherwise you have a surge of material," explains Uminger. "This principle also helps our suppliers so they can level their outputs and shipments to us."

VASCOR picks up from within a network of 500 suppliers in North America and delivers to any one of eight crossdocks that Toyota's LPs operate for the company. "The crossdocks are located where we need them, based on volume," says Uminger, adding that no product sits at a crossdock for more than 12 hours, with most shipped out in less than six hours.

"Crossdocks accumulate shipments from a region. Those shipments then get split according to plant requirements and are shipped directly from the crossdock to the plant," Uminger says.

Milk runs help optimize transportation and production. "We can operate efficiently by increasing the frequency of runs to multiple suppliers, which reduces the lot size of each move, allowing us to fill trucks," Uminger says. "We know we have to sacrifice some mileage, but the benefits are steady and level flows of material and higher order frequencies."

Building Cube with Lego

Another important equation in this model is building cube for optimal efficiencies. "We have standardized box sizes that fit together like Lego building blocks so we can have small order lot sizes and still build a square cube to utilize cubic space inside the trucks," says Uminger.

"These are all tools we've developed to achieve our production system goal of handling small order lots efficiently, and all of this is tied in with our ordering system," Uminger says.

Toyota doesn't use the word "inventory" because the material flows continuously. "What I like about our system is how it is totally integrated into one continuous flow of work—incorporating the production floor with logistics," Uminger says. "We don't feel like we have to break through a wall between us and manufacturing in order to work efficiently with them."

As Toyota's 3PL, VASCOR plays a dual role. "We are one of Toyota's transportation operators, as well as one of its crossdock operators," says Jim Brutsman, general manager of business development for VASCOR.

"Typically, Toyota gives us a month's worth of milk run routes to operate, all in the framework of lean manufacturing and a JIT environment," he says. "It's an intense schedule—Toyota measures us by our ability to operate within 15 minutes of the scheduled time."

VASCOR assigns routes to partner carriers and its milk runs employ 580 team and single drivers and 375 tractors. "On an average day for Toyota, we cover the equivalent of seven trips around the equator," Brutsman says. "And while we are making those trips, every 80 seconds one of our trucks stops to deliver returnable containers and pick up parts."

Routes are structured precisely, to and from the plant as well as to and from the supplier. If a driver encounters an exception, VASCOR's centralized communications center is advised immediately. "Then we have to inform quite a string of Toyota personnel," Brutsman says.

VASCOR employs GPS tracking of its milk-run fleet and its sequenced delivery drivers use Nextel wireless communications. These sequenced situations are time-critical because of the distances involved and the precise sequencing of orders, loading, delivery, and entry to the production floor.

"Sequenced deliveries are complicated and well-orchestrated exercises of matching the right part with the right car at the right time," Brutsman says.

Ford Improves by Light Years

Working with approximately 1,700 manufacturing suppliers, more than 5,500 Ford service dealerships and another 300 Ford authorized distributors, and managing more than 450,000 SKUs can be a logistics nightmare if something goes awry.

That experience is one that Bill Naples, transportation manager for Ford Customer Service Division (FCSD), knows all too well. Today, however, he can talk about how his division significantly reduced order-to-delivery time.

"Our supply base has moved light years from where it was when we first started using Schneider Logistics, our 3PL provider. That's how we were able to eliminate a lot of time from our operations," says Naples. "We reduced transit time and inventory, and doubled our turns at relatively the same cost as two years ago."

Prior to June 2001 when Ford began working with Schneider Logistics, its customer service division lacked order traceability, dealt with shipments that had missing or incorrect ASNs, and had numerous problems with freight payments. The department also relied on suppliers to comply with Ford's written instructions to use its carrier of choice.

"We had serious supplier conformance and compliance issues and we had no connection to the release of material," Naples recalls. "Consequently, we didn't know when to expect shipments.

"We charged suppliers back for excess freight costs Ford incurred because they didn't follow shipping instructions. We wound up having a lot of heated discussions," he says.

At one time, the Customer Service Division had about 1,000 inbound trailers at its hub facility yard and at carrier yards in the area. "There was no synchronization between requested and actual ship date on releases from suppliers and all that inbound material got to the hub either too early or too late," Naples says.

But that was just the beginning.

"Then the supply chain folks would look at the distribution system's performance and try to compensate for inefficiencies by increasing the size of their buy," Naples explains. "So, if it took 80 days from release to have the material available at selling locations, they would just compensate for all the inefficiency and buy more and more inventory. This just made matters worse."

Ford personnel were operating independently to meet customer service objectives. "If we were aiming for 98- percent order fill with an inefficient network, we would buy more inventory to protect the customer, and try to expedite the parts through the distribution system," Naples says. "As a result, we were expediting a large portion of inbound material or diverting shipments around our hub facility, which resulted in substantially higher freight costs."

When it was brought in as FCSD's third-party logistics provider, Schneider Logistics' first order of business was to create enterprise-wide visibility, control conformance to shipping instructions, and monitor carriers' performances in pickups and deliveries.

"We did the same at our hub location and through Schneider we monitor performance in terms of time from tender at a supplier to receipt and unload at our hub," explains Naples. "Then we monitor how long it takes for our hub to receive a request to ship to a field location from the time it's tendered to the carrier—and finally the carrier's performance to the final destination."

Order-to-delivery time was reduced from 87 days to 35 days, which substantially reduced the amount of inventory the division had to carry.

The new system includes all partners in the supply chain loop, resulting in greater efficiencies. "We are even starting to manage returnable shipping containers, which used to be the responsibility of our hub traffic office by default," Naples says.

Without a continuous flow of returnable containers, suppliers' ship performance could be limited by not having the containers back in time to continue shipping.

Packaging Suppliers Get in the Loop

Packaging suppliers are also included in the loop, and know when to expect inbound parts. They can plan their production and procure enough packaging materials in advance for the expected inbound shipments of parts, which helps accelerate the flow of material through the supply chain.

With Schneider's help, Ford created an inbound crossdock near the hub facility in the Detroit area. The crossdock allows the company's 300 suppliers to make bulk shipments to one destination instead of individual shipments to up to 11 separate destinations in this area. These 11 destinations are parts warehouses and suppliers specializing in parts packaging for FCSD.

"Instead of suppliers shipping to individual locations in the Detroit area, they ship in bulk to the crossdock. There the parts are deconsolidated and sorted according to the ultimate destination, then shipped in full truckload quantities via local cartage," explains Naples. This eliminates a substantial number of LTL shipments from the same supplier going to these destinations on any given day.

"Now we know where the material is in our system and we can communicate that to our packaging suppliers so they can make sure they have the material available when the parts arrive," Naples says. "This not only takes time out of the process, but it offers significant transportation cost savings."

The automotive service parts supply chain resembles a retail supply chain. "Ford Customer Service Division must forecast what it thinks dealers will be ordering," says Steve Kowalkoski, vice president of automotive operations for Schneider Logistics.

Seasonal variations have to be considered as well; for example, there might be more orders for sheet metal parts during winter months due to fender benders.

"Similar to a retail supply chain, material is transported to a processing center where some value-added processes are performed, such as sheet metal that needs primer. The parts are put into a box and moved to a DC, where orders are fulfilled," says Kowalkoski.

Schneider Logistics specializes in the service parts side of the automotive industry. "What we do well is engineer the networks, procure the transportation to connect the nodes in the supply chain, execute the day-to-day operations, and pay all freight bills," Kowalkoski says. "We also manage all the information so we can make the best possible supply chain decisions for our customers."

The process is a delicate balance of keeping inventories low, while still being able to respond to orders in a timely manner.

Schneider Logistics makes sure parts are available to Ford when they are needed and are delivered on time, as efficiently and cost-effectively as possible. "All of this has to be done without compromising service and value," Kowalkoski says.

From 3PL to 4PL to XPL

When The Chrysler Group was looking for a logistics partner, it wanted one that could take on the role of an analytical tool, and that could understand how to integrate existing manufacturing processes with logistics and the supply chain. That search led to Ryder.

"The trick for Ryder was to bring in their processes without changing my infrastructure and poisoning my water," says Ed Sprock, director of logistics for The Chrysler Group. "I have to live in a certain environment—The Chrysler Group process and manufacturing network—and I can't go around changing purchasing or manufacturing processes at whim to sub-optimize the logistics process of a 3PL provider."

The Chrysler Group refers to its logistics partners as XPLs because they go far beyond the realm of a 3PL or 4PL.

"Ryder personnel have as much in-depth understanding of The Chrysler Group process flow, design and network as do my own personnel, my carriers, and my manufacturing people," says Sprock. "My XPL is my analytical tool, providing the horsepower I use to optimize my network based on strategies I prepare internally."

Sprock outlines for Ryder the network surrounding a particular physical location, including what will be built at that location, the preferred supplier sources, negotiated modes, rate structures, available equipment, and densities.

Ryder then designs a proposed logistics network detailing when certain trucks will be loaded at a particular supplier, the departure time of those trailers from the supplier, when parts will be delivered at a particular plant, and when that truck will be unloaded.

"Ryder proposes which parts will be delivered through my integrated logistics center (ILC) regionally and consolidated into a load to be delivered to a particular dock. They also propose which parts will pass through a plant ILC to be processed and delivered to a particular dock," Sprock says.

"Ryder provides me with a model of the ideal logistics network we need to operate. They generate proposed supply chains that meet both our manufacturing requirements in terms of deliveries, and our logistics requirements in terms of cost and partner selection," Sprock says. "Then we meet jointly and review the results on a strategic level. Finally, we try it in the real world by doing a dry test run."

In one delivery option, parts are picked up from supplier plants on geo routes—or milk runs—and brought to ILCs, where they are trans-loaded onto trailers destined as fully cubed loads for particular plants. These pickups are generally independent of a destination facility in the regional ILCs and plant-specific for plant ILCs. They are significantly more cost-effective than LTL shipments, Sprock says.

"This delivery option requires a lot of design work and considerations of pickup times. Routes are optimized so we are not shipping a lot of air, and we have to be flexible enough to be able to handle any changes in our dynamic environment," he says. "Our XPLs help keep us nimble on our feet."

Working with Partners

The Chrysler Group also uses Ryder as its XPL to work with another partner—Freightliner, for example. "Freightliner might want to deliver some parts to its facilities through one of my regional consolidation centers," explains Sprock.

The Chrysler Group then gives the appropriate Freightliner data to Ryder to see if those parts might move through Chrysler Group's geo shift network, simultaneously picking up Freightliner and Chrysler Group parts and moving them through the ILC, then delivering on a consolidated basis.

"We also use this model for plant launches we plan, and we forecast inbound logistics costs," Sprock says. "We turn our data over to the XPL, telling them this is a new product and our product team needs to know what the inbound costs will be based on the way the parts are laid out." The Chrysler Group then runs simulations using Ryder software.

XPLs describe an operationally functional network for The Chrysler Group that can deliver the parts to the windows and frequencies required, and the conveyances available. "Then they make that recommendation for us to consider. We have the ability to adjust that recommendation on an ongoing basis," Sprock says.

Material Cost Management is a process The Chrysler Group uses to facilitate efficiencies and cost reduction across the entire enterprise. "We've invented new processes, optimized densities, increased cube, developed new methods of consolidating shipments, and partnered with Freightliner and other companies to take advantage of scale. Because of this we've been able to save significantly," Sprock says.

For instance, a one-percent improvement in efficient trailer cubing for The Chrysler Group is worth about $2 million in each plant where this method is employed.

"If I can improve my cube from 90 percent to 91 percent in our 13 assembly plants, that equates to $26 million," says Sprock. "Our latest and greatest initiative in conjunction with our XPLs is to design routes that do this. We've increased our cube by 12 percentage points in the last two years. That's pure money."

Providing Support

A new trend is for 3PLs or XPLs to act as more of a logistics support provider, especially as it relates to the tier environment, where manufacturers are generally smaller and don't have their own logistics departments.

"These manufacturers might be more dependent on the solutions and recommendations companies such as Ryder can provide," says David Michael, director of national accounts for the automotive, aerospace and industrial group at Ryder.

Automotive manufacturers are focusing more on planning prior to vehicle production and launches, Michael says. "There's a lot more front-end planning in event management and manufacturers are paying attention to execution in terms of measuring, monitoring, and continuously improving," he notes.

Ryder assists The Chrysler Group in the sourcing process, providing a logistics impact analysis of various shipping points and container density considerations. Based on manufacturing requirements, Ryder develops a logistics and transportation plan for every part, focusing on packaging, density, frequency, and facility and network constraints.

New Opportunities

Michael also notes that the trend to consolidate through acquisition means new opportunities for 3PLs that can pull together the independent and disparate processes. "Companies such as Ryder can offer network design solutions to help these companies optimize where centers should be, where inventory points should be, and where manufacturing centers might be located," Michael says.

Another emerging trend in the industry is for automotive manufacturers to use a collaborative approach in integrating their process into the supply network solution using a variety of XPLs or 3PLs, each with its own particular strength, says Michael. This model is particularly evident in the relationship between Penske Logistics and Saturn (see sidebar below).

As automotive manufacturers continue to squeeze more efficiency from their manufacturing, supply chain, and logistics systems, they look to identify fixed costs, such as inventory, insurance, or transportation, says Temple University's Lancioni. "They try to convert these fixed costs to the variable side using third-party logistics providers," he says.

"For survival purposes, manufacturers are asking their 3PLs to back their trucks into their operation and take over a lot of the activities manufacturers used to do themselves, such as crossdocking, inventory management and warehousing," Lancioni says.

Many industry analysts agree that it is just a matter of a few years before these XPL, 3PL, and 4PL models consolidate the logistics requirements of the automotive industry.

"You will see routing, mapping, and parts distribution all coming together and customer-specific shipping lines will start to blend," says AMR Research's Mixer.

Auto manufacturers are beginning to study this possibility closely. "We are looking at other manufacturers to discover where we can share services," says Naples. "We are matching up common suppliers and we are investigating how we can use our crossdock in the Detroit area to bulk-ship not only parts for Ford, but for GM and Chrysler as well.

"We can share the transportation costs to the crossdock, and build truckloads containing parts for each particular company," he adds. "This will be a way for all of us to improve our operations and put efficiencies into the supply base."

Sidebar: Collaborating Strengths in the Supply Chain

A growing trend in automotive manufacturing is to use more than one logistics and transportation supplier in a collaborative approach that utilizes the unique strengths of each third-party logistics provider. The relationship between Saturn Corporation and Penske Logistics is one example.

Saturn uses two logistics providers to operate its flow-through crossdock, or logistics optimization center (LOC), feeding into its manufacturing plant. Ryder functions as the 3PL, optimizing the logistics network and managing inbound freight. Penske Logistics manages the LOC and is responsible for two primary processes: optimizing the flow of material from the LOC into the plant and handling container management, according to Tim Connearney, materials director for Saturn's Spring Hill, Tenn., plant.

LOC: A Cost-Efficient Option

This kind of arrangement is not uncommon, says Dick Lancioni, Ph.D., professor of logistics at Temple University. "As long as you have a routine flow of orders, a relatively predictable demand pattern at customer locations, and very few expedited orders or out-of-stock situations, then using an LOC works well. A number of industries use this method," he says.

"It's a very cost-efficient operation because you can move full trucks, especially on the inbound side," Lancioni says. "It is low-cost from the transportation standpoint, and keeps inventory levels very low. Replenishment is also quite frequent, so it works well for all parties along the supply chain."

Penske manages all the work within the four walls of the LOC, while Ryder does over-the-road transportation, both into the LOC, then from the LOC to the plant. Inbound material is either crossdocked and delivered directly into the plant, or is staged and delivered to the plant hourly.

"We move freight from the LOC to the plant using electronic pull, and every hour we order specific quantities of specific material," Connearney says. Pickups and deliveries are scheduled within 15-minute windows.

"It's really a milk-run operation. The inbound material is received and empty shipping containers are sorted and loaded for outbound logistics heading back to the suppliers where we dispatch those trucks out for another pickup coming in," Connearney says. "We don't want to run empty dead-head trucks without optimizing container returns in support of our logistics plan."

This model works well because it allows Saturn to decouple the supplier pickup while optimizing miles. "We can get a day's worth of materials—say 20 containers—from the supplier, bring it into the LOC, then signal the LOC to send the plant one container every hour. This means I don't have to run back and forth to the supplier or stage that material somewhere," Connearney says.

"Decoupling allows us to have the best of both worlds in terms of optimizing our transportation network and delivery, utilizing lean systems in the plant."

Penske Logistics supports the Saturn LOC with its own employees and UAW labor, which allows the 3PL to contain costs through a competitive contract.

"We understand that our pricing has to stay level, so we use initiatives such as Six Sigma and ISO practices to help us reduce costs while we continue to bring value to Saturn," says Dave Cumbo, Penske's vice president for global automotive operations.

These initiatives include optimizing the use of floor space and providing Saturn with consistent inventory levels.

Providing Critical Visibility

"Our goal is to deliver leveled amounts of production parts so that Saturn doesn't experience up or down spikes," Cumbo says. "We also flag any critical parts they may be running close on. In these emergency instances, we use our own vehicles to drive these parts directly to the line side so they are available for production."

Penske provides Saturn with a range of value-added services. "We give Saturn visibility, which is so critical because there are huge amounts of resources within the Saturn walls waiting for products to be built. There's a lot of money to be lost if those resources are idle for any reason because the parts are not flowing," Cumbo says.

"It's a discipline that we provide Saturn throughout its supply chain and supplier base because over-shipments are just as bad as under-shipments."

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