Supplier Logistics in the Driver’s Seat

Increasing complexity in the automotive supply chain has created a host of global logistics challenges that have auto suppliers operating in overdrive. How are they steering their supply chains in the right direction? By finding creative ways to keep inventories lean, improve velocity, and cut costs to meet manufacturer demands.

Early predictions on the cost n the 1970s, U.S. and European original equipment manufacturers (OEMs) got hammered by Japanese automakers and their just-in-time production systems. Today, competition is even more fierce.

Realizing they can’t survive only by cutting internal manufacturing costs, automakers are looking beyond their corporate borders to suppliers to shoulder a growing portion of the burden. In turn, best-in-class suppliers are looking to supply chain management strategies for solutions.

“On a macro level, the biggest strategic question facing the auto industry today is ‘What percentage of the automotive market will move to Asia Pacific?'” says Franco Gonsalves, vice president and business unit head, automotive and aerospace at Infosys Technologies Ltd., a global consulting and IT services firm.


“Right now, 82 percent of the market is in North America and Europe. By 2010, experts predict one-third of the world market will shift to Asia Pacific.”

This will cause tremendous change in the configuration of the automotive manufacturing and supply base.

“Most car companies choose to locate assembly plants in regions where demand exceeds 200,000 units per model per year,” Gonsalves continues. “As the shift to the Asia Pacific region occurs, Tier 1 and Tier 2 suppliers will begin to locate production in those countries. Because new plants take anywhere from one to five years to bring online, ideally, suppliers and OEMs will participate in joint planning processes to identify where to build new factories.”

The pressures facing manufacturers and suppliers, such as globalization and cutthroat competition, create conflicting goals as these organizations work to meet cost-reduction targets, improve quality, and accelerate time to market. Supply chain management (SCM) activities play a significant role in many of these areas.

Mastering the automotive supply chain is challenging for suppliers and manufacturers alike. Why? SCM is tough to conquer because its processes are difficult to integrate across numerous functional areas, according to New Competitive Realities in the Automotive Value Chain, a study conducted by the IBM Institute for Business Value and the Office for the Study of Automotive Transportation (OSAT) at the University of Michigan Transportation Research Institute.

“SCM touches nearly all parts of an organization from strategic planning to sales, marketing, purchasing, product development, manufacturing, and logistics,” the study notes. “The external SCM links with both Tier 1 and Tier 2 suppliers, when placed in the context of hundreds of suppliers located across the globe, clearly compound the complexity both manufacturers and suppliers face as they manage their supply chains.”

An Evolving Industry

Many OEMs have consolidated purchasing functions into one global entity—a move that has thoroughly changed how manufacturers view their supply base. Some manufacturers have created online portals, for example, through which they receive bids from potential suppliers anywhere in the world.

“This technology has raised the awareness level about the breadth of suppliers available to expanding global operations. Global sourcing increases the complexity of managing the supply chain and can create disconnects among high-level company objectives,” the study explains.

Over the last several years, the industry has evolved to include not only local “build-to-print” suppliers but also billion-dollar global systems integrators capable of providing complete solutions.

“Automotive suppliers are now responsible for producing greater portions of vehicle assembly,” notes Keith Nash, senior manager, manufacturing supply chain practice, Deloitte.

This modularization requires collocated plants, and creates the need for suppliers to work closely with manufacturers in both design engineering and supply chain coordination, says Gonsalves.

As manufacturers increase the complexity of their orders, the cost risk for suppliers escalates geometrically. Of particular concern to suppliers is inventory exposure—in terms of both excess quantity and obsolescence.

“When companies have ‘leaned out’ their factories as much as possible, they often turn to low-cost-country sourcing to continue cutting costs,” says Nash. “This practice has created capacity issues at U.S. ports. One Tier 1 supplier, for example, saw its ocean lead times increase from 28 days to 42 days. That’s another 14 days of inventory in the supply chain.

“Companies get a low labor rate, but their transit times and risk of obsolescence increase, and they have to deal with container security issues,” Nash continues. “Also, U.S. OEMs often make product engineering changes in mid-course, so suppliers have inventory in transit that immediately is either obsolete or has to be reworked.”

Although the work is slow and difficult, the auto industry is making progress toward getting rid of inventory. Some transplant OEMs—foreign OEMs manufacturing on U.S. soil—send engineers to work with their Tier 1, 2, and 3 suppliers to train them on rooting out cost. “In return, they expect that in year two of your relationship, you’ll reduce your prices,” notes Nash.

On a larger scale, the auto industry is working as a group to reduce costs by streamlining and standardizing processes. Specifically, the Automotive Industry Action Group (AIAG), whose members include OEMs and their suppliers, has focused on improving the industry’s materials management practices.

In the past, each OEM had its own proprietary materials management requirements so suppliers had different sets of processes for each customer. This was prohibitively expensive—especially for smaller suppliers. In the late 1990s, the AIAG established a special task force to address the issue.

Common Processes

The Materials Management Operations Group (MMOG) developed a common set of guidelines for materials management. The result, published in December 2004, is MMOG/LE, a single set of global best practices standards, supported by AIAG as well as its European counterpart, Odette International.

MMOG/LE is a self-assessment tool that enables companies to rank their material planning and logistics performance and gain guidance toward best practice within the industry. MMOG/LE assigns three levels of supply chain proficiency—A, B, and C—with A being the best.

An A-level supplier “far surpasses minimum standards in every aspect of materials management and can be considered at or near world-class standards,” the document says.

“MMOG/LE is an Excel file that contains yes/no questions about companies’ supply chain practices,” explains Morris Brown, program manager for materials management at AIAG. “The practices are ranked in importance—F3, F2, and F1, with F3 being most important.

“After filling out the survey, companies can determine their score and rating. If it doesn’t meet world-class standards, they can use a gap analysis tool to assign a time frame for accomplishing the changes needed to get to world-class status.”

One company using MMOG/LE to evaluate its operations is Denver-based Gates Corp., one of the world’s largest manufacturers of industrial and automotive belts, hoses, and related products.

“The F3 items on MMOG/LE are the high-impact areas, so we immediately established robust systems to address those items,” explains Aidan Hughes, materials manager at Gates’ London, Ontario plant, who served on the MMOG/LE development committee.

“If you don’t have good business processes in place for these areas, you risk disruption to your customer. Once we covered the F3 items, we worked through the F2 questions.

“Whatever the materials management group can do to enhance performance and help meet customer objectives factors into being awarded business,” Hughes notes.

Ford, for example, requires its suppliers to meet certain standards to be considered MMOG/LE Level A. Part of Ford’s approval process includes an endorsement from its materials logistics group saying a supplier meets all requirements.

“When we set up our London plant, we used the tools imbedded in the MMOG/LE to determine the processes we’d need to meet Ford’s quality requirements,” explains Hughes.

The fact that MMOG/LE has been adopted in Europe by Odette’s members is significant. “We’re collaborating with Odette to make this a truly global document,” explains Brown. “If you’re a supplier to DaimlerChrysler, whether you’re located in Stuttgart, Germany, or Auburn Hills, Mich., the materials management requirements will be consistent.”

AIAG and Odette are working on rolling out MMOG/LE in Asia as well.

“If I achieve Level-A status at my facility, I know I have the best possible business processes in place to serve my customers,” says Hughes. “Being able to demonstrate that gives me a leg up on the competition.”

Transformation at Work

Eaton Corp., a diversified industrial manufacturer with 2004 sales of $9.8 billion, believes supply chain management is key to its current and future success. The nearly 100-year-old Cleveland, Ohio-based company is a global leader in supplying fluid power, as well as electrical, automotive, and truck components and systems. It sells products to customers in more than 125 countries.

“The competitive global marketplace has really turned up the heat for us,” says Rick Williams, director, supply chain management for Eaton’s Fluid Power Group, Automotive Division. “We saw the emergence of competitors in regions of the world we didn’t even know about.”

Three years ago, Eaton embarked on a campaign to radically change the way it does business, focusing on its supply chain in particular.

“We are evolving from a supplier resource management organization—where we managed with a price-based transaction orientation—to an integrated supply chain organization, where we manage based on total cost and value delivered,” explains Williams.

To enable this transformation, Eaton’s supply chain strategy focuses on four key areas:

1. Globally competitive sourcing. Switching to globally competitive sourcing meant layering a total cost of ownership approach over simple low-cost-country procurement. “Buying material at the lowest price is not enough. You have to take into account all the cost elements that make up a delivered product—including inventory,” says Williams.

2. Business intelligence. Eaton wanted to migrate from simply collecting data, which was difficult or impossible to use in many cases, to turning information into actionable business intelligence. “In a global, 24/7 operating environment, if you can’t move and exchange data freely you have nothing,” Williams says.

Eaton made a variety of changes. It decided to invest in new information infrastructure, build a data warehouse, and digitize supplier transactions to allow collaboration and performance measurement. The company also created a sales and inventory operations planning solution that included visibility tools, and implemented standard information processes and tools across the company.

3. Globally integrated logistics. Eaton’s goals in this area include optimizing logistics globally, developing a standard international logistics model, and creating an integrated global logistics competency.

4. Supplier development and collaboration. Eaton identified its top 50 suppliers worldwide and is working with them to create collaborative relationships. Eaton gives key suppliers access to its inventory and production planning system, for example, so suppliers can view factory demand on a real-time basis, enabling them to more effectively plan replenishment. This also reduces the demand uncertainty that forces suppliers to carry higher inventories, which, in turn, takes significant cost out of their operations.

In late 2002, Eaton began executing its new integrated supply chain management strategy in its Fluid Connectors Division (FCD). FCD, which has plants around the world, makes hose and tube assemblies used for air conditioning, power steering, oil cooling, active body control, and a variety of couplings and spoilers. Customers include BMW, GM, DaimlerChrysler, Ford, Toyota, Honda, and Volkswagen.

To improve its manufacturing efficiency, FCD shifted some of its production to Queretaro, Mexico. It partnered with a third-party logistics provider for distribution operations to support the new plant.

“Warehousing and distribution are not core competencies for us,” Williams explains. “Manufacturing is what we do. We believed an integrated and optimized supply chain could be a strategic weapon, a competitive differentiator. So we were looking for a full-service supply chain solutions provider.”

Eaton contracted with Caterpillar Logistics Service Inc. (CLS) to set up a 33,000-square-foot Mexico Logistics Center, which operates six days a week, 24 hours per day. The Mexico Logistics Center receives raw materials from North American and overseas suppliers, and provides raw material manufacturing line-side support—including point-of-use ordering and line-side delivery—to Eaton’s production plant.

“We receive raw components and move them directly to the production line without Eaton ever touching them,” explains Jorge Pintado Villafana, Caterpillar’s logistics center manager.

The Mexico Logistics Center provides outbound finished goods distribution to FCD’s Laredo, Texas, logistics center, and crossdocks for U.S.-based OEMs. It also performs incoming component inspection services per engineering drawings.

“We deliver component material to the plant every three hours,” Villafana notes. “The plant sends finished product back to us, which we store and ship to the final customer. We handle approximately 1,100 different raw component parts numbers, and 300 finished goods parts numbers.”

Space utilization was a key issue for FCD in relocating production to the Queretaro plant. The company was concerned about losing valuable manufacturing floor space to warehousing. “We actually realized a nearly 50-percent gain in manufacturing capability space by allowing CLS to focus on logistics,” reports Williams.

Reducing Inventory, Attacking Costs

Perhaps the biggest challenge at the Queretaro operation was managing inventory effectively. “We had to figure out how to get the right inventory level and lean out the supply chain to a degree that was cost-competitive for us but also reduced costs for our suppliers,” Williams explains.

“The first step toward leaning out inventory was stabilizing our manufacturing demand requirements and tightening up our supply chain,” he continues. “This allowed us to react to demand fluctuations quickly without excessive build-up of material or finished goods inventories.”

Eaton wanted to move the Queretaro production plant toward a consignment inventory model, so the company placed these supplier stocks across the U.S. border at its Laredo facility. Suppliers own their inventory until it is delivered to Eaton’s Queretaro manufacturing plant, and CLS manages supplier deliveries to the Laredo facility.

“The concept behind consignment is to make sure the supplier gets information as quickly as possible, from the time the demand signal comes out of the assembly plant, to the time they can replenish,” Williams explains.

Eaton’s new IT capabilities come into play here. “Our suppliers were not able to access our inventory database to see demand,” says Williams. “They just shipped to schedule. So we weren’t able to flex our inventory up or down to reflect real demand.” As a result, FCD carried excess inventory.

Today, FCD gives suppliers access to its in-house inventory levels so they can view consumption and plan replenishment appropriately. “If our suppliers can help us significantly reduce our inventory, that takes cost out of our supply chain,” Williams notes. “We give them credit for that.”

Within the Mexico Logistics Center itself, FCD looked to CLS to optimize costs. CLS is currently identifying costs associated with each warehouse function by SKU and by activity—determining what it costs to receive, inspect, store, pick, pack, and ship particular products from particular suppliers.

“Using this information, we can determine a financial penalty for supplier non-compliance,” Williams explains. “If inspecting their product consumes ‘x’ amount of warehouse space, we can associate a cost with that. By understanding these costs, we can have intelligent conversations with our suppliers about how to eliminate these pain points.”

CLS helped FCD improve customer service for its OEMs by meeting finished goods delivery needs. These elevated customer service levels helped the group win important new business from Chrysler, GM, and Ford. At the same time, inventory—raw material, work in process, and finished goods—declined substantially; more than 24 percent in 2004, and nearly 30 percent in the first four months of 2005.

A Continuing Challenge

Clearly, increasing complexity creates a host of supply chain challenges for automotive suppliers. “Manufacturers are making serious efforts to integrate their SCM processes internally,” says the IBM-OSAT study.

“Unfortunately, they pay far less attention to collaborating on SCM with their suppliers. Manufacturers’ SCM efforts, in particular, often increase the complexity of SCM to the point where it conflicts with their and their suppliers’ main business and organizational goals.”

This means suppliers have to find creative ways to collapse time and improve the velocity of their supply chains. “If you figure out how to be flexible within a short time frame, you will make money,” Nash says. “How do you increase flexibility? Through a well-coordinated set of processes, supported by technology, that allow you to react quickly.”

“The comparative ability of automotive suppliers to master the complexity of SCM is the new competitive reality that will determine which supply chains ultimately succeed,” concludes the IBM-OSAT study.

Leave a Reply

Your email address will not be published. Required fields are marked *