Change Drivers: Navigating the New Auto Supply Chain

Globalization, evolving supplier roles, and new network design models are driving change across the U.S. automotive industry. Logistics management is where the rubber meets the road.

The automotive industry continues to shift gears, backing up and moving forward at the same time.

U.S. automakers keep slipping into reverse. Ford Motor Company lost $12.7 billion in 2006, surpassing its $10.6-billion loss in 2005. Its top U.S. rival, General Motors, also is expected to announce a significant loss for 2006, after losing more than $8 billion in 2005.

Non-U.S. automakers, in comparison, are revving into overdrive. American Honda Motor Company recorded a sales increase of more than 20 percent for 2006, and Toyota’s 2006 sales broke company records for the 11th consecutive year.

When 2006 figures are announced, Toyota will finally overtake GM as the world’s number-one car maker, predicts forecasting firm Global Insight. The latest forecast shows Toyota producing 9,018,461 units for the year, while GM is estimated to build 8,714,803 units, compared to 2005’s actual figures of 8,322,417 units for Toyota and 8,615,949 units for GM.

“While Toyota has been busy adding production capacity and building new plants over the past 12 months, GM has been taking exactly the opposite path in the face of consistently heavy losses,” notes Global Insight in a recent report.

In addition, GM’s global vehicle production and sales have remained static, while Toyota’s have risen as a result of extra investment in plant capacity, the report notes.

“The really alarming aspect for Toyota’s rivals is the fact that Japan’s number-one car maker has achieved this feat without having a particularly convincing strategy in China and India, the world’s two fastest-growing major automotive markets,” Global Insight notes.

With the company now working hard to address this weakness, Toyota looks set to strengthen its position in the coming years.

Fuel for Thought

Intense competition is forcing change on a major scale across the auto industry landscape. As part of that change, U.S. automakers are scrutinizing their supply chains like never before.

Two concurrent forces are fueling major transformation: globalization, and the changing role of automotive suppliers.

Globalization. From the late 1920s until the late 1970s, the U.S. auto industry had the home market mostly to itself, notes The American Automotive Industry Supply Chain—In the Throes of a Rattling Revolution, a recent report by the International Trade Administration (ITA), U.S. Department of Commerce.

That changed when Volkswagen (1979), Honda (1982), Nissan (1983), and Toyota (1984) established large-scale U.S. assembly operations. Total “transplant” vehicle assembly began to increase steadily in the United States.

This globalization trend spread across the entire auto industry, redefining where vehicles are manufactured—even for the slow-to-change Detroit Big 3 automakers.

“Last year, for the first time, General Motors sold more vehicles outside the United States than it did in America,” notes Jim Press, president of Toyota Motor North America.

With this new influx of competition, car makers of all kinds sought to establish manufacturing alliances in an effort to drive down costs and generate greater economies of scale.

“In 2004, six separate corporate clusters, representing 25 large-volume auto manufacturers, produced 75 percent of the world’s output,” the ITA notes.

“While these Global 6 automakers—GM, Toyota, Ford, Honda, Chrysler, and Nissan—will still operate in 2010, and will still represent 75 percent of the world’s output, where they produce those vehicles will shift significantly,” the ITA says.

China’s global share of vehicle production, for example, will rise from 5 percent in 2003 to 8 percent in 2010, buoyed by a 90-percent increase in output to 5.3 million units, predicts PricewaterhouseCoopers’ Autofacts research. NAFTA’s global share, in comparison, could slip one point to 27 percent.

U.S. automakers found adapting to globalization a challenge.

“They grew up operating under a regional business model,” explains Cary Vandenavond, vice president sales for automotive, aerospace and defense, industrial and metals, i2 Technologies Inc. “Under that model, if the company makes vehicles in a particular region, it sells and markets them only in that region.

“That model sets up the domestic automakers as regional operating entities in North America, South America, Europe, and greater Asia Pacific,” he adds.

It’s also a model that is quite different than the way original equipment manufacturers (OEMs) operate in Asia.

“Asian OEMs leverage their assets globally, and ship vehicles across large bodies of water and land,” Vandenavond notes. “They make anywhere, source anywhere, assemble anywhere, and market and distribute anywhere.”

Globalization has also given rise to the production of globalized vehicles, which are designed to sell across different regions of the world and are built off the same platform with common sets of parts.

A new tier structure and expanding supplier responsibilities.

The second major force reshaping the auto industry stems from a shift in OEM manufacturing practices.

Increasingly, the major OEMs are moving toward a “Vehicle Brand Owner” (VBO) business model. Under this model, each VBO eventually will be responsible primarily for managing, marketing, and maintaining a stable of car brands, and surrender responsibility for content engineering and vehicle assembly to outside suppliers, explains the ITA.

OEMs are now evaluating their suppliers not only on the basis of near-term price and long-term cost reduction programs, but also on their corporate stability, product design, and production engineering capabilities.

OEMs also judge suppliers on the downstream management of their own supply chains, delivery reliability, willingness to locate plants in close proximity to the OEMs, and participation in the assembly process.

Suppliers are in the throes of responding to these new challenges. Some are willingly taking on the new responsibilities OEMs demand, transforming themselves into what the ITA calls “tier one-half systems integrators.”

These suppliers/integrators engineer and build complete modules—for example, an entire interior or rolling chassis. They assume vastly expanded product design and development responsibilities, as well as downstream supply chain management functions previously handled by OEMs.

Suppliers also are building additional plants to satisfy OEMs’ production line requirements, adopting global manufacturing best practices, investing in the development of new technologies, and buying or merging with firms that can contribute new technology and skills, as well as complementary products.

Traveling a Different Road

Other suppliers, however, are choosing not to pursue this new role, consciously deciding to remain in the less-demanding tiers.

The Original Equipment Suppliers Association (OESA), which represents automotive suppliers, estimates that 30,000 firms in North America were part of automotive supply chain tiers in 1990, but only 8,000 in 2004. By 2010, OESA predicts their numbers will dwindle to no more than 5,000, each enjoying significantly higher sales volume.

These changes hold dramatic supply chain implications for OEMs and their suppliers.

First, supporting the automotive OEMs’ manufacturing operations continues to grow more complex. “More new models are launched, and the OEMs are trying to bring these new vehicles to market more rapidly,” explains Dick Jenning, vice president automotive supply chain, Ryder.

Second, OEMs are retrofitting their assembly plants to embrace flexible manufacturing, so that many different models can be produced in the same facility. That drives a need for exponentially more parts.

Finally, OEMs are sourcing from greater distances, “making the supply chain geographically longer,” Jenning notes.

OEMs also are changing the way they manufacture—moving to a modular assembly model, where suppliers provide full modules—such as dashboard assemblies—rather than individual parts to the production line.

“The move to modular assembly means that many sub-assembly processes occur outside the OEM manufacturing plant, often at supplier campuses,” explains Tom Cross, senior director logistics for Ryder. “This trend, in turn, drives up complexity for Tier 1 suppliers providing these sub-assemblies.”

At the same time, OEMs are evolving away from traditional just-in-time (JIT) practices toward a just-in-sequence (JIS) supply model. “OEMs now tell component suppliers what specific cars they will build on which days of the week,” explains Ron Riggin, senior vice president—technology, RedPrairie.

The suppliers then determine what assemblies to make—interior dashboards, for instance—produce them, then sequence delivery in the exact order of the manufacturing production run.

This JIS model shifts the focus to building assemblies-to-order, bringing them to a staging location, and sequencing them to the manufacturing line.

The sequencing is a matching process that greatly facilitates manufacturing and reduces errors. It also shortens the OEMs’ cash-to-cash cycle by cutting material inventories.

“While JIT means moving frequent small-lot deliveries from suppliers to the OEM’s plant, JIS means moving larger lots less frequently from suppliers into a distribution center, then making frequent small-lot deliveries to the manufacturing plant,” explains Dan Greenberg, vice president—parts logistics for Vascor Ltd., a third-party logistics provider located in Georgetown, Ky.

Instead of a 3PL delivering to a supplier 16 times a day, it may go to the supplier twice a day, bring the materials to the DC, then move from there 16 times to the OEM plant.

“The plant still receives the same 16 deliveries,” Greenberg notes, “but the external flow makes more economic sense. If, for example, the 3PL moves material from a supplier 100 miles away from the OEM, a roundtrip runs 200 miles. Delivering 16 times a day equals 3,200 miles.

“If, on the other hand, the 3PL moves material from the supplier twice a day in larger quantities, and puts the shipments in a distribution center close to the OEM’s plant, travel distance is reduced to 400 miles,” he says.

“As volume grows,” adds Jim Brutsman, vice president business development for Vascor, “this network design has a bigger impact—it trades transportation costs for distribution center costs.

A DC can do two things: serve the plant where it sits, and operate as a regional DC serving other OEMs or suppliers. A 3PL may pick up material from nearby suppliers, crossdock it, split out what’s going to the local OEM plant, and load the rest on a truck for delivery to another DC or plant.”

Capitalizing on these types of network-wide efficiencies offers a rich source of savings opportunities.

“It is very important for every truck, railcar, or ship to run at the maximum capacity possible,” Ryder’s Jenning says. “Sometimes, because automakers want to operate in a strict JIT environment, their 3PLs don’t move or deliver material in full trailer or container loads.

“But significant opportunities exist for multiple companies in a supply chain to create a collaborative network and optimize it as a whole. Everyone benefits.”

Early Planning Pays Off

A high degree of collaboration and robust planning capabilities help 3PLs support the new automotive supply chain.

“The only way 3PLs can execute to flexible assembly manufacturing and manage this complex network effectively, is to get involved early in the vehicle-making process,” Jenning says. “For Ryder, this means getting involved two to three years ahead of production, when automakers are still selecting suppliers.”

Ryder also likes to participate in packaging decisions for inbound parts and assemblies at an early stage in a vehicle’s planning cycle.

“It is important for Ryder to have input into packaging decisions because it helps us match internal assembly plant logistics to external supply chain logistics,” notes Jenning. “We want to make sure packaging is consistent with ensuring good transportation capacity utilization.”

Having the opportunity to influence packaging decisions early on also helps 3PLs assess a material or assembly’s total landed cost, and base sourcing decisions on that data.

Once an automaker finalizes its parts sourcing decisions and packaging configurations, Ryder begins to build a logistics database—one part at a time.

“We plan inbound logistics for every part the assembly line will require,” Cross explains.

Ryder’s database contains information on the primary container delivered to the assembly line for the operators’ use, as well as the secondary packaging in which the material is shipped.

“Certain physical characteristics of the packaging material are consistent with allowing for good transportation equipment utilization,” Cross notes.

Part of Ryder’s process also includes developing contingency plans for every part.

“If an automaker uses a supplier located 50 miles from its plant, the risk is minimal because of the proximity,” Jenning explains. “But if the supplier is 2,000 miles away, the risk of supply disruption or delay is greater, creating a different set of issues for the car maker to deal with. For every part, Ryder creates a decision tree geared to responding to the unexpected.”

Accurate, real-time visibility is a critical necessity in today’s globalized automotive supply chain.

“The time devoted to decision-making has shrunk,” notes David Ellis, solutions engineer with Covisint, a B2B visibility platform. “No longer can suppliers or OEMs wait for paper or e-mail to filter through people. At some production plants, a line stoppage could cost an OEM $10,000 to $100,000 per minute.”

This means OEMs must know in real time about shipment delays, order shortages, and other supply chain events that could impact production. Immediate visibility into these events gives OEMs, as well as their suppliers, 3PLs, or other parties, time to take corrective action.

“Timeliness of information is critical,” Ellis says.

The Detroit Big 3 automakers believe visibility is so critical to their operations that, in 2000, they founded Covisint to provide exactly that.

Initially, Covisint was established as a technical services organization to provide interoperability and data information to the OEM supplier community and outside processors. But it has evolved into a global B2B interoperability platform.

“Covisint provides global visibility and secure access to data—including logistics and supply chain information—anywhere in the world,” Ellis explains.

Covisint today boasts 280,000 users, representing 30,000 supply chain participants in 96 countries. Here’s how it works:

Materials managers can log on to the Covisint web site, check the status of shipments, and receive alerts for weather-related or other kinds of delays. All parties are notified if, for example, a shipment is delayed three weeks so they can make alternate plans.

“Users can keep the inventory visibility dashboard up on their desktops in real time, and check where products are in the world at all times,” Ellis says.

Looking through the windshield toward the horizon, the auto industry, both domestically and globally, has made tremendous strides in reinventing itself, and will continue to do so in the coming years.

“Despite some of today’s headlines, the automotive industry is alive and well, and expanding,” says Toyota’s Jim Press. “Globally, sales are rising because people in major developing countries such as China, India, Russia, and Brazil are achieving a higher standard of living and discovering the freedom that cars provide.

“In the United States, business is steady,” Press continues. “With America’s population reaching the 300-million mark, the future is full of promise.

“The U.S. auto industry is coming off its third-best year in history. General Motors and Ford are taking bold steps to recover, and good things are starting to happen. Both were profitable in Asia, Europe, and Latin America in the first quarter.

“And their sales have doubled so far this year in China, which is rapidly becoming the world’s second-largest auto market.

“I firmly believe GM and Ford will both come back stronger than ever and be successful,” Press says. “And that’s important because they are vital to our industry and our national economy.”

A Strong Future

Press and other industry analysts agree that we are seeing not the demise of the U.S. auto industry, but rather its globalization, as car companies restructure and redeploy resources to meet the needs of markets around the world.

The supply chain plays a major role in achieving this evolution. “Many practices in place today are designed to satisfy lean manufacturing requirements,” notes Jenning of Ryder.

“Now we’re creating lean logistics practices as well. We’re working to build totally integrated systems that take into account the cost trade-offs of decisions made all across the supply chain. Lean logistics will continue to evolve.”

Automotive OEMs that are able to comprehend the total cost of materials movement will be more competitive.

Offering the lowest vehicle purchase cost is one thing, but attaining the lowest sourcing and transportation costs drives home the real benefits of an efficient automotive supply chain

Doing More With What You Have

To squeeze out unnecessary costs and improve efficiencies, OEMs are looking to all areas of their production operations—including the receiving dock and yard.

“The OEMs’ existing facilities were devised for low-frequency, large-quantity deliveries,” says Gary Latham, director industry solutions in the automotive practice for RFID technology company WhereNet Corp. “Under today’s manufacturing practices, however, they receive far more deliveries, which taxes the capabilities of their yards.

“The OEMs had one choice: either increase the size of their yards, which is often impossible due to space/land constraints, or find technology that helps them optimize the throughput of their facilities. Active RFID gives them this ability,” he says.

Ford Motor Company implemented a WhereNet active-RFID-based, real-time locating system to help manage inbound freight activity at most of its plants throughout North America and Europe.

Ford initially implemented the WhereNet system in 1998 to track materials within a 250,000-square-foot area of its Van Dyke facility in Sterling Heights, Mich., which produces more than nine million components annually for Ford cars and trucks.

Utilizing the same local infrastructure of antennas, Ford and WhereNet then co-developed a wireless “call” system, known as WhereCall, to bring parts to the assembly line as needed.

When supply of a specific part reaches a pre-determined replenishment level at an assembly station, the line worker presses the WhereCall button, which sends a signal to re-stock that particular part so the line never runs out of it.

This process eliminates the need for replenishment workers to travel routes to pick up Kanban cards. It also cuts some lag time from the process, further minimizing line-side inventories.

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