Friday, August 3, 2007

Top Automakers driving for efficient logistics

2006 and 2007 have been eventful years for the automotive sector. It has seen a huge amount of restructuring, not only in its supply chain but also among the vehicle manufacturers themselves. DaimlerChrysler has ceased to exist with the sale of the Chrysler business to a private equity house and VW Group is now effectively controlled by Porsche. And a large proportion of the US component suppliers remain in bankruptcy protection. The implications of these changes for logistics are substantial. In the case of VW, there appear to have been organisational changes directed in part to creating new logistics systems. This is a response to the success of the KOVP logistics system at BMW, a major competitor to VW’s Audi brand.

While the automotive logistics markets is mature in the traditional markets of Japan, Western Europe and North America, it is growing vigorously in the new markets, such as China, central Europe, Russia and Turkey.

Over recent years, logistics has risen up the corporate agenda of almost all vehicle manufacturers. Most now either have programmes in place or are working on projects to develop their logistics systems. It has been realised by most VMs that logistics is fundamental not only to the efficient working of their assembly plants, but is also key to the management of their markets.

In parallel with the greater sophistication of these logistics systems is an increasing need for more sophisticated services from LSPs. This is seen particularly in finished vehicle logistics, where capabilities such as track-and-trace and greater visibility of inventory are now essential.

A large number of logistics providers compete for contracts with the vehicle manufacturers, which, in contrast, are few in number and well informed about the market.

The result is that operating margins among LSPs servicing this market are often poor, with low organic growth. LSPs, however, continue to be attracted by the large volumes offered.

Assembly plants can easily cost t500m and the vehicle manufacturer feels under intense pressure to utilise this investment to the maximum. This can be characterized as "production orientation".

Raw materials and components need to be fed into the assembly plant, coordinated with the production schedule. This has been perceived as the central logistics task in the automotive supply chain and one that in the past was given to production engineers.

The attitude to logistics changed in the 1980s with the emergence of the Toyota Production System. The greater prominence given to logistics-related ideas such as JIT has resulted in increased prominence for logistics managers and more integration between different types of logistics process in the supply chain.

Toyota has the most coherent approach to logistics, closely followed (but in a very different manner) by BMW. It is no coincidence that these two companies are among the most successful vehicle manufacturers.

Most passenger vehicles are made near the market where they will be sold. Even components are manufactured near the assembly plant. Within Europe, for example, it is quite usual for 90% of component suppliers to be located within 100km of the assembly plant. This supply chain geography is so pronounced that the car industry has created specific locations for suppliers next to its assembly plants, known as supplier parks. Components are then fed directly into the assembly plant often using conveyer belts or forklift trucks.

The use of supplier parks also improves communication between component supplier and vehicle manufacturer.

But Tier 1 suppliers are also faced with the contradictory demands of vehicle manufacturers. On the one hand they want suppliers to invest in logistics or assembly facilities near assembly plants, but are unwilling to commit themselves to suppliers for long enough to ensure that the investment is covered. Consequently there is a danger that suppliers will be left with facilities at or near the VM's assembly plant which are redundant or under-used.

Many LSPs view this as an opportunity for outsourcing, with several suppliers sharing facilities owned and run by the LSP. This appears logical, but conflicts with the unwillingness of many T1 suppliers to outsource assembly operations which they regard as core competencies.

Logistics is usually one of the core functions of such near-plant facilities. Their main function is to break-bulk, and feed components into the assembly plant in a sequence dictated by the production schedule. This would suggest that LSPs are well positioned to offer such services within shared-user facilities, certainly the case in many plants. However, many larger T1 suppliers are very aware of the importance of logistics as a core competency and are unwilling to relinquish it to LSPs on a large scale.

As a consequence, the market for such centres may appear more promising for LSPs than in reality.

Reference: International Freighting Weekly

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