Car Makers Gaining Traction

With the economy driving out of recession, car makers are re-tooling their supply chain relationships to accelerate profit growth.

For many years, original equipment manufacturers made our cars. Today a wide variety of businesses can be considered car makers, including component suppliers and logistics service providers, which do many of the subassemblies for their automotive clients. That’s because the prevailing trend among Detroit’s Big Three has been to eliminate vertical integration. Especially when the economic times were better, it made more sense to push as much of manufacturing’s investment costs and risks back to suppliers.

The most recent recession reversed that trend somewhat, with many automotive companies bringing production back in-house. At one Ford assembly plant near Detroit, for example, a production engineer told MH&L his operation is bringing kitting and direct assembly of automatic transmissions back in as much as possible so they can better control inventory sizes and reduce contamination issues.

“We can be stricter on ourselves about these things where it’s sometimes difficult to get the point across to someone else about how tightly we have to control our contamination issues,” he says. “A few microns can screw up a transmission and you don’t have a second or third shift to deal with that. We can police that ourselves a little better.”

Another reason for bringing work back in-house is to keep the union workers who have been coming back to work busy. What this engineer is learning in the process is that the lean practices that were pounded into workers’ heads during the better economic times have to be re-learned.

“We were really good at it 10 to 12 years ago,” he says. “While we were losing so many people we took our eye off it. Now management is bringing us back to it. We already have a lot of the tools, we just haven’t been using them well. We lost the experience level in some areas that made it easy.”

The Economic Pendulum

With the economy on the upswing again, automotive plants are becoming inundated with work and there’s less space available for it. That’s making component suppliers and logistics service providers attractive outsourcing partners again. However, there are fewer of them to choose from these days.

According to the Original Equipment Supplier Association, there were 62 auto supplier bankruptcies in 2009 alone. Many of the big ones—Federal-Mogul, Collins & Aikman, Tower Automotive, and Delphi—occurred before ’09. Automotive industry analyst Jim Gillette adds that the industry isn’t finished “restructuring,” either—in North America or globally. He’s a consultant with IHS Automotive, but before joining IHS, he was a strategic marketing consultant for the Automotive Components Group (currently Delphi) of General Motors and vice president of automotive forecasting with IRN, Inc.

He believes mergers and acquisitions will accelerate over the next few years as the credit markets become more accommodating.

Part of that restructuring involves the supply chain. It has caused logistics service providers to become more nimble as automakers deal with suppliers both onshore and offshore.

“Improved logistics has enabled plants to locate in new and distant areas, while demands for new plant locations have stimulated logistics improvements,” Gillette says.

Global Service and Sourcing

Material handling, both inside and outside automotive plants, is changing to meet the demands of new markets like China, India, Eastern and Central Europe, and parts of Latin America. With cyclical swings in vehicle demand, both in these and in more established markets, suppliers and logistics providers must exercise greater care in choosing which supply chain partners to work with. And, Gillette reminds, rapid growth of other automakers in these new markets will make it more challenging for logistics professionals in all supply chains to manage service demands.

“Export-import logistics were nearly unknown to many suppliers just a decade ago,” he says. “Economies of scale are hoped for, but they’ll be offset to some extent by vast distances between end users. The good news for many suppliers is that component quantities increase. The bad news is they now have to find ways to supply parts in widely dispersed foreign locations.”

Automakers have experimented with the use of “supplier parks” over the last 20 years. The idea is to place all suppliers making just-in-time and/or in-sequence-delivery parts within close proximity to the respective assembly plant. The concept works well for the automaker, but can be risky for suppliers, Gillette adds.

“In the best of worlds, a supplier’s manufacturing plant should serve a variety of customers, providing some diversification,” he explains. “If a plant is dedicated to a single assembly plant, the supplier’s fortunes ride with the products made at that plant. When General Motors decided to close its Spring Hill, Tenn., assembly plant (formerly Saturn), many of the supplier operations in the area either became obsolete or had to scramble to find new customers.”

What’s Good for GM

Comprehensive Logistics Inc. (CLI) used to serve GM from a Lansing, Mich., campus of facilities and had full responsibility for the daily operations of three warehouse facilities totaling more than 750,000 square feet of space and employing approximately 450 people. These facilities served three distinct GM assembly plants within the greater Lansing area. As lead logistics provider for the automaker, CLI did sequencing, kitting, subassemblies, container management, quality inspection, transportation and network design, inventory control and automated conveyance.

Today, in Lordstown, Ohio, CLI manages global inbound logistics and value-added subassembly processes for the 2011 Chevrolet Cruze. It receives parts and components from hundreds of global suppliers and builds complex vehicle configurations for just-in-time delivery to GM’s assembly lines. Materials for the Cruze flow through CLI’s 500,000-square foot Logistics Optimization Center in Austintown, Ohio. GM issues electronic “pull signals” containing specifications for front horizontal, vertical and rear suspension systems as well as headliner modules with visors, dome lamps, OnStar safety devices and overhead consoles.

The recession threatened to take this business away from CLI, as collapsing vehicle sales created productive capacity within the OEMs’ facilities. However, Brian Hume, senior vice president and general manager for CLI, says his company is expecting to benefit from the rosier picture being painted for the automotive industry this year.

“There may be renewed interest in outsourcing, especially as demand for multiple vehicle platforms continues to increase,” Hume says. “When you bring in another vehicle platform into an existing manufacturing facility, the OEM has to expand its operating footprint as well as reengineer the process of presenting the new parts to the operator. It makes much more sense if that productive space can be freed up and put to better economic use by employing a 3PL with the capability to build and deliver complex vehicle configurations in the precise sequence needed by the cars coming down the manufacturing line.”

Business Coming Ashore

Along with that anticipated growth in outsourcing is an equally anticipated growth in nearsourcing. Hume believes that the massive push to source from low-cost offshore countries can’t be sustained thanks to the penalty that’s rising with oil prices and the wage rates of workers in those countries. That means business is likely to come back into the U.S. or into Canada and Mexico and some of the South American countries.

However, border-crossing delays and lean inventories can make nearsourcing from south of the border problematic as well. Terry Miller, executive vice president of operations for Penske Logistics, says those challenges are creating opportunities for companies like his. Penske is the lead logistics provider for General Motors in Mexico, handling 99% of the freight coming out of Mexico up into North America for them. Penske also serves Ford out of Mexico, handling growing volumes of freight for the auto maker’s tiered suppliers. According to Miller, the automotive industry represents 45% of its business, and represents a key strategy in Penske’s growth. That strategy includes managing returnable containers and rack. Losing assets like those represents an enormous expense for the OEMs.

“We’re experimenting with different technologies and bar coding capabilities to be able to track those assets,” says Miller. “Some of our clients can’t even put a number on the overall cost of lost containers or the lack of containers in a timely fashion. Our technology people are looking at different ways to manage container activity.”

Tracking Assets

Penske is developing technologies to track arrivals and departures, and to do signature capture to shorten the cash to cash cycle. These technologies include cell-based scanning which allows them to have little or no network infrastructure. Miller foresees that his company’s focus on yard management solutions will help clients keep a tighter rein on inventories and give them a picture of exactly what’s in their trailers so they’ll know what they have on their premises and where.

“Some of the manufacturers we work with have hordes of trailers and in some cases they have to go out and roll the back door up because they don’t know what’s in them,” Miller says.

Labor management represents another big opportunity, both in the four walls and inside the truck cab.

“We have to get better at productivity improvement and managing lean activity, particularly in automotive,” he adds. “We’re watching hours of service and the new regulations being released. There are people we work closely with in Washington, keeping us abreast of what’s going on. We’re concerned we’ll end up in a relationship where someone doesn’t recognize what the cause and effect is in some of the lawmaking.”

Good Dealer Strategies

The need to help the automotive industry stay on the right side of law makers and consumers was brought to the forefront during several high-profile recalls. Service providers like UPS played an important role in making sure dealers equipped consumers with the parts they needed. Considering many of those parts came from offshore, timing was critical.

“We worked with Toyota on one of their recalls,” says Kristin DeBates, corporate marketing manager for the UPS Automotive Segment. “They were faced with massive numbers of customers going into the dealers and they had to make sure those dealerships were stocked with the appropriate recall parts. We helped supply what they needed from Asia or wherever their manufacturing supplier is and helped them meet some of their schedules.”

Supply chain visibility is key here, and the UPS Quantum View Manage tool includes dashboards that help OEMs and dealers keep an eye on incoming shipments as well as what is being returned. The ability to quickly receive warranties into inventory facilitates the processing of credits back to the dealer. And consumers are learning to expect same-day service as well, according to DeBates.

“If a dealer doesn’t have the necessary inventory in place, they may be able to source it from another dealer down the road,” she says. “We’re seeing more dealer to dealer cross utilization of inventory.”

Industry analyst Jim Gillette adds to that observation:

“The cost of wholesale financing (floor planning) at dealers is one factor in the long-run that will encourage a change in the way inventory is handled at dealers,” he concludes. “There are groups studying the possibility of setting up regional distribution centers for new vehicles that will allow a large number of dealers to quickly obtain selected models with specific color and feature combinations to meet customer demands without carrying large inventories on their lots.”

That’s a good example of how the global economy is changing the art of logistics and the sociology of supply chain relationships in the automotive industry. With everyone in that chain having a stake in accelerating the cash-to-cash cycle, other industries would do well to watch and learn from what happens next.

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