Sum of many parts
When it comes to logistics in the automotive industry, nothing happens until you sell a car.
The sale of a car is a demand trigger to build new product. It’s also the beginning of an after-sale relationship with the customer, representing a valuable revenue stream dealers want to protect at all costs.
Parts distribution is a multi-tier network that can place the original equipment manufacturer (OEM) at a distance from the customer. Most automotive OEMs maintain central parts distribution centers that supply a network of regional parts distribution centers (PDCs). These PDCs, in turn, support the dealer network.
For Tim Hess, who heads a PDC for Hyundai (www.hyundai.com), keeping over 600 dealers stocked with parts is complicated by the fact that Hyundai is now offering a 10-year warranty on its cars. There are two types of parts business, explains Hess, Hyundai’s manager of parts transportation. One is company-paid warranty repairs and the other is customer-paid repairs. Customer-paid repairs are work the vehicle owner has done beyond what the OEM pays for under the warranty. Extending its warranty to 10 years has actually helped Hyundai develop stronger customer loyalty that shows up in more customer-paid business.
“You start to see these positive effects at the three- to five-year timeframe,” Hess explains. Keeping dealers supplied with parts so they can meet customer expectations helps build that loyalty.
Hyundai is unusual among automotive manufacturers, in that all parts are handled through its dealer network. There are effectively no aftermarket parts available for its vehicles, in part because it has not been in the U.S. market for long. Other OEMs’ principal parts distribution is through dealers, but dealers and other repair shops also have access to competing aftermarket parts.
Speed in getting parts to a dealer is as important as the reliability of what the OEM tells them, says Bill Garrett, vice president of automotive business development for UPS Supply Chain Solutions (www.ups.com).
“Dealers won’t bring the car into the shop [to begin work] until they have all of the parts,” Garrett points out. Limited space for parts inventory coupled with an increasing number of models to support places a heavy burden for parts supply on the OEM’s distribution network.
Dealers are typically served by regional parts distribution centers, and a critical measure of success for these regional PDCs is “facing fill.” How many orders was the PDC able to fill for the dealers it serves directly? If the PDC doesn’t have a part, it is common practice to find that part at another PDC and have it moved to the PDC experiencing the stock out. These referral parts create a number of logistics problems.
Hyundai’s Hess says he had looked at various third-party logistics providers (3PLs) who said they could handle his parts distribution. One said it was handling $30 million in parts distribution for one of the Big Three U.S. automakers. On closer examination, Hess found the 3PL was moving parts between PDCs and wasn’t delivering a single part to dealers.
With a long history in the automotive industry, UPS’ Garrett notes that DaimlerChrysler (www.daimlerchrysler.com), for one, had good data on what was happening in its parts network. It knew its facing fill rate, its backorder rate, and it could see that 5% to 6% of its daily volume was referral parts.
Further complicating the problem of referral parts was the inability to consolidate shipments. A large dealer in Los Angeles might need 15 referral parts, Garrett suggests. Five of those parts may be coming from a PDC in Portland, another five from Denver and the last five from Dallas. But each part was handled as a separate shipment, so each PDC was tendering five shipments to the same destination, and the receiving dealer had to deal with 15 inbound shipments of referral parts in addition to its regular parts shipments.
Cost is always a major concern in parts distribution, Hyundai’s Hess observes. “Transportation expenses always go up at a faster pace than our ability to price parts,” he says. The focus is on freight expense as a percentage of the cost of sales, and Hess’ goal is to keep the cost in balance while providing better service to dealers.
Garrett says the solution for the DaimlerChrysler example was to establish a mechanism where the 15 referral parts the dealer needed would be consolidated and shipped from one national DC. This not only helped control costs, it improved the dealer’s visibility over the parts order because the dealer had only one shipment to track, not 15.
Isuzu (www.isuzu.com) didn’t have a broad network of DCs like U.S. domestic manufacturers, but it still found opportunities to consolidate.
Working with 3PL PROMAX Automotive (www.promaxauto.com), it consolidated four parts distribution centers into two. The larger DC (600,000 square feet) is in Cincinnati. A smaller DC (300,000 square feet) handling high-volume and fast-moving parts is located in Mira Loma, Calif. Isuzu went from operating its own network to outsourcing. PROMAX helped Isuzu liquidate its 1.7 million square feet of wide-aisle, low-bay warehouse space and developed a narrow-aisle, high-bay facility utilizing wire-guided handling systems.
PROMAX opened the Cincinnati facility in 2000 employing Isuzu’s information technology systems to avoid any service failures. It is currently preparing to install a warehouse management system (WMS) from Manhattan Associates Inc. (www.manh.com) that PROMAX is already operating at its own packaging facility. It will bring in radio frequency identification (RFID) systems, completing the upgrade from manual systems to a streamlined, high-tech network.
Not surprisingly, Hyundai also operates a small network of distribution centers, despite being only the fourth non-U.S. nameplate to achieve 400,000 units of annual sales. Hyundai operates three parts distribution centers in Aurora, Ill., Jamesburg, N.J., and Ontario, Calif. It has some space in an Atlanta DC operated on a 3PL-like basis by its sister company Kia (www.kia.com). A similar arrangement exists for Kia at Hyundai’s Aurora facility.
From this network, Hess serves 670 dealers and achieves a 96% facing fill rate. Industry average, according to Hess’ estimate, is in the mid to high 80% range.
Your cost of freight is really affected by your fill rate, Hess points out. So are your operating costs because with referral parts you have to duplicate the process two or three times before it’s complete. You also destroy your other PDC’s inventories because you bounce back and forth trying to bring the supply at each PDC back into balance.
To keep parts rolling for Isuzu, Rich Doran, vice president and chief development officer at PROMAX, uses a combination of modes. There is a lot of less-than-truckload (LTL), but his goal is to create full truckloads out of that. Still, LTL is a strategic part of the transportation spend for Isuzu. With only two distribution centers, the LTL moves are regional and inter-regional. The customer commitment to dealers is two-day delivery, so Doran has to reach as far as southern Florida and El Paso out of the main Cincinnati DC.
PROMAX started its two-point distribution system with a major 3PL, Doran recalls. But the company didn’t perform to the standards. PROMAX brought in FedEx Freight (www.fedex.com), and now the network operates at a 99.67% on-time rate.
The regional and inter-regional LTL is picked up at the DC and, if the data have not already been fed to FedEx Freight via electronic data interchange (EDI), the driver records the shipment information on a wireless device. The regional hub is ready to sort the individual parts shipments by the time the pick-up and delivery driver arrives.
For parcel shipments, FedEx’s Express operation has a mini-hub on site at the PROMAX Cincinnati DC. With Express personnel on site, shipments are pre-sorted and entered into the information systems that feed FedEx. Individual parcels are consolidated into air containers and trucked to the FedEx Express facility in Indianapolis or flown directly out of Cincinnati.
Hyundai’s Hess also uses multiple modes and carriers. Within California and to Las Vegas and Phoenix, he co-mingles shipments with other automotive OEMs for dedicated runs on a small truckload company whose sole business is doing parts deliveries for these five automotive companies. Conventional consolidation would be priced on a volume basis, with charges for multiple stops, Hess explains. This dedicated, co-mingled operation is priced on a per-shipment delivered cost. “You simply agree to a minimum number of stops per night,” he says.
For dealers along what Hess calls main corridors, he arranges dedicated deliveries — many unattended. Pitt Ohio (www.pittohio.com) was a pioneer in providing unattended LTL deliveries, says Hess. He worked with Pitt Ohio when he was in Jamesburg, N.J., noting the carrier said that where the practice worked for shipper and consignee, overnight, unattended deliveries would also enhance the carrier’s ability to clear a lot of freight before business hours. Pitt Ohio has expanded its unattended delivery service, and so has Hyundai.
“Security isn’t the concern you might think,” says Hess. Most Hyundai dealers now participating in unattended delivery have security people on duty at night. In virtually every case, parts are either delivered to an area in the dealership that is fenced off from the rest of the facility or to storage containers outside.
Dallas is a microcosm of Hyundai’s distribution methods. “We should really have a PDC in Dallas,” says Hess, “but we don’t.” Hyundai ships LTL to Dallas from Ontario, Calif., every day and has dedicated trucks running two days a week.
“We bring parts in for direct delivery off the truck to seven or eight locations, then the truck goes to the LTL carrier’s terminal in Dallas to do an intrastate pool distribution,” Hess says. That’s a hybrid of the approach which uses the multi-stop, unattended deliveries in a large percentage of Hyundai’s parts deliveries. But for about 20%-30% of the dealers system-wide who are outside the dedicated delivery corridors (50%-60% in Texas), Hyundai must rely on LTL.
Parts returns seem to be the least sophisticated segment of automotive parts distribution. In most cases, dealers are responsible for returns of unused or obsolete parts. There is typically less logistics or transportation expertise at the dealer level. So, the job for auto manufacturers won’t be done when they conquer the problem of cost effective, timely parts deliveries to dealers — there will be at least one more challenge for them to tackle. LT
Coping with parts distribution
Automotive OEMs employ a wide range of strategies to keep their dealers stocked with parts, including the following:
- Control “referral parts” by centralizing fulfillment and avoid moving parts between distribution centers.
- Consolidate less-than-truckload shipments into truckloads wherever possible.
- Use dedicated, multi-stop truckload for direct dealer deliveries.
- Co-mingle freight with other automotive manufacturers’ parts distribution.
- Use overnight, unattended deliveries to dealers.
- Reduce the number of parts distribution centers.
- When outsourcing distribution center operations, retain existing information technology systems — at least initially — to avoid service failures.
- Consolidate pre-sorted parcel and air shipments to obtain later cut off times and deliver directly to airport or hub.
- Deliver intrastate shipments to a regional LTL hub as one stop on dedicated multi-stop truckload shipments.