Executive Briefings

Volkswagen of America Concentrates on Process

Rolls out new, dealer-friendly distribution system An interview with Gregory M. Smith, executive director of process and logistics

Volkswagen of America Inc.

Gregory M. Smith
Executive Director of Process and Logistics

Gregory M. Smith is executive director of process and logistics at Volkswagen of America Inc. in Auburn Hills, Mich. He has worked in the automotive industry for more than 20 years, the last 17 of those with Volkswagen. During that time, he has held a wide variety of positions with the German-based automaker, including field sales, marketing, parts and service, and now logistics. "About the only thing I haven't done is finance," he says.
Volkswagen of America is the U.S. sales arm of Volkswagen AG, one of Europe's largest automakers. The company sells Volakswagen and Audi cars through about 600 Volkswagen dealerships and 260 Audi dealerships in the U.S.


Q. How did the Sept. 11 terrorist attacks impact Volkswagen of America?

A. We experienced some initial disruptions in two different areas. We get about 70 percent of our Volkswagen product from our plant in Mexico and as a result of the heightened border security we did experience some delays in transit time with our products coming from Mexico into the United States. That seems to have normalized now. (Ed. note: the interview was held in early October). The other area where we experienced some disruption was in the supply of special parts through expediting services such as UPS and FedEx. This represents parts that we bring in for cars that have transit damage or other kinds of repair work that needs to be done at our entry ports and we did experience some delays in that. But, again, that seems to have normalized.

As far as contingency plans go, we have normal contingencies that we put in place when there is a supply-chain disruption as a result of a strike or a carrier problem or a natural disaster, but we haven't done anything outside of our normal contingency plans because of Sept. 11. We don't anticipate any lasting effects.

Q. You import all the vehicles you sell in the U.S., is that right?

A. Yes. On the Volkswagen side we build the new Beetle, Jetta and Cabrio in Mexico. That is roughly 70 percent of our sales volume. Also on the Volkswagen side, the other big car for us is Passat, and we get the Passat from two plants in Germany. We get our Eurovan from Germany as well, and our Jetta wagon. Then, in addition, we source the Golf and GTI from a plant in Brazil. On the Audi side, our two primary plants are in southern Germany, but the Audi GT also is sourced out of Hungary.

Q. How do you manage the transportation issues associated with sourcing from so many parts of the world?

A. We deal with five ports of entry in the U.S., spread around the country. We use Boston; Wilmington, Del.; Brunswick, Ga.; Houston; and San Diego, though on the West Coast we are in the process of relocating from San Diego to Port Hueneme, north of Los Angeles. In Canada, we have one port of entry for vessels, on the East Coast in Halifax. The rest of the Canadian product goes directly by rail from Mexico.

We have in our supply chain what we call a vehicle preparation center at our ports and at the railheads in Canada because our quality group wants to have a final vehicle preparation inspection process before the cars go to our dealers. So we do ship all of our cars in the U.S. through those five ports, even if they are coming by rail. So the vehicle movements from Europe and from Brazil come by vessel into a port of entry and then from there they go either by rail or truck or by some combination to the dealers. In the case of the Mexican product, that moves mostly by rail, although we do some vessel shipping to the East Coast. Product goes to the port of entry and from there moves again by rail or by truck, just depending on the location.

For ocean transport, we make arrangements through Volkswagen Transport, a group within Volkswagen that is located in Germany. They do the actual purchasing. We do the planning and they do the final negotiation on contracts with ocean carriers.

For rail and trucking, we don't have a blanket carrier. We try to have a long-term relationship with our rail and trucking partners, but we do expect them to meet all of our quality and EDI standards and to be competitive in price. Over the last year we went through a rationalization process on each of our truck and rail routes, which all leave from a port location. In some cases we had four or five trucking companies we were dealing with and what we tried to do was get down to maybe two trucking companies per route. Audi uses enclosed trucks and Volkswagen uses primarily open carriers, so that is why we would sometimes have two carriers, depending on their availability of equipment. We went through a bidding process, but the bidding was not looking just at cost, although, of course, cost is important. It was also looking at the quality of the service the carriers provide, the level of driver education, the monitoring, and EDI availability. With some of our products we are using soft tie-downs now, so our trucking partners need to have that kind of equipment. So we went through this process and looked at all that and narrowed it down and we have completed some contracts, but the carriers vary from location to location.

Q. When B2B marketplaces were proliferating, Volkswagen opted not to join Covisint but to start its own marketplace, in partnership with i2 Technologies and Ariba. How is that going?

A. The B2B marketplace that Volkswagen group announced really involved the manufacturing organization and its suppliers. Volkswagen America, as an importer, doesn't have production located in the U.S. and Canada, so that marketplace does not directly affect us.

However, we are looking for a long-term supply-chain system solution on our end and the one we are leaning toward is SAP Automotive. This is still in the early stages, but the step we are in now is to do a blueprint with them that compares our distribution, transportation and planning activities against what the SAP Automotive solution offers. I think a lot of manufacturers are leaning toward some of these software packaged solutions for a platform, as opposed to trying to do their own. If you want to link all the way through the supply chain it really helps if you are on some kind of standard platform. We are looking pretty intensively at that here, and at the SAP solution.

We also are rolling out a new distribution system, which is pretty much a homegrown solution that we developed with Volkswagen Group's information technology organization. We have rolled it out for Audi and are in the process of rolling it out for Volkswagen.

Q. How is it working?

A. Really well. The dealers are very happy with it. It is all web-based, point-and-click, very easy to operate, and the dealers are seeing some of the things they had asked for during the field meetings that we had when we were developing requirements for the system. We sent a task force into the field and then we had a pilot group work with us for quite a while to actually use it and give it a shakedown cruise. One of the things the system contains, for example, is a tracking system where a dealer can get an estimated time of arrival and track either a car or groups of cars all the way from the time he places an order through production and shipping.

Another thing that I think is a little bit unique is that when a dealer has a customer order for a car that is not in stock, he can go onto our system and interface with the actual production and scheduling system at the plant and get instantaneous confirmation of when a car with that configuration can be built. Assuming that the customer says, 'yes, I want that car,' the dealer can hit the enter key and it will immediately be scheduled into the factory production system.

So there is a lot of benefit to the dealers. The system also helps them manage their inventory better and gives them new reports that they haven't had before that show them, for example, their turn rates on cars and what their pipeline looks like. It's all stuff that really enhances their business and that they are very pleased to have.

Q. The automotive industry in general seems to be focusing on shrinking order-delivery times and working toward the goal of a five-day car. Is this a priority at Volkswagen?

A. It is absolutely a priority for us and something we are doing a lot of work on. For us, a five-day car is not in the cards because of the fact that we don't produce here in the United States. We just can't get away from geography and we are always going to have to build in shipping time, but we are actively working with our plants to reduce the order-to- delivery cycle. There are really two main ways people buy cars today in the U.S. and Canada. Either they go into a dealer and try to buy a car out of dealer inventory, or in some cases they will do a custom order where they have a particular car they want and the dealer will place an order into production. What we are working to do now is to get our order-to-delivery time for dealer stock cars down to somewhere between 60 to 70 days, which is about a 30 percent reduction from where we are today. For pre-sold cars, we want to get down to the 45- to 60-day range, depending on where the plant is located. Brazil has a pretty long lead-time because of transportation. We are working on this really actively.

Dealers are required to stock 60 days' worth of inventory at the dealership and that is something we don't see changing, just because that number seems to be one that meets customer needs and provides reasonable inventory selection. But we need to re-supply the dealers and we want to do that quicker so we can get closer to meeting their market needs and react to changes. And for sold orders, we want to get there quickly. One of the things that is going to help us is the new distribution system and the ability of the dealer to schedule sold orders. That will cut down on the time.

Q. You have an interesting title, "director of process and logistics." Tell us about the process part.

A. Yes, it is an interesting title and one that was created when I came into this position. We have discovered through experience that the processes we use are one of the most important things for us to focus on. Systems are important, IT support is important, but it is really people and process that make the big difference. So we spent a lot of time when I came in here trying to map our processes, trying to really get everyone on the same page, including all the people that interface with us - the sales group, our dealers, our field organizations - and to have them understand everybody's role in the processes. This has done a couple of things for us. One, it has given us a good vision of where we want to go. We have our internal processes fairly well defined now, so we have a kind of road map. And secondly, when we start to look at IT solutions like SAP it is much easier to move forward because we know what we want to do. It becomes a matter of being able to hold them up against our processes and see how well they align. So I guess that is why "process" was added to my title, to make sure I didn't forget what's at the heart of everything we do.

Q. Process certainly is a big part of collaboration. What type of collaborative programs do you have with your partners?

A. We do a ton of collaboration with our suppliers. I guess it just depends on which stage of the supply chain you want to look at. With our assembly plants, particularly with Mexico, which provides a high part of our volume, we have intense collaboration. Also we work with the ports to help move our vehicles through. We have process-mapped each of our port operations in partnership with the ports, so it was a joint process map that they own as much as we do. And with our transportation suppliers we have done the same kind of thing. One of the things you want to have in a partnership is to always be looking for ways to optimize operations and mapping the supply chain in collaboration with suppliers makes a big difference.

Q. What is on your wish list term of IT support?

A. Our wish list for the next stage, and this is why we are talking to someone like SAP, is a common platform. We have become a lot more integrated and collaborative throughout the supply chain, but we still have different systems for forecasting and ordering, for example. We have a different system for our dealers. So what we would like to do is come up with one common platform that unites all of the supply chain through dealers, the field and our organization, and the way we communicate to the plants.

Q. What are some of the key "learnings" you have gathered in your career?

A. One of the things I have learned is that the goals that you have in the supply-chain area are always very easy to articulate. You want to get it there faster and cheaper, the right product to the right place, but the systems and processes needed to get to those very simple goals are quite complex. There is a lot of complexity to accomplishing that.

Volkswagen of America Inc.

Gregory M. Smith
Executive Director of Process and Logistics

Gregory M. Smith is executive director of process and logistics at Volkswagen of America Inc. in Auburn Hills, Mich. He has worked in the automotive industry for more than 20 years, the last 17 of those with Volkswagen. During that time, he has held a wide variety of positions with the German-based automaker, including field sales, marketing, parts and service, and now logistics. "About the only thing I haven't done is finance," he says.
Volkswagen of America is the U.S. sales arm of Volkswagen AG, one of Europe's largest automakers. The company sells Volakswagen and Audi cars through about 600 Volkswagen dealerships and 260 Audi dealerships in the U.S.


Q. How did the Sept. 11 terrorist attacks impact Volkswagen of America?

A. We experienced some initial disruptions in two different areas. We get about 70 percent of our Volkswagen product from our plant in Mexico and as a result of the heightened border security we did experience some delays in transit time with our products coming from Mexico into the United States. That seems to have normalized now. (Ed. note: the interview was held in early October). The other area where we experienced some disruption was in the supply of special parts through expediting services such as UPS and FedEx. This represents parts that we bring in for cars that have transit damage or other kinds of repair work that needs to be done at our entry ports and we did experience some delays in that. But, again, that seems to have normalized.

As far as contingency plans go, we have normal contingencies that we put in place when there is a supply-chain disruption as a result of a strike or a carrier problem or a natural disaster, but we haven't done anything outside of our normal contingency plans because of Sept. 11. We don't anticipate any lasting effects.

Q. You import all the vehicles you sell in the U.S., is that right?

A. Yes. On the Volkswagen side we build the new Beetle, Jetta and Cabrio in Mexico. That is roughly 70 percent of our sales volume. Also on the Volkswagen side, the other big car for us is Passat, and we get the Passat from two plants in Germany. We get our Eurovan from Germany as well, and our Jetta wagon. Then, in addition, we source the Golf and GTI from a plant in Brazil. On the Audi side, our two primary plants are in southern Germany, but the Audi GT also is sourced out of Hungary.

Q. How do you manage the transportation issues associated with sourcing from so many parts of the world?

A. We deal with five ports of entry in the U.S., spread around the country. We use Boston; Wilmington, Del.; Brunswick, Ga.; Houston; and San Diego, though on the West Coast we are in the process of relocating from San Diego to Port Hueneme, north of Los Angeles. In Canada, we have one port of entry for vessels, on the East Coast in Halifax. The rest of the Canadian product goes directly by rail from Mexico.

We have in our supply chain what we call a vehicle preparation center at our ports and at the railheads in Canada because our quality group wants to have a final vehicle preparation inspection process before the cars go to our dealers. So we do ship all of our cars in the U.S. through those five ports, even if they are coming by rail. So the vehicle movements from Europe and from Brazil come by vessel into a port of entry and then from there they go either by rail or truck or by some combination to the dealers. In the case of the Mexican product, that moves mostly by rail, although we do some vessel shipping to the East Coast. Product goes to the port of entry and from there moves again by rail or by truck, just depending on the location.

For ocean transport, we make arrangements through Volkswagen Transport, a group within Volkswagen that is located in Germany. They do the actual purchasing. We do the planning and they do the final negotiation on contracts with ocean carriers.

For rail and trucking, we don't have a blanket carrier. We try to have a long-term relationship with our rail and trucking partners, but we do expect them to meet all of our quality and EDI standards and to be competitive in price. Over the last year we went through a rationalization process on each of our truck and rail routes, which all leave from a port location. In some cases we had four or five trucking companies we were dealing with and what we tried to do was get down to maybe two trucking companies per route. Audi uses enclosed trucks and Volkswagen uses primarily open carriers, so that is why we would sometimes have two carriers, depending on their availability of equipment. We went through a bidding process, but the bidding was not looking just at cost, although, of course, cost is important. It was also looking at the quality of the service the carriers provide, the level of driver education, the monitoring, and EDI availability. With some of our products we are using soft tie-downs now, so our trucking partners need to have that kind of equipment. So we went through this process and looked at all that and narrowed it down and we have completed some contracts, but the carriers vary from location to location.

Q. When B2B marketplaces were proliferating, Volkswagen opted not to join Covisint but to start its own marketplace, in partnership with i2 Technologies and Ariba. How is that going?

A. The B2B marketplace that Volkswagen group announced really involved the manufacturing organization and its suppliers. Volkswagen America, as an importer, doesn't have production located in the U.S. and Canada, so that marketplace does not directly affect us.

However, we are looking for a long-term supply-chain system solution on our end and the one we are leaning toward is SAP Automotive. This is still in the early stages, but the step we are in now is to do a blueprint with them that compares our distribution, transportation and planning activities against what the SAP Automotive solution offers. I think a lot of manufacturers are leaning toward some of these software packaged solutions for a platform, as opposed to trying to do their own. If you want to link all the way through the supply chain it really helps if you are on some kind of standard platform. We are looking pretty intensively at that here, and at the SAP solution.

We also are rolling out a new distribution system, which is pretty much a homegrown solution that we developed with Volkswagen Group's information technology organization. We have rolled it out for Audi and are in the process of rolling it out for Volkswagen.

Q. How is it working?

A. Really well. The dealers are very happy with it. It is all web-based, point-and-click, very easy to operate, and the dealers are seeing some of the things they had asked for during the field meetings that we had when we were developing requirements for the system. We sent a task force into the field and then we had a pilot group work with us for quite a while to actually use it and give it a shakedown cruise. One of the things the system contains, for example, is a tracking system where a dealer can get an estimated time of arrival and track either a car or groups of cars all the way from the time he places an order through production and shipping.

Another thing that I think is a little bit unique is that when a dealer has a customer order for a car that is not in stock, he can go onto our system and interface with the actual production and scheduling system at the plant and get instantaneous confirmation of when a car with that configuration can be built. Assuming that the customer says, 'yes, I want that car,' the dealer can hit the enter key and it will immediately be scheduled into the factory production system.

So there is a lot of benefit to the dealers. The system also helps them manage their inventory better and gives them new reports that they haven't had before that show them, for example, their turn rates on cars and what their pipeline looks like. It's all stuff that really enhances their business and that they are very pleased to have.

Q. The automotive industry in general seems to be focusing on shrinking order-delivery times and working toward the goal of a five-day car. Is this a priority at Volkswagen?

A. It is absolutely a priority for us and something we are doing a lot of work on. For us, a five-day car is not in the cards because of the fact that we don't produce here in the United States. We just can't get away from geography and we are always going to have to build in shipping time, but we are actively working with our plants to reduce the order-to- delivery cycle. There are really two main ways people buy cars today in the U.S. and Canada. Either they go into a dealer and try to buy a car out of dealer inventory, or in some cases they will do a custom order where they have a particular car they want and the dealer will place an order into production. What we are working to do now is to get our order-to-delivery time for dealer stock cars down to somewhere between 60 to 70 days, which is about a 30 percent reduction from where we are today. For pre-sold cars, we want to get down to the 45- to 60-day range, depending on where the plant is located. Brazil has a pretty long lead-time because of transportation. We are working on this really actively.

Dealers are required to stock 60 days' worth of inventory at the dealership and that is something we don't see changing, just because that number seems to be one that meets customer needs and provides reasonable inventory selection. But we need to re-supply the dealers and we want to do that quicker so we can get closer to meeting their market needs and react to changes. And for sold orders, we want to get there quickly. One of the things that is going to help us is the new distribution system and the ability of the dealer to schedule sold orders. That will cut down on the time.

Q. You have an interesting title, "director of process and logistics." Tell us about the process part.

A. Yes, it is an interesting title and one that was created when I came into this position. We have discovered through experience that the processes we use are one of the most important things for us to focus on. Systems are important, IT support is important, but it is really people and process that make the big difference. So we spent a lot of time when I came in here trying to map our processes, trying to really get everyone on the same page, including all the people that interface with us - the sales group, our dealers, our field organizations - and to have them understand everybody's role in the processes. This has done a couple of things for us. One, it has given us a good vision of where we want to go. We have our internal processes fairly well defined now, so we have a kind of road map. And secondly, when we start to look at IT solutions like SAP it is much easier to move forward because we know what we want to do. It becomes a matter of being able to hold them up against our processes and see how well they align. So I guess that is why "process" was added to my title, to make sure I didn't forget what's at the heart of everything we do.

Q. Process certainly is a big part of collaboration. What type of collaborative programs do you have with your partners?

A. We do a ton of collaboration with our suppliers. I guess it just depends on which stage of the supply chain you want to look at. With our assembly plants, particularly with Mexico, which provides a high part of our volume, we have intense collaboration. Also we work with the ports to help move our vehicles through. We have process-mapped each of our port operations in partnership with the ports, so it was a joint process map that they own as much as we do. And with our transportation suppliers we have done the same kind of thing. One of the things you want to have in a partnership is to always be looking for ways to optimize operations and mapping the supply chain in collaboration with suppliers makes a big difference.

Q. What is on your wish list term of IT support?

A. Our wish list for the next stage, and this is why we are talking to someone like SAP, is a common platform. We have become a lot more integrated and collaborative throughout the supply chain, but we still have different systems for forecasting and ordering, for example. We have a different system for our dealers. So what we would like to do is come up with one common platform that unites all of the supply chain through dealers, the field and our organization, and the way we communicate to the plants.

Q. What are some of the key "learnings" you have gathered in your career?

A. One of the things I have learned is that the goals that you have in the supply-chain area are always very easy to articulate. You want to get it there faster and cheaper, the right product to the right place, but the systems and processes needed to get to those very simple goals are quite complex. There is a lot of complexity to accomplishing that.