"Relentless" and "brutal" are the two words most often used to describe competitive pressure in the automotive supply chain. Battered by global over-capacity, shorter model lifecycles and seemingly permanent rebates of up to $5,000 per car, automakers are passing the pain - with interest - on to their suppliers.
"When you talk about the automotive supply chain, you are talking about elephant and mouse relationships," says Ken Rice, manager of manufacturing engineering-commercial division at IMMI, a Westfield, Ind.-based provider of seat belt assemblies. "All the talk about partnerships is just baloney. What happens is the big guys, major OEMs, keep putting more and more requirements on the supplier that are non-negotiable. They simply say, 'This is the way it is going to be done as of this date, and next year we want another 5 percent price reduction.'"
If anything, the pressure is getting worse, particularly among U.S.- and EU-based manufacturers, agrees Greg Lehmkulh, director of automotive operations at Menlo Worldwide, a global logistics provider located in Redwood City, Calif. "They may speak about collaboration in the press, but what we see in real life is increased cost pressure on their suppliers and no softer edge to getting there. It is brutal right now and we don't see it getting any better."
The top ten Tier One suppliers, which are themselves multibillion-dollar global companies with complex assembly operations, are somewhat better positioned to weather this environment than their smaller Tier One and Tier Two brethren. But there is no question that every company in this sector is challenged to continuously reduce costs and add value without decimating razor-thin margins. The result: increased torque on an already squeezed supply chain.
The latest way that OEMs are raising the stakes is with "global pricing," which is code for pushing Tier One suppliers to source more product from low-cost countries, especially China. The tactic is working. In the 2004 Annual Supplier Survey from Ward's Automotive Reports, 41 percent of supplier respondents say their companies have moved U.S.-based manufacturing operations to a low-cost country over the past two years; 33 percent say they are considering such a move during the next 18 months.
Aside from its considerable economic implications, this trend has a significant impact on the supply chain. How do suppliers maintain just-in-time delivery when weeks are added to a delivery cycle that previously was measured in hours or days?
"Current automotive supply chains were built around just-in-time production and very short lead times," notes Mark BÃƒÂ¼nger, senior analyst at Forrester Research, Cambridge, Mass. "When these companies start sourcing from overseas, this dramatically increases the complexity." In addition to long distances and multiple modes, there also are more opportunities for things to go awry - like the West Coast dock strike of a couple of years ago. "When that strike occurred, there was a factory in Freemont, Calif., that had three days' worth of inventory on hand," he says. "When that was gone they had to start flying in steel and very heavy components to keep the factory going." This company eventually found another way, he says, "but those kinds of tie-ups become a lot more common when companies source a significant amount from China, for example. It is just more of a crap shoot as to when the goods will arrive."
In many cases this challenge is being handed off to third-party logistics companies. 3PLs, long a staple in managing OEM logistics, increasingly are also the solution of choice for suppliers.
"These companies recognize that the extended supply chain is very complex to manage, especially when the point of origin is 6,000 miles and 15 time zones away," says Mike Pilver, vice president of global automotive sales at APL Logistics, Oakland, Calif. "They are looking for providers who have an established ground presence wherever they locate and who can help them pull together and coordinate the movement of parts."
As an example, APL cites a customer, a Tier One supplier, that is moving parts from China, India and Europe to its sub-assembly plants in the U.S. APLL has visibility to the purchase order from the Tier One customer to its Tier Two suppliers. "We monitor and track the actual parts, by number and quantity, that are supposed to be released from the Tier Two suppliers," says Pilver. These materials are consolidated in the three regions and moved via ocean and/or airfreight to the U.S. APLL shepherds the materials through customs and on to a Materials Support Center, from where the parts are sequenced into the Tier One's assembly plant. "The visibility piece of this is especially critical" as supply chains lengthen, he says.
Greg Slawson, manager of automotive solutions at G-Log, Shelton, Conn., agrees. He says several G-Log automotive customers are using its GC3 suite to track as many as 19 different supply-chain milestones: when the shipment is picked up at the supplier, when it arrives at the consolidation center, when it sails, when it arrives at port, when it is deconsolidated, when it clears customs, and so on. "If something doesn't happen or happens late, we proactively send an alert to the manufacturer, so they can re-plan or minimize the impact in other ways." Tracking at this level also enables reports on how each supplier is performing and on where bottlenecks recur, he says. "Those types of analysis were just not possible before."
More Than Transportation
Many automotive companies, particularly the medium- and small-sized Tier Ones, "are not able to staff up fast enough or acquire the expertise to support the pace of globalization that the OEMs are requiring," says Lehmkuhl. As a result, 3PLs like Menlo are seeing "increased outsourcing of myriad supply-chain functions." One of these is supply-chain engineering studies. "We have more companies asking us to evaluate sourcing in China - to tell them what the supply chain will look like, what it will cost and how that compares to sourcing in Eastern Europe or Mexico, for example," he says.
Menlo's sister company, Vector SCM - a Detroit-based joint venture between Menlo and General Motors created to manage GM's supply chain - recently introduced a new tool for that purpose: Vector Supply Chain Design (VSCD). "This tool really takes us beyond logistics and into total cost management," says Mani Manivannan, director of engineering at Vector. Current logistics network design tools solve for things like the best mode, the best service provider, the optimal frequency and the best flow, he explains. "But they don't answer the question of whether you should be supplying from this location or a different location. They don't question whether you should have five suppliers or two suppliers and where those suppliers should be."
VSCD is designed to look at the total cost of different options, including piece price, transportation costs and inventory carrying costs. Container costs are included as well "because in automotive all these materials travel in returnable containers and you have to take the empties back to the supplier. So there is an impact on the number of containers you have to have in your network and the investment cost of that." Customs and duty charges also are considered when the options include offshore sourcing, as they increasingly do, he says. "All these things are needed to make a decision as to whether your supply chain is operating optimally."
Using the tool at GM, he says, "we have made tremendous improvements as well as tremendous cost reductions on a total cost basis by analyzing and comparing several potential sources of materials. If you only have one supplier in China and one in Michigan, then maybe you can do this on a brown paper bag, but if you are looking at 10 different countries and are trying to figure out which is better, you need a tool," he says. "And if you are doing 200 to 300 of these every month, you really need a software and engineering environment to help the purchasing and supply-chain groups make the right decision."
Such a high number of calculations is not unusual. "We just had our mid-year review with one of our OEM customers and at the six-month point, we had processed more than 4,000 changes," says Ed Cumbo, senior vice president-automotive at Penske Logistics, Reading, Pa. "These involved sourcing changes or suppliers shifting production to another factory or something similar," he says, "and every one required a cost analysis."
Gary Allen, automotive supply-chain leader at Cap Gemini Consulting, underscores the importance of total-cost-of-ownership (TCO) analysis and the inability of most automotive companies to "properly calculate and compare TCO based on different sourcing options." Additional tools and capabilities in this area definitely are needed, he says.
In addition to offshore sourcing, globalization involves having suppliers support local production, as OEMs attempt to capture market share in emerging markets. "The real pressure is to get these Tier Ones, which are in many cases operating on a shoestring, to invest in markets like China at a pace with the OEMs to support their manufacturing there," says Hank Rossi, a consulting partner at Accenture, New York. "There is pretty severe pressure for them to start up operations or form alliances and joint ventures in very short order, or risk losing the OEM business."
As they expand, OEMs also want the same logistics service they are accustomed to in the U.S. and Europe.
"There really are not a lot of logistics companies that do business in Asia that have a global presence and global capabilities equal to what they have in mature markets," says David Vieira, senior vice president-automotive sector at Exel, a global logistics and solutions provider based in the U.K. Acquiring that capability was the driving force behind DaimlerChrysler's recent decision to name Exel its international lead logistics provider, he says.
As DaimlerChrysler expands in Asia and Europe, it will deal with lower volume and far fewer suppliers than in the U.S., Vieira says. "But it is no less important to their production control process to have those suppliers ship to a schedule." It is Exel's job to make sure, from DaimlerChrysler's perspective, that the logistics operation looks and feels exactly as it would in Michigan, he says. "We train the suppliers on how to read the releases, we work with the suppliers day in and day out to make sure they comply with DaimlerChrysler's requirements and we book their transportation." Through integration with DaimlerChrysler's in-house STARS system, Exel also controls the international flow of materials and information to assembly plants.
Tightly managing inbound material to automotive assembly plants is one of the key functions of lead logistics providers. Perhaps the biggest supply-chain innovation of the past decade in this area is the supplier park. Usually associated with new assembly plants, these parks are located very near the plant and inhabited by a variety of suppliers that feed parts to the line as needed and on very short notice. Supplier park operations typically are managed by a logistics service provider.
Exel pioneered supplier parks eight years ago at the SEAT-Volkswagen factory in Martoreli, Spain. This facility is one of the highest production automotive plants in the world, turning out nearly 2,000 cars daily in seven different models. There are 35 suppliers in the park, all providing just-in-time and sequenced parts and sub-assemblies. Exel manages this entire process, which includes delivery of nearly 6,500 components every hour to the assembly line. From the time an order is received to actual assembly of a part within a car averages 105 minutes.
Orders are received as the car leaves the paint shop, as this is the very first moment that it is possible to change the car sequencing operation. Exel then sends a parts release to the suppliers for their components, arranges and executes various requirements, such as in-line sequencing, and manages the movement of components to the line. A second VW plant in Puebla, Mexico, also managed by Exel, has since adopted this same model.
The supplier park concept has a lot of value-add that is not seen in this brief description, Vieira says. "For instance, our systems provide a degree of protection against the manufacturer's system going down," he says. "If the plant production systems should go down, we would be able to maintain the build schedules by calling out the VIN numbers that are coming off the line and still broadcasting to the supplier all of their activity requirements." Vieira also notes that participating suppliers have a cost advantage because their inventory is consumed almost immediately, resulting in a faster cash cycle and lower carrying costs.
This advanced model is difficult to employ at older, brownfield assembly plants, but not impossible. Ford Motor Co. recently transformed a 155-acre site near its 79-year-old plant in South Chicago into a modern supplier park. With ample help from state and local governments, Ford was able to develop four multi-tenant buildings with 1.5 million square feet of manufacturing and office space, shared by 12 suppliers. Officially opened last month, the Chicago Manufacturing Campus is the industry's largest supplier park in size and scope in the U.S.
"When we talk about 'bull's-eye sourcing,' this is exactly what we mean," said Tony Brown, vice president, Ford global purchasing, at the park's opening.
Located one-half mile from the assembly plant, the suppliers provide 60 percent of the plant's inventory with just-in-time deliveries. This results in freight-related savings of $50 for each vehicle the plant builds, Ford reports.
"Our supplier campus is not a typical sequencing center in which suppliers receive large shipments and sequence parts for just-in-time delivery to the assembly line," Brown said. "Components are being manufactured here, and that gives us tremendous quality control."
The park also allows for easy cross-tier supplier relationships. For example, S-Y Systems ships main-body wire harnesses directly to the plant. At the same time, it delivers wire harnesses to Lear, Visteon and Brose for use in their components that go into the new models. These cross-tier relationships add value and create synergistic opportunities between suppliers, according to Ford. It also supports Ford's flexible manufacturing system, which enables the Chicago plant to product three distinct models on one vehicle platform and eight models on two platforms.
Flexibility is the Goal
Such flexibility for automotive manufacturers is key to winning in today's climate. "We see a lot of emphasis on this whole issue of increased flexibility," says Mike Morel, industry marketing director for manufacturing at ILOG, a developer of optimization software based in Mountain View, Calif. "That itself is nothing new, but what is new is the use of optimization tools to solve very sophisticated problems." Until fairly recently, the technology did not exist to solve these problems quickly and cost efficiently, he says. Over the past 10 years, however, hardware processing speeds have increased by a factor of 800 and software speeds have increased by that much or more. "Our software has increased in efficiency by a factor of 1000," says Morel. "So if you multiply those two together, you can solve problems about two million times faster than you could 10 years ago. That opens up capabilities to be able to model with a very high level of detail and to solve problems very quickly."
Automotive companies are using this optimization power to increase plant flexibility, he says. One example is a Nissan plant in Sunderland, England, which used ILOG Solver Optimization software to go from producing two models to three, without additional capital investments in the factory. "This doesn't seem like a lot, but when we did it three or four years ago, it was very much breaking-edge technology." Being able to make such changes gives OEMs and Tier One suppliers the flexibility to plan globally, Morel says. "The idea is to look at everywhere in the world you can produce a vehicle and figure out what makes the most sense," without being captive to existing configurations.
Exel also participated in this solution. Adding a third model meant that Nissan needed extra space in its plant to cope with the increased volume and complexity of three-car production. Exel refurbished a warehouse near the plant. Sea containers of packaged components from Nissan Japan are now received, unloaded and stored at this facility. In a typical week, the Exel team handles almost 80 containers, more than 3,000 different product lines and makes some 250 just-in-time deliveries.
In-line vehicle sequencing is another way that companies achieve flexibility. In this process, suppliers not only deliver parts to assembly lines just in time, but also in the proper build sequence. AMR Research, Boston, says that by 2010 more than 70 percent of vehicle content will be sequenced; that figure is at 40 percent today. "Those companies that cannot respond will be removed as preferred suppliers," warns an AMR report.
Penske's Cumbo explains that the management of in-line sequencing typically begins with broadcasts from the assembly plant listing which cars are soon to move onto the assembly line and what components/sub-assemblies are required and in what order. "What we have noticed is that the time requirements of the broadcasts keep getting shorter and shorter," he says. "We used to sometimes have four hours, but today it is mostly 90 minutes. That is how quickly they can now adapt the production line to change." To help it manage sequencing in its Materials Support Centers, Penske uses Real-Time Locator, an RFID-based product from WhereNet, Santa Clara, Calif. "RT Locator is a very good system for both locating the product in storage and also allowing us to sequence it properly," Cumbo says.
Sequencing is necessary, but not sufficient to meet the demands of OEMs, says Bill Sheeran, general manager-automotive logistics at TNT Logistics North America, Jacksonville, Fla. Sequencing should be just one of a variety of delivery options, he says. "We believe a differentiator for us is that we can, from the same facility and with the same work force, supply parts in bulk - a pallet of the same part coming every hour or so - or go all the way to the other extreme and provide one part by color and by type, in a row or in a kit," he says. Most importantly, he says, is that this is accomplished using one system. "Our system allows us to sequence part A, send over part B in bulk, and use a whole other methodology for delivery of part C. It is simply not efficient to have different systems and different processes to accomplish this. We use the same stream of information and the same processes to do it all with one system."
Inbound to Tier Ones
Tier One suppliers not only have to stay on top of their outbound supply-chain to OEMs, they also have an increasingly complex inbound supply chain. This is because they are doing more and more sub-assembly of products, an OEM-driven trend designed to push out labor and material costs. "When a supplier is suddenly assembling a complete instrument panel, as opposed to making one piece of it, they are dealing with a bill of materials that has exploded by an order of magnitude," says G-Log's Slawson. "The coordination required to bring in all these parts and have them arrive at the right time to produce a module in sequence for the assembly plant is very difficult work."
Consequently, more Tier Ones also are turning to 3PLs, which, in turn, have developed service offerings tailored to their specific needs. Ryder System, Miami, began working with Tier One suppliers five or six years ago and now has several of the 10 largest Tier Ones under contract, says Tom Jones, senior vice president in charge of Ryder's U.S. automotive business. The company's service offering in this sector has evolved from an asset-based solution focused on transportation management into the more comprehensive Logistics Management Suite (LMS), he says.
A foundation of LMS is a data management capability that Ryder uses to gather and catalog the logistics attributes of every part passing through its customers' supply chains. "One of the biggest problems in the automotive industry is having good information about the parts that are actually moving," says Jones. While this may seem fairly basic, he says, enterprise databases typically do not include information pertinent to a logistics modeling activity. "We want to know all the dimensions and ship weights, proper containers, origin and destination points, receiving hours at a particular location, shipping hours, contact information - things that are important from a logistics standpoint," he says. "We gather all that data and put it into a single database." While protecting the privacy of each company's data, Ryder is then able to look at all this information as a network. "Because of the way we have structured our technology in LMS, we can look for synergies and model solutions across multiple customers," he says. "This is a significant advance.
"A lot of people have talked about doing this, but the systematic processes have not existed in the past to do this on a large scale," he says. "In fact, we had to go out and develop the technology ourselves because it didn't exist in the market. Now, we have the ability to manage a single database with 500,000 part numbers and to find synergies among our multiple customers."
Once a plan is created and communicated, it has to be executed on a daily basis. Here too, Ryder has developed an innovation solution - one that has a patent pending. Ryder Logistics Release is a material release that includes instructions for the logistics provider. It is designed to facilitate the release and delivery of materials from Tier Two to Tier One suppliers. "The relationship between Tier One and Tier Two suppliers is very primitive in comparison to the OEM/Tier One relationship," says Jones. "A lot of material ordering is still done by purchase order over fax and phone. There is very little EDI connectivity." The logistics release is a web-based system that takes the demand signal from the manufacturer, puts it through an optimization process and transmits it out via the web to the suppliers, giving them instructions on what and how to ship, explains Jones. The plan includes parts and packing information, scheduled pickup time, mode, route, etc. This same information is issued simultaneously to the carrier, so it also knows exactly what is required.
Ryder's logistics release is an important development, says Allen of CapGemini. "Managing the materials release process and trying to stabilize activity so that when the release is sent, the supplier has the ability and flexibility to deliver, is a continuing challenge for suppliers." A decade ago, he says, there was one stable release. "If a manufacturer was making 100 cars of a certain model per day, the release was a known entity. Now, due to the ability to leverage multiple lines within an assembly plant and the pressure of shorter product development cycles, it is much more dynamic."
Closing the Gap
Improving communications between Tier One and Tier Two suppliers is a challenge being addressed on several fronts. Agilisys, a software company based in Atlanta, enables communication, collaboration and visibility for customers throughout the automotive supply chain with its SupplyWEB solution. "The connection between OEMs and First Tier suppliers is rock solid and has been for some time," says John Flavin, senior vice president-global development, at Agilisys. "But we find that only about 15 percent to 20 percent of Tier One suppliers are connected to their Tier Two supplier base. The way they communicate is by phone or fax or mail, which means they often don't get the right information at the right time, or if it is the right information, it's late and already has changed." If they are connected, he says, not only can the Tier One supplier pass OEM requirements on effectively, but the Tier Two supplier can respond as to when and how it will ship the order. "So now the Tier One supplier can see what is coming, so if the OEM makes a schedule change, it knows whether it can accommodate that or if it will have to expedite components. We are letting the demand flow from the first tier to the second tier and then we are allowing the replenishment to happen from the second tier back to the first tier." Because SupplyWEB handles the transactions, he adds, it can report on how many orders were filled, at what rates, at what cost and in what amount of time. "That's all integrated into the solution so it is easy to see how the suppliers are doing," he says.
PeopleSoft, an ERP provider based in Pleasanton, Calif., also is addressing this issue. "It doesn't do any good to be able to get parts from a Tier One to an OEM in an hour if takes forever to get the data down to the Tier Two," says Richard Scott, global automotive director at PeopleSoft. "That is the area where the most work is required."
PeopleSoft thinks a portal solution is the "logical way to go," he says. "It needs to be two-way communications where the Tier Two supplier can respond back." That is the idea behind PeopleSoft's Supplier Self Service solution. "This is a portal tool that gives users the ability to push schedules or kanban signals or whatever out to the supplier and it allows the supplier to respond back if, for example, there is a problem meeting the requirement. This makes is much more of a collaborative partnership," Scott says. The next step PeopleSoft is working on is to add workflow processes to the solution. "Instead of just pushing out information, we want to be able to highlight any changes the supplier needs to look at," he says. "This will allow our customer to be proactive in terms of making their suppliers aware of potential problems early on."
Absolute Imperative No. 2
In addition to continual cost cutting, the other absolute imperative among automotive suppliers is to never, ever cause an assembly line to go down. One estimate puts the cost of such an occurrence at $40,000 a minute.
That means there are times when expedited movement of parts is a necessity. National Logistics Management is a Detroit-based 3PL formed specifically to handle such situations. "We basically handle everything that doesn't go according to plan for our major customers, which include Ford, GM, DaimlerChrysler and Visteon, among others," says Scott Taylor, CEO of the company. "Whether it is a quality issue, a weather issue or a capacity issue, they call us and we make it happen." These calls come in about 1,500 times a day, he says. "We have an extensive carrier base that we work with - more than 400 providers," Taylor says. "We communicate via the internet mostly, but we also have interactive voice response technology. Our priority is to get the information out as quickly as we can to as many people as we can so we can get a response back."
Taylor acknowledges that automotive companies would rather not have to call on his services, but he also knows that the push toward lean manufacturing and inventory reduction makes the availability of a reliable, expedited service even more critical. "These supply chains, "just don't have extra time," he says.
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