balance

Automotive supply chains require just the right mix of lean and agile in an increasingly complex and global arena
By Julia Kuzeljevich
CT&L NOVEMBER 2012

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utomotive is an industry vertical that is beginning to ramp up following a period of dampened demand and supply issues. Cost containment and lean distribution, the hallmarks of efficient automotive operations, continue to be the main focus of supply chain players operating in this arena. But as supply chains get more complex and lead times longer, that very efficiency depends on greater visibility and transparency. According to an Ernst and Young study on working capital in the automotive industry, worldwide, the automotive industry "is in a period of profound change." "Consolidation, competition, fast-evolving technologies, a shiff toward greater energy efficiency, the globalization of supply chains and the promise of emerging markets are just a few of the challenges facing industry participants," the study suggested. Auto sales are now resurging following a significant decline affer the 2008 recession. But in terms of auto parts exports, a recent Scotia Economics report suggests that Canada has now fallen out of the list of top 10 exporters in the sector. In a Global Auto Report published earlier this year by Scotiabank, senior economist Carlos Gomes noted the Canadian auto parts sector has been losing global market share, "with the industry still searching for a strategy geared to benefit from the rapid growth occurring outside of the mature auto markets of North America and Europe." Concerns about supply issues also remain on the forefront, such as those resulting from natural disasters. The March 2011 Japanese earthquake, tsunami and later incidents of flooding in Thailand were the most prominent recent examples, but disruptions in one form or another are a daily occurrence, said Bindiya Vakil, president and founder of Resilinc, a provider of multi-tier supply chain resiliency solutions. "What we're seeing is that there are continuotis events happening every day globally to cause companies to react because of a lack of information," she said. "In order to be able to deal with that kind of commotion, you need to have the capability to have visibility into every part of the system," said Dick Jennings, vice-president of automotive supply chain solutions for Ryder, recently named a GM Supplier of the Year for the seventh time. "You're going to see, on the part of the OEMs, more alternative solutions, more attention being paid to alternate sourcing of parts that come from far distances. There are a lot of challenges. Everyone does business a little bit differently. We just have to make sure we have solid partnerships and construct an agreement that is suitable to everyone in the process," he said. "I think that all of the OEMs and all of our service providers are going to be grappling with economic recovery. Most people are seeing healthy signs of recovery, and good consistent growth. Hopefully, we will see efforts to expand capacity after a period of consolidation and shrinkage. I think now everyone is trying to determine to what degree they will invest, and how to manage that," said Mike Steck, vice-president of supply chain management at

Nissan North America. On the manufacturing side, he noted, there have been more efforts in localization as opposed to offshoring, because of currency volatility. "The Yen exchange rate has been quite harmful to us over the past year or so," he said, noting that Nissan North America is now ramping up its plants closer to full capacity while avoiding investing in facilities. "There were some significant disruptions following the Japanese earthquake and Thailand flooding in 2011. This impacted some of our own facilities and our supply base had some challenges, which were all consistent with the other OEMs who share some of the same supply base. Eliminating ambiguity and getting good information right away in those situations is key prioritizing decision-making. For example, is there a part that may be shared across all our vehicle platforms? We had a good handle on which of our products were in tighter supply than others and this helped us to navigate earlier on," said Steck. "If you look at trends in automotive over the last several years, before, OEMs would buy components, now they buy complete subassemblies. The complexity, with electronics components, has increased compared to 15 years ago. Then you add the amount of complexity at the tier one level where a lot of the control of the design of the product has been passed on. Also with the use of subcontract manufacturing overseas, now you have a very stretched supply chain, but the culture, and the amount of information-sharing between the tiers, is stul where it was 15 years ago," said Vakil. This has led to the need for increased communication and collaboration as a risk mitigation strategy. "With suppliers, we probably want more specifics in terms of capacity, any volume changes we're anticipating, and we share these more frequently. We have thought about various contingency plans a little more frequently. Some of the risk mitigation strategies helped us. In a situation like a port strike, you have to ask if you're too dependent on one particular port; should you spread risk across various points of entry, or carrier? [i.e. parts provider or car hauler). If there were to be a financial crisis or strike, you are vulnerable to that. Do we have experience with alternate operators? Could we set up inland transport relatively quickly?" said Steck. "I think, in principle, we're not going to do something to stockpile. I think managing with lean principles is the right way to manage the business. The better you can engage with your sales organization and forecast ahead, with upward and downward scenarios, and building contingency plans around potential bottlenecks and how to get out of them, then at least you can do a little bit of the homework behind some of the potential investments and capacity issues," he said. Resilinc's Web-based cloud solution, focused on the auto industry vertical, "enables companies to be proactive and address single points of failure. Where are the critical exposures? Where are they most vulnerable? We collect information about their supply chain needs, what alternate sites are available to them. They can query the information, look at a map and see suppliers' ag-

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automotive logistics

gregated hot spots," Vakil said. "We help customers bund out the mapping, to show them what the supply chain actually is. We store and manage that for them and deliver it as a service. Then, once you have that, you can do some interesting things around events. We generate tracked global events, and notifications, and also the impact of the event. This oifers visibility so you can plan more proactively aroundrisks,"said Jon Bovit, chief marketing officer for Resilinc. Automotive manufacturers are attempting to get product to customers a lot more quickly, according to Jennings. There is more attention given to new launches earlier in the process than in the past. "It allows for communication to occur a lot more quickly than it had. There's also more investigation around what has to happen six months to 18 months out to have steady supply," he says, adding that 3PLs that are well integrated in the automotive industry employ lean strategies where the focus is on "rigorous execution." "It's amazing how buying patterns change very quickly depending on gas prices, and that involves dialling down production of certain vehicles. We've learned to employ lean techniques and literally produce a plan for every part that goes into an automobile, collect the data, purify it, and make sure that the packaging is correct. We put together a complicated and detailed transportation system managing the material from point of supply to point of use. It allows us to deal with all of the complexities within a supply line," said Jennings. Damage and quality control are other areas where there is now

a lot of emphasis when it comes to cost containment in automotive supply chains. "3PLs like us are responsible for building more economies of scale into the process, trying to bund more efficiency into shipping and packing, and providing more value added like pre-packing. Everyone is conscious of the cost of disposing of waste material. There is a trend - wherever you can - to reuse tote boxes, skids, etc.," said Steve Terry, site manager at BMW's Whitby, Ont. distribution centre, which has been handled by Schenker of Canada since 2006. There's also the issue of what is the better way to package a product so it's better protected, for example with windshields, and body packaging. Most of the manufacturers are going to as few vendors as possible for their packaging materials so they can develop protocols. There's more detail analysis of what types of damage are occurring, to rectify quality control with the vendors overseas. A new warehouse management system, consistent with the manufacturer's systems around the world, now offers more consistent flow and visibility. "While this trend is not new, more manufacturers are going this way. There's more top-down distribution as a result without waiting for orders," said Terry, who also noted that, in many cases, OEMs are moving to get more product closer to the retailers. "They are looking at getting smaller DCs in some of the different areas in Canada called 'DM DCs,' a smaller distribution centre for some of the places where there is no distribution centre like this," he said.

Will Michigan ballot amendment kill new Detroit-Windsor crossing?

he proposed New International Trade Crossing (NITC) connecting Windsor and Detroit is critical to automotive logistics. Yet, it could be in danger - again. The Nov. 6 US election ballot will ask Michigan residents to vote on an amendment that would prevent the state from spending any money or resources on "new international bridges or tunnels for motor vehicles" unless approved by the voters. The move comes after Michigan Governor Rick Snyder along with the Canadian government this summer saved years of plans for the new six-lane bridge with special lanes for preapproved freight and carriers from being laid waste by political wrangling and lobbyitig. They did so by signing an "interlocal agreement" that would allow the crossing to go ahead. Since the state had no authority to pay for the bridge, Canada agreed to finance Michigan's $550M portion of the project. Canada plans to make back its investment through tolls. Manuel Maroun, the owner of the four-lane, 83-year-old Ambassador Bridge, however, continues to doggedly fight any plans that would allow the construction of the new public bridge and cut into his toll revenues. He has spent millions on a campaign against the new bridge, proposing that he privately build a new bridge alongside his existing one instead. And he has now managed to force the question on to the state ballot. The measure was put on the ballot through the efforts of a group called The People Should Decide, which was created and funded by Maroun and his family. Eor his part, Gov. Snyder says it was within his constituCT&L NOVEMBER 2012

tional authority to sign the deal with Canada and that the new bridge will go ahead regardless of the election outcome since the agreement has already been signed. The complex automotive supply chains see some car components crossing the border up to seven times. Windsor's two largest employers are Chrysler and Eord. The latter estimates it has as many as 600 trucks a day crossing the border on the current bridge. It's estimated that 1.3 million trucks trips are made annually over the Ambassador Bridge and one study found that about one-third of our exports to the US are composed of goods previously imported from the US. The bridge is by far the busiest commercial crossing in North America and congestion when the economy was booming left both shippers and carriers complaining. So it's no surprise that the automotive industry is concerned about being so reliant on aging infrastructure in private hands and that the industry is solidly behind proposals for the new bridge. Constructing the new bridge, will not only better secure access for Canada to its primary market, but is also expected to create considerable growth for Michigan. The new bridge will create 6,800 permanent jobs and contribute $630M each year to Michigan's gross state product, according to a recent study by the Centre for Automotive Research. The state's three largest employers' organizations have also lined up in support of the project. It remains to be seen if this wave of support will be enough to get bridge construction started.
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"The pressure to have the supply ready and available faster continues to grow. We do several deliveries a day to major centres. The dealerships in the major centres are starting to have major problems with space. They are landlocked as properties around them get but up, so it's more of a trend to multiple daily deliveries and overnight deliveries, of stock as well as emergency product," he said. OEM service parts pricing is an area that often falls short on visibility and that can negatively impact revenue and gross profit. "We do a lot of metrics around getting competitive parts pricing. When we go in and analyze specifics, we see a lot of spreadsheets and prices that just don't make any sense," said Jon Utterback, vicepresident of service parts pricing for Servigistics, an SLM (Service Lifecycle Management] software company which provides postsales service automation solutions for 12 of the top 15 automotive original equipment manufacturers. "OEMs want to run and maintain inventories in a lean fashion and try to manage inventory stocking levels as closely as possible, and also to put pressure on service parts groups to manage visibility. There are companies out there today trying to manage millions of parts using some very basic cost-plus types of pricing. There are so many parts and challenges of what belongs where. It ends up being a default of what's our cost and let's put a margin on top ofthat, and that will be our pricing," he said. Servigistics offers a blended software solution allowing OEMs to manage price elasticity curves, and to offer competitive price research.

"We're able to take a list of parts from an OEM, understanding the form, fit and function of these parts, and to look at comparable and competitive prices in the marketplace. Based on this form-fitfunction, we go out and try to find aftermarket suppliers that wl fit the parts and gather those prices as well. By taking market averages, it gives the pricing analyst tremendous power in terms of determining and pricing adjustment strategy for the OEM," he said. While the Ernst and Young study suggests the automotive industry "is struggling to strike a better balance between operational efficiency with flexibility and responsiveness," Jennings said there's a growing interest in collaboration amongst automotive players. "We're calling it a strategic initiative. Intuitively, we believe there are opportunities for people to collaborate on transportation routes, to comingle and allow for different customers to share the same vehicle conveyance. Diesel prices are impacting this. What you want to do is attempt to move material without driving as many miles as you have in the past," he said. "The secret to this stuff is to be able to have the data aligned with the OEM and tier one and to execute at 100% proficiency. There has to be a great deal of faith placed in the supply line - that's the basic tenet, no matter what else is going on," he said. cm
Features editor Julia Kuzeljeinch has been writing about transportation issues for more than a decade. Her meticulously researched articles have garnered several transportation and Canadian Business Press uniting awards.

OD'DOMESnC

OD'EXPEDITED

HELPING THE WORLD KEEP PROMISES.

arks of Old Dominion Freight Line, Inc.

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