Caution, but logistics looks forward again
Logistics is healthier than the economy on which it depends, and has learned the lessons of the crisis well. It still faces economic, capacity and supply chain risks, but has renewed energy in tackling them
DETROIT, 29 SEPTEMBER 2011: In the face of a sluggish if not worsening economy, carmakers, tier suppliers and logistics service providers are not backing off from the recovery mode of the past two years. Though this week’s Automotive Logistics Global Conference did reveal that debt, the risk of a double dip recession and recent high fuel and commodity prices have brought a noticeable air of concern, this has its bright side.
Caution appears to have pushed the sector towards renewed interest in industry collaboration and efficiency. From redesigning inbound networks through new fuel-saving techniques, and from pooled IT to sharing backloads for vehicle distribution, there was evidence that the logistics sector has learned the lessons of the crisis well.
A record turnout for the 12th annual Global conference saw nearly 400 delegates gather to hear that forecasts for US vehicle sales this year and next have been downgraded. Back in May, IHS Automotive’s director of strategic review, Rebecca Lindland, had told the Finished Vehicle Logistics North America conference in California that light vehicle sales would reach 12.7m units in 2011, a number already reduced from 13.3m earlier in the year. At that time 2012 was expected to recover to around 14.7m. (read full report of that conference).
But this week, Lindland reduced her 2011 forecast to 12.5m light vehicles sales in US, and pulled more than 1m vehicles off her 2012 forecast, which is now just 13.5m units.
She blamed the well-known macroeconomic factors of a sluggish US economy and the Euro-zone crisis, but said that perhaps the gloomiest news for the US car industry continues to be the lack of job creation. She predicted that real job growth would not occur until 2014, which will hold back vehicle sales until then.
On the global front the picture also appears less than rosy. IHS has lowered its 2012 forecasts for European sales by about 0.8m units to 18.5m, and taken about 0.5m units off previous forecasts for Japan and South Korea. While Japan is seeing recovery now as carmakers come back to speed following the earthquake this past March, in the long term Lindland said the Japanese economy still lacked real momentum.
Even the fast-growing markets in Brazil, Russia, India and China are no longer the “free-for-all” that they’ve been for the automotive industry in the past few years, she said. IHS has knocked around 1.4m units off its predictions for the BRIC economies, with China scaled back the most.
Other risks to the sector, according to Lindland and other speakers, are the cost of both fuel and other commodities & raw materials, with IHS predictions that oil prices will remain at the $100 per barrel level.
Emphasising the impact of this on transport costs, Arild Iversen, president and CEO of Wallenius Wilhelmsen Logistics, noted that fuel costs were now three times the price of capital costs for shipping. The gap is likely to widen considerably when new restrictions on sulphur levels for fuel come into effect on the East and West coasts in 2012, followed by even stricter levels by 2015, he said.
Iversen told delegates that, for shipping, carmakers and customers still tend to focus more on capital and financing, and on the operational side of delivery time and speed. “But in the ‘fuel age’, we have to work together to identify ways to mitigate these costs, including smarter communications and adjusting our speeds,” he said.
The ‘fuel age’ impact, combined with the weak economy, is likely to hold back car sales over the medium-to-long term, according to IHS. Lindland predicted that US light vehicle sales would reach 15m units by 2013, 15.8m by 2014 and not get back to the levels of the pre-crisis decade until 2015, when sales are forecast at 16.4m. These too are some 0.7m units lower than prior forecasts, she added.
“The car parc in the US is now more than 10 years old on average and has never been so old,” said Lindland. And, amazingly, relative to the number of households, population growth and people of driving ages, sales are at 50-year lows.
But if the economy remains relatively sick, the automotive industry in North America is healthy. Carmakers and suppliers are carrying low levels of debt thanks to restructuring and bankruptcies, are making strong profits, are carrying low levels of inventory, and have average plant capacity utilisation at more than 80%.
The weakness of the dollar and a more competitive cost structure has attracted more transplants – the latest example being Volkswagen’s Chattanooga opening in May – and Lindland anticipates that yet more production will move into North America. The incremental growth anticipated in sales and production over the coming years may not be as high as previously hoped, but it is “sustainable and healthy,” she concluded.
Supply chains are a risky business
Supply chain risk and complexity were among the most discussed topics of the conference, not least because of recent extreme weather across North America, including Hurricane Irene in the Northeast, as well as the continued effects of the Japanese earthquake. Increased global sourcing, global-platform engineering and cross shipping appear only to be adding to the complexity that carmakers face in their daily supply chain.
While in recent years carmakers appear to have given more consideration to risk and logistics costs in their sourcing decisions, the conference offered no signs that global sourcing and material movement was reducing. Steve Harley, executive director for global MP&L and PS&L at Ford, said that there had been increased regional and local sourcing in some areas, but that his company continued to increase global parts imports and vehicle exports, particularly as it leveraged production across global platforms. The continuing trend towards more global sourcing was echoed by others, including Jeffrey Morrison, director of materials, logistics at containers for GM, and Mike Silvio, director of supply chain management at Cooper Standard.
Harley highlighted some examples of the constant disruptions Ford had encountered, including drug wars and flooding in Mexico, hurricanes in the US which put one supplier’s factory in Pennsylvania literally under water, an insect infestation in a pallet imported from China that drew the attention of border control, and a train buried under snow somewhere in the Midwest.
He spoke about the exceptional measures taken by Ford, tier suppliers and logistics providers to avoid disruption to the assembly line. The supplier in Pennsylvania, for example, which was a large carpet manufacturer, borrowed robots, shifted production to other factories and dried out tooling to resume output quickly. GM’s Christine Krathwohl, who took over the top job at GM this past summer as executive director of global logistics and containers, reported that GM had sent some 150 of its own staff to that factory to help the supplier recover.
“I think that crisis management and overcoming supply chain risks is something that the automotive industry actually does better than almost any other industry,” she told delegates.
Patrick Bauer, Visteon’s global director of MP&L, outlined how his company had overcame disruptions in Japan to avoid major shutdowns, including resourcing and re-engineering certain critical components. “Visibility was absolutely key for us. We have a very centralised control and command centre for logistics, and we were able to make fast decisions. But we also had to leverage our global operations to find out exactly what was going on in our supply chain.”
Bauer said that Visteon had also sought to gain a more complete understanding of the supply chain of certain outsourced suppliers, particularly electronics producers in Asia, to better understand the risks. And the company now looks more carefully at secondary logistics providers that can respond quickly to moving critical components.
Beyond natural disasters, speakers pointed to supplier capacity risks that are more related to the economic cycle and a lack of resources. Ford’s Harley noted that some suppliers, particularly of tyres and electronics, had not increased their production capacity at the rate of the market’s recovery. He re-iterated the long-understood need to improve forecasting between carmakers, suppliers and providers to help anticipate and react to these potential shortages.
Visteon’s Bauer pointed to the same issue for a tier 1’s own suppliers. “We’ve had to work very carefully with our purchasing department to identify our potential risks and to see what our alternative sourcing options might be,” he said.
As a rejoinder, Cooper Standard’s Silvio explained that his company reduced corporate costs by 40% during the downturn, and that recovery was focused only on return on assets. This meant an extreme pressure on supply chain costs at the same time that the company is balancing more international freight and supply chain complexity. To manage all this, Cooper Standard has created a global council for logistics and customs, as well as a programme of supplier development aimed at improving the processes and logistics of global suppliers.
But Silvio admitted that the company was not going to solve its logistics issues “by throwing money at them”, and pointed to incremental improvements that boiled down mainly to better communication. As examples he added: “I now ask my LTL provider to send a list each day to our plants to tell them exactly what is on the truck and being delivered to them. I also ask for my freight forwarder to give me a daily update on the actual freight that it is carrying for me.”
The opportunity for logistics providers to do more for resource and capacity-strapped suppliers was identified by Peter Baumann, global director of automotive for Geodis Wilson. Baumann said that his company had been taking on more value-added services from some of its tier 1 customers, including order management.
Camille Chism, packaging engineer at Johnson Controls, pointed to new designs and changes in packaging and pallets that could help save the company significant money and improve supply chain flow without investing in more assets or transport. In one example, she said that a new packaging system could deliver “major savings” by increasing the number of parts in a sea container from 800 to 1,000.
Sometimes the issues are more basic. Chrysler’s William Cook, director of worldwide logistics and customs, pointed to important changes in the supply chain and logistics operations at his company as it adopted more of Fiat’s world-class manufacturing (WCM) techniques.
Whilst most of the changes applied to in-plant logistics, the next step would be to push them out into the supply chain and on to the entire order-to-delivery process. “WCM has done some great things for our plants, and we are now opening it up to the entire organisation,” he said.
Just five months ago, the Finished Vehicle Logistics North America conference, also a part of the Automotive Logisticsgroup, saw carmakers and logistics providers expressing deep concern for a potential outbound capacity crunch, particularly for road transport. It was expected to hit as early as the 4th quarter of 2011 as Japanese OEMs resumed imports and sales picked up again in the US.
The general consensus now is that the capacity crunch would not hit soon, and may not even hit for several years. “I was wrong about the [capacity] tsunami wave hitting us in Q4,” admitted Mike Riggs, chairman of Jack Cooper Transport, who had been among those voicing the concern. “I don’t have a single carrier in our group who doesn’t currently have the capacity to match demand. We may not see an issue with capacity for another two years.”
Steve Tripp, head of vehicle transportation for Chrysler, said that modest individual improvements in the transport network, as well as lower-than-expected volumes, had helped in avoiding capacity problems. “For example, we’ve now implemented repair shops at our storage centres, eliminating the need to transport damaged vehicles from storage to those repair areas,” he said.
Only a few months ago Chrysler had been considering the possibility of purchasing its own trucks for vehicle logistics, but that has stopped. “We are not concerned about a capacity crisis for quite awhile,” said Tripp.
“I’ve always been on the opposite side of this debate and didn’t really see a major capacity problem” American Honda’s Dennis Manns told delegates. “Our car sales business has been severely challenged and, although [capacity] would be a good problem to have, the sales are just not coming back quickly.”
Even with some railways and providers shifting towards universal and adjustable wagons, Tripp remained worried about near-term shortages in tri-levels, not least as Chrysler now builds more passenger vehicle and small cars in North America, including the Fiat 500 in Mexico.
Capacity also has regional variations; areas which appear to be facing some shortages include the Southeast. And, importantly, the two fundamentals that threaten capacity are still in place – a shortage of drivers and low investment in new equipment.
To counter these, and rather than talking simply in terms of rates and investment, several speakers at the conference suggested major shifts in the way the vehicle logistics network is run, including even load sharing. The most notable example came from Jack Cooper Transport, which Riggs said is in the middle of developing an optimisation model using software that would be applicable and open to the entire industry. Citing an empty mileage rate of up to 70%, Riggs said that the tool would help identify return loads and better routing. By rolling it out to the industry in general – at no cost – he said there could be dramatic improvement in capacity usage and in margins. He suggested using an industry association, such as the Automobile Carriers Conference, to help make the tool more universal, and said that 2012 would be a major year for the project’s implementation.
The proposal was enthusiastically received by the carmakers, other providers and IT companies present. Matthias Berlit, from software-provider Inform, discussed a system trialled by his own company that had improved load rates and reduced mileage by as much as 17%. Such software was essential as one truck could have as many as 400 different configurations between smaller or larger vehicles, he said.
Chrysler’s Tripp was also keen, but cautioned that Jack Cooper and others would need to overcome considerable hurdles from the different commercial agreements between carriers and carmakers. “We fully support this idea, but believe coming to these agreements will be extremely challenging,” he warned.
Neverthless, something must be done. GM’s Krathwohl summed up the mood when she said that the single biggest opportunity to eliminate waste and cost is still in finished vehicle logistics. “We still see a network that runs 65-70% empty and there is tremendous opportunity for us to share and collaborate,” she said. “That is a nut that we still have to crack.”
On the inbound side, the push to reduce costs and make the most of limited supplier capacity appears to be putting the spotlight once again on more collaboration. In a joint presentation by GM, Chrysler and Ceva Logistics, the companies discussed the outcomes of a project implemented in the Southeast.
Separate GM and Chrysler cross dock and warehouse facilities between Memphis and Nashville, Tennessee, as well as Spartanburg, South Carolina, could be consolidated into one, Ceva-run cross-dock at Nashville, which eliminated the three other locations by combining parts flows and storage facilities. According to Jeff Hurley, senior vice president of automotive for Ceva, a study revealed that 56% of the parts used by GM and Chrysler in the region were shared. The network was re-engineered to allow for co-mingled loads, as well as dedicated loads for both GM and Chrysler. The result, according to Hurley, actually improved the fill rates to the trucks for all three flows to above 70%, from 60%.
To GM’s Jeff Morrison, the advantages of this project were obvious. But it required both a strong 3PL and willing customers to agree to share information to allow savings. Chrysler’s Mercedes Figueroa, manager of transportation supply china engineering, said that her company was very encouraged by the results, and was now looking for similar opportunities.
The process can also work cross-border. Sylvia Hill, North American and International Logistics Director at Delphi, reported that her company was actively pursuing collaboration with other manufacturers around the US-Mexico border. Delphi has the large majority of its plants south of the border, but ships the majority of the material it produces in Mexico back to the US. She revealed that Delphi’s cross-border operations were now done via multi-client facilities.
There was some debate among delegates about whether manufacturers or logistics providers should drive collaboration. Ceva’s Hurley believed that it should be the manufacturers, since they control the information about their networks and parts flows. But other tier suppliers suggested that 3PLs have a better view since they know the supply chains of a variety of customers.
In the end, GM’s Krathwohl admitted that carmakers, including her own, liked to talk a lot about collaboration, but aside from the GM-Chrysler example – itself a fairly small project – there was little to show for it.
“I believe that the entire North American less-than-truckload network should be collaborative,” she urged. “There is a lot for us to do. I’ve already discussed with several of my peers that by next year’s conference we will be sitting here presenting the concrete results and actions that we’ve taken to collaborate more in the supply chain.”
With the US car parc being on average over 10 years old, and the profits in the used vehicle market up 40% in the past year, used cars have become a more important market for logistics service providers according to Ford’s Stephen Harley. This is also good news for the aftermarket, and Harley pointed to greater outsourcing in this sector in the near future.
The 5,000 dealership closures since 2008 mean that the remainder are sharing sales growth which generated revenue for them of $42.6 billion in 2010. Per dealership, average profitability has increased from $277,000 to over $735,000 projected for 2011.
Chrysler’s George Campbell, the Mopar division’s senior manager for process reliability, logistics and cost management, said that his company had been compromising its deliveries before the downturn, but that has changed. Mopar ships parts on 800 trucks a day to 2,314 dealers with 77% of them getting delivery within 15 hours and 98% of them getting deliveries five days a week. An increase in shared delivery has brought mileage reductions of more than 60%, he said, which is important given that a 10-cent increase in diesel means $2m of extra costs to Chrysler.
Meanwhile, Ford delivers $450m of inventory to 3,500 dealers with a fill rate in 48 hours running at 98%. The company is also integrating Canada and Mexico with the US for parts delivery.
The aftermarket can also benefit from co-mingling deliveries between manufacturers, according to Chrysler’s Campbell. Dealers needn’t know about this sharing, and even if they did should not be concerned given the good delivery rates. “With a half hour window for delivery that has hit 98%, the dealer doesn’t care,” he said. But, added Jim Rose, Nissan North America’s senior manager for Service and Production Parts Transportation, “where they will raise hell is when they find out that something is late.
The conference touched on the fast-growing emerging global markets where there are more aftermarket challenges. Campbell described distribution regulations in different countries as “staggering”, and added: “We fall in to a new surprise on a daily basis and that is going to be a regular discussion.” But “global launches mean global aftermarket supply,” conceded Nissan’s Rose, “and you have to go around the nuances of each country.”
Chrysler is trying to leverage its relationship with Fiat to bring greater efficiency to its aftermarket,. Meanwhile one of the biggest challenges is the struggle for commonality, according to Ford’s Helmut Nittman, global director of parts supply and logistics, Customer Service Division “Each country plans their own supply chains and inventory,” he said. “It is convoluted.”
About the conference
Automotive Logistics Global 2011 provided an all-in package for a single delegate fee containing:
1) Networking Opportunities
Careful scheduling allowed interaction between customers and suppliers at:
- Introductory cocktails
- Coffee breaks
- Networking lunches
- Informal meetings within the conference area
- The mid-conference business dinner
Formal speaker presentations
- Q&A discussion sessions
- Break-out workshops
- Soft copies of the speaker presentations after the conference.
3) Business and Social environment
We recognise the all-important personal dimension to any business relationship, so the event provided a relaxed environment for both the mid-conference Gala dinner and the pre-conference cocktail reception.
The mid-conference gala dinner was held in the national historic landmark, The Henry Ford Museum, among thousands of awe-inspiring artefacts, every one of them with a tale to tell about America’s passion for innovation.
See also a 4-minute overview of our principal European event, Automotive Logistics Europe 2011