Logistics is a term that embraces a number of different elements, including the physical transportation or materials and parts, supply-chain process control, inventory management and quality control. The elongated supply chains that characterise the auto industry and the cost pressures on automakers and suppliers have left the auto industry at the forefront of developments in the field of logistics. We consider some of the issues that are changing the automotive supply-chain and the broader role of automotive logistics.

Vehicles are a complex bit of kit. A typical car consists of 12,000 parts that must be designed and manufactured to be compatible and integrated as the final product. An elongated  supply-chain that stretches from raw material supplier to parts supplier and final assembler characterises the manufacture of a vehicle.

In the early days of the automobile vehicle manufacturers tried to do as much in-house as they possibly could. But a multitude of individual factories dedicated to making specific parts was clearly costly and unsustainable from an organisational point of view. It was a lot to coordinate, especially as mass production manufacturing techniques took hold. To this day, levels of vertical integration among automakers differ widely, some preferring high vertical integration for reasons of control or to protect product innovations, others resorting to outsourcing as much as possible in an effort to reduce costs.

In the 1920s and 1930s in North America, decentralised parts-making divisions with separate profit centres were devised as a solution. That way you could get the benefits of specialisation and cost management, but within the context of a unified group. Eventually, some parts companies became fully independent and able to generate bigger scale economies as they supplied multiple customers – forming many of the big Tier 1s or systems integrators that we know today. These firms, with their global footprints, supply parts and sub-assemblies to vehicle makers.

As the auto industry has globalised, the big suppliers have followed their customers. If a Tier 1 wins a big contract to supply, say, a front-end module on a particular vehicle programme, these days that will typically entail supply to the vehicles under that programme to production sites across the world. And the provider of the sub-assembly system has to coordinate with its suppliers – Tier 2s – and any raw materials suppliers to ensure that it manufactures the sub-assembly to meet its customer’s requirements on product cost, quality and timeliness of delivery.

The increasing complexity of designing and producing a motor vehicle is also forcing OEMs to identify key first-tier suppliers and give them more responsibilities, to work with them more closely on design and engineering for future product. That helps to create a mindset from design concept to production fulfilment that is geared towards process integration.

Along with a growing understanding of the need to reform the automotive supply chain, a parallel development over the last twenty years has been the steady rise of third-party logistics providers serving many industries. These specialist service companies have been able to meet manufacturing industry needs across the world as international trade volumes have grown.

Firms in the automotive industry have been quick to see the benefits in contracting out to specialist companies who can take control of areas such as material flow management, inventory control, container management, just-in-time delivery, warehousing and transportation. Moreover, the logistics specialists emerged with scale and expertise that meant that they could provide logistics solutions more competitively than a carmaker could do it themselves. And the carmaker could then be left to concentrate on its core business.

The global sourcing of automotive components has also been encouraged by the search for low-cost manufacturers in places like China and India, itself encouraged by the shift in locations for final assembly from the established demand and supply centres of North America, Western Europe and Japan to the emerging markets – notably in Eastern Europe, South America and Asia. If Hyundai is going to use India as a global hub for the manufacture of small cars (serving both the fast-growing India market and acting as a low-cost production base for export to markets around the world) then it will be looking for low-cost suppliers nearby. And a supplier who builds a low-cost plant in India that is partly there to serve local producers has the option to integrate that operation into its global supply network so that it can produce as cheaply as possible optimising at any point in time according to customer needs while also optimising for variable costs – typically shipping/transportation costs (highly tuned to the fluctuating price of oil in the case of shipping) and exchange rate movements.

The rapid adoption of outsourcing has led many companies, where shipping is vital to their businesses, to turn to third party logistics services providers for shipping support services, including warehousing, scheduling and distribution services. The sectors of goods transport, supply chain management and logistics services have become heavily interrelated, creating further opportunities for logistics efficiencies.

Information technology has also played a role in the rise of third part logistics service providers. Sophisticated databases that can track inventory levels and shipments on a global basis via the internet, have created further efficiencies in transport and logistics enabling just-in-time delivery and helping to optimise the production process along the supply-chain. It has also made possible build-to-order (BTO).

Third-party logistics companies have assumed a vital role in the automotive supply chain. On an outsourced basis they can provide a one-stop shop in terms of integrated freight services, inventory management, warehousing and distribution. Logistics services are generally defined as services added onto regular transportation activities, including freight forwarding, which is the handling of freight from one form of transport or mode to another (for example, the movement of containers from ship to truck or rail to truck). Value-added warehouses store the stock and its shipped as it is needed. Supply chain management software makers specialise in software that can track and allow communication between the different parts of a supply chain.

But for all the planning and clever systems disruptions can still happen. And if a production line is suspended due to a shortage of a critcal component, that can be very expensive. Evolution Time Critical (ETC) is a UK-based emergency logistics provider that specialises in facilitating emergency deliveries to auto industry production lines across the world.

“We can’t just throw money at a solution,” says ETC CEO Brad Brennan. “We have to work with our customer to understand the degree of urgency. Is it a priority because in 48 hours cars will be coming down the line without headrestraints? Is it time critical because the production line will stop in 18 hours? Or is it a supply-chain emergency, where the line will stop before even the swiftest conventional techniques could deliver the goods?”

Brennan also maintains that auto firms are increasingly integrating emergency logistics with their lean manufacturing strategies. “The better your contingency planning, the bigger the risk you can take with your inventory reduction and supplier strength.”

Lean production

A key development in the theory of efficient supply-chain operations has been the arrival of ‘lean production’ theories and their prevalence in the automotive industry. When the Massachussetts Institute of Technology (Mit) published the results of a five-year study looking at the future of the automobile in 1990 in The Machine That Changed The World, the auto industry was already embracing massive changes in the way it organised its manufacturing operations. Much of the change was being initiated in Japan, but firms in Europe and North America were starting to pick up on practices that improved efficiency and quality, particularly as Japanese manufacturers spread their operations beyond Japan. Joint ventures between US and Japanese automakers helped to diffuse techniques in production (especially process and workflow) and supply-chain management that improved efficiency.

Terms like ‘lean production’ and ‘Just-in-Time’ were rapidly gaining currency. A ‘lean’ supply chain was stripped of waste to the bare essentials of what was needed to maintain production at all points of the production process, unnecessary inventory removed. In simple terms, it is getting parts and materials to the correct places – where there is demand – in a timely manner to optimise production resources and minimise cost.

Lean manufacturing is a generic process management philosophy derived mostly from the Toyota Production System (TPS).  As waste is eliminated quality improves while production time and cost are reduced.

Continuous improvement is built into lean production systems so that there is incremental improvement of products, processes, or services over time, with the goal of reducing waste to improve workplace functionality and the quality of the final product. This contrasts with the ‘mass production’ approach which dominated automotive production in North America and Europe in the post-war period under which vehicles were built under a system that was good at producing to scale but poor in identifying and rectifying failings in the production system. These failings would, in relation to lean manufacturing techniques, impair build quality, increase cost and create divergence between the end-product and the customer’s wants.

Global strategies: the value chain

By focusing on common platforms and interchangeable production modules, OEMs are able to speed up product development solutions across the whole product range, while better tailoring vehicles to a local tastes and brand values. If brands and products can be sufficiently differentiated then the scale economies achieved through platform sharing (or shared ‘engineering architectures’) as well as the development of powertrain families that can be easily shared and adopted across brands are a major contributor to profitability.

The strategy necessitates an ongoing evaluation of the extent to which the OEM wants to outsource he responsibility of developing, manufacturing, and assembling of critical vehicle systems. A controversial issue is research and development outsourcing. The manufacturing cost of modules and systems is often as high for suppliers as OEMs. Outsourcing becomes worth doing only if the supplier does much of the engineering work. This is particularly relevant for complex systems or modules where the supplier can spread development cost across several customers. This would tend to support the idea that the biggest Tier 1s will get still bigger, their market position strengthened further as they gain greater scale.

Vehicle OEMs are varying in the degree to which they are reducing supplier numbers and the extent to which they outsource R&D or engineering work to major suppliers. Some are wary of the commercial clout this strategy will ultimately put in the hands of suppliers in certain areas of the product or sensitive about sharing in an area that is sensitive commercially and involves big investments (like electric drive technologies). But the trend is for the larger suppliers to get larger and become global providers of sub-systems to multiple OEMs.

As the auto industry collectively strives for lower cost and to better meet customer wants across the world, the supply-chain is clearly a focal point for further attention, in terms of how it operates, how the firms along it interact and the extent to which the vehicle maker will lead the process. More collaborative business models are being led by technology, by globalisation strategies and by increased outsourcing. If the vehicle maker could still be said to be in the driving seat by virtue of its position at the end of the value chain facing the customer, it’s perhaps a driving seat with a less commanding position than used to be the case.

Still to come on this subject later in September:

Part 2 – The rise of the BRICs and logistics challenges

Part 3 – Insource, outsource – the perennial logistics debate