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Designing for agility Capacity, cost constraints and evolving players require a flexible and optimized automotive supply chain

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By: Julia Kuzeljevich
2014-03-01

North America’s demand for automobiles is rising, having recovered post Great-Recession, but OEMs are still keeping a relatively tight rein on capacity.

Sales of light vehicles in Canada jumped to 1.74 million units in 2013, an increase of 4% since the previous year and a 10% increase since 2011, said a BMO Capital Markets report.

But according to the Centre for Automotive Research, compared to the 17 plants built in the United States since 1990, there has been only one built in Canada. Canada’s share of global automotive production has halved since it peaked at 5.4 per cent in the 1990s, placing it 11th in terms of global market share.

After the Great Recession, OEMs that had excess capacity in the US and Canada have “right sized” the capacity through consolidation and plant shutdowns.

“They’ve moved their overall production around to plants that made more economical sense. That has created some interesting challenges in the overall supply chain. We’re not seeing new OEM plants going up in Canada and the US, but there is growth and new plants in Mexico,” said Guy Toksoy, Vice President/General Manager Ryder Supply Chain Solutions Canada.

Jim Barnett, vice president, automotive business development for the Americas, with CEVA Logistics, said the automotive industry is rebounding going into 2014, with 16 million units in 2013 expected to grow to 16.5/16.6 this year.

“Increasing that capacity is a predominant trend among the Big Three and the transplants. They don’t want to use bricks and mortars. Their last option is new fixed costs. They’re coming back to us with a revival of outsourcing-of tire and wheel, suspension, and assemblies. Automakers, with some of the merger and acquisition activity that is taking place, are going after higher volumes with the platforms they developed,” he said.

But as demand is rising, the effect of prior consolidation is manifesting in capacity constraints.

In order to expand capacity some OEMs convert inventory holding space to manufacturing, moving that function out of the plant and creating more opportunity in the 3PL space, Toksoy noted.

For automotive OEMs, he said, the decision “comes down to an economic choice about where to locate their plants in terms of geographic proximity to demand, labour costs, environment, and the overall economic picture. From a logistics perspective there is constant pressure on 3PLs to optimize their supply chain and analytics,” he said.

Total landed costs and outbound costs take on paramount importance.

“There are two schools of thought at work: companies are going to continue to chase lower labour costs and chase the locations that have the lower costs and come up with what makes the most sense for them. When you put up a plant in a new location these are minimum 20 year decisions. It’s not a cheap task to pack up and go to a new place,” said Toksoy.

New opportunities are emerging via the use of mulitple logistics centres, which can manage some of that complexity.

“With global sourcing supply chains have significantly elongated the challenge of mixing inbound components from multiple different geographies. All of this creates the need for well-run logistics centres,” he said.

“Interestingly enough, what we’ve seen more and more is product specialization.

Multiple plants that produce the same type of product be consolidated into one.

We’re running into these sorts of projects and 3PLs see more growth in that area,” added Toksoy.

DB Schenker is planning to open more than 30 Shared Logistics Centers (SLC) worldwide in the next five years, representing additional investment in approximately 500,000 square meters of warehouse space, the company said.

The facilities will be located in strategic locations close to transportation hubs and in geographic markets where customer demand is foreseen in the medium to long term. The SLC program will provide additional capacity in these selected markets as a basis for ongoing growth and development of the target industries, including automotive, the company noted.

“We do see a trend toward shared transport networks, and we’ve been very successful with a product in the US that looks at dedicated delivery service. We will take a client’s overall delivery profile and come up with an outbound distribution plan on a timed basis, with cutoff and delivery times. In Canada dealer dispersion is huge so getting out there is really difficult,” noted Barnett.

Automotive players are also partnering on the delivery of outbound parts via a shared network that offers them the ability to share costs on the outbound delivery, he said.

“Up until a few years ago the OEMs did not get behind that because they did not want to share delivery. But by using an LTL model they found their parts were still travelling with a variety of other cargo, so why not plan that out. The OEMs are going to something where they try to standardize the packaging, the methodologies and dealer delivery times,” he added.

Specific to the Canadian market will be goals around efficiency improvements, and overall cost reductions. Almost everyone wants more visibility, GPS tracking, and online reviews, to see where goods are at all times, Barnett noted.

“I’ve seen automakers come to us with ‘what if’ scenarios. If we move our production from Mexico and we start producing it in X, what would the logistics costs be? We just had one of those what if scenarios for a major Tier 1 that has production facilities in Dallas and Toronto. You’ll see that in past years decisions were made on more of an instinctual basis, while nowadays they look at density and logistics costs. A lot of the OEMs want to take money out of the overall supply chain,” he said.

According to Barbara Jordan, Site Manager, Contract Logistics, with Schenker of Canada Limited, the automotive industry has also become heavily reliant on customer ratings at the end user level, and this has tremendous impact on what is expected from supply chain partners.

“With technology and global visibility, now with real time access of everything that happens in the automotive DC world it’s crucial that that info happens in nanoseconds. Accuracy is high on the radar,” she said.

The 3PL now plays that pivotal role in terms of making sure customer service levels and ratings are met, and this ties in to the longevity of that 3PL’s success in retaining business or winning new business.

A lot of promotional automotive items and value adds to upsell vehicles are now considered “rush” from a supply chain perspective, noted Jordan.

“It’s all about customer rating, branding, and global access of information within the 3PL world. When people are talking about customer service they are not even talking about the warehouse. What we’re seeing is that there are more and more incentives that are being offered at the end user level putting pressure on the warehousing side. We have to take away from the fact that it’s boxes we’re receiving, storing, picking. There’s a whole mindset in terms of changing the morale of the workforce and making them more customer-focused,” she said.

Within the integrated North American supply chain, crossborder paperwork is not a big issue from a regulatory standpoint, but a bigger issue remains the predictability of wait times at the border.

“There’s not a lot being done to improve that. More lanes would obviously help but there is enough infrastructure- it’s just the turnover and speed that could use some work,” said Barnett.

“Hours of service changes have impacted the designs of many networks we had going cross border in the automotive space. The US and Canada are so integrated in terms of supply chains, and there are pressures on us to continuously re-engineer and reroute, plus costs in terms of fuel, bridges and tolls. That could one day change current patterns because the costs become a tipping point for some companies,” said Toksoy.

“We need to ensure we have the most efficient supply chains we can have-keeping control on total costs to improve overall production-that’s what we can control and that’s what we should focus on,” he said.

Automotive supply chains employ modal shifting, air chartering as strategies

As a result of the cold weather this winter on the North American continent, many automotive companies have also utilized aircraft charters to transport urgently needed production line parts that had become stuck or delayed.
Gary Hopkins, Managing Director of Air Charter Service (ACS) Canada, said that while chartering aircraft is the most expensive way of doing it, this method is the cheaper solution when OEMs are facing penalties if production shuts down or if weather delays will risk ‘just-in-time’ production.
“In terms of the automotive sector everything is unpredictable. The only pattern we see is inconsistency. We have a big reach with a number of freight forwarders who handle automotive accounts. There’s been an increase in automotive charters in our company as the sector has grown. Even during tough times the need to charter car parts has continued out of necessity,” said Hopkins of ACS’s ‘Go Now’ aircraft charter services.
While many companies have tried to improve their planning, things will inevitably go wrong, he added.
And while for some automotive stakeholders the aircraft charters are used just once in awhile, others call on the service more frequently.
“We’re fully 24/7 and we can offer charters everywhere in the world,” said Hopkins. The company currently operates 17 offices worldwide.
He noted that a lot of charter traffic is heading Canada to Mexico and sometimes northbound out of Mexico into Canada.
“Sometimes we do intra-US chartering, or US-Mexico for Canadian clients. In Ontario there is lots of activity in the London, Windsor corridor. A number of events can trigger a charter, such as a just-in-time manufacturing problem, and bad weather is another big factor. The weather has stood out this year vs. other years,” said Hopkins.
Due to severe winter storms across the North American continent at various intervals this winter, some automotive supplies that are supposed to move by truck were delayed in transit.
“In terms of the people paying the bill they are really chartering when there is no other option. They might spend $30,000 on a charter but the consequences of not doing so are pricier. Sometimes the OEMs have fines imposed by the car companies so they have to charter to avoid these. The freight forwarders want to be chartering because it’s good business for them,” said Hopkins.
“Our job is to deliver the right solution so we’ll identify transit time, how quickly the shipment can get into the airport, for example. We try and give the client three options, sometimes a quicker option that may be more expensive. It’s up to the client to decide what they want,” he said.
The automotive sector has also been making more use of LCL services. Panalpina’s global LCL (less-than-containerload) network is expected to reach 500 services by the end of 2014, with roughly 15% of its current 450 LCL services operating two or three sailings a week, said Frank Hercksen, Panalpina’s global head of ocean freight.
The majority of Panalpina’s LCL services are used by the automotive and manufacturing industries, which accounted for almost 30% of its LCL volumes in 2013.
“The 30% are not year-on-year growth but the share of LCL volumes of automotive and manufacturing in 2013,” said Sandro Hofer, Panalpina’s Corporate Media Relations Manager.



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