German OEMs like BMW and Mercedes-Benz find themselves in a difficult yet enviable position as they work to match strong US sales growth with the necessary outbound logistics capacity.
Among the biggest winners in the US sales recovery so far this year have been the German luxury brands Audi, BMW and Mercedes-Benz, with sales for each increasing around 15% or more in the first five months compared to last year. The Volkswagen division, meanwhile, is up 35%. This growth has come as the brands’ production and imports are running at nearly full throttle. It’s also leading to investment in more North American production capacity for all three groups.
The Germans’ growth in the US has been ahead of that of most other OEMs and luxury brands, with the Japanese and their premium marques like Lexus and Acura only making real gains during May. Porsche has been a bit behind the general German surge, with sales up 4% in the first five months.
For outbound logistics, this represents a difficult but enviable position for BMW North America (BMW NA), Mercedes-Benz USA (MBUSA), the Volkswagen Group of America and their providers. Customer-sold allocation rates for vehicles out of US factories or from imports on ro-ro vessels are high, and need to move quickly through ports, while trucking and rail capacity needs to be aligned, especially with potential shortages in view.
With competition in the luxury segment likely to increase, including a push from Japanese brands, it would not be an exaggeration to say that a delayed vehicle could mean a lost sale.
Balancing cost with growth
But, as ever in the supply chain, it is necessary to balance service to match sales at a controlled cost. Fuel and equipment costs have risen considerably, while some of the contracts signed during the dark days of 2009 have—or will—come up for renewal, with rate rises all but inevitable in some lanes. “Current contracts were negotiated at a very low ebb [in 2009],” says John Marion, who manages vehicle logistics at BMW NA. “You have to find the right balance, but you also have to pay what the market requires.”
MBUSA has kept a close eye on the situation with the help of a ‘cost reference’ tool that Daimler is developing globally, which establishes a centralised database of the operational costs for logistics services to help the carmaker better understand the price it pays for supply chain provision. Daimler implemented the tool last autumn in the US, according to Markus Gichert, manager of vehicle logistics. “Right now we are almost done calculating the costs on all routes, which gives us a lot of transparency,” he says.
But Gichert admits that knowing the operational cost of a service does not mean that MBUSA can avoid paying a market-driven price. “Knowing cost is one thing and is important, but knowing what the market demands is just as key. If you tell a carrier that you’ll pay the cost of operations plus 3%, it can still say no,” he says.
How then to reconcile cost control with servicing high demand? For starters, it’s a better problem to have than the painful shrinking of a network. Those responsible at BMW NA and MBUSA are approaching it by working more closely with providers, making process changes and careful investments, such as in IT, terminal capacity and specialised skills.
For example, BMW NA has expanded its car carrier base in recent years from two to eight, Marion says. It is also closely monitoring carriers and stepping in where necessary to find capacity on the spot market.
At MBUSA, there is considerable focus on the efficiency, capacity and scheduling at its three vehicle processing centres (VPCs), which it operates in-house. At the end of 2010, the carmaker switched to an expanded terminal at the port of Baltimore. Mercedes is also reviewing its options at its VPC in Carson near Los Angeles and Long Beach, according to Rory Anne Hepner, general manager of vehicle distribution and logistics for the carmaker. The VPC has some space constraints, as its facilities are spread over three sites.
Very similar networks
Another perennially called-for approach to lowering outbound cost is combining vehicle distribution among OEMs, such as co-loading and sharing backloads. In fact, few competitors in the US cooperate at the level that BMW NA and MBUSA already do. In 2009, they shared a tender for distribution from the ports of Brunswick, Georgia and Baltimore, Maryland. Since 2010, MBUSA has been processing BMW imports, as a customer, at its VPC in Baltimore.
However, opinions vary on the effectiveness of such collaboration. Indeed, MBUSA appears to be looking towards the wider potential of sharing operations with other Daimler companies and regions in North America to find savings, rather than with other carmakers.
A closer look at the way the two carmakers have built their outbound networks in the US partly explains why this is so, as it turns out that overlapping networks could offer fewer opportunities for cost-saving collaboration than complimentary ones would. Few carmakers share as many characteristics as BMW and Mercedes here, right down to their sales and distribution headquarters located just five minutes drive from each other in northern New Jersey, where their vehicle logistics and operations teams are based, too. With common customer groups and sales volumes, their networks overlap widely with one another, particularly in dealer locations, ports and even plants in the south-east— albeit around 300 miles (480km) apart—in Greer, South Carolina, near Spartanburg for BMW and in Vance, Alabama, near Tuscaloosa for Mercedes-Benz.
BMW and Mercedes-Benz both use the ports of Brunswick and Baltimore. BMW also uses New Jersey on the east coast and Hueneme in Oxnard, California, north of Los Angeles, while MBUSA uses Carson in LA. On the export side, the main port of exit for BMW is Charleston, South Carolina while for MBUSA it is Brunswick.
BMW and Mercedes-Benz share growing SUV production and exports out of the US. The former’s Greer plant produced 277,000 X3, X5 and X6 SUVs in 2011, and expects to reach 300,000 units this year. With plans afoot to bring the X4 to the plant, BMW expects 350,000 units per year in the medium term. The manufacturer also exported around 172,000 units from Greer in 2011, making it the largest automotive exporter from the US by value.
Mercedes-Benz’s plant in Vance built 155,000 M-, GL- and R-Class SUVs last year. Daimler expects production to reach 185,000 this year, and 250,000 in 2014, when the C-Class will be built there. According to Gichert, about two-thirds of the plant’s production is currently exported.
Both OEMs use a similar amount of road and rail transport. BMW uses only truck from its entry ports and for most of the domestic distribution from the Greer plant, relying on a base of eight carriers in total (although it used to be just two).
MBUSA relies on truck from its VPCs, spreading its volume among 15 carriers. “The mix is important between larger and smaller carriers, as the smaller depend more on your business, while the larger carriers have more access to capacity but might not depend so much on you,” says Gichert.
“We are happy with most of our carriers and I believe we have a good mix.”
From the plant, BMW uses rail for destinations in California and the north-west. Rail wagons are moved to the Oxnard facility, where vehicles are consolidated with imports for truck delivery. The proportion by rail is about 20% of the domestic-produced volume from the plant, says Marion. In 2011, Spartanburg sold around 75,000 X3, X5 and X6 units in the US market.
MBUSA uses three of the Class A railways to move vehicles to western markets from both Vance and Ladsen, South Carolina, where it assembles Sprinter vans from SKD kits. According to Gichert, the scope to add more rail transport is difficult for MBUSA volumes, since it adds transit time. “We have a rail RFQ this year as our contracts will expire, and we’re looking at alternatives and options, but the most critical thing is the transit time and the cost,” he says. “As rail easily adds a week’s transit time, there would need to be significant cost benefits.”
Marion says BMW has previously tried rail to Houston, but found the lead times were too long, and the cost difference not great enough to make that sacrifice. “If the margin between rail and road were wider, then we would consider it by adding a day or two to lower cost,” he says. “But now, the costs are close but you lose days.”
Diversity makes the difference
While it might seem that combining two such similar networks would result in a host of efficiencies, the reality is not so straightforward. Diversity and difference, in fact, may actually offer more opportunity for outbound cost savings.
For example, the most efficient parts of MBUSA’s network are those where it can balance loads between different locations. To the west and north, the carmaker moves one way by rail or truck. But in the south, where it has the plants, it is possible to make round-trip movements in which a truck picks up a load at the plant destined for Georgia or Florida, from where it can again load at the port of Brunswick. “That is the only area where we really have these types of synergies,” says Gichert.
On a related point, having a varied mix of vehicles —such as small cars like Mini or smart—can also be more beneficial than having all the same kind. The growth in Mini volume has allowed BMW to improve its load factors. “Out of South Carolina, we only have the SUV product, which because of its weight means that you can’t get an extra vehicle onto the truck,” says Marion. “With Mini, you can add extra products to balance the load since it is smaller and lighter.”
Logistics specialists therefore need to find complimentary exchanges in one or several OEM networks, where consumption and production or import points can be coordinated. Being too similar might actually make things worse. Take the case of the shared tender from common ports like Baltimore and Brunswick: “The problem is that when you go from Brunswick to Texas and you have both BMW and Mercedes going in one direction, and not a lot coming back, then you’re actually compounding the problem of one-way traffic and creating more empty miles,” says Gichert.
That is not to say that there haven’t been benefits to cooperation. “In some areas where we overlap, it has been helpful in mixing loads and getting [trucks] out faster, particular in less dense areas like the Midwest,” says Marion.
The NAFTA project
Sprinter vans and smart cars, but it is just one entity among a varied group of companies in North America. Others include Daimler Trucks North America (DTNA), with commercial vehicle brands like Freightliner and Western Star trucks, Thomas buses and the diesel engine producer, Detroit Diesel.
MBUSA and DTNA have operated mostly in isolation, but Daimler is currently in the midst of a major study, dubbed the NAFTA Transportation Project, that has its sights set on the integration of inbound, outbound and spare parts logistics between all the entities. While Gichert acknowledges that the potential for sharing is greater for inbound and parts logistics, he believes there are potential savings on the outbound logistics side, too.
“We have very different products [across NAFTA] but there could be vendors and modes that we use in common,” he says. “We ship a lot of Sprinter vans out west by rail, for example, where we also have the DTNA Freightliner and Western Star plants. Using a uni-level railcar capable of loading vans as well as trucks, we could use volume from those plants as a backload.”
Gichert also points to the potential for sharing certain back office and IT functions.
The NAFTA project is slated to run for two years, analysing the potential synergies, after which Daimler will decide whether or not to create a more permanent structure. The project is being led by Tonja Cochran, who was previously responsible for logistics, vendor management and some procurement functions at the Vance plant.
Comparing the VW Group
The VW Group and Audi also bear comparison to the BMW and Mercedes-Benz networks, but a closer look here also reveals the benefits of a group-wide strategy. VW’s factory in Chattanooga, Tennessee is about equidistant between Greer and Vance, but its network has a different modal and geographic flavour to either OEMs, using different ports with more rail and short-sea transport thanks to its plant in Puebla, Mexico. Plans for an Audi factory in Mexico by 2016 are likely to take the network more in this multimodal direction, although Mexican port and rail capacity could limit this approach.
Joerg Schackenberg, general manager of vehicle logistics, speaking at the FVL North America conference, revealed that VW uses the ports of Davisville, Rhode Island, Brunswick, Houston, Texas and San Diego, California as well as the Mexican port of Veracruz. Vehicles from Europe are sent to each port on the east coast in chartered ro-ro ships, and when they are empty at Veracruz, Mexican-made product is then sent back to Brunswick and Davisville, with the remainder sent to Europe.
VW’s current network uses rail transport out of Chattanooga, as well as AutoMax rail wagons (which have more flexibility for size and capacity) from Mexico to its ports in Houston and San Diego. In Houston, the volume is combined with European imports and sent by rail to Chicago, Illinois; Denver, Colorado; St Paul, Minnesota and Orillia, Washington. In emergencies, charter ships are sent between Veracruz and Houston.
While Audi is likely to have similar demographics to BMW and Mercedes, the VW Group strategy appears more beneficial than working overtly with other OEMs. Porsche also shares the same port network in the US as VW, again demonstrating the effectiveness of a group-based network.
A study in VPC management
If support for continuing OEM cooperation on transport tenders appears lukewarm, there is more enthusiasm around BMW’s use of the MBUSA terminal in Baltimore. “I think the VPC is a big success for everyone,” says Gichert. “We could provide a competitive rate and BMW could get a competitive service at the same time that the carriers can pick up the same units from the same origin.”
Again, benefits of the cooperation come from where the strategies of the two companies are complimentary rather than the same—the port terminals are a case in point, as each have a different model for management and outsourcing. MBUSA operates its VPCs at Baltimore, Brunswick and Carson in-house, as well as the marshalling yard at the Sprinter plant in South Carolina, while the physical operations for marshalling yards at the Alabama plant are outsourced (but managed by MBUSA staff onsite). Of the three terminals, it owns the facility at Brunswick, and leases the other two.
In the past, BMW owned and operated its terminals (which it calls vehicle distribution centres), but over the years it has outsourced most. It still owns and operates the terminal at the port of New Jersey, while it owns the facilities at Brunswick and Oxnard, but uses third party providers to manage them, as well as for operations at the marshalling yard in Greer.
This mixed model left BMW NA open to outsourcing options, and as MBUSA had spare capacity at its new terminal in Baltimore, it was able to offer BMW a competitive service.
Hepner says that MBUSA benchmarks and compares the VPC models for other carmakers and outsourced operations, and she believes that MBUSA rates higher than 3PLs for quality. “We take pride in the fact that BMW chooses us to handle [its] vehicles, and I feel confident that our employees do a superior job compared to 3PLs,” she says.
“I think it is potentially a significant problem,” says Marion. “Our current carriers’ capacity will not be capable of handling the volume that BMW expects.”
Gichert also foresees a problem, and both he and Marion say that their carriers are not investing with the market’s growth. “The good thing is that the carriers are starting to invest again, but it is not as quick as it should be and it comes with higher rates,” says Gichert.
Both acknowledge that there were similar concerns around this time last year, which abated when the market lost momentum. Currently, capacity is in a state of relative balance, but with limited room to manoeuvre. “What is currently missing in the market is flexibility,” says Gichert.
Marion says capacity has not been a problem as yet but that there have been several occasions when carriers have fallen behind and it’s been necessary to hire trucks on the spot market. Should the situation worsen, he predicts that the company might have to take extraordinary measures, including using more rail services or even securing truck capacity and paying for it ahead of time in a particular region. “We have to be able to look a bit outside of the normal processes to achieve the kind of numbers that we’re looking at,” he says, although he admits that no such actions are guaranteed and that he’s watching the market carefully.
Gichert acknowledges the gaps among contracted carriers, although he is hesitant about buying capacity in advance.“I’m not a fan of releasing carriers that have a contract in order to pay others that charge more, especially as there is a risk you’ll be left with trucks standing empty,” he says. “We’ll do it if it is necessary, but I believe that the market will regulate itself.”
He adds that MBUSA generally expects its carriers to solve their own capacity issues, even if it means using “outside help”.
If buying capacity with uncertainty is a non-starter, then a more obvious way of tackling the issue is through improving throughput with better IT and communication tools. BMW, for example, has its own system for tracking vehicles, which includes carriers scanning vehicles at certain checkpoints and communicating that data through an EDI-type transaction to Munich. However, three of its eight carriers are currently not set up electronically with BMW. “Originally, the volumes that these carriers were moving for us were considered too small to be worth the effort, but now with the growth, the expectations are to add them to the system,” says Marion.
MBUSA is also refining its tracking system together with IT provider ICL Systems, including measuring carrier performance and sharing the results with them. “We are standardising everything with ICL, measuring performance on rail, trucking, transport from VPCs and railheads,” says Gichert. “At our carrier meetings, we have ICL present [to carriers] how they are managed and evaluated. I think it’s really a good way to help carriers improve performance.”
A further emphasis for both carmakers is scheduling processing and releasing at ports and the plants, which can sometimes lead to delays in building truckloads, particularly when there are many sold vehicles arriving from a ship or off the line, and it may take several days to process them off the ship. “That is why it is difficult to provide carriers accurate information sometimes about what vehicles will be released and exactly when,” Marion says.
Gichert points out that releasing vehicles from the plant has become more of a challenge because there have been more quality checks and short-term holds of vehicles, leading to some being blocked and then released again at once in larger batches to carriers.
Processing at the VPCs is better, Gichert says, but improving scheduling is a major objective. Ted M. Boudalis, strategic VPC operations manager for MBUSA, says that this year the company’s VPCs are trying to schedule their processing to release vehicles to trucking providers into geographical batches, to help move cars quicker to dealers, which could include processing some unsold units (those with a dealer but not final customer allocation) earlier if it would help a particular load be released sooner to a dealer.
Boudalis admits that the current scheduling is still a bit too manual to account for all factors, but that MBUSA is getting better. Waiting times at the VPCs have come down, and in recent months around 22% of customer-sold cars in Baltimore left the VPC on the day they arrived. But that leaves plenty of room for improvement.
“We’re able to give cleaner, simpler snapshots to help us to better understand what we did before,” says Boudalis. “Right now we have each dealer put in preferences, which I then adjust in my scheduling. The more we refine those processes, the better IT systems we can build.”
A rewarding culture
Coping with rising volume and limited capacity must involve working closely with providers. Marion’s team is working on refining forecasts, which are provided at the beginning of the month as a three-month outlook based on wholesale objectives. During the last week of the month, BMW shares information on the vehicles arriving on vessels.
MBUSA is also trying to build in rewards for its higher performing carriers. It held a carrier day this past spring for all its logistics providers —similar to the European version of the event and other dealer meetings in the US—where it gave out awards and discussed tenders and new models.
In Europe, Daimler’s performance-related pay scheme includes bonuses and deductions, but in the US Gichert says that in the current contract cycle there will only be rewards. However, MBUSA is looking at developing a more comprehensive performance programme that could include bonus payments and malus deductions as part of future contracts.
BMW also has a bonus/malus in Europe, but has so far found it impractical to apply it for the US, although it may apply seasonal bonuses or surcharges, says Marion.
Incentives and efficiency programmes should go someway towards addressing potential service issues. Carriers will no doubt still point to difficulties investing in equipment, but those serving these German OEMs will be glad to play catchup with volumes rather than the other way around.