Continental is bouncing back in China, but is aware that the country’s bureaucracy and lack of visibility present particular challenges to a supply chain that requires a flexible approach.
The story of Continental in Asia Pacific is one of rapid growth and accelerated development for sales and production, particularly for its automotive division, with the Chinese market essential to the tier supplier’s turnaround. Following a difficult 2009, in which the company lost nearly €1 billion ($1.4 billion) while struggling under acquisition debt and costs, 2010 saw revenue increase nearly 30% and profits recover to around €2 billion, while business in Asia nearly doubled in the same period for the automotive group. The region now represents about 21% of global business for Continental’s two divisions (Continental Automotive and Continental Rubber), with growth in 2011 still high.
However, the success in Asia and China has not come easily, particularly for supply chain management. China is the engine for Continental Automotive: it opened its eighth plant there this year and has more planned in the medium term. But the company is managing a supply chain characterised by poor visibility and connectivity, uncertain lead times, a need for flexibility and occasional shortages for transport and material, in particular, semi-conductors.
At the same time, according to Continental’s director of logistics for Automotive Asia Pacific, Dr. Jörg Biesemann, the supplier faces the challenges of a highly flexible market characterised by quick shifts in demand and short product-life cycles. “The consumer approach in China is more aggressive than in the rest of the world. They are now changing car brands and models almost as quickly as those in the West change mobile phones,” he says.
This dynamism renders forecasting in China extremely complex. While Continental is developing a global system called Customer Demand Planning (CDP) that features an 18-month rolling forecast, Biesemann says that the CDP does not work equally between Nafta, Europe and Asia: forecasts in markets like China are less accurate. OEMs are now adjusting their processes to the market’s complexities.
“The fluctuations and changes we recognise in our forecasts show that we are in a very dynamic and emerging market,” he says.
The short, unpredictable lifecycles define the strategies for Continental’s logistics in China, requiring both its global and Chinese logistics providers to be more flexible. And while traditionally Continental may have been known to use larger, global logistics providers, Biesemann is clear that “we need to work on different approaches”. Sometimes, he finds, the most flexible companies are those small and agile enough to make quick decisions. “What is of major importance for us is quality, short reaction time, high service levels and dedication to the business,” he says. “We are very much open to those flexible companies that fit into our strategy.”
Indeed, dedication to the business is particularly important to China where the conditions are so specific, from dealing with the necessary bureaucracy to the scale of geography: one Continental factory in central China has to truck material 2,000km to its customer in Changchun, in the northeast. At a systems and IT level, China also has many gaps that make delivery and lead times even less precise, such as a lack of EDI or GPS navigation. “You always need to consider that China is not just a country, but is the size of a continent,” Biesemann says.
One outcome of this general unpredictability is that customers have increased the amount of consignment stock they want Continental to carry, which is inventory that the supplier continues to own (and finance) until its customer uses it. That, combined with already lengthy inbound lead times, increases the total material pipeline, tying up more working capital.
Freeing up working capital is a critical issue for any company. Continental also faced heavy acquisition costs both from its purchase of the electronic supplier Siemens VDO– the former units of which now represent about two-thirds of Continental’s automotive business–as well as from subsequent takeover attempts by the Schaeffler Group. Logistics plays an essential role, says Biesemann, in increasing available working capital. While price is always a crucial consideration, the ability for a provider to perform well enough to improve inventory is worth considerably more than the cheaper provider that does not deliver consistently.
“Every company needs to pay attention to working capital, much of which gets tied up in inventory,” he says. “But every day that a logistics company can release material and products out of the pipeline has a direct financial impact. This is one of our major selection criteria for awarding business.”
Biesemann also says that another way in which logistics providers can support its business under the current conditions in Asia are by being more flexible with payment terms.
The opportunities with Continental are considerable and growing for logistics providers. In Asia Pacific the Automotive and Rubber group has a total of 41 manufacturing locations between the two, with 14 business units and a staff of about 24,000 people. Automotive represents about 19,000 of that total, including 24 of the plants. The largest plant is in Changchun.
The supply chain is exceptionally complex for Continental Automotive. It produces more than 2,000 product numbers from around 2,000 suppliers and 220,000 part numbers, and delivers to about 100 customers. In 2010, Continental’s logistics spend for Asia Pacific was about €160m. Globally, the company will have a total purchasing spend of €9.8 billion, with more than €1 billion for logistics.
For material, 81% of the content used in Asia Pacific is sourced within the region, although this represent areas as disparate as Japan and Australia: 15% of the material is imported from Europe and 4% from Nafta. While Continental continues to source parts from Asia for Europe and North America, Biesemann says that the amount of Continental exports from Asia to other continents is limited. “It still happens, but we are really trying to avoid shipping parts from, for example, Manila to Hanover, because shipping parts around the world just doesn’t always make sense,” he says. “The goal is to build and sell locally.”
Organisationally, Biesemann’s team cooperates in global shipping tenders together with the Nafta and the European region, as well as running its own intra-Asia and countryspecific tenders, although the aim is usually to bundle together as many regions as possible. Biesemann’s team also runs domestic trucking tenders, while day-to-day logistics operations are the responsibility of the plant logistics managers.
Biesemann himself joined Continental three years ago following the acquisition of Siemens VDO, where he had been financial controller based in Singapore (“Asia for beginners compared to China,” he says with a smile). Before that he had several assignments within Siemens VDO in production and materials management.
While his focus is currently on the automotive group. Biesemann points out there are increasing links and collaboration between the Automotive and Rubber groups.
For Asia, Continental currently uses 29 logistics providers, although Biesemann says “consolidating suppliers is always on the agenda”. Traditionally, Continental has relied on the major global players for its international logistics, but, as mentioned, the book is far from closed for new entrants. “We truly believe in diversification and providers that can provide us the best total cost are of particular interest to us,” he says.
For domestic transport in China, Continental tends mostly to use local players that are familiar with the rules and intricacies of the Chinese market. As Biesemann points out, China has more than 160 cities that each have a population of more than 1m people or more, which makes the needs and requirements of domestic trucking incredibly complex.
More than 90% of domestic material moves by truck, with only occasional rail services, and the rest by air.
While Biesemann admits that the performance is improving, the logistics network in China has a long way to go to catch up to the more sophisticated transport systems used in Europe or North America, where providers consolidate loads at cross docks and then deliver just-in-time by milk runs.
“Our distribution in China is full-truck load. The providers fill up the trucks and they go point to point,” he says.
With labour costs rising in China–particularly in the traditional manufacturing locations around Shanghai and in the northeast–Biesemann points out that the trucking industry remains extremely competitive. And there have been significant improvements as well. More suppliers and providers are using EDI and can send ASNs, even if gaps remain. For warehousing, many of the most advanced tools are already in China, although it varies between the coastal cities and the mainland.
Continental is not just waiting for its logistics providers to improve, but is encouraging a “Collaborative Supply Chain Design” based on the logistics needs of a product during different stages in its lifecycle.
As mentioned earlier, China is distinct from markets in Europe and North America, having an even shorter, more dynamic lifecycle for products. As one example, Beisemann says that, while a sales person in Europe might be able to go to a potential customer with a design of a potential product, in China it is better to bring a ready-made sample.
This short and changing product lifecycle means that logistics providers must be able to move swiftly between the differing supply chain management requirements of each stage in the cycle. “I believe it is very important for our providers to understand that we are driven by the product cycle,” he says. “The logistics tools for mass production of millions of parts are very different to those used at the ramp up at the launch of a product.”
For example, at the start of a product life the supply chain requires planning, including network, location and packaging; during the serial production phase the needs are built more around transport management and inventory planning; finally, at the end of a product’s life, the focus is on spare parts and risk of obsolescence.
To help providers better understand and react to these requirements, Continental is making efforts to work more closely with providers, including earlier involvement of business partners in the design of supply chain processes and more collaboration between business partners and staff at Continental. The company will also hold more workshops to define supply chain requirements. Continental has already held a raw material supplier day for Continental in Asia in early March, and later in the month it held a logistics supplier day with all 29 partners.
One of the hoped for consequences of closer collaboration with logistics providers will be a decrease in premium freight, which Biesemann admitted represented a “significant percentage” of the company’s general freight spend in 2010. A good deal of this premium freight was the result of backlogs that followed last year’s ash cloud disruption to airspace in Europe. This year, the Japanese earthquake and its subsequent impact on the supply chain will also lead to more premium freight.
The Japan crisis has worsened what was already a critical situation concerning the short supply of semi-conductors. “For the past two-and-a-half years, we have been in daily allocation mode for semi-conductors, and the Japan issue has turned us into super-allocation mode,” he says.
So far, Continental has had limited impacts to its production in Asia Pacific, aside from short line stops, and has not been responsible for shutting down a single customer’s line either this year or during last year’s ash cloud. The higher inventories necessary in China have helped the company to keep factories going.
“At the moment, because of the Japan crisis, we are glad that we have the extra inventory that we carry in Asia, although that is not the usual situation,” he says. “Normally we want to drive down inventory as low as possible without shutting down ours or our customers’ production lines.”
But Biesemann admits that he cannot say for sure how long that will last in the current conditions. “We are working hard with our purchasing colleagues to do everything possible, including second sourcing, reclassification and redesign. We have war rooms set up for America, European, Japanese and Chinese OEMs.”
Looking ahead, Continental anticipates fast growth to continue in China and Asia. Of its global purchasing budget this year, more than 20% is expected to come from Asia.
It appears clear that the logistics challenges in China will not be solved overnight, while capacity and material shortages are also likely to get worse before they get better. In some cases, such as for container shipping, Biesemann is watching price rises carefully. But while he understands that costs will rise with business increases, he says that it is still essential to stick to the contracts signed between two companies until they have reached their term.
For Biesemann and Continental, the relationship between customer and logistics provider should be a give and take one in which both try to help and understand each other. He accepts that rates may rise in the next tender but he does not appreciate attempts to break a contract. Likewise, he points to a lack of flexibility on payment terms amongst certain providers, which sometimes comes from the largest providers. But Biesemann is clear: be flexible, or be gone. Market conditions may change, but it does not automatically include termination of contracts. “Being flexible and understanding business needs are the keys to a successful and profitable cooperation,” he says.