American Honda’s vice-president of logistics and sales planning, Dennis Manns, outlines the OEM’s route to success in Mexico and North America.
In today’s North American vehicle logistics market, the issue keeping most supply chain managers awake at night is the anticipated growth of exports out of Mexico. Carmakers have announced plans to add around 1.5m units of new production capacity in the country by 2016, which could see exports rise considerably from 2.4m vehicles in 2012 to totals that would rival South Korea and Japan as the second highest exporter of passenger cars after Germany.
But as exports start flooding from the assembly plants rising up around the fertile plains of the Bajio in central Mexico, then pour into the valleys and flatlands between the Rocky Mountains and Appalachian Highlands, trickling as far north as the icy reaches of the Hudson Bay, there are worries over whether rail, port and even road capacity will be able to carry all these vehicles. Honda’s Dennis Manns calls this dilemma “the $64,000 question” in vehicle logistics and the answer seems likely to be worth much more than the correct response would have been in the old American game show that Manns references.
The problem is one of limited infrastructure, assets and service. Mexican ports are crowded and investment plans slow to be realised. Short-sea services to the US are relatively inconsistent compared to the potential export volumes. Meanwhile rail transport, the dominant mode for exporting vehicles to the US, will need fleet and track investment (see Mexican multimodal feature on p24).
“The larger volume will require more equipment moving over a greater distance, and those are negatives that don’t combine to make a positive [in transport efficiency],” says Manns, who is vice-president of logistics and sales planning at American Honda, the company’s US sales and distribution arm, based in Torrance, California.
One of a group of carmakers expanding in Mexico – others include Chrysler, Mazda, Nissan and Audi – Honda has a new plant starting production during the spring of 2014 in Celaya, in the state of Guanajuato in central Mexico. It is also arguably the first of these manufacturers to comprehensively address, if not to answer, some of the ‘Mexican questions’ for vehicle logistics, with Manns and his team having finalised plans for the export flows.
Honda's Celaya plant will begin producing the Fit (Jazz outside North America) in 2014 and will soon after add a compact SUV based on the Fit platform.
The Mexican import flows will expand Honda’s current outbound network, including grafting onto it three US east coast ports – up to now, the carmaker has typically used only west coast entry points to receive Japanese-built cars. But the Mexican expansion also heralds a deeper integration of Honda’s vehicle logistics and inventory management across North America. While American Honda, Honda Canada and Honda de México have historically managed these operations separately, Manns believes there should be more central steering, including shared inventory visibility and handling processes.
A US-based system for yard management, for example, will be applied at the vehicle distribution centre (VDC) in Celaya.
“Although most of the [sales and production] volume is for the US, from a systems and process standpoint it is mission critical to be in sync with the three organisations just to obtain efficiencies in sales and logistics,” says Manns. “I see our plan for Mexico as a starting point for that integration.”
The wider company is already making moves toward a North American management group. This spring Honda is incorporating a new service group at its manufacturing headquarters in Marysville, Ohio called Honda North America Services, which will combine current support functions that had been based in Torrance, such as legal, corporate audit and risk management, with several senior executives. According to Tetsuo Iwamura, chief operating officer of Honda’s North American Regional Operations, the intention is to improve the speed of decision-making and the introduction of new vehicles across areas like sales, manufacturing, purchasing and research and development.
While Manns and his team will not be moving to Ohio, he anticipates “big changes” for logistics too as Honda moves closer to a North American approach.
The plant will begin with production of the compact Fit (known as the Jazz in other markets) with an initial annual capacity of approximately 150,000 units, expected to rise to 200,000 units after Honda adds production of a compact SUV. At full tilt, Celaya will increase Honda’s North American production capacity to 1.92m units. Although the majority will be exported to the US and Canada, Honda will also export to other markets, including South America and Europe.
"Flexibility is the name of the game. We wanted to make sure that, should we have a disruption on one mode or route, we could shift to another option" - Dennis Manns, American Honda
Plant utilisation was already strong in the region in 2012, as Honda built 1.69m vehicles across seven plants. US production surpassed 1.2m units at four assembly plants located in East Liberty and Marysv ille, Ohio, Greensburg, Indiana and in Lincoln, Alabama. In Canada, the carmaker built nearly 410,000 cars between its two plants in Alliston, Ontario. In Mexico, where Honda currently has a small plant in El Salto, near Guadalajara, the OEM built 61,000 CR-V models (nearly 40,000 of which were exported).
VDCs at each port and plant location are outsourced to logistics providers and Manns points out that American Honda’s dispatch operations are relatively simple; since all vehicle modification and accessories are done at dealers, there are only two choices for each vehicle coming off the line or the boat – railcar or truck. “Our business model doesn’t have a lot of dwell time,” he adds. “Sitting is good for red wine, but a car does not get more valuable or more attractive [when it sits].”
Honda is also an extensive user of rail. Around 80% of American Honda’s outbound mileage, including Canadian and Mexican imports, is covered by rail. The company also has a fleet of around 400 Auto-Max rail wagons, which have higher carrying capacity and more flexibility than normal multi-level wagons.
The Mexico plan unveiled
Drawing Honda’s planned export routes from Celaya on a map (see below) demonstrates the impressive range of territory they cover, with both amphibious and land entry points at no fewer than eight US locations. Honda will use rail and short-sea shipping partly because of infrastructure and capacity uncertainties, but also in spite of them.
"Our business model doesn't have a lot of dwell time. Sitting is good for red wine, but a car does not get more valuable or or more attractive [when it sits]." - Dennis Manns, American Honda
Volume will flow in almost even thirds of rail up the middle, and ocean from two coasts. Daily rail services will move north from Celaya to the US Midwest, as well as to the ports of Lázaro Cardenas on the west coast and Veracruz to the east for dispatch by short sea. From Lázaro, a regular service will call on Honda’s three west coast ports, while from Veracruz the ship will call at Brunswick, Baltimore and Davisville, Rhode Island. As the ships make international calls, they will be able to call at US ports without violating the Jones Act.
The simple and elegant logic of this strategy belies a complex accumulation of different locations, logistics providers, processors, and even the creation of new services altogether. For the rail flow, Honda will use both Kansas City Southern Mexico (KC SM) and Ferromex (FXE) to increase flexibility, limit the potential for disruption and enhance geographic reach. Using both providers, as well as both port options, should also foster competition and help to improve service levels, says Manns.
American Honda also plans to integrate a portion of its Auto-Max fleet into the Mexican flows, although not yet to expand the fleet size. Volume from Honda’s plant in El Salto, which is now trucked to a railhead in Guadalajara, 300km west of Celaya, has also not yet been planned into the new flows.
"There have been no changes to those decisions yet, but the current plant will benefit from the efficiencies and scale that we put in place,” says Manns.
Choice is king of all flavours
In designing a new export flow for Celaya, Honda wanted to ensure it had as many options available as possible, whether in the face of capacity shortages or weather-related disruptions. Considering Celaya will be the sole production location for the compact SUV, inventory availability is going to be critical. The combination of both rail and short sea is a counterbalance to disruption or strains on either mode, as well as to gaining better service and reach.
"Choice is king. That’s why Baskin Robins has 31 flavours,” says Manns, whose easy, unflappable manner is accentuated by his colourful idioms and wholesome – if not somewhat antiquated – pop cultural allusions.
Manns remains sanguine about the railways meeting Honda’s expectations. “I’d be happier to say that everything is already finished but there are definitive plans in place and there is a lot of activity among the railroads.”
There are capacity questions at both of Honda’s chosen port locations. Veracruz, which is the busiest port in North America for vehicle movements, faces space issues, while there has been legal wrangling over the concession of the vehicle terminal at Lázaro Cárdenas. But Manns is resolutely optimistic. “There is a lot of activity going on in Veracruz, which was a reason why we wanted to go there in the first place,” he says. “We’re also confident that the operational issues in Lázaro will be resolved, but we will be following up continuously with our processors in each location.”
Creating a new short-sea service
As well as making the best use of resources and competition in the market, Manns emphasises the need to make these flows profitable for logistics providers. While Honda will split its exports across two railways and short-sea shipping, it w ill also use rail for inland carriage from the factory to the ports, in part to give the railways more volume. Manns recognises that Honda needed to make certain commitments over the coming years that would allow logistics partners to make the necessary asset investments. “We do take a lot of time and effort in our vendor selection process. You can always go cheap, but I’d rather make a good spin first and sleep better at night,” he says. “Whether rail, short sea or processing, we’re in it for the long run to minimise the service disruptions. We hope not to have to make a change during the contract term.”
Perhaps nowhere was such a careful approach to partnership more necessary than in arranging the short-sea service from Mexico. While ro-ro movements between Mexico and the US do exist, services are relatively infrequent and are usually a bolt-on leg from Veracruz as part of a larger deep-sea Asian or European route. The Volkswagen Group, Nissan and Ford each supplement rail service to different degrees with regular short-sea services from Veracruz (see Mexican multimodal article on p24), however ocean is typically used4 for a minority of exports and in many cases only when rail capacity has been exhausted.
Honda therefore needed to encourage a shipping line to create a new service with enough frequency to match its distribution needs. “With large volume like this you can’t sit and wait a month to release it,” he says. “Meanwhile, short-sea providers are not interested in a one-way service.”
Manns admits that it was difficult to find lines willing or able to commit but American Honda has now contracted with MOL, which has plans to run regular services from both ports. Manns expects these to become a weekly call by the time Celaya is at full capacity, a frequency that is virtually unheard of among OEMs for regular services to the US from Mexico.
Honda needed to be able to commit enough volume to make the business attractive enough for MOL to make the investment. “We’re optimistic that we’ll be able to have an ocean carrier call weekly,” s ays Manns, adding that he expects the shipping line will offer its capacity to other OEMs. “If using one of our competitors helps to increase service, that’s great for us.”
Managing across North American borders
As the Mexican plant ramps up production and exports, Honda’s vehicle flows will move along a truly continental axis, with hundreds of thousands of vehicles exchanged between the US, Canada and Mexico. This cross-shipping requires more central coordination of all three countries’ operations. While there are no formal plans to integrate the logistics management of the business units, in practice American Honda is taking a lead on managing these flows.
“We already have a lot of interface with the other business units, but we are now trying to stay connected at the hip to Mexico and Canada,” says Manns.
Today, American Honda already controls most of the transport for vehicles destined for American dealerships. It takes responsibility for cars once they arrive in US ports, or come into an American VDC. For Canadian-built vehicles, American Honda takes over once they are loaded onto a truck or wagon. For El Salto, the plant is responsible for trucking vehicles to a nearby rail station from where American Honda takes over. For the new plant in Celaya, American Honda will have control as soon as the vehicle is released from the VDC.
Although American Honda controls the lion’s share of transport operations and costs, Manns sees an opportunity to assimilate the handling procedures and the visibility of inventory at VDCs across the borders of North America.
Whether it's a unit that needs to be built, is waiting to be assigned [to a dealer], or is damaged, as longs as it's an American Honda unit, today I can see exactly where it is" - Dennis Manns, American Honda
Firstly, Honda would like to replicate yard management processes so that a distribution centre manager from Ohio could move between Alliston and Celaya and be familiar with the operations. The company will thus extend the yard management system that it currently uses across its American VDCs to Mexico. Eventually, Manns also believes it will be rolled out to Canadian operations.
Beside the savings of using the same system, Manns sees importance in having full transparency of inventory. “Whether it’s a unit that needs to be built, is waiting to be assigned [to a dealer], or is damaged, as long as it’s an American Honda unit, today I can see exactly where it is,” he says.Beside the savings of using the same system, Manns sees importance in having full transparency of inventory. “Whether it’s a unit that needs to be built, is waiting to be assigned [to a dealer], or is damaged, as long as it’s an American Honda unit, today I can see exactly where it is,” he says.
But that’s not the case for Canadian or Mexican vehicles, which are partly shielded behind the artificial borders of Honda’s business units. “If you need to go through a sales operating arm to see what product you have, you lose so much control,” Manns says. “But if I can see it, I can manage it.”
The savings that American Honda has enjoyed by having such basic visibility in the US have been substantial. Several years ago, for example, the time it took to repair and reintegrate damaged units into the supply chain was 90 days. The savings that American Honda has enjoyed by having such basic visibility in the US have been substantial. Several years ago, for example, the time it took to repair and reintegrate damaged units into the supply chain was 90 days.
Today it is 24 days. “Having the visibility means that we know what vehicles to chase when they are no longer moving. If it’s a damaged unit, we act right away to get the survey done, order the replacement parts and get the car back in the system,” he says. “A sitting car is dead cash and one of my financial responsibilities is to minimise that.”
Also important to this North America-wide visibility is the way information could be fed into Honda’s order-to-delivery system. American Honda currently has an in-house system that provides an estimated delivery date as soon as the vehicle is assigned a dealer. The system is sophisticated enough to provide automatic updates to dealers and logistics providers based on changes in production or delivery delays, however the ETA accuracy varies widely until the vehicle is actually released from a plant. “Once the factory gate comes down, the predictive aspect of the system is more accurate,” Manns says.
Given this information’s value to dealers, providers and American Honda, it is obvious why Manns is keen to have the same access to the production pipeline and vehicle releases in Canada and Mexico, too. “Because there are so many units and so much money involved, this integration is going to help us out a ton,” he says. “I’m very excited about the possibilities.”
A model of risk management
The growth of Honda’s exports and imports from all corners of North America represent nothing short of the Japanese OEM’s transformation to having a fully fledged continental network in North America. Indeed, only GM, Ford and Chrysler will have such extensive cross-shipping routes and modes across all three countries, which is perhaps why Honda is looking more carefully at managing logistics on a North American basis that would more closely resemble the structures of the Detroit carmakers (although others, such as Nissan, have something similar in place, while Daimler too has been exploring such integration).
"With a consistent, sustainable growth, equipment can be purchased and built even as you stretch out your network from top to bottom" - Dennis Manns, American Honda
Honda will also join the Volkswagen Group as the only OEM to balance its Mexico-to-US imports between sea and rail – and may even tip the balance in favour of sea. The use of two ports that deliver to both the west and the east coast will also be a significant development for the industry, and could offer opportunities for other OEMs to join these routes.
Of course, Honda now faces the challenge of turning contractual planning into operational reality, from building up the team in Mexico to making sure providers are ready to move once production starts. At the same time, Honda is facing rising sales volumes across North America, with transport rates starting to jump as well.
But these are problems that would have seemed too good to be true only a few years ago when Manns and his team were hit by the successive waves of the financial crisis, the Japanese earthquake, Thai flooding and a strong yen. With steady growth and a vehicle logistics industry that is generally healthy – from trucking providers to rail wagon builders – Manns is able to see a clear path to meeting distribution targets. “With a consistent, sustainable growth, equipment can be purchased and built even as you stretch out your network from top to bottom,” he says.
But uncertainty is something that Manns and his team have dealt with enough to at least anticipate. Honda’s Mexican plan, with its built-in buffers between modes, ports and providers, may well turn out to be a model for other manufacturers as they reshape their strategies for North America’s changing vehicle flows.