With BMW’s production at full speed, logistics has become critical in maintaining record profits. But Dr Karl May, head of logistics, tells Christopher Ludwig that there have been service failures and he’s looking for reliable partners to share BMW’s considerable growth.
Logistics is always important to a carmaker’s bottom line, as it represents a measure of production efficiency, inventory control and, critically in recent years, a means to improve cash flow. That is no different for BMW, except that today logistics is also acting as a kind of autobahn that either paves the way for the company’s profits to keep moving at a fast pace–or leads them into gridlock.
With fast growing sales in almost every corner of the globe and some factories running at as much as 110% capacity, the Munich-based carmaker needs to produce as many vehicles as quickly as possible. “As we do not have any room to catch-up on lost production, anything we lose represents lost profits,” says Dr Karl May, the company’s head of inbound logistics and network design. “No one will understand if we cannot produce additional volume because of logistical issues. That is the last thing our board, and ultimately our customers, wants to hear.”
The imperative is even stronger given the economic uncertainty in Europe and worldwide. While BMW will surpass its objective of selling 1.6m vehicles for 2011, and its medium-term plan of selling 2m cars is unchanged, Dr May acknowledges that nobody knows exactly how long the good times will last, which puts even more pressure on reliable and efficient material flows.
The company’s profits, which reached a record level in the third quarter, speak for themselves in terms of the success that Dr May and his team have achieved in keeping production flowing. A newly centralised inbound logistics structure has also made it easier to make sudden changes, a flexibility that Dr May believes has helped BMW avoid losing production following the Japanese earthquake or the Thai flooding.
But logistics–and specifically, logistics providers–has stopped production in other cases this past year, Dr May reveals. There have even been multiple incidents when providers lost track of their trucks.
“I’m sorry, but in these days of GPS, that is completely unacceptable. Whenever I’m negotiating with providers, they always tell me that the trucks are very expensive and they need to utilise them fully, but then they lose track of them for three days.
“It’s a core issue. If we ask for transportation, we want it on time, as ordered. If we stop a plant like Dingolfing, I don’t want to even calculate how much money is lost.”
These are serious issues for Dr May, as well as for logistics providers–even more so because now is a time of serious opportunity for LSPs and the premium OEM. With expansion across its core production in Germany, as well as in the US, South Africa and China, plus increasing semi-knockdown and complete-knockdown (SKD and CKD) exports, Dr May says that the business potential for the right service providers is almost limitless.
“We need flexibility and reliability. If our logistics partners can give us those two attributes, then there is almost endless potential,” he says.
This is not mere hyperbole–much of BMW’s production boom has been achieved by increasing production capacity without necessarily expanding plant space. That means more operations–such as sequencing, kitting and subassembly–are put in the hands of logistics providers.
SKD/CKD packing is another area where Dr May sees opportunity for providers, particularly with trade and custom barriers being re-erected in regions like Russia, South America and Southeast Asia. While BMW carries out packing and consolidation in-house at its CKD centre in Wackersdorf, the rest of its centres in Germany and in the US are outsourced, with plans to outsource even further in 2012.
Finally, Dr May–who is in his second tour in logistics since spending several years heading up German retail outlets for the carmaker–admits that BMW is considering a major redesign for its European inbound logistics network. BMW’s full truckload network is outsourced and run by eight different logistics providers in Europe, while in 2005 the company made the decision to award all less-thantruckload freight to DHL. That contract expires in 2013 and with BMW running at higher volume than when the network was outsourced in 2005, Dr May sees an opportunity to consolidate more freight by full truckload. “Replacing the area forwarding system with the LTL-network was the right thing to do at the time and has been successful, but we now have to make the next step. We are thinking about a more advanced system that might include having our own crossdocks, but it is not finalised yet,” he says.
With so much under development, the message to providers couldn’t be clearer: move fast and reliably if you don’t want to see BMW speeding past you on the autobahn.
Christopher Ludwig: You’ve returned to logistics following some years as head of the BMW-owned, German retail outlets. These appear to be two very different areas, but is there a link between them?
Dr Karl May: Many people think that it was strange to go between these roles but it was a perfect fit, as the network of our retail outlets was facing challenges similar to those within our logistics network, including leadership issues, process reengineering and major IT challenges. As in logistics, there was a decentralised organisation in the sales network with some 55 different sites. The great challenge was to get those coordinated and put standard processes across them. We also had to replace a 30-year-old dealer management system. When the job was done, our management wanted me to go back to logistics to manage the growth.
CL: In an interview earlier this year, a vice-president of assembly said that BMW aims for flexible production more than lean production. Do you agree?
KM: I think we need both. But if we have the leanest production building a product that the customer doesn’t need, it doesn’t help anyone. We need the flexibility to meet customer wishes and fluctuating demand but we have to do it in the leanest way possible. From my point of view, it is not a contradiction.
CL: Has the pressure to remain lean and yet meet very high demand put a strain on logistics?
KM: There is pressure on logistics, of course. Coming out of the crisis, our growth has been on a steeper gradient than that of most others, but not all of that growth had been planned. During the crisis a lot of capacity had been cut from the supply base and if you hit reduced capacities with unplanned growth, it is clear that you’re going to have some issues. But obviously we have done quite well if you look at the growth we were able to realise over the last two years.
CL: Are high levels of production and low inventory leading to higher instances of premium freight?
KM: We are good customers for air freight, which is usually less because of our planned levels of inventory but because of disturbances somewhere in the supply chain. With many of our suppliers running 19-20 shifts per week, there isn’t much room to catch up if a tool breaks, so you need air freight before the pipeline runs dry. Another aspect is product-driven: when you have a lot of engineering changes and it might be wise not to have nine weeks of parts at sea that could become obsolescent.
CL: That brings up the question of where you source parts. Is logistics playing a significant role in those decisions?
KM: We are deeply involved. It is a landed cost decision, but in that equation you need to consider process risks as well. If you have a longer supply chain, you usually have higher risks than with a shorter supply chain, so you’d better have room in the business case for emergency concepts.
CL: Has global sourcing increased since you were last in logistics?
KM: There was a kind of hype a few years ago, as everyone said we needed to go to the best-cost countries. From my point of view, the hype is over. We have best-cost countries on our doorstep in Europe and so we will probably see more regionalisation, which includes Europe sourcing more from Eastern Europe and the US more from Mexico than either do today.
CL: Are you working on any advancement for IT systems to manage supply or providers?
KM: We are currently having more discussions about structures and processes rather than for IT. But for the SKD/ CKD business, we are operating a very old system. With trade barriers and protectionism going up again, our knockdown business is growing strong and we need to do something about it.
CL: BMW has outsourced its groupage network in Europe to DHL. Are there any planned changes?
KM: About six years ago we moved away from Gebietspedition–area forwarding–and created two networks: one was full truckload shipments where we had significant cost advantages...the other was the LTL network, which we awarded to DHL. In principle, the LTL freight was meant to be like putting a letter in the mailbox, since DHL’s network in Europe is so dense. We didn’t care if the provider took one or five handling steps or drove it directly, so long as it arrived reliably on time.
I think it was the right step at the time as it gave us considerable flexibility. Our volumes were also small enough that our fluctuations wouldn’t affect the network much, which was a good thing. Nonetheless we are now looking for an even better concept. The DHL contract is running out in 2013 and we are in a conceptual discussion about a more advanced system, perhaps using own crossdocks or provider hubs, as so far we have only used DHL hubs. But nothing is finalised yet.
CL: Why is now the time to make a change?
KM: We just keep learning. We are on a much higher volume today and we have more opportunities for full truckload shipments. We want to take advantage of what has happened in the last six years.
CL: How do the inbound networks that you’re running in global locations compare to the core production in Europe?
KM: In the US and South Africa we are operating classic areaforwarding systems. One reason is the volume is lower and the second is that we don’t have a network provider as strong and specialised as DHL is in Europe. Distances are also a lot longer. The distance between Spartanburg and Mexico is a distance that nobody really thinks about in Germany.
CL: In the past BMW has been relatively careful about services that it outsources for logistics. Are you exploring the outsourcing of more services?
KM: I don’t know where you picked up the impression that we are reluctant to outsource. We outsource 100% of transport and do not operate a single truck, which is quite different to what some competitors are doing. For SKD/CKD about 80% of packing volume is outsourced already and during the next year that will increase to 85%. We’ve also opened four supply centres in Germany this past year and providers operate all of them, including sequencing, kitting, etc. I think we are in good shape when it comes to outsourcing.
CL: Does this level of outsourcing extend to your production facilities?
KM: We have increased production or added new models without necessarily extending the size of our production facilities. If you don’t have the space to get in five boxes, you push them out to providers for sequencing, which usually they can do more efficiently anyway.
Let me be clear, too: there is more to come for logistics outsourcing. There are many opportunities for service providers over the coming years, as long as they are reliable and flexible.
CL: How would you rate the current reliability of providers?
KM: I’ve had a few events recently that didn’t show the best quality of service. For partners that are strong and reliable, we have business that is almost endless.
CL: Are the service issues that you’ve seen capacity-related or specific to companies?
KM: I don’t want to talk about any specific company, but we had transport issues that led to plant stoppages. There were providers–and this didn’t happen just once–that could not tell us where their trucks were. I’m sorry, but in these days of GPS, that is unacceptable.
CL: Has BMW used or considered using 4PL-style services?
KM: For me it’s an easy decision. If you ride a bus, you trust that the driver takes you where you need to go. We prefer having the steering wheel in our own hands. We gladly take 3PLs, but we like to stay in control.
CL: Would you say that the logistics network and setup for Leipzig, where there is also a high level of outsourcing, is more advanced than other plants?
KM:Yes and no. It’s our newest plant and so we developed some innovative concepts at the time. There is the ‘finger’ concept with docks where you can deliver directly to the line. But on the other hand, we built an extension to the Spartanburg plant in 2010–for the start of the X3–where we did even better things. We have a ‘JIS [just-in-sequence] warehouse on wheels’, which from my point of view is the leanest process you can do. And we’re doing that over huge distances.
We have four docks at the plant for each specially-sequenced part and we don’t have any additional handling step after getting the parts out of the truck. One truck is docked for unloading while the other one is docked to retrieve the empty containers. We carry no additional stock in the plant or in the suppliers’ yards for these parts. The concept was perceived as quite risky at first, but it has worked out very well.
CL: In developing these concepts, what role would you say LSPs play? Are innovations coming from their side?
KM: If you Google my name you will still find a quote from 2003 where I said that I wasn’t being ‘overrun by creativity from logistics providers’. That is still true. The concepts typically come from our people, although we might refine them with providers.
CL: Do you have any concerns over future transport capacity levels, given the low investment in trucks and equipment?
KM: We are more likely to face bottlenecks in infrastructure for ports and rail. Even today, we handle container shortages and port congestions, which have a tremendously negative impact on reliability. If a ship is waiting three days outside a port, the shipping line might eventually decide that it is too expensive to wait any longer and our containers end up in the wrong port. But we have to deal with that. I can’t replace all of the governments in the world to get the infrastructure right.
CL: Is it something you’re encountering more in emerging markets?
KM: Actually, we face port congestions all around the world. It could be a very dangerous thing for logistics in the long run because it leads to unreliable supply chains.
CL: What role, if any, is reducing carbon emissions playing for your logistics? Do you judge providers on this basis at all?/p>
KM: There is usually a strong correlation between economic and ecological efficiency. But we are not looking at it in a systematic way in our provider nomination process. We have looked at it if we can get the data, but our focus is more on reliability. We do a lot of rail transport in German plants– about 20% of our parts logistics in Europe including CKD–but it is nothing really new. We also move all of the parts arriving in the Chinese port of Dalian to a container yard in Shenyang by rail. We have no rail in the US or South Africa for inbound.
CL: I understand that BMW is now sending kits by rail over the Eurasia landbridge to the plant in Shenyang–is this now a standard service?
KM: We are doing it on a regular basis due to some specific regulations for the X1 launch in China, for which we learned from the Chinese authorities that we needed a kit solution. The preferred mode of transport would be sea freight, but this rail service has proved reliable. It is a lot cheaper than flying but also much quicker than sea freight, so I think we should use it as an alternative for when we don’t necessarily need to move material as quickly as we would by air. This service is limited to the X1. Next year we will start with the long-wheel base model of our new 3-Series in China and that will be partby- part production and move by sea freight. But it is good to know that this solution exists.
CL: Are you experiencing any specific logistical challenges in places where BMW is expanding production?
KM: We are expanding just about everywhere, in fact, and we have some significant new launches. In South Africa we are going to launch the new 3-Series at the beginning of 2012. Also, to expand capacities within our ‘LK’ network, which is where we build the 1- and 3-Series, the Rosslyn plant will nearly double output to produce 100,000 units in the midterm. That will be a major challenge for logistics and the local supply base. But we are confident that we’ll get it done fine.
CL:What sort of growth are you anticipating for assembly in India?
KM: For India we have SKD operations in Chennai, which is showing strong growth but from a low level. It is a very interesting country, but market-wise we will probably be in SKD mode for quite a while.
But as I said before, I believe that SKD and CKD will show significant growth, particularly for places like India and Russia. That is down to the markets, but also because there has been a shift recently towards protectionist barriers. We had a completely different view on that a few years ago, when everybody kept saying that the barriers would go down thanks to the WTO [World Trade Organisation]. But there has been a complete turn, and we see barriers going up in places like Turkey, Brazil and Argentina. The latter has even gone so far as to resuscitate barter trading from the cemetery of history by insisting that companies export products of equal value to what they import.
CL: Let’s finish with something for which I think I know the answer. What would be top of your ‘wish list’ for providers or potential providers working for BMW?
KM: As you could guess, it’s reliability. Of course we have to be competitive on price, but we have to be reliable and flexible in the first place. If partners can give us those two attributes then, as I said before, there is almost endless potential with us.