Audi has gained market share and kept a tight reign on inventory thanks to industry-leading logistics processes. Now, as Dr. Ernst-Hermann Krog tells Christopher Ludwig, it is applying its ‘new logistics concept’ further down the supply chain
If you want to see the future of supply chain strategy for the wider Volkswagen Group, it is a good idea to study what Audi is doing today. Three years ago, for example, the premium carmaker was the first in the group to update its production system, focusing on shrinking the amount of worker movement and inventory on the line. It was also the pioneering brand for the group’s order-to-delivery system, which allows later production changes and more flexibility for swapping orders in the pipeline. More recently it was the first to begin work on the Neues Logistikkonzept (new logistics concept, or NLK), which will synchronise the supply chain from assembly back to the supplier base.
Audi is often a good place to introduce production and logistics concepts because of the advanced infrastructure at its German plants at Ingolstadt in Bavaria and in Neckarsulm, outside Stuttgart. Both have excellent transport links, as well as logistics centres or suppliers parks next to the plant, a model that has been copied elsewhere for Audi and the VW Group.
While VW Logistics purchases transport services on behalf of the group, and VW manages logistics at a group level across brands and inter-plant activities (such as where powertrain components are shared), the group’s development of Markenlogistik, or ‘brand logistics’, devolves certain power in the supply chain to brands. Each is responsible for tracing the order-flow from customer or dealer order, then developing a full production schedule, including complete knock-down (CKD) kits; brand logistics also includes transport planning, pre-production logistics and outbound logistics in many cases.
For Audi’s supply chain, led by 25-year industry veteran Dr. Ernst-Hermann Krog, executive director of brand logistics, expectations for order accuracy, flexibility and delivery targets form a fundamental part of the brand’s identity, especially as consumer expectations for premium cars are highest when it comes to the ordering process and the ability to make changes. Audi’s KAP, or order-to-delivery programme, has focused on connecting customers directly to Audi’s logistics pipeline for the entire build and supply of the car.
The system, first put in place for Europe several years ago, provides accurate delivery dates, while allowing later changes (up to three days before the bodyshop production begins). For built-to-stock markets, such as the US, the system also allows more ‘pipeline trading’, where dealers can swap cars with other dealers in stock, in transit, or even before they’ve been built.
The variations in the logistics systems for different markets, whether built-to-order or built-to-stock models, has also helped keep Audi competitive. While Audi has become the top-selling luxury-brand in Europe in 2009, scrappageincentive- fed markets in Germany and Western Europe have had smaller appetites for premium cars. But Audi’s control over the order-to-delivery process has helped it to keep production in tight alignment with the market, avoiding any major inventory problems particularly at the worst points of the downturn at the end of 2008 and early in 2009.
“Fortunately Audi had and has the flexibility to react very early,” Krog says. “The order-to-delivery programme has been an important part of that.”
Meanwhile customers in the US and China share tougher expectations over the time they will wait for cars, and in those markets the emphasis on flexibility for dealers and improving distribution is most important, particularly for features such as pipeline trading. In the US, a depressed market has forced carmakers to carry less vehicle inventory, but Audi has kept service in line with customer expectations. It is tracking well ahead of the market, down just 8% after 11 months (in a premium market down around 25%), a lower drop than Audi has seen in Europe. It has done so recently with inventory levels as low as 15 days supply for some vehicles.
In China, Audi’s second largest market outside Germany, Krog says that last year the OEM carried out an extensive survey on activities from the plant to dealer. Chinese sales are up about 23% this year, surpassing the 2008 level of more than 118,000 cars by the end of October.
With a large portion of Audi vehicles sold in China built at the FAW-VW joint-venture plant in Changchun, Audi wants to apply its NLK and order-to-delivery systems here. It is also introducing the features from the American order-to-delivery process and pipeline trading to other sales markets, such as in Japan, and eventually across the entire VW group.
The Audi production system reduces the ‘worker’s triangle’ on the shop floor, or the distance an assembly line worker moves to retrieve material. It means ergonomic improvements and better material handling technology, as well as a change toward smaller, faster delivery feeds to the line from adjacent ‘supermarkets’, where parts are arranged and sometimes pre-assembled. It’s a process since introduced across Audi’s production (in varying degrees of automation) from Europe to its new assembly hall in Changchun, as well as for CKD assembly at the shared Skoda plant in Aurangabad, India.
Now Audi is taking those lineside improvements back to the supply base so that it may become more integrated with Audi production, according to Krog. The implication is that suppliers will match Audi by producing in smaller batches, and deliver to the plant more frequently. Such an alignment would not only reduce inventory and avoid unnecessary production, it would mean the supply base could react quicker to the production plan and allow later production changes.
For that to happen the company wants to standardise its production schedule with the market, while also producing consistently, particularly in the last four weeks of the cycle.
“Audi has focused not only on being flexible, but on fixing the production programme at a certain moment and then to run it very consistently,” says Krog. “We have been on a good path toward running the factory close to the market, and the final four weeks in the cycle in a rolling and stable way.”
Jens Tilgner, Audi’s head of inbound transport logistics and heavily involved in the NLK project, believes that stable production, combined with suppliers linked closely to Audi production, will eliminate waste. “Our focus is to run smooth, with the whole supply chain really in line with us from the order entry to the start of production,” he says.
Needless to say such even, synchronised production is the holiest of grails for supply chain management, and the volatile demand patterns of recession-hit economies make it even more difficult. However, Audi has become better able to manage this volatility owing in part to its expansion, which now includes about ten models. With its sales target now raised to 925,000 vehicles globally this year (from a record 1m units in 2008), there is enough potential variation to smooth production over many of the peaks and troughs.
The NLK requires an IT overhaul to improve data exchange and integrate the various systems between suppliers, LSPs and Audi. It is also a complicated transport orchestration, and requires refinements in the transport network.
“If you are transporting more often, and in smaller portions, there is a risk that the truck will not be fully loaded,” says Krog. “We are making much effort to bundle our material to ensure optimised utilisation of our transportation network.”
To move the freight most effectively, Audi is currently using a European network of consolidation points to combine material volumes from across the VW Group. However, the objective is to switch to a cross-dock system that is more numerous and closer to suppliers, allowing the inbound material to be consolidated without holding excess inventory.
While Audi benefits from the VW Group’s scale to consolidate material, Krog and Tilgner believe that crossdocks, including the overall VW Group volume, would be a better system, and should eventually work across the entire group. “A cross dock in the future is really intended to move the supply chain for the assembly line back to the suppliers, in a continuous flow over just a couple of hours,” says Tilgner.
Audi also wants to develop the NLK in its global production, particularly China. “China wants not only the newest cars, but also the newest programmes and latest processes,” says Krog.
In September, Audi opened a new assembly hall on the grounds of the FAW-VW plant in Changchun. The hall, which will produce the long-wheelbase Audi A4 and Audi Q5, has integrated all of the logistics processes from Audi’s production system, including adjacent supply supermarkets. “We have supported FAW-VW to bring a state of the art logistics concept to the new assembly facility,” says Krog.
Currently, Audi studies have centred around improving outbound distribution to meet the Chinese consumer’s expectation for lead times, but Audi is now looking more carefully at the order-to-delivery and inbound process. “What we have done so far is to implement activities to improve customer flow, but in the future it would also make sense to optimise from the point of the dealer order as well,” Krog says.
However in China Audi’s logistics is managed differently. Decisions at the plant and local level are decided by FAW-VW, and logistics are outsourced to two FAW in-house logistics companies for each inbound and outbound (a model common among Chinese OEMs).
The NLK requires much from a logistics provider, including delivery discipline, an integrated IT system, as well as the skills to effectively manage cross-docks. But Tilgner questions how many providers will be able to meet the demands of the system.
“I think at the moment there are a limited number of logistics service providers in the market that really have this knowledge in practice,” says Tilgner. “The challenge for the future will be the integration of the NLK processes with our LSP on a day-to-day basis.
“We have a clear idea of how to run a cross dock, and we have a clear focus on how the operations should run,” he adds.
This caution partly reflects the control that Audi maintains for supply chain activities. While the current consolidation activities for inbound logistics are outsourced, and will remain that way for the NLK, Krog believes it is essential for Audi to maintain a high level of in-house integration and competence, an approach somewhat consistent across the VW Group.
Krog describes how Audi maintains its CKD consolidation for India and China with a mix of in-house versus outsourced activities. At the logistics centre in Ingolstadt, a portion of the operation is performed by Audi staff, where it does the planning, the packing and even produces some of the packaging. The rest is outsourced to a provider in Emden.
“Our belief is that if we did not have one part of our activities operated by us, and only counted on a logistics service provider, we would not be so successful,” says Krog.
For example, he says that for the Indian CKD operation, Audi’s team increased the material per container that it could fit from three cars to four.
In-house logistics operations are especially strong in Germany, where Audi performs all in-plant logistics at both plants, and considerable activity at its logistics centre adjacent to the Ingolstadt plant. The centre, which was upgraded and expanded in 2009, has a container terminal as well as one for car carriers, along with a rail terminal and three consolidation centres, which include both the CKD operations and material handling for the Györ, Hungary plant.
Audi is somewhat less integrated for logistics outside of Germany. LSPs manage some operations in-plant at Audi factories in Brussels and Györ. In China, as mentioned, domestic and factory logistics are decided at the local level, although Audi provides strategic input. The situation is similar in India, although in this instance a much greater amount of material originates and is consolidated in Germany.
It is likely Audi will take more responsibility over its logistics operations as markets develop, even where it shares capacity. An example is the Audi assembly hall in Changchun, complete with all the features of the Audi production system, despite it’s being part of the FAW-VW joint venture.
This desire for control is perhaps best exemplified by the NLK, which seeks to align the whole supply chain.
For Krog, more than the balance between what is outsourced for Audi and what is kept in house, he finds order visibility, tracking and control to be the best measure of logistics. “Logistics is not about transporting material,” says Krog. “Logistics is about controlling the order flow from entry all the way through to delivery.”