Global tier ones in Brazil restructured their supply chains during the industry slump, only to find a year later that they were scrambling to meet huge new demand. Tony Danby investigates how the timely overhaul of their logistics and supply chains has helped them cope with the unexpected onslaught of new business in South America’s auto hub
Brazil, South America’s largest economy, was rocked briefly by the financial crisis at the end of 2008. But the government weighed in to support vehicle manufacturers with hefty tax breaks that helped to propel sales. Then, the mix of tax breaks and available credit as well as a growing economy helped to boost record growth in 2009.
With economic growth at 9% in the first quarter and a continuation of available credit, new car and truck sales remained strong in the first half of this year.
Brazil’s automotive association, known as Anfavea, says that Brazil’s domestic vehicle sales quickly recovered after the financial crisis in late 2008 and early 2009. This year, Anfavea says that domestic sales of cars, trucks and buses have already jumped 4.2% to 1.5m units between January and July compared to the same period a year ago. The national sales figures for July were also up 2.5% to 231,045 vehicles (compared to a year ago when the recovery had already started).
Indeed in August, Anfavea hiked its annual forecast for 2010 exports to 620,000 vehicles (from 530,000), as other Latin economies have recovered faster than expected.
Brazil’s steadily accelerating growth for OEMs and tier ones emphasises the country’s healthy auto business. Tier ones such as Magneti Marelli, Robert Bosch and MWM International all have long-term, established operations in Brazil, which is usually the hub for their operations in the Mercosur trade bloc. The tier one segment, which has about 45 main players, employed 199,000 workers in 2009 and has boosted this number to around 213,000 workers in 2010. The global tier ones can afford some wry smiles as volumes and sales expand while their home markets in the US and Europe continue to stutter in the wake of the global crisis.
Brazil’s National Association of Auto Parts Manufacturers, known as Sindipeças, estimates that Brazil’s auto-parts sector, of which tier ones account for about 70%, is expected to ramp up investment this year. Sindipeças predicts that the sector is likely to invest $1.8 billion to expand the factories and logistics operations to meet the rising demand. This compares to $900m in 2009 when the effects of the global crisis stalled investments.
Virgílio Cerutti, CEO of Italian tier one Magneti Marelli’s South American operation, says that Brazil’s slowdown in production during the financial crisis gave the company a chance to better manage its logistics activities across its 12 South American plants. Magneti Marelli runs 11 factories in Brazil and one in Argentina.
Magneti Marelli, which counts South America as its second largest global unit, used the economic slowdown and low volume of orders at the end of 2008 and in early 2009 to implement a new strategy with its suppliers in Brazil.
According to Cerutti, Magneti Marelli in Brazil expects to grow at 5-10% in 2010 compared to BRL2.4 billion ($1.4m) in revenues last year. This continues the same pace of sales and volume growth year-on-year as between 2008 and 2009. As a result, the company can cautiously upgrade its supply-chain activities to handle the increase in flow.
With the current steady growth rate, Cerutti says that logistics companies can manage their capacity in a sound way with careful planning and investments. Cerruti says that if the market continues to grow at 5-10%, the company’s logistics processes can grow in parallel. “This is stable, sustainable growth,” he says.
Moreover, the tier one needs to handle complex inbound and outbound flows. For instance, for inbound, it receives thousands of parts at its 11 factories in Brazil, from complex electronic components through to basic metal items. The company, therefore, needs to handle inbound deliveries from a wide range of suppliers.
For outbound deliveries, the company needs to manage the full portfolio of 11 business lines (ie shock absorbers and exhausts) to most of the major global manufacturers such as Fiat, VW and GM in Brazil.
As a result, Magneti Marelli opted to whittle down its logistics transport providers via a selection process for inbound and outbound logistics. “We have chosen just one Brazilian company to do this work,” Cerruti says, declining to give the name.
The executive explains that Magneti Marelli’s handling in the factories–at the assembly line or in warehouses–has remained the same, with in-house logistics experts working alongside subcontracted employees.
The process requires a wide range of products to be moved, from fragile headlights through to heavy shock absorbers. The aim therefore is to work closely with the logistics providers to improve KPIs and subsequently to build loyalty. “Loyalty is a term usually used for the customers but we use it for suppliers,” Cerutti says.
The company is also working to upgrade its IT system. Magneti Marelli uses a customised global ERP system for its logistics processes in Brazil. Although the company studied other systems, it chose to work more efficiently with the existing tool and to integrate data from suppliers and customers into the system.
Virgilio Cerutti also recalls that a large variability in inbound and outbound flows was seen during the global financial crisis. The aim is therefore to understand suppliers and customers better and to correct issues as early as possible. “IT is important but you also need to develop personal touches with them,” he says.
Magneti Marelli is also looking to develop its staff and to work more closely with its customers. Over the last 15 months, the company made steps to arrange frequent meetings with them to better understand their business and needs. “Our teams work together,” Cerutti says.
MWM international, a subsidiary of US holding group Navistar, also used the slowdown to retune its supply chain and logistics activities in South America, says Carlos Panitz, logistics and material planning manager in the region.
Panitz explains that the challenge for MWM has been twofold this year as volumes of supplies and parts gathered pace. Firstly, MWM’s supply base initially struggled to meet the volume and quality to manage the increase in demand from late 2009 through to the first quarter of 2010.
Many of MWM’s 400 suppliers (of which 200 are in Brazil) needed to add second and third shifts to meet the demand, and this led to quality issues as new employees often faced a steep learning curve. Besides this issue, from March through to August bottlenecks have begun to appear, such as with overseas suppliers, says Panitz.
MWM expects to produce a record of 145,000 engines this fiscal year (November 1 to October 31), up from 122,000 engines in 2009 and 140,000 in 2008. MWM’s two plants in São Paulo state and Rio Grande do Sul produce diesel engines mainly for trucks, jeeps and agricultural machinery. Customers include GM, Ford, ACGO, and Volvo, as well as Navistar.
MWM expects to continue its growth in 2011 in both volumes and sales as new regulations stimulate new models of engine and investment builds up ahead of the FIFA World Cup in 2014 and the Olympics in 2016 in Brazil, he says. MWM is hiring new employees and reorganising the management structure to prepare for the growth, says Pantiz.
The company has reorganised its logistics structure into international and local teams. Panitz explains that one deals with warehousing, local contracts and transport, while the other handles international flows. The company also created dedicated teams of engineers to develop best practices especially for long-term projects and to evaluate the best supply-chain strategy.
MWM is also planning the logistics to handle two new engines in 2011. The tier one will build a new engine for GM’s pickup trucks and for heavy-duty MAN trucks. This will involve handling supplies of parts from Asia and Europe and the company is currently assessing potential suppliers. To meet the changes, MWM will also need to review its network design to best define the location overseas of consolidation points. The company will also select a logistics partner to store parts and handle inbound flows, he says.
MWM is working with its logistics providers such as Cargolift Logística e Transpotes in Rio Grande do Sul for full loads and milk runs.
Like Magneti Marelli, MWM aims to get deeper into its clients’ businesses and create “intimacy,” Panitz says. “We need to manage the schedule and flow of parts as well as to work with suppliers and customers on communications, packaging and logistics.”
Like its peers, German tier one Robert Bosch in Brazil has experienced some delays in parts from its 300 local suppliers to its four plants that supply OEMs such as Fiat, GM and VW with equipment ranging from brakes through to diesel pumps and electrical starters.
Paulo Rocca, director of purchasing and logistics in Latin America, says that local suppliers–especially for steel such as flat sheets or bars–struggled to meet the pace of the changing volumes last year and early this year.
Rocca explained that these suppliers needed four months to readjust their quantity of steel deliveries. These companies have now added two-and-a-half shifts and this eases the flow, he says. But as soon as one issue is resolved then another pops up. Currently imported parts from Europe are starting to show delays as European demand strengthens and suppliers need to adjust their capacity, he says.
Although many tier ones have opted to outsource their logistics, Robert Bosch is keeping its expertise in-house. Activities such as handling parts for Toyota at the correct time in the correct quantity is a core activity and a vital part of Bosch’s business, Rocca explains, so the company doesn’t outsource it. “It is essential to keep the brains in-house, so all of the management is retained,” he says.
Moreover, Robert Bosch’s suppliers and customers require varying services such as milkruns, full deliveries or delivering to crossdocks. Given the different characteristics of Robert Bosch’s inbound and outbound logistics, it doesn’t make sense to outsource it, he says.
Robert Bosch, which purchases some BRL1.2 billion annually in parts, primarily from Brazil, works to train its local suppliers, which are often small- and medium-sized companies. Robert Bosch invests some BRL1.5m each year to ensure that the company can meet its targets. Part of the company’s internal process improvement is to help its own local suppliers, he says.
Rocca recalls that many small suppliers stopped investing during the crisis and they now need to reinvest to meet the steady growth. Robert Bosch therefore has a programme called Fit for Global Approach, or FGA, which trains suppliers and identifies suitable tools for them.
Robert Bosch and other tier ones have managed to get through the financial crisis and are now seeing good growth. Although the increased demand for parts has forced some tier ones and tier two suppliers to adjust their logistics and supply chain structure, the steady growth allows incremental and planned changes.
“We managed to survive the downturn and it is now necessary to meet the growth,” says Rocca. “It’s already time to prepare for 2011 and 2012,” he says.