Dr Holger Scherr, head of Worldwide Transport Logistics, wants to bring a change to logistics at Daimler, helping the OEM to better understand logistics across all of its business units

In 2009, as Daimler saw sales decline across all business units on its way to a pre-tax loss of €1.5 billion ($2 billion), the company moved firmly towards crisis management. Worldwide transport costs, which coincidentally are also around €1.5 billion annually, came directly into the sights of upper management. In February 2009, at the nadir of the crisis in the automotive sector, Daimler appointed Dr Holger Scherr as head of Worldwide Transport Logistics, responsible for inbound, outbound and service parts transport across all business units for the company from Mercedes-Benz cars to vans, buses and commercial vehicles.

Since Scherr joined Daimler in 2003 he has held several roles, including leading the development of a new truck. He began his career with Siemens doing what he calls “very detailed, special” research as an electrical engineer, before moving on to the somewhat more abstract and lofty dealings of management consultancy for five years. This is his first role in logistics and he appears to approach it with the precision of the engineer backed with the calm, process-driven leadership of the consummate manager.

Scherr’s is a critical role at Daimler, as transport logistics is the company’s only cross-departmental supply chain function–operational logistics for production and sales logistics are organised at plant level, while logistics planning is separate for each business unit. Scherr’s team is perhaps best positioned to work as ‘one Daimler’.

To that end, Scherr makes clear his intention to change–not just evolve, he makes a point of saying–logistics at Daimler; he wants the various Daimler logistics teams to improve cost and performance from a “total supply chain” view, rather than for individual business units and locations.

He would also like to expand Daimler’s incentive scheme to inbound carriers, already in place for outbound carriers for several years. Finally, he’s looking closer at cooperation with other companies following the success of working with rival BMW to import and distribute cars in the US.

His job is not an easy one. Daimler is scrambling to respond to global shifts in demand, currency and technology. Just a few important projects include: the shift of C-class production to Bremen and to Alabama; finalising a new plant in Kecskemét, Hungary where Daimler will produce compact cars in the near future; a truck JV in Russia; the manufacture of electric vehicles, including Smart and Mercedes; and, not least, ramping up local passenger car and commercial vehicle production, as well as vehicle export for China and India.

Daimler predicts a modest rise in sales this year, but Scherr acknowledges the risk and fragility in the logistics market ranging from the oil price to the viability of railcar and trailer manufacturers. He believes Daimler’s team is doing well, but admits that the crisis has proved there are no “scared cows”. “In a crisis you get the buy in of everyone, and it gives you the chance to tackle that which you normally wouldn’t,” he says.

Christopher Ludwig: How has starting in this role during such a bleak economic time influenced your approach to transport and logistics?

Dr Holger Scherr: I am in a position where many general management capabilities are demanded and, when I started, every department in the company was doing crisis management. At more than €1.5 billion worldwide, Daimler’s transportation bill is a cost plug that top management cannot avoid. Secondly, during a crisis there are shifts in your global flows that you need to readjust all the time. So that was my start. I didn’t have the famous “first 100 days” of leading and watching. I had to act straight away.

CL: What adjustments has Daimler had to make in logistics?

HS: There were several areas, but if we look at shipping, the oil price went down while at the same time special fees changed, such as for the Suez Canal, which lead many Asia-bound vessels to go slowsteaming around the horn of Africa instead, changing the lead time. For Daimler it impacts our pull system and we have to be careful because if the ships take longer than planned this could affect our supplies.

If you look at overland transport, there were situations where full truckloads no longer worked with the volume and we had to move into area forwarding. There were no big issues around contracts, just daily adjustments. Fortunately we saw that our network generally works as it is well developed with a mix of strong carriers. We also have a system that tracks quality and it really helped us in these times.

CL: So does the focus then become a daily struggle to find the best cost?

HS: Logistics networks have a faster heartbeat than production, so it is a daily operational issue. LSPs must manage our daily peaks and lows, but in crisis management you must also prepare for the future. General management is asked not to forget that and we haven’t. We built up a new reference-costing capability for commodities, which has been a powerful tool for network planning, process optimisation and for negotiations. We want to support this going forward.

Logistics is the proof for production strategies

CL: Have the global shifts in car sales had any impact on the logistics strategy for supplying global markets? For example is there a need to build more locally to cut lead times, particularly in higher growth markets like India and China?

HS: Logistics is not driving strategy so much as it is a function of strategy. It is very much a strategic asset to get products quickly to market, but it is not a core strategy behind our decisions for production or entering markets. In China last year we grew at around 65% for passenger cars, which means we had to adjust networks. To that end, we adapted the vehicle flow to China to a more competitive mode for higher volume by implementing ro-ro instead of container services.

CL: Were logistics costs considered much in the decision to shift North American C-class production to Alabama?

HS: Again, logistics must prove that a production decision works, rather than the other way around. In this case the decision had more to do with being closer to market and using assets, as well as currency factors. The plant in Tuscaloosa [Alabama] will not be that big of an adjustment because we are already building SUVs there. But for the new plant in Kecskemét [Hungary] or JV plant in Chelny [Russia], that is where a planner really can have fun in building totally new and interesting setups.

CL: Are there still any distribution agreements with Chrysler?

HS: Those agreements have now ended. Over the years they worked pretty well with Chrysler colleagues, as they covered North America and we did Europe. Early in 2009 we built up a new team in North America with colleagues from Germany and local staff. It is a really high-performing team and fun to watch–the first amazing results are in the books already.

CL: Has the crisis brought any opportunities for change that weren’t there before?

HS: One idea that has become stronger is to have an integrated supply chain. There is no sole responsibility for this at Daimler and during ‘normal’ times, you don’t usually do the cross-functional and cross-departmental calculations to a great extent. But if you optimise just your own field you usually do not end up with the best overall result. It is not a Daimler-specific issue, but we’re working on improving this.

CL: Do logistics work on a ‘total landed cost’ basis at Daimler?

HS: It’s our objective, but sometimes hard to achieve. Operational logistics are organised by the local production facilities, while logistics planning is granted to the business units. Looking at this you see you have an enormous amount of players and if you align something, you have to move a lot of people. Doing this is always difficult but worth doing. We are getting better every day.

Transport beyond supply-and-demand economics

CL: How do you respond to providers in the past year that have voiced concerns that they are just being treated as commodities as prices get slashed? Is this a simple matter of supply-and-demand or should there be other considerations?

HS: It’s a good question. We know that transportation always has to be competitive, there is no getting around that–if freight rates are going down, you need to adjust to market levels. But it is about more than money: it is a partnership. Sometimes you need providers who can do a special job for you even when they don’t need to do it.

Clearly we have had to reduce costs to follow the market. But the question is how you do that? In our case we did it with bilateral talks with all of our providers. In the vast majority we found very sound solutions.

CL: Particularly in Europe, we’ve heard from outbound carriers who complain they are being forced to take work at a loss. Do you recognise that scenario?

HS: We never force any provider to take work at a loss. Usually we plan the networks and then tender the scenarios and different alternatives to find the best solution, which is natural business. We have no interest at all in players going into a minus, as it would not be good for the business–it is not sustainable and it puts risks in our supply chain.

CL: Do you see any signs of a reversal yet in term of either freight rates or transport capacity?

HS: Mainly the flows are still imbalanced and inhomogeneous. We have some fast growing lanes where there are capacity issues, particularly in Asia. The shipping lines, whether ro-ro or container, are extremely professional and took out assets early on to balance their utilisation rate. As a result, there are some very specific and very local capacity constraints, but it is still quite the opposite in Europe, for example.

But we must recall that all companies have had financial impacts. If a logistics provider is under-capitalised and the market comes back a little then it might struggle to react quickly. Also, there is a supply chain to the transport sector too–there are railcar and trailer manufacturers that are extremely hit by the crisis and this could pose a risk in future.

CL: Is Daimler prepared for any of these potential risks?

HS: I believe we are on a very good way from Daimler’s side. We try to have extremely healthy logistics partners, and to have a strong mix–and we try to have second solutions. That is not to say bailouts, but back ups. I don’t see a problem for Daimler.

A step toward cooperation

CL: What is covered in the cooperation with BMW in the US?

HS: It is for processing at the port [of Baltimore] but also some outbound movements. We also tendered a portion of the outbound network and integrated it together.

CL: Was it a challenge to work together like that?

HS: For passenger cars, Daimler and BMW both have similar networks and specifications in the US and it is very logical to put that together. But we did need to challenge some of the specifications and contracts from the past. That was interesting because, if you have a similar specification but it is not 100% the same, then you need to really talk about that to find a solution out of the box.

CL: Does this open the door to any deeper cooperation in the supply chain?

HS: In terms of contracts that are signed and moving forward, this is the only one. But logistics is always looking for synergies and cooperation–not just with BMW but other companies as well. But the thing that people often forget is most of this comes most naturally from the provider side. We don’t really want too many standalone, dedicated solutions [from providers], preferring to be part of a wider network where the provider leverages his customer base. The best area forwarders are those that don’t just deliver your goods but have the right synergies behind it, including their own consolidation points.

CL: Daimler is going to build more hybrid and electric vehicles. Does this present any unique logistics challenges?

HS:Yes, it is challenging, because these technologies have some components that are in the official category of ‘dangerous goods’. That has implications for how the material is packaged and moved. Because this is a fast-growing segment, we see these regulations changing on a regular basis and we’ll have to adapt our general procedures and manuals.

The entire industry is facing this and all OEMs will have to work together with authorities to guarantee the highest level of safety as well as functionality. We have a team member who is dedicated to working in this area.

CL: To what extent are you willing to outsource activities to 3PLs?

HS: The main question is whether such providers can better integrate the supply chain than the OEM is able to do. If this is true, then it should be done. For a large company like Daimler, where we have many flows, we believe that the providers can achieve better integration for us in only some niche flows, such as for aftermarket or for vehicle distribution in parts of the African continent. For the larger markets and trade lanes, a 3PL would leverage structures that we can directly manage better ourselves, by using our own know-how and local expertise without incurring any additional surcharge. For that reason we don’t give the big networks to 3PLs but keep them in house.

Potential incentive schemes for inbound carriers

CL: Daimler introduced its performance-related pay several years ago for outbound carriers for passenger cars, and in 2009 for commercial vehicles. How well has this worked?

HS: At the beginning, our LSPs feared that we just wanted to reduce cost, which is not true. We have very significant statistics that demonstrate how the overall performance is improving continuously since the performance-related pay is placed from the top performers down to those with lower scores. We purposely pay a little bit more to enjoy constantly improving services.

CL: Would the scheme work for inbound carriers?

HS: Yes, basically. Of course, it would be necessary to define reliable and standardised KPIs that have to be legally proven in contracts. But if it works for outbound, why should it not work inbound? This is a field that is worth exploring. At this point we are measuring inbound logistics performance in the plants but there is no standardised methodology across all business units. Therefore, we would have to implement a couple of strong KPIs, which are valid for all plants, to gain a common and clear understanding of the service performance of our logistics providers.

CL: In general how satisfied are you with the providers Daimler is using in key developing markets like India or China?

HS:You can’t directly compare performance in these markets with the mature markets in Europe, Japan or the US. But in general you see the mature players go to the emerging markets with sales offices to participate and learn more about the business environment. Meanwhile, they leverage the existing logistics structures available to minimise their own risk. I think this approach is absolutely feasible, but you also need to have the management capacity for that expansion, which is often underestimated.

CL: Looking ahead, how do you want to change or evolve logistics?

HS: First off I think it is a case of changing rather than evolving logistics at Daimler. I think the colleagues in supply and material procurement therefore have to focus on the supply chain in an integrated way supported by reference costing, as I mentioned, and that includes things such as improving load factors, call orders and expedited freight. We also need to make risks in transportation transparent, extract specific ones and cover them separately, for example hedging fuel prices. But it is not just about transportation, as we want to focus also on planning capabilities. You can’t make sustainable solutions just by having better buying performance. It is about better networks. The cost needs to be taken out of the process, especially in anticipation for when freight rates eventually go up and we have transportation capacity issues again.

We should also look more carefully at incentive systems, as I mentioned, for inbound carriers as it has worked so well for outbound. Last but not least, new innovative networks as well as cooperation with other shippers will be a matter of course in the next years.