Last week’s ECG Conference in Prague revealed that OEM order and production systems in Europe are still not responsive enough to market demand, with vehicle inventory levels rising as sales decline. Meanwhile, poor forecasting and communication, as well as longer delivery lead times in some cases, appear to be causing stock to build up at certain points of the supply chain.
After the sudden sales drop of the 2008-2009 crash left many OEMs and distributors holding a large amount of unsold vehicles – many of which had been built long after sales dropped – the automotive industry shifted to more order-led production, with a focus on carrying lower levels of vehicle inventory and freeing up vital cash flow.
Or so the general narrative goes. Conference speakers revealed that, while there has been improvement in the flexibility and responsiveness of order-to-delivery systems, the changes have been relatively incremental and not enough for some markets to avoid expensively high levels of stock.
Ben Waller, senior researcher at the UK-based retail and distribution consultancy, ICDP, said that while vehicle stocks in Europe had been relatively low until a few months ago, the deepening sales decline has more recently come with rising inventory levels and a return to bad habits. Waller also alluded to instances of “forced wholesaling” of vehicles to dealers in some markets, such as the UK, whereby vehicles are moved as ‘sales’ to dealer lots or distribution centres before month or quarter end to drive up sales numbers. There have also been practices that inflate sales and inventory numbers in other markets, such as Germany, whereby OEMs purchase a share of their own vehicles.
Distortions in end of month or quarter deliveries were also confirmed by several speakers and delegates at the conference, something that has long been an issue cited by ECG president Costantino Baldissara as an unnecessary and inefficient burden on the available transport capacity of European vehicle logistics providers. In such a scenario, fleets might sit idle for weeks and are then put under strain to meet artificially driven targets. 
Not as flexible as necessary
While such methods appear to be even more common in the current crisis, Waller identified a mixed picture in assessing the flexibility in European production and supply systems. ICDP studies showed that the proportion of cars sold from the order pipeline, as compared to those sold out of dealer or distribution centre stock, has increased, although perhaps not as dramatically as was previously thought.
In 2004, for example, around 45% of sales were made from the order pipeline, compared to around 35% from dealer stock and around 20% from stock held at distribution centres or carriers. In 2009, the most recent year when data is available, sales made out of the order pipeline increased to 55%. “There are more sales being made from orders, but it has not been a transformation,” said Waller.
Europe’s level of order-driven purchasing is nevertheless among the highest in the world, making it more flexible in this way than North America, for example. Waller acknowledges that European-based carmakers have also made steps towards the “unthinkable” when it comes to changing production. “OEMs have been quicker to slow production or even to temporarily close factories in response to demand, something that had been almost unthinkable a few years ago,” he said.
A case in point could be found this week from Volvo Car Corporation, which announced it would temporarily stop output at its Torslanda plant in western Sweden at the end of this month in response to slow demand. The move follows an earlier decision to reduce the production pace in the plant from 57 cars to 50 cars per hour starting 1st October.
However, with nearly half of sales in Europe still made out of stock, and with chronic levels of production overcapacity in many markets, the potential for lags between slowdowns in sales and subsequent reactions in production is still high.
Poor planning information
The conference also revealed that, although there have been efforts in recent years to improve forecasting, problems evidently remain in communicating updated sales and production planning across the supply chain. Jean-Marie Souvestre, commercial director of rail transport for STVA, described “woeful” planning information, citing examples where national sales companies were still using annual projections that were developed earlier this year or in 2011, despite the fact that for them to be true would mean a near 40% increase in volume in the last few months of the year – clearly absurd in current market conditions.
The production distortions are also driven in some cases by poor upstream communication from dealers. Stefan Nilsson, shipping manager for the EMEA region for Volvo Construction Equipment, said that his company was now compelling dealers to provide retail reports so that their sales projections could have a “sanity check”. He noted cases where dealers would call for production although their pipeline had been revealed to be full.
Impact of logistics on inventory
While most inventory build up occurs from mismatches between production in demand, the conference demonstrated how vehicle logistics decisions could also have a direct impact on where vehicle stocks might clog in the outbound chain. One such example could be found in Seat’s decisions to change transport modes and increase outbound lead times in some cases. 
In the face of sales decreases in southern Europe, and increasing imbalances between imports and exports to and from Spain, Seat has had to dramatically change its distribution flows and network. Manuel Medina, vehicle distribution manager for Seat, outlined how the VW Group OEM had shifted transport modes, regrouped its distribution and varied its logistics provider base. Seat has put a strong focus on cost over lead times, with higher vehicle inventory in ports one consequence of these decisions.
Among the most significant shifts has been to dramatically decrease the amount of rail transport used by Seat in favour of truck and especially sea transport. Rail now makes up less than 7% for distribution, compared to nearly 30% in 2009, while for exports, rail’s share from Spain has declined from 20% to around 3%, according to Medina, not including the use of a rail shuttle from Seat’s plant of Martorell to the port of Barcelona.
Transport of vehicles by vessel, previously around 30%, has reached more than 47% for Seat. Truck has grown from 40% of volume in 2008 to around 45% today.
The decrease in rail has been a factor of lower volumes, a different market mix for Seat (which has increased exports by sea to Germany, the UK and China), and the costs and delays from the difference in track gauge between Spain and the rest of Europe.
But lowering cost has been one of the biggest factors. According to Medina, Seat now accepts increased lead times and more transhipments if the costs are lower in parts of distribution where it often didn’t before. The longer lead times and increase in sea transport has led Seat to nearly double the amount of cars held at the port of Barcelona to around 7,000 units.
“This has come at a high cost for us, and dealing with that is currently our fight,” he said.
Logistics needs a voice
While Medina admitted that Seat had traded lead time speed for lower cost where appropriate, and had thus accepted higher port inventory as well, such trade offs raise further questions about how carmakers measure the balance in their supply systems between lead time, cost, inventory and other factors. There was some evidence that inefficiencies would be further eliminated if OEMs put more internal focus on the role of logistics and providers in the order-to-delivery system. Toyota’s general manager of vehicle logistics for Europe, Cyran Vanderhaeghen, admitted to delegates “we still have internal issues to address”.
“Our manufacturing and sales operations are on much better speaking terms [than they used to be],” he said. “But logistics is still not present. We have to put ourselves into the equation internally. We need more planning, not to overcome market volatility – you can’t do that – but to provide more information so we can respond to changes.”
Read more here for a wider report on Toyota Motor Europe’s wider logistics strategy wtih an interview with Levent Yuksel, head of production parts logistics and the vehicle logistics group.
Read the comprehensive report here on the ECG Conference here.