As the head of VW Group Logistics, Thomas Zernechel is keeping logistics innovation at the forefront of the carmaker’s global expansion, particularly with the rollout of its ‘new logistics concept’.
For many carmakers, logistics management is often the afterthought to the demands set by the management of purchasing and manufacturing. Wherever a part is sourced, however many cars a factory builds or wherever it sends them, logistics meets the requirements in between. Some carmakers even refer to logistics as ‘waste’ or ‘the necessary evil’. While an important cost consideration, not every manufacturer gives logistics significant weight in its management.
This is not the case for the Volkswagen Group. Europe’s largest carmaker, and among the fastest growing globally, the group has not only given logistics a voice on its management board, but has recently completed a major restructuring of its logistics management between group, brand and plant levels. Furthermore the role of Volkswagen Logistics has been clarified and become part of the ‘VW Group Logistics’ division while being maintained as a legal entity. The daughter company provides 4PL services for the whole Volkswagen Group and for external customers. Hence the expanded division includes a portfolio covering all parts of the supply chain, as well as capacity and demand management. This includes international material logistics (CKD), in- and outbound logistics, planning and procurement of logistics services, container management and freight auditing.
Not least because of the prominence it grants logistics, the group is actively promoting supply chain innovations. Volkswagen is in the midst of a project to realign its logistics strategy and network around a concept borne out of its relatively new group production strategy. The Neues Logistikkonzept (NLK; ‘New Logistics Concept’) synchronises the supply chain from the line back to the supplier base and is being rolled out aggressively in Europe and beyond.
Taking the lead on these management and process changes is Thomas Zernechel, head of Group Logistics. When we first interviewed him in 2007 Volkswagen had recently recreated Group Logistics to assume more cross-brand responsibility. Crucially, it had been given significant planning responsibility including programme planning and demand and capacity planning, formerly the domain of the respective brand logistics. It also included material and information flow for vehicle production and responsibility for order fulfilment.
During the 2008-2009 restructuring, Volkswagen concentrated more logistics responsibilities at the group level. Today, Group Logistics has responsibility for logistics worldwide in the areas of planning and procuring all crossbrand component flow, inbound logistics and outbound logistics. It is also responsible for the flow of overseas material and vehicles to and from Europe, as well as for global container management together with Volkswagen Logistics. Furthermore, it has responsibility for selecting, developing and implementing standards at a global level, including reducing the variety of IT systems the group uses.
The changes have led to a growth in the Group Logistics team from a staff of 50 to around 1,200 globally, according to Zernechel. “This has been a major change and we have optimised the processes at a group level,” he says. “Before we had certain areas, such as inbound planning, capacity and demand planning, that were organised by the brand logistics individually or by Volkswagen Logistics for the entire group, which created some conflict over targets and demand levels.”
Despite the expansion of Group Logistics, procurement for plant and brand-unique trade lanes remains in the hands of those plants or brands, which in some cases allows considerable independence. But the ability to aggregate more supply chain management–as opposed to only transport purchasing–across the group’s vast empire is a strategic advantage. While this marks something of a shift for Volkswagen Logistics, which still plans and procures inbound and outbound transport, manages containers and in-plant and warehouse logistics, it has become part of Volkswagen Group Logistics. Zernechel is the head of this division and also the spokesman for Volkswagen Logistics’ management.
Christopher Ludwig: One of the biggest issues still facing the global automotive industry remains the fallout from the earthquake in Japan. To what extent is Volkswagen seeing or anticipating disruptions?
Thomas Zernechel: We source a few, but very important parts from Japan. What helped us to avoid major disruptions has been the capacity and demand planning function that we have fine-tuned over the past 15 years. This forecast, which is communicated to our suppliers and providers, allows us to create flexibility and urgency in the right places. We cooperate very closely with the brands in individual regions, as well as with other departments including procurement, development and quality assurance, to come up with technical solutions to maintain supply. Thanks to the specialist task force set up immediately after the catastrophe in Japan there were no effects on production at Volkswagen.
CL: Does Volkswagen have enough visibility across its tier supply chain, including the lower tiers?
TZ: We have a certain degree of overview of our tier one and two suppliers. Beyond that there are gaps but that is why it is very important that our suppliers, whether for logistics or material, set up a capacity and demand planning process similar to ours that would then allow them to be in touch with their second and third tier suppliers. With that in place we would have a clearer overview across the supply chain.
CL: What IT systems are you using for demand and capacity planning?
TZ: The core system that we use is called Auto-BKM, and in that we store information about any kind of capacity and demand situation worldwide. It is an automated system from which we get information on volumes to be expected in the coming weeks or months. That system has been standardised worldwide. We have also just designed a new logistics IT system called UNIT, which supports the process of scheduling and supply in the individual plants. What was important here was to integrate all the languages concerned as well as all of the time zones, legal, tax and custom requirements. UNIT is now used at our plants in Chattanooga [USA], Pune [India], Kaluga [Russia] and also in Osnabruck [Germany].
CL: What would you characterise as the top challenge for Volkswagen right now for European inbound logistics?
TZ: It is still our ‘new logistics concept,’ or NLK [see boxout on p20]. We have already introduced many changes for in-plant logistics that make material supply and assembly more efficient. Now we want to take this process to the supplier. A crucial point is to move from a system of regional freight forwarders to a system done via crossdocks.
The most important building block for that change is stable production. We have made progress in this discipline, whether that be at [the Audi plant] in Neckarsulm [Germany] or at [the Volkswagen plants] in Bratislava [Slovakia] or Wolfsburg. We will strengthen that process further and drive down inventory, with the goal being to notify suppliers six or seven days in advance for the material they need to deliver. We always say that we can ‘replace inventory with reliability’. The next step is the rollout of group consolidation centres beyond the three we have already established across Europe.
CL: How will overseas parts be integrated into this system?
TZ: That material will still be delivered by our traditional methods. I don’t see much scope to economise on the inventory for global imports. Security is key and we have to make sure that we guarantee supply.
CL: Has the group used or experimented with using a lead logistics provider for such an operation in Europe?
TZ:We haven’t experimented with that concept at all, really. Quality and efficiency are very important at Volkswagen, so that we prefer to be in control ourselves. Outsourcing, whether for in-plant warehouse activities or more complex operations, is always a question of economic viability. Does it make sense for us to be in charge of the material or can a logistics provider do it more efficiently? In this case we believe that we can.
CL: Has the increase in the cost of fuel changed the group’s logistics or sourcing strategy?
TZ: Although for procurement decisions we always consider the current logistics cost and try to predict where it will end up, there are always risks. But we always focus on networks that are as efficient as possible. We are constantly looking at our equipment too, including rail wagons and lorries with a higher loading capacity. We are currently in discussions about using the ‘Lang-LKW’ [a truck 25.5 metres long], for example. We see scope here to reduce fuel consumption.
CL: Is putting more inbound freight on rail or intermodal a consideration?
TZ: Ultimately our use of rail depends on the cost situation of road versus rail. We already transport 60% of inbound material between plants by rail, which is more than most OEMs in Europe. For materials from suppliers it is more difficult since few suppliers have a rail link and we have to use a combined or intermodal solution that is less economically viable.
However, for intermodal traffic there are several ongoing projects with different types of technology that could make intermodal more attractive. At Wolfsburg we have a large cargo distribution centre where we can link road and rail together in a reasonable way.
CL: I understand that there is also a considerable amount of inbound rail freight between Europe and the Kaluga plant?
TZ: Yes, for this trade lane we use a sophisticated intermodal transport solution with DB Schenker. We are packing centrally in two places for Kaluga. We are also trialling special containers that can carry a larger amount of volume by rail. Once we have a positive result from that we will be using it with DB on that trade.
CL: How would you characterise the performance and quality of inbound logistics providers in Europe?
TZ: As far as our carriers and freight forwarders are concerned, we check their performance regularly to make sure quality is still up to scratch. We do regular audits and try to support our logistics suppliers where needed. By and large we can say that quality is improving.
CL: What would be at the top of your ‘wish list’ for improvements or development from inbound logistics providers?
TZ: One wish would be to make sure that they are recruiting the right people for the future. With increasing globalisation, it is vital for Volkswagen and its logistics providers to train a significant amount of young talent. As we set up new plants all over the world, this is particularly important and it is one of my top wishes.
CL: For outbound logistics in Europe, what would you highlight as the most important objective or challenge?
TZ: The goal is to optimise our network further for both cost and faithfulness to deadlines. Today we are working on concepts for outbound to use distribution hubs in a similar way we discussed for inbound. These hubs will receive vehicles from across regions and countries, and consolidate them for onward distribution by block trains. We have such plans in the pipeline and soon we will roll out this concept from our Bratislava plant.
CL: Is the goal to expand the use of rail?
TZ: We already use rail for 38% of our vehicle distribution. We would like to use rail services more but ultimately it comes down to economic viability. There is also the consideration of CO2 emissions for which rail is much better.
Volkswagen Logistics and Audi have already developed a CO2-free train together with DB. We would like to roll that out to other trade lanes as well. But it is a question about how much electricity we have with a zero carbon footprint. DB is working intensively on this, including setting up its own wind farms to generate renewable electricity. It will take some time but we already have the first train.
CL: Does the ability of a provider to reduce CO2 play any role in the tender or selection process?
TZ: Very generally, dealing efficiently and consciously with energy and natural resources is at the core of Volkswagen activities. To live up to this claim, we take account of environmental impacts throughout the entire product life cycle, so that includes logistics processes, too. For that reason the issue of sustainability does play a role in the whole procurement process as we always want to lower cost to have better capacity utilisation, which automatically reduces our carbon footprint. We have already prepared a CO2 database to calculate our exact carbon footprint for logistics whether for inbound material or vehicles.
CL: How would you characterise the performance of outbound logistics providers in Europe?
TZ: It is a similar situation to inbound as we also do audits and performance monitoring here. For outbound we are well placed and the situation is improving constantly. We have worked well with a regular team of partners for many years. We try to involve new partners to support competition, but we always consider quality as key.
CL: Would you add anything specific for outbound to your wish list?
TZ: One point on my wish list is that providers become more active in rail transport. Competition is already quite good but there could be more private companies offering services alongside the state companies within Europe.
CL: Does Volkswagen see capacity shortages for inbound or outbound transport for any modes within Europe?
TZ: We can see that following the development of individual economies the market for transport services has become more difficult and it is a challenge for logistics providers and railway companies to invest in the future and provide us with the capacity to support our growing production and sales.
CL: Are you worried that providers are not investing enough?
TZ: I cannot say that we are worried, necessarily, but we have to keep a close eye on it. Of course we have to motivate our transport logistics providers together with our freight forwarders, and we are in constant talks to discuss the expected volumes and the necessary investment.
CL: The plant in Tennessee has now begun production. Were there specific logistics challenges that you would identify?
TZ: In Chattanooga we have rolled out our standard processes, which include developing the production system along the lines of the NLK. That required specific training for suppliers and logistics providers, a challenge given it is a new plant and a relatively new concept.
Of course, the fact that it is a new plant has also been an advantage since we could build it to meet our new standards. In fact, for North American suppliers, which make up 85% of the supply base, we have organised the network via crossdocks.
CL: Will the logistics network of the US plant be integrated with Volkswagen’s plant in Puebla, Mexico and later with the new engine plant in Mexico?
TZ: Yes, on the inbound side we have planned our processes between Puebla and Chattanooga and in the future we will make sure that container shipping is organised more intensively between the two locations. That is still at its early stages but we are making progress.
CL: For Chinese-based production, how much influence does Group Logistics have on logistics and supply chain management?
TZ: In China, the region and plant logistic departments are taking care of inbound and outbound logistics themselves. However, we support our colleagues in China in the planning of new plants and networks, and also to assign their existing concepts to the ideas of the NLK in their respective region and existing processes. For other processes, like standards and IT systems, demand and capacity planning, we take responsibility as in other regions.
CL: Is the NLK a big project here?
TZ: In China, in particular, our plant logistics colleagues are highly interested in the NLK. The implementation has already started for in-plant logistics in quite a number of factories. For new plants the aim is to implement those concepts.
As far as the inbound logistics network is concerned, we are rather at the beginning. Material transport in China has historically been organised with the responsibility for delivery in the hands of the suppliers. Also, transport is typically arranged point-to-point in full truckloads–if you are lucky–as opposed to less-than-truckload consolidation or groupage.
But in the future that will have to change as far as we are concerned. The cost pressures will increase in China and we will have to be more active in reducing the number of transport processes.
CL: What would be top of your wish list for China, then?
TZ: We’re going to have to change to an ex-works/FCA delivery process, and those point-to-point deliveries will have to change. That will be one of the biggest challenges and my wish would be that we begin to address the situation as soon as possible.