Paola Petrone is revolutionising Fiat’s supply chain management with state of the art IT and the development of an in-house freight forwarder to pull together flows across the group to improve efficiency and reduce emissions
Paola Petrone was appointed senior vice president of Supply Chain Management at Fiat Group Automobiles less than a year ago, but she is overseeing radical reforms in the way the Italian carmaker manages its inbound and outbound supply chain. Most dramatically, she is orchestrating the expansion of Fiat’s iFast Container Management subsidiary to include freight forwarding and network management, functions that are currently handled by lead logistics providers (LLPs).
On the outbound side, Petrone is rationalising the network to concentrate international distribution at ports where possible, or closest to the largest sales area, eliminating some secondary compounds. She is also aiming at increasing direct factory-to-dealer deliveries especially from Italian and European factories. Further, she continues to develop Fiat’s in-house car haulier, iFast Automotive Logistics Outbound.
Petrone has wide experience in supply chain across sectors. She worked for ten years in logistics for Siemens, for four years as a management consultant in Roland Berger Strategy, consulting mainly in the transport industry, and for five years she was regional director with the Italian rail company, Trenitalia. She joined Fiat in 2008, first as the head of outbound logistics, before taking on her current role, which reports directly to the CEO.
It is a job Petrone clearly enjoys, not least because of the relative importance that Fiat’s management structure gives to logistics. Rather than splitting functions or subordinating them to purchasing or manufacturing, Fiat combines responsibility for managing cost, performance, production planning and distribution, albeit with considerable crossdepartmental dialogue.
“I believe the way we manage logistics is a winpoint, because we fully control the chain in an integrated way,” she says. “It’s important that we have full control over day-to-day operations to solve any specific issues in a short time, but also to monitor the performance versus our standards. Thanks to our integrated approach, we manage the right balance between critical aspects such as service, costs, quality and accuracy.”
Christopher Ludwig: Has your experience working with the Italian railways shaped your perspective now as a buyer of rail services?
Paola Petrone: Absolutely. Fiat was already using rail but I managed to expand it. For instance, we set up new routes from our Polish plant to France, Belgium and Germany. I think my experience within the railways has helped me understand better how to best leverage this transport mode for our business. People tend to think that running the railways is easy, but it is actually very complicated, especially with a network that has to combine passengers and freight. It is difficult to automate processes and if there is an interruption, the system cannot just adjust everything automatically, and this is where the human capital becomes even more important. Much of railway planning is still done by hand! If you ask for a modification or if you want a new train, it takes at least three months to implement it. You can easily underestimate how hugely difficult it is dealing with different networks from different countries.
Christopher Ludwig: Have you increased rail for inbound as well?
Paola Petrone: Yes, but so far the increase has been limited. The fact is that for inbound, the material mix can vary significantly, and in that case, the rail system can be quite rigid. You would need to run single wagons, which the railways don’t like to do. The key challenge they have is to control single wagons on an international scale. This sometimes means lower reliability of the logistics flow and potential performance issues. We run block trains for inbound flows which are stable, such as for the engines or gears.
Consider also that generally the logistics providers are reluctant to offer us rail services, especially on international routes. Even if in theory the markets are liberalised in Western Europe, in most cases you still have to travel within Italy with the Italian railway, in France with the French railways, and so on. For instance, if you need a train from Italy to Germany, it is almost impossible to receive offers from other countries and even unlikely to receive it from the German railways. Although the market is open to this possibility, it is still very difficult.
Christopher Ludwig: Fiat has used a list of LLPs for many years, but now the plan is for iFast Container to do freight forwarding. What was the thinking behind that?
Paola Petrone:We believe that we will be able to combine together the flows of Fiat, CNH (Case New Holland), Iveco, Powertrain, etc, as the factories are quite close together or on the same routes. Today each of these companies manage a separate contract with a LLP, but by putting it together we–iFast Container–will be able to purchase in larger volumes and get a discount in price. Also, we will be able to reduce costs by moving with fewer empty backhauls, once we have combined the freight. Currently our utilisation rates are 70-80%, and we believe that we can get to 90%.
Christopher Ludwig: Why didn’t Fiat do this before?
Paola Petrone: A fundamental element of such a joint approach is the IT system. As a group, we have recently taken the decision to move all the companies onto OTM (Oracle Transport Management) already used by CNH. The main goal of this project, which is based on a common system, is to achieve the best network configuration and reach more efficiency levels on our transport activities collecting material for all Fiat companies. It will also provide us with a better ability to track and trace material at part-number level on each shipment, with potential control-gates throughout the network and process.
Christopher Ludwig: What is the timeline for iFast to make this transition?
Paola Petrone: The idea is to roll out these operations next year, starting with Europe operations and then, potentially moving to global scale operations at a later stage.
Christopher Ludwig: Do you still see scope to work with third-party logistics providers (3PLs)?
Paola Petrone: Definitely. In the first year our 3PL will assist us in the implementation, while after the transition, it could sell space inside the network to customers outside the Fiat Group, as iFast will not seek external business. This would mean a shift in the relationship from provider to partner.
Christopher Ludwig: Why do you believe that Fiat will be better able than specialised providers to improve efficiencies in the network?
Paola Petrone: I think there is a great opportunity for improving further our efficiency. We know our own networks best and by pulling together all of our group companies, we can go beyond what any provider could ever achieve in terms of optimising both costs and service. For instance, we could achieve much higher performance on truck utilisation, allowing us to reduce unit transport cost to a very competitive level without compromising on service quality.
Christopher Ludwig: Are you beginning to see or anticipating any upward pressure on freight rates for inbound transport?
Paola Petrone: All of our contracts take into account variations in fuel prices according to the countries’ rules, so of course that goes up with the price of oil. However, regarding rates, the market is not really pushing back yet. The economy is not strong enough, especially in Italy. I am fully aware that when growth returns, we will be under pressure as the balance of power will change.
Christopher Ludwig: Is Fiat still pushing for lower rates, then?
Paola Petrone: We are always looking for efficiency, not simply reductions. Normally I ask for reductions when I see space for efficiency. In these cases, I am very hard on providers.
Christopher Ludwig: Is Fiat sourcing significant quantities from low-cost countries?
Paola Petrone: We manage our global sourcing through seven poles: Italy, Brazil, Argentina, India, China, Turkey and Poland. The flows are large with Brazil, where Fiat produces about 800,000 cars per year, as well as for Poland and Turkey, but the volume is still small from India or China.
Christopher Ludwig: Will more cross-production with Chrysler increase flows between Europe and North America?
Paola Petrone: Yes, but our strategy is always to localise components where possible. Theoretically, we try to set up supplier parks very close to the factory. Take the example of the Fiat 500 production in Mexico, where Chrysler has localised many components.
Christopher Ludwig: Has Fiat felt the effects of capacity shortages in its supply chain? *[Asked before the Japan crisis]
Paola Petrone: In this very moment we are suffering from a lack of tyres, because during the crisis suppliers significantly reduced capacity in Europe. Consequently, the whole market is short of tyres. In reality, in many cases it is more a question of profitability than capacity.
We have seen similar issues on the shipping side going from Europe to China, for both container and ro-ro. Due to low profitability, the transport offer has been halved and the price doubled in some cases.
For material shortages, we have a function in capacity management where we check supplies everyday. In the last year we have suffered a bit from a shortage of microchips from Asia, as those manufacturers prefer to serve the consumer industry rather than automotive. But this is just a part of everyday life in the industry.
Christopher Ludwig: What IT tools does Fiat use to manage its outbound supply chain?
Paola Petrone: We have a proprietary transport management system called TRAMA, which provides updates at each point in the supply chain. We have also been installing RFID at the compounds, most of which will be fitted within the next few months. RFID gives you the opportunity to control everything: the arrival times, departures and the load factors, for example. You can see if some providers are loading fewer or more cars on their trucks than others, and it gives you the chance to find out why.
Christopher Ludwig: How would you characterise the performance levels of your vehicle logistics providers during the volatility of recent years?
Paola Petrone: I would say that, similar to what I see for inbound, there are issues with execution. In general, we try to work with larger companies so as to avoid an unstructured approach, but still we see shortfalls on the three KPIs we monitor: lead time, proof of delivery and damage rate.
Furthermore, few companies appreciate the value of relationships. If I have a problem, and I come to my providers looking for support, I find it disappointing when they immediately hide behind constraints or procedures, and on my next invoice they have added a few extra thousand euros on top of whatever million I’m paying them. In a true partnership, we can help one another. If there are rewards for going a little bit beyond the contract, they will come in the form of more business for that provider in the future. Not many companies understand this but the ones that do have been able to see their business with us develop.
Christopher Ludwig: Does Fiat use any form of bonus/ malus for rewarding or penalising its providers?
Paola Petrone: A bonus/malus clause is typical for the German market, and we do have similar conditions in contracts with some providers in Germany, but I will phase it out. Frankly, I believe in applying a malus, but not a bonus. That may sound harsh, but when I am looking for a service from point A to point B, I tender it, and receive quotes at the providers’ stated cost and conditions. I accept their price and their conditions to meet my needs. So let’s say I do a tender and I have a choice between doing the service in three days at €10, or two days at €15. If I choose three days, then I expect to pay €10 and get my cars in three days, not more or less time for more or less money. If the provider cannot reasonably provide that service in three days for €10, then it should not have put forward a bid at that level! Why should I have to pay extra to get the service that was agreed? It is like I said before, if I want to reward a provider recognising good performance, I will give this provider more of my business. But if, as a provider, you don’t fulfil your promise of three days, then I believe you should be penalised. I’m not trying to be too rigid, but it is the providers that state their price conditions, not me.
Christopher Ludwig: Have you dealt with any drops in performance for outbound that may be the result of capacity shortages?
Paola Petrone: In the last year, many small vehicle logistics companies in Europe went down. It could be a problem going forward as the market recovers, but in that case we can expand our fleet for iFast Outbound. But I don’t think that the market, especially in Italy, will grow fast enough for it to be a real issue. We will at some point return back to the 2008 level, but not much beyond that level as the European market is quite mature.
Christopher Ludwig: Are you more worried about capacity in markets outside of Italy?
Paola Petrone: To a certain extent yes, but to my view it is not a matter of missing capacity. Over the last two years we have observed a significant mutation in the import/ export flows. Consequently, on some routes, it has become a challenge to balance the flows, finding the right capacity at the right price.
Christopher Ludwig: Is Fiat currently tracking carbon emissions in its supply chain operations?
Paola Petrone: We do track CO2 emissions in conformity with international sustainability reporting guidelines developed by the Global Reporting Initiative (GRI-G3). In 2009, our sustainability report achieved the maximum grade (A+).
Data and information on CO2 emissions from our logistics activities–supply chain operations–are also requested by the main sustainability rating agencies, such as SAM, Oekom, Vigeo, as well as Socially Responsible Investors and other international independent organisations worldwide, including the Carbon Disclosure Project.
Reducing the CO2 emissions is one of the major reasons why we are checking the capacity utilisation for trucks. For both inbound and outbound logistics transport we aim to use vehicles that meet the strictest environmental standards and thereby guarantee the lowest emission levels.
Another stream of CO2 emission reduction projects concern the use of intermodal solutions. These promote other feasible modes of goods transport (sea, rail, etc.) in accordance with the geographic location of components, material suppliers and vehicle distribution network.
It is also why, when possible, we have shifted more freight to the railways.
Christopher Ludwig: Does it impact how you design the network or choose partners?
Paola Petrone: It does because the external audits put some pressure on this. If you want to take an opportunity to reduce the price, such as by going by truck on some routes, I have to think twice about it because we have a strong commitment on it. We have also taken many measures in the supply chain to reduce our packaging and introduce stricter rack management.
Christopher Ludwig: What would you say to providers seeking to gain or retain business with Fiat?
Paola Petrone: I would like to see more discipline on execution from providers. As I am paying for these services, I shouldn’t have to check everything they do, which is what, in fact, I do at the moment. The accuracy of the execution is for me an important point and I see gaps. So far, I have not seen a provider that I could really describe as ‘top level’.
Christopher Ludwig: What would you suggest they do to start improving?
Paola Petrone: I would like to see them go back to the roots of logistics. Innovation is fine and we continuously look for it, but this should be based on excellent basic execution. Operational issues are still spotted too late in the process and we are forced to be constantly in reactive mode. I expect more proactive ways of working from partners.