An insight into steering supplier Nexteer’s drive for control and visibility over a supply chain is becoming more global and complex.
For a medium-sized tier supplier, Nexteer Automotive has an impressive global footprint and pedigree. The company is headquartered in Saginaw, Michigan, but owned by a Chinese consortium of state-owned entities, including a car parts supplier. It has 20 plants in seven countries across five continents. And with production and material sourcing growing strongly in the US and Mexico, as well as in China, getting a grip on the wheel of logistics costs has become a major priority for the steering and driveline supplier.
The company’s global production control and logistics team (PC&L) has therefore been re-engineering its logistics to better consolidate regional and international material flows, including introducing milkrun collections in markets such as China, and switching more often from less-than-container (LCL) shipping to full container loads (FCL). Nexteer has also been working more with third party logistics providers in growing regions, particularly with the ambition of gaining more visibility over its freight movements and costs. “Our 3PLs’ ability to provide visibility through a global system will become increasingly important,” says Jim Miller, executive director of global PC&L. “Today, visibility is limited to manual processes and systems. We are evaluating global partnerships with large 3PL providers that will include improved visibility as part of their service offering.”
Nexteer might be a relatively new name among tier suppliers but its production history goes back decades. Formerly the steering division of Delphi, it was taken over and run as a separate business unit by General Motors when Delphi emerged from bankruptcy in 2009. In 2010, after GM emerged from its own bankruptcy, the company was bought by Pacific Motor Company, a joint entity formed by E-Town, a state-owned financing arm of the Beijing Municipal government, and Beijing-based Tempo, a manufacturer of automotive components and modules for chassis, powertrain and driveline systems. In March 2011, AVIC Automobile Industry Holding, a parts manufacturer owned by the Chinese state, bought a 51% share in Pacific Motor Company.
Nexteer specialises in both electric and hydraulic power steering, steering columns, drivelines, and front-wheel drive shafts. It produces across 20 plants in the United States, Mexico, Poland, China, India, Brazil and Australia, and serves 60 vehicle manufacturers, including GM, Chrysler, Toyota, and PSA Peugeot-Citröen. Its revenue totalled $2.2 billion in 2011.
While Nexteer produces and sources material across a global footprint, about 75% of its global logistics expenses are in North America, with 10% in Europe and the balance in emerging markets. China accounts for 7% of Nexteer’s inbound logistics business, while India is 3% and Brazil 2%.
While these emerging markets are still a minority of Nexteer’s cost, Miller points out that logistics can be more expensive in such countries relative to total product costs. For example, Nexteer’s plant in Porto Alegre is located in the southern part of Brazil, requiring material to be transported long distances to feed OEM plants.
To manage an expanding and increasingly complex global supply network, Miller says that Nexteer makes purchasing decisions according to ‘total landed cost’, which adds together all supply chain costs including an element for risk.
The logistics factors that go into such calculations include transport, fuel, Nexteer’s size in the marketplace and its fixed costs, such as warehousing. Other costs might include customs and duties, risks based on customer scheduling, and inventory carrying costs. “Inventory is the biggest variable involving the cash management. We need to lower inventory and increase turns,” says Miller.
Nexteer wants to increase the visibility of costs and operations in its global supply chain. “We also need good risk management across the board,” Miller adds. “We try to make the logistics cost structure as variable as possible. It is difficult to reduce fixed costs and to react quickly to volume swings, so we design the network with a bias towards a variable cost structure. The variability of the cost structure may also be a challenge that requires us to consider supply base issues.”
Nexteer’s efforts to gain better control over its costs include a redesign of its global transport network, partly due to the company migrating from a logistics system it inherited from its previous owners. “These enterprises were much larger and were not focused on optimising our transportation system. We now have the opportunity to tailor the network to meet Nexteer’s requirements,” Miller explains.
Nexteer’s inbound logistics network makes use of most road and ocean modes, including full truckload (FTL), less-than-truckload (LT L), and ocean FCL and LCL shipments. It ships by air for less than 2% of its total freight budget, including standard routing for high-value, small and light material such as electronics, but air freight makes up a larger share of costs in some developing markets.
"It is difficult to reduce fixed costs and to react quickly to volume swings, so we design the network with a bias towards a variable cost structure" - Jim Miller, Nexteer
In North America, Nexteer’s largest region, the supplier has six plants in Michigan and four in Mexico. Southbound components cross the border at El Paso, Texas for its Juarez plant, and at Laredo for Nexteer’s two plants in Queretaro and Sabinas Hidalgo. Allen Holcomb, global director of logistics, says 70% of Nexteer’s shipments from the US to Mexico start with LTL collection and are consolidated at a US point before being trucked to the border. From there, Nexteer does a tractor swap or, if other clients’ freight is on board, it unloads the trailers before trucking to the Mexican plants.
An example of Nexteer engineering a new transport lane was for the movement of cut steel blanks from the Midwest to the US-Mexican border, where it converted the truck lane – which was moving heavy and dense freight – from long-haul truck into intermodal truck and rail. “We are evaluating additional [intermodal] lanes to determine whether the cost reductions justify the additional transit time,” adds Miller.
Nexteer has also recently overhauled the logistics for its European operations, which are based mainly around Poland. “More than a year ago, in Poland, we leased a new off-site shipping and receiving facility next to our plant, with kitting and just-in-time lineside delivery, to our manufacturing operation,” says Miller.
Nexteer serves its plants in Tychy and Gliwice with the use of local and Western European suppliers. Overseas shipments from the Asia Pacific and North America regions enter through the German port of Hamburg and the Polish port of Gdynia. “Our Poland [warehouse] facility grew out of a necessity for outside warehousing,” s ays Miller. “Nexteer provides data and inventory management and contracts trucking for both of our plants in Poland. Here, JIT delivery is a fairly important process.”
Stuart Turner, enterprise commodity manager for purchasing at Nexteer, says the company has also been able to lower its costs using an effective IT system, which allowed it to change between hydraulic and electronic steering without adding manufacturing floor space.
The changes in China
One of Nexteer’s most important regions is China, not least because of its ownership structure. It operates one plant in Wu h u, southeastern Anhui Province; two in Suzhou, near Shanghai; and one in Zhuzhou, Hunan Province.
There are several important differences to Nexteer’s logistics operations in China and other emerging markets compared to North America and Europe. Firstly, Nexteer’s supply chain is more regionally flavoured in its developed markets. In North America, Nexteer purchases approximately 80% of its material within the region, while in Poland local sourcing is around 50% of material, with much of the rest from Europe. For markets such as China, India and Brazil, there are a higher number of suppliers still based in the US and Europe.
Miller anticipates that the balance is shifting towards sourcing in emerging markets as volumes in those regions grow, particularly in China. He also notes a trend at Nexteer towards sourcing more material globally, both in purchasing for lower-cost locations as well in following OEM customers as they expand their manufacturing.
“We are experiencing our fastest growth in international air to China and Poland and in ocean transportation to the US, China, and Poland as we increase global sourcing in low cost regions and match our manufacturing footprint to our customers’ global platforms,” he says.
Almost all of Nexteer’s domestic suppliers in China and India are responsible for delivering inbound material to its factories or warehouses. In terms of pure transport costs for China, India, and Brazil, Miller says the modal split is approximately one third each for truck, ocean, and air – the high ratio of air costs standing as clear evidence of the infrastructure issues that manufacturers face in such countries. Miller points to problems the company faces with port capacity in India and Brazil and the slow, unpredictable and expensive customs bureaucracy in Brazil.
Milkruns and VMI in emerging markets
In spite of infrastructure issues and more reliance on air freight, Nexteer has been able to lower logistics costs in regions like China. Holcomb says the company has been switching its inbound delivery terms in China from suppliers having responsibility, to Nexteer. This has allowed Nexteer to increase its network efficiency by using milkruns and vendor-managed inventory (VMI) to improve costs and reduce stock. “Milkruns have generated 10% to 20% savings and we have just begun,” says Miller. “This will improve our cost structure over time.”
or international shipments to and from emerging markets, Miller says that Nexteer has also developed a number of new lanes that converted its shipments from LCL to FCL. “This enabled us to achieve a 25% reduction in transit time and reduced the cost per cubic metre by 35%,” he says.
Another trend in emerging markets like China, as well as in growing production regions like Mexico, is the increasing use of VMI. According to Miller, VMI is growing in China, the US, Mexico and Poland for both inbound and outbound warehousing. “VMI is growing especially as international supply chains become more common and as we seek to dedicate expensive manufacturing floor space to high value-adding activities,” explains Miller.
Nexteer also runs several distribution centres globally, including in Laredo and El Paso, as well as in Germany. As well as storage, the warehouses in Europe repack expendable packaging into returnable packaging.
In Poland and elsewhere, Holcomb says Nexteer has moved towards in-sourcing certain operations. “We continuously evaluate vertical integration as increased demand for our products drives the need for more capacity. In some instances, on a total cost basis, it makes sense to selectively utilise existing manufacturing capacity,” he says.
However, Nexteer also relies heavily on 3PLs to manage its inbound logistics worldwide. It seeks logistics providers that are strong in the markets in which Nexteer operates and can provide it with global strategic support.
"We need to consider lane performance as well as supply chain security. Drivers and transportation require the greatest need for cost control" - Allen Holcomb, Nexteer
“What is currently lacking is piloting of our supply chain,” says Miller. “We need to manage the variable cost structure by working with a lot of 3PLs and brokers. The volatile pricing environment for full container ocean lanes affects all of our emerging markets as we struggle with general rate increases and peak season surcharges.”
As well as relying on 3PLs for managing freight, Nexteer also wants to make better use of these providers’ IT and visibility systems. Recently, Nexteer began using cloud-based collaboration platform provider GT Nexus for its international ocean freight procurement. Within the next year, it also plans to deploy a global IT platform that will provide ‘door-to-door’ visibility of the supply chain for its international freight movements.
Improving outbound costs
b Nexteer’s role for outbound logistics mirrors somewhat the trends for its own delivery terms in each region. In North America, Nexteer’s customers typically control the supply chain from its docks. From Mexico, finished goods move northbound by truckload to an OEM distribution centre in El Paso, for example. In Brazil, Nexteer is responsible for about half of its flows to customers. By contrast, in Asia most OEMs want Nexteer to deliver to them. “In China, mainly we deliver by truck to our customers’ warehouses that are located near their assembly plants,” says Miller. In India, where Nexteer manufactures components at its plant in Bangalore, it ships material by truck to its final assembly facility in Gurgaon near the customer’s plant, which means trucking a distance of 2,400km for JIT delivery. Miller admits that consolidation would help reduce the cost of this long-distance trucking in India.
Miller says that for cases in which his company is responsible for delivery, customers generally insist on frequent deliveries as a means of minimising their inventory. This requires Nexteer to use trucks that are partly empty, but this disadvantage is overcome in part by using final assembly sites close to its customers. “We become more efficient by achieving a higher cube, which also means less frequency,” s ays Miller. “In Asian warehouses, materials are near the customer location, unlike in the US. So the close proximity ameliorates the effects of reduction in shipping frequency.”
Whether carmakers in Asia start to change their delivery terms may depend on the structure of the industry, says Miller. Should the Chinese industry consolidate to a smaller number of larger players, it is likely that Nexteer’s customers would be large enough to assume control of their own inbound networks. “Generally, our customers have much more commercial advantage due to their size, and are interested in controlling material flow to their operations in order to increase their visibility and control of their supply chains,” he observes.
But such a change would not occur overnight and in the meantime Nexteer is pushing for more control and visibility of its supply chain. By reengineering freight lanes, readapting its IT systems, and working more closely with providers, the steering supplier hopes logistics will help drive global growth of its production and supply chain rather than slow it down.