With supply chain costs and risks on the increase, Andrew Williams looks at how LSPs can respond to the squeeze on relatively healthy German manufacturers and their suppliers. Additional reporting by Christopher Ludwig.


In spite of Europe’s economic woes, the German automotive sector is expected to enjoy modest growth in production and sales over the next few years. What’s more, the competiveness of the German supply chain and the region’s logistics infrastructure is an important advantage to maintaining productivity despite the country’s comparatively high labour costs.

This strength was evident in the country’s record export levels last year–which rose to 4.5m vehicles and saw record volumes at German ports, like Bremerhaven (see Finished Vehicle Logistics p36)–and in investment in German manufacturing. Carmakers such as BMW are doing all that can be done to run their factories at full production. Porsche, for example, is investing €500m ($655m) at its Leipzig plant to upgrade production, while the carmaker, soon to be part of the Volkswagen Group, has introduced its lean logistics system to increase output for 2012.

approach-2Global manufacturing for German brands is also driving exports across overseas production and platforms (see CKD report on p32 for more). Audi opened a new completeknockdown (CKD) packaging station last year in Wunstorf, near Hanover, to prepare kits destined for final assembly in the Chinese and India markets. There are plans to double the site area, which is run with Syncreon, to 40,000m2 this year.

Another example is the Mercedes C-Class, now built on four continents, but with the competence centre at the carmaker’s Bremen plant, from which logistics for the model are controlled worldwide.

But while the prognosis for German carmakers and their base of Mittelstand suppliers is positive, the industry faces challenges with the spread of overseas production, which increases supply chain costs and risks. Recession in Europe is of course a threat to exports, while success in the country has not been universal. Ford and GM’s European units lost money in 2011, both with significant production capacity in Germany. The resulting cost squeeze will be felt here as much as anywhere, with the chance that cost-cutting leads to lower investment in logistics and thus reduced service levels.

It’s a scenario already recognised by Dr Michael Hauf, head of brand logistics for Audi. “In recent years we have seen a gap between increasing production volume and the lack of transport capacity–trucks and especially rail,” he says. “The reason for this tightened situation is delayed or missing investment from the logistics service providers.”

Capacity and service gaps could be a critical issue, especially for the premium brands and their suppliers competing strongly with each other. Executives believe that further supply chain rationalisation and communication among OEMs, suppliers and providers will help mitigate these risks and help expand the German automotive logistics supply chain.

Modest growth

According to Axel Blazejak, director of marketing and supply chain at Kia Motors Germany, new registrations in Germany are expected to total 3.2m vehicles in 2012–a small increase on the 3.17m sold last year. He anticipates that there will be no significant shift in market share and thus “no major changes” in logistics operations.

Production, which reached 5.87m passenger cars last year, is also expected to be stable this year if a wider economic slowdown is avoided. German sales and production in the first two months of the year were largely in line with 2011, according to VDA figures. In general, German brands continue to show strength, rising 1.2%, while foreign brands dropped 3.4%. Production was up 3.3% and exports up 0.7%.

But others warn of a difficult 2012. “Because of these uncertainties most players will delay investments. [However], at the same time we expect continuous growth for exports from Europe to major markets,” says Rudolf Luttmann, general manager for Europe for the shipping line MOL.

“I expect production to remain stable with growth in the premium export sector to off-set any decline in domestic markets,” adds Bruce Arlinghaus, senior advisor at EurBeacon European Business Consulting.

The difficulties faced currently by GM’s Opel/Vauxhall division, which recently announced an alliance with PSA Peugeot-Citroën, could have some impact on future manufacturing and supply footprints, but this is not yet clear.

Engineering intelligence and the Mittelstand

For Stephan Freichel, managing director at Logwin Solutions Germany, the reason why the German automotive manufacturing and logistics sector has enjoyed growth even in lean times is down to a combination of “innovation, engineering intelligence, deep identification with the automobile, smart suppliers, a worldwide focus and highly profitable premium markets” as well as “quality label[s], great designs, excellent products and good marketing”.

Meanwhile, Blazejak explains that, for “foreign” OEMs at least, an important aspect is the reduction of “incidental expenses, such as transportation, insurance and taxes” accruing as a result of having European-based plants. For him, the shorter length of the distribution chain and reduced requirements for temporary storage represent clear benefits.

approach-3“Kia Motors can deliver [cars] produced in Zilina, Slovakia to the dealer within 48 hours. A delivery [from] overseas, for example from Korea, takes about three months,” he explains.

Also related to the benefits of regional production is the efficiency of the German model of clusters of small- andmedium- size suppliers, often referred to as the Mittelstand.

Freichel describes the model as a form of “entrepreneurial engineering” that promotes a “down-to-earth” technical problem-solving approach. An important facet is the concentration of specialisation in individual suppliers and a focus on the creation of plants that become centres of excellence in particular niches. For logistics, this can lead to reductions in collection and delivery addresses, resulting in a general increase in volumes and improved opportunities for consolidated pick-ups and deliveries.

However, Arlinghaus argues that, although the Mittelstand remains a source of innovation and flexibility, the financial crisis and credit crunch continue to make it difficult for companies in the system to expand capacity. “[It is] a similar situation as with small- to medium-[size] logistics service providers. It is interesting to see how many German tier one suppliers are following the OEMs to the southeastern US and doing well,” he says.

As German carmakers expand production, there are also difficulties for some of these companies, which may be more accustomed to exporting from Germany rather than expanding in global markets. To that end, there may be further roles for LSPs to fill in gaps and manage the transitions. Blazejak highlights the fact that it is often necessary for companies to collaborate with specialists for the handling of logistics and foreign trade issues. “Many companies, including Kia Motors, are working together with specialised suppliers who assist us with efficient manpower and the corresponding ERP systems,” he says.

Not shielded from risk

The German supply chain and logistics sector is likely to face challenges throughout 2012-2013. Perhaps chief among these will be the eurozone crisis and volatility over fuel and raw material costs. Regional carriers also continue to suffer from the effects of the 2009-2010 crisis and some are seeking out non-automotive customers to spread the risk.

For Simon Brummer, logistics director for Europe at tier one Cooper Standard, further challenges will include the need to enhance expertise in ‘green logistics’ activities, such as returnable packaging and freight network optimisation; the necessity of adopting emergency global supply chain strategies; and the challenge of adapting to changing OEM production.

“As OEMs introduce new models and produce cars in more facilities around the world, the challenge for suppliers is to establish themselves as ‘global suppliers’ to avoid volumes being split between several local suppliers,” says Brummer.

Blazejak also highlights the trend for localised production and points out that more companies produce regionally to shorten delivery times, improve the ability to customise products for local markets and ensure lower costs. “The biggest challenge for Kia Motors is gaining market share and thus the establishment of an efficient logistics system,” he says.

Continuing strength in export performance has also not been completely matched by a growth in imports, leading to a trade imbalance, particularly for shipping lines and providers serving flows to and from ports. In Luttmann’s view, this means that “traditional trade patterns” no longer work and he highlights a need to “reorganise tonnage and cost allocations.”

“We understand that our customers are under pressure to reduce their logistics budget, but in the current environment it will be quite difficult to realise savings as we see significant cost increases,” explains Luttmann.

This imbalance is in some ways highlighted by the growing disparity between German brands, which grew 10.2% last year in Germany, and foreign brands, which grew just 5.5% and are set to decline this year. However, lower foreign brand sales do not always means lower imports–one of the fastest growing trades for the port of Bremerhaven last year was imported German-brand vehicles such as BMW and Mercedes built in the US. But imports are still small compared to exports.

In terms of inbound logistics, Freichel stresses the need for stability, agility and resilience to cope with fast-changing markets without losing the supply side. Supplier risk management will continue to be a “big thing”, he says. He also calls on customers to “walk the talk” in terms of truly supporting suppliers with a focus on “true rationalisation” rather than “desk polishing” and points to the benefits of collaboration in areas such as joint engine and component development, assembly and the better utilisation of assets.

Building transnational supply chains

Given that German OEMs now build many vehicles outside Germany, an important question is how best the German approach to supply chain efficiency can be applied across transnational automotive logistics supply chains.

To begin with, supply chain costs increase when managed and operated over longer distances and it is perhaps unlikely, at least in the short-term, that German OEMs will find it easy to achieve the same sort of supplier-vehicle manufacturer density abroad that they enjoy at home. As soon as sourcing goes global many domestic efficiencies will inevitably be eroded and the logistics cost in the total piece price is likely to increase–although the piece price itself might well fall.

Brummer calls for standardisation and a greater variety of transport modes and reusuable materials. “Due to long supply chains there will be much more one-way packaging. On the informational side, different standards need adjustment.”

approach-4However, Freichel stresses that over the years many German suppliers have followed their OEM clients to overseas production locations and that this trend will continue. As a result, he believes that mid-size German suppliers will be called upon to manage increasingly complex supply chains. He believes there is a need for suppliers to cooperate, find adequate personnel and continue to grow to stay competitive.

“These developments are challenges. A global setup with a seat, or interior component, or module supplier with both operating transplants in Mexico, or wherever, is a new game; however [one that is] often based on historical experience and trust,” says Freichel. “LLPs and LSPs and their relationships also play a vital role in this game.”

Meanwhile, Luttmann argues that, on the outbound side at least, German OEMs are likely to demand the same standards of quality and efficiency irrespective of country or location– but admits that shipping operators will occasionally “need their help in order to convince terminal operators and ports”.

Transparency and collaboration

Observers suggest that more transparency and collaboration should be important aims. Arlinghaus argues that the sector should “get serious” about collaboration, adding that other industries are ahead of automotive in this respect and that German OEMs could lead the process across Europe.

One perspective is that improved performance could come from more integration between the IT systems of suppliers and customers.

“Each customer receives information from its direct supplier and the other way round. The deeper we are able to look into the supply chain–to the second or third tier–the better we are able to react [to] incidents and the smoother the supply chains will work,” says Brummer.

Freichel agrees that “artificial, home-made instabilities” remain, which can and should be eliminated. “OEMs may need to utilise the internet for supply chain decision making. There is a high correlation between which specifications people choose and what’s being ordered at the dealer. One could say: ‘Why forecast? Just build what people ‘click’. The key is, there is a significant ‘bullwhip’ [effect] and instability where there is not always a need,” he says.

Another example of collaboration might be the sharing of containers, racks and boxes–simple yet vital production tools that can limit production if not available. In this light, Freichel thinks that further standardisation (such as the type seen with the VDA ‘maxi-plastic container’) makes a lot of sense.

Another potential area of improvement could be the further integration of external supply chain resources in planning. Freichel’s view is that links within the external supply chain, driven by LSPs deeper into the “linking pins” of plants and points of demand and supply, may lead to a better, marketbased sharing and use of resources.

approach-5The most shining example of this development may already be under way at the country’s most important manufacturer. As reported in last year’s July-September issue of Automotive Logistics, the VW Group is replacing its system of freight forwarding with a more centralised network of crossdocks that will better synchronise production and supply. Dubbed the New Logistics Concept (NLK), Audi is also currently integrating the system (see accompanying interview).

The German automotive supply chain sector continues to enjoy high levels of competitiveness and innovation and has managed to forge a stable growth path despite economic turmoil. Increased levels of collaboration, transparency and integration, if managed correctly, could help to cement such high levels of performance for some time to come.