With car production jumping across the border to Mexico, manufacturers are making increasing use of the country’s developing intermodal services, writes Anthony Coia
Mexico is resurgent as a manufacturing and export base for the automotive industry. While the country has suffered from violence and security issues relating to drug crime in recent years, the automotive market has been growing steadily, the peso has remained stable to the dollar, and the climate for doing business has been seen to improve. The evidence for this is clear in the recent spate of plant investment in the country, with Mexico set to add around 1.5m additional units to production by 2016, which means it could see more vehicle assembly growth than the US in the coming years.
Mexico’s central region looks set to become even more of a stronghold for automotive production. Known as El Bajio, it includes the states of San Luis Potosi, Queretaro, Aguascalientes and Guanajuato. Honda and Mazda are locating their new plants in Guanajuato and Nissan in Aguascalientes (where it already has a factory). Audi is building a new plant in the east-central state of Puebla, which is also the location of its group partner, Volkswagen. The VW Group is also building a new engine plant in Silao, Guanajuato, which will supply North American production.
To meet this demand, Mexicanbased manufacturers are looking to develop a leaner and more sophisticated network for their inbound logistics, including more intermodal and rail logistics within the country. Strong growth and OEM localisation are heightening demands on Mexico’s logistics infrastructure.
As production volumes grow, there has been a greater need to expedite shipments to production facilities on a more frequent basis. A solution has been the expansion of intermodal transport designed to serve inbound destinations in a reliable and costeffective manner, although rail alone has yet to prove its speed and reliability for transporting shipments within Mexico. Another challenge is the need for access to secure highway infrastructure, since most inbound movements still move by road.
One carmaker that is taking a leaner approach to inbound logistics is Ford Motor Company. Ford’s vehicle assembly plants are located in Hermosillo (in the northwest) and Cuautitlan (near Mexico City) and its engine plant is in Chihuahua, in northern Mexico. Ford uses its crossdock facility in San Luis Potosi, at which it has recently increased its flow of ocean freight thanks to growing production volumes, says Roger Huff, material planning and logistics manager for North America. Ford works with several third-party logistics providers for various functions, including Penske, DHL, UTi, and Seglo, which provides in-plant logistics services for its vehicle plants. It also contracts with 17 dedicated carriers for inbound logistics, which use ocean, truck, milkruns, and rail intermodal just-in-time delivery.
Huff explains that Ford is aiming to increase its load factor to exceed 95%, as well as to increase its intermodal volume, develop dedicated loops, return its racks and dunnage and reduce inventory. Ford’s fastest growing services for inbound logistics include ocean imports, thanks to the growth of its global platforms in Mexico. The use of its San Luis Potosi crossdock for overseas material resulted in a freight cost reduction of $660,000 and a transit time reduction of seven to ten days.
“Ford made these improvements because we did not need to use a Michigan facility to receive material from international sources in the US and then transport it to Mexico,” Huff says. “We receive internationally sourced material in San Louis Potosi and send it directly to our Mexican plants.”
For Ford, highway infrastructure and safety are also challenges, as is the need for 24-hour customs operations at its border crossings where they are not currently present. Huff says that Ford is trying to do more co-loading with its suppliers and possibly other vehicle manufacturers. He foresees cost-saving opportunities from higher load factors on consolidated routes and from the conversion of more consolidated routes to direct routes.
Another of Ford’s growth areas is intra-Mexico intermodal transport, but it faces challenges from the lack of infrastructure and chassis equipment for such flows. However, along with partners such as rail carrier Ferromex, Ford has invested in intermodal infrastructure at its Hermosillo and Chihuahua plants, which has allowed the OEM to increase its intra-Mexico intermodal volume between suppliers in Silao and its Hermosillo plant. The improved facilities also resulted in freight and fuel cost reductions of more than $3m, according to Huff. It has applied the same concept between its suppliers in Ciudad Juarez and its Chihuahua plant.
According to Kate Betsworth, president of intermodal services provider Union Pacific Distribution Services (UPDS), automotive parts shipments typically move along the NAFTA corridor using multiple gateways. UPDS, a subsidiary of Union Pacific Railroad, works with both of the primary railways in Mexico, KCSM and Ferromex. “UPDS manages shipments that cross the border by truck from Laredo or El Paso as well as shipments that cross by rail to interior rail terminals in Monterrey, San Luis Potosi, Toluca, and Mexico City,” she says.
UPDS has seen higher demand throughout Mexico. “Our intermodal products are growing – particularly our transborder service in which we ship to a rail destination in Mexico. Demand for this service is increasing due to a tightening of truck capacity and the security benefits,” says Betsworth.
UPDS also offers a service that uses rail to the US-Mexico border and truck to Mexico. Its intra-Mexico service ships to and from a rail terminal within Mexico. Betsworth says that improved visibility is an important way to address inbound logistics challenges in Mexico. “By the years’ end, we will have a new version of our online ShipmentVision system which will provide visibility to the entire shipment cycle. Instead of verbal exchanges based on data pushed to the customer, the customer will be able to pull their necessary data in real-time,” she says.
General Motors has been adapting its logistics networks to accommodate growth in ocean freight. The OEM operates plants in Ramos Arizpe, San Luis Potosi, Silao and Toluca. Approximately 20% of its inbound material comes from overseas. “The biggest change to our network within the past year has been the growth of intercontinental material for our Mexico plants, which is being driven by global platforms for those vehicles. This has led to an increase in ocean freight, port handling, intermodal, truck delivery and premium air freight,” says Jeffrey Morrison, GM’s director of materials, logistics, and containers. He says that GM is focused on reducing transport costs and inventory for Mexican production.
Martha Lorenzini, GM Mexico’s logistics supervisor, says that its annual inbound ocean freight has increased by 50% since 2010 to approximately 28,000 TEUs. GM’s main ports are Altamira, Lázaro Cardenas and Manzanillo. “Within the past six months, we moved most of our containers from the ports to Ramos, Silao and San Luis Potosi by rail instead of road, which generated $2m in savings,” says Lorenzini.
Besides ocean imports, approximately 80% of GM’s material flow from the US and Canada to Mexico is intermodal. But the carmaker struggles with insufficient infrastructure. “Logistics service providers, especially rail carriers, will need to increase capacity in order to meet higher demand levels,” says Morrison. “Truck capacity is also a challenge. Since we cannot influence fuel costs, we seek to optimise our fuel usage by focusing on mode optimisation and cube utilisation. We also see an opportunity to increase our freight consolidation services in Mexico, which would enable us to consolidate closer to the origin locations than we do today.”
Furthermore, security and safety is a top focus for GM. “As a means of achieving this, we are leveraging the experience of our logistics suppliers and our interaction with federal or state governments in order to promote the right infrastructure,” says Morrison.
Tier one supplier Visteon Corporation operates three climate plants in Juarez, located on the Texas border, and two electronics plants in Chihuahua. Its 3PL provider, Ryder System, manages Visteon’s southbound supply chain, which runs through the supplier’s distribution centre in El Paso, Texas. This facility handles all crossdocking, inventory storage, loading and customs paperwork for more than 700 shipments per month, according to Patrick Bauer, global director, material planning and logistics, indirect purchasing and MDS (Master Data Services) at Visteon.
“About 70% of our southbound freight originates from outside of North America. Most of this freight moves as either FCL or LCL [full container load or less-than-container load] through our freight forwarder Ceva Logistics. About 30% of our inbound freight in Mexico is domestic, which we primarily consolidate to our distribution centre through ProTrans International,” says Bauer.
Whereas the above systems account for 90% of Visteon’s inbound freight costs, direct truckload, LTL, and parcel equal about 10%.
Visteon is in the process of shrinking its El Paso distribution centre, which will save on leasing costs and on common area maintenance costs. “Since 2011, we have reduced our transportation spend for our Mexican plants by 12% and we plan to reduce our annual El Paso distribution costs for both southbound and northbound freight by 20% beginning this year,” reports Bauer.
Bauer says that an important part of Visteon’s competitiveness in Mexico relies on international trade and customs programmes that minimise delays. Bauer points to several initiatives, including AES Option 4, Nuevo Escquema de Empresas Certificadas (NEEC), and C-TPAT that have enabled Visteon to use expedited border-crossing programmes. “We are watching the US government’s position on limiting ‘Option 4’ export processing, which currently enables us to file our commodity data up to ten days after the export date. Removing the programme or diminishing its benefits could have a detrimental impact on how we operate at the US-Mexico border,” reveals Bauer.
Besides changing border-crossing initiatives, Bauer has been disappointed by how few US-based trucking companies have been willing to transport freight into Mexico. Another challenge is that the intra-Mexico logistics network consists primarily of LTL and truckloads, which can be inefficient. Bauer says that the locations of Visteon’s suppliers in Mexico are spread out and do not lend themselves well to the use of milkruns.
“Recently, we have seen a growing push by other tier one suppliers for a consolidated network through which tier ones can share the same network of Mexican suppliers to our plants and potentially to our customers. This will enable lower transportation costs and higher shipping frequencies and would cause minimal impact on transportation times,” states Bauer.
One company that enables tier suppliers to improve their logistics efficiency in Mexico is the Entrada Group, a shared services provider based in Zacatecas, Mexico that helps smaller tier ones and tier twos improve their viability in the Mexican supply chain. “Traditionally, these types of tier suppliers ship smaller quantities that need consolidation, which takes place at crossdocks at the US-Mexico border, according to Doug Donahue, vice-president of business development. He says that their logistics networks can be more complex than those of large tier ones and OEMs. “Transactional costs of moving goods across the border are based on the transaction and not the shipment size, which places a heavier burden on smaller shippers,” he explains.
The Entrada Group offers logistics expertise through economies of scale. “We help these companies reduce their freight costs and transactional costs by bringing suppliers into our manufacturing park. We can then negotiate rates as a group, which reduces costs.”
For example, Entrada would buy a 40ft trailer and each client would use a portion of it. It would then ship the trailer to Entrada’s crossdock at the border at Laredo, consolidate it, and bring it across in one transaction. It also has a department that focuses on meeting Mexican compliance issues. Donahue says that Entrada has reduced transaction costs by 20% for its tier supplier customers between 2011 and 2012.
In the case of regional procurement, Nissan Mexico is involved in an operation involving twelve countries in Asia, the Americas and Europe, making use of shared Renault Nissan consolidation centres, according to Daniel Saenzpardo, director of logistics at Nissan Mexico. “We consolidate most of the materials coming from these locations at Nissan or Renault Inter-regional Parts Centre locations overseas. We generally consolidate supplies at each country of origin to ensure highcube optimisation, efficient long-distance transportation, and weekly delivery patterns,” he says.
Saenzpardo says Nissan’s logistics goals entail four pillars: cubic metre optimisation through packaging improvement; shortening supplier distances by making the best sourcing selection for parts with respect to total delivery cost; improving the fill-rate to ensure maximum cube for each transport mode; and finally improving freight rates through cross-functional cooperation with the Renault Nissan Purchasing Organisation.
For Nissan, one challenge has been to offset rate increases from carriers during the past two years and to reduce premium freight operations related to suppliers’ capacity constraints versus production volume increases. “We address these challenges by developing new carriers in order to support fast growth, secure planned volume increases, and provide visibility to key logistics suppliers,” says Saenzpardo.
One of Nissan’s main changes during the past few years has been its adoption of new high-capacity trucks that are above the North American industry standard of 53ft. “We have employed tandem trucks and adopted side-curtain trucks. Last year, we doubled our load capacity in terms of specialised trucks. This has reduced our logistics costs and simplified the unloading operation at the receiving end. Our total improvement over last year contributed to a reduction of 5% of our budgeted expenses,” says Saenzpardo.
Nissan is experiencing strong growth in the Bajío area, which includes a logistics-intensive corridor that connects to the Laredo border. The port of Manzanillo is also active as a key entry port for supplies coming in from Asia.
Saenzpardo says that for the first time, the northboundsouthbound flow between Mexico and the US is changing for material flow. “In the past, the ratio of imports to exports was mainly driven by imports from the US. Today, exports are growing at a faster rate than imports, creating a lack of balance between those movements. We are also expecting a growth of 30% from Manzanillo port to Nissan Mexico’s facilities,” he reveals.
Nissan Mexico also uses a JIT system for its inbound deliveries. This includes milkruns for most loads; the radius ranges from 50km to 600km from Nissan’s facilities. It uses FTL for high volume or frequency commodities. Saenzpardo says that its delivery deadlines drive scheduling activities, thus avoiding the need to warehouse supplies near Nissan’s facilities.
Most of Volkswagen Mexico’s imported materials originate in Europe and arrive through the port of Veracruz. Material from the Asia Pacific region arrives through the ports of Lázaro Cardenas and Manzanillo on the west coast. VW also imports materials by land from the US and Canada. Logistics director Roman Müller says that for its domestic suppliers, Volkswagen uses milkruns and JIT/JIS suppliers located near its plant in Puebla, which deliver materials directly to its assembly lines. The German OEM is also running its Mexican operations in line with its Neue Logistik Konzept (NLK), which includes synchronising the supply base.
“When we review land transportation within Mexico, we must remember how our milkrun operations are constantly enhancing its scope. The best proof of this is what we call the ‘Pick-Up Sheet Concept’, whose main objective is to support Volkswagen’s NLK strategy. It consists of planning and ensuring that loads delivered by our suppliers will match in quantity, type and frequency to what we need at our production line,” says Müller.
To accomplish this, it is necessary to have a process in which all parties are capable of ensuring that Volkswagen’s demand information will be properly interpreted and fulfilled, locking out any deviation to the material needed at each pick up. These enhancements favour transparency, stability, and continuity of the materials supply chain, while enabling cost reductions. “We are able to optimise our logistics costs due to stable deliveries, stock reduction, and shortened lead times,” says Müller. “We are also increasing the cubic metre volume of our loads as well as improving our packaging.”
Volkswagen is also using rail transport where possible, including transporting 40% of its containers by rail from the port of Veracruz to Puebla. “We reduce the CO2 emissions rate by 55% for each container carried by rail to our facilities,” Müller says. “Rail guarantees a stable process in terms of time, continuity, and safety,” he adds. With UPDS, VW has also begun to run an intermodal route from Wisconsin to Puebla.
Müller says that Volkswagen increased its intermodal transport without compromising safety stocks by working with its logistics providers to add visibility to the process and expedite urgent containers. Volkswagen wants to speed up its inbound flows and thus reduce inventory. Müller says that the manufacturer needs logistic partners with which it can build stable and durable business relationships, which has led it to strengthen its processes for selecting logistics providers.
A positive trend for Mexican inbound logistics has been its technology improvements; systems upgrades are advancing from paper to electronic transactions. Logistics service providers are among the leaders in promoting viable IT solutions. Among them is Geodis Wilson, which serves vehicle manufacturers and first and second tier suppliers with services that include transport to and from Mexican ports and airports. It offers an Automotive Competence Centre (ACC), which provides supply chain visibility and full monitoring. Order management procedures and information technology tools are the engine of the ACC activities, according to Kai Schmersahl, managing director, Geodis Wilson Mexico.
The results of these initiatives are reduced inventory levels and premium costs in logistics as well as improved forecasting and planning processes. “For our top three customers, we have identified inventory cost savings averaging $2.4m per customer within the past three years,” says Schmersahl.
Challenges include rising exchange rates, which may drive the need for continuous re-sourcing locations, as well as the Mexican government’s participation in key decisions with OEMs that relate to infrastructure such as the volume balance in each port, terminal, and rail and road route.
While these issues will be common among all 3PLs working in Mexico, the growth of production and material flow in the region continues to present many opportunities. As plants come online and suppliers continue to make more moves to localise and increase material flow to the US and other regions, there is likely to be substantial demand for advanced logistics services.