The recession has consolidated the tier supply chain, forcing those who have managed to survive to become stronger and more competitive. But that has to be reflected in their own supply chain efficiency as well.
Earning a profit as a tier one automotive supplier has never been for the faint-hearted. For a start, there’s that famously cut-throat competition. Then there is the slim margins and ever-shorter product life-cycles, as well as a requirement for levels of demand responsiveness that border on the most extreme to be found in business anywhere.
And things haven’t been made any easier by a fast-changing industry landscape that has seen a decade of breakneck globalisation add to both the commercial and logistics challenges that an automotive tier one faces. New entrants from overseas are competing in tier ones’ home markets, in short, even as tier ones themselves must support extended supply chains brought about by OEMs establishing production plants in far-flung emerging economies.
Nor is there any doubt as to the relative balance of power in the OEM-supplier relationship. After decades of playing supplier off against supplier, OEMs remain firmly in the driving seat.
“Historically, tier ones have been at the mercy of the OEMs,” says John Begg, director of North American logistics at tier one automotive seating supplier CRH North America. “They set the schedules, they have the power to re-set them on a dime, and the supply industry has no choice but to carry the capacity it needs to be able to respond.”
Worse, the pressure that carmakers exert on tier suppliers can be difficult to reciprocate in terms of the tier ones’ relationships with their own suppliers. Either the nature of the tier twos’ business is such that automotive work accounts for only a modest proportion of their revenues, thus sapping tier ones’ leverage, or–as Begg puts it–automotive work instead perversely accounts for too much of their revenues.
“When we go to our tier twos for the same flexibility as is required of us, they can’t cope–because they’re also supplying Magna, Lear and all the other tier ones,” he notes.
The logistics pressures, too, are very different for a tier one supplier than for an automotive OEM. Contrast the on-time performance requirements placed on outbound logistics by an OEM with those to which a tier one must comply, for example.
“For an automotive OEM, if a car is a day late arriving at a dealer, it’s an embarrassment,” says Adrian Weiler, chief executive of automotive supply chain planning and optimisation vendor Inform. “But if a truck with components on it is just two hours late, production might stop: the imperatives are very different.”
And contrast, too, the behind-the-scenes technical challenges involved in achieving this level of performance.
“It’s not just about delivering on time,” stresses Weiler. “The tier one must also–if required–deliver in sequence. Yet the time available to carry out schedule optimisation activities to do this is very limited: the schedule might come through just hours before delivery is expected.”
Yet talk to tier ones with this background in mind, and a recurring complaint–from a total automotive supply chain perspective–is a misplaced sense of relative priorities.
For even though it’s the tier ones’ logistics flows that are on the critical path, it’s the OEM’s logistics flows that get the carriers’ bandwidth and attention. Especially when the distances involved are cross-border or cross-continent.
“OEMs have the purchasing clout from a transportation and logistics perspective,” says Mike Pilver, vice-president of global automotive sales and marketing at APL Logistics. “They have critical mass, and offer carriers steady flows and steady volumes. So they’re not really affected by times of peak volume, when, say, container traffic is dominated by retailers building inventory for the holiday season.”
But increasingly, it’s a case of ‘that was then–and this is now’, as memories of before the 2008-2009 recession fade fast. Tier one automotive suppliers should in theory today be in a more comfortable place than they’ve been for years. For while the financial crisis and ensuing recession of 2008-2009 was very painful, it was also cathartic.
In March 2009, for instance, a study by consulting firm AT Kearney warned that over half the United States’ automotive supplier base could go bankrupt in 2009, with many of the remainder forced into restructuring and plant closures.
Painful, to be sure. Yet two years on, the observations of John Godfrey, director of logistics at tier one tyre supplier Pirelli Tire North America, neatly summarise the views of many.
“The tier ones that made it through the crisis are survivors,” he notes. “Two or three years ago, automotive OEMs had a choice of five or six suppliers–and now there might be only two or three.”
So how has the automotive tier one logistics landscape changed to reflect this new paradigm? What pressures shape it today–and are they different from the pressures that existed pre-recession? Where do the opportunities for improvement lie, and what might be done to unlock these improvements?
Certainly, there have been changes. APL’s Pilver, for instance, points to rising automotive demand from consumers and businesses resulting in stresses and strains in global automotive supply chains that in pre-recessionary times would have coped more readily.
In terms of both manufacturing capacity and logistics capability, deep and savage cuts have resulted in a leaner operation, but also one that lacks the ability to respond quite so readily to fluctuations in demand.
“We’re seeing a lot of premium flows,” he reports. “OEMs and tier ones still haven’t caught up with demand.”
Pirelli’s Godfrey concurs: “Here at Pirelli we’re seeing many more requests for airfreight and expedited logistics services, with OEMs stepping in to pay the cost themselves–and I’m getting the feeling that other tier one suppliers are experiencing the same thing.”
The rush to offshore manufacture has slowed, too, with logistics service providers pointing to clear signs that in some cases it has even reversed, with parts returning to onshore–or at least ‘near shore’–manufacture.
“Tier ones have moved a lot of manufacturing to Mexico, whereas their tier two supply base has stayed in the Midwest [United States],” says Jorge Salas, group director, Ryder Supply Chain Solutions. “The result is a lot of network complexity and cross-border traffic that builds in additional cost and additional timescale.”
“There’s a growing recognition that long supply chains are too risky complex to manage,” says APL’s Pilver. “A charter from Mexico to Detroit is one thing–an intercontinental charter from Shanghai to Detroit is quite another.”
So where are the improvement opportunities in this changed landscape? What can tier ones do to make their lives easier– and more profitable–from a logistics perspective?
One answer is surprising. Despite the deep cuts of 2008- 2009, it seems that running leaner still is something that remains very much a possibility.
“We’re lean, and we’re leaner than we’ve ever been, but we’re not as lean as we could be,” affirms CRH North America’s Begg. In just one year, he reports, CRH was able to cut its transport budget by 32%–which, he adds, “is a reflection of how much waste there was in the system.”
The cuts in question were achieved by taking a sharp pencil to practices that may once have arisen through prerecessionary customer pressures, but which now seem either unnecessary or too costly to be justifiable.
A prime example, says Begg, was a tendency to ship two less- than-full-load trucks to the same customer on the same day–a practice that has been eliminated or at least much reduced by a combination of better planning, better communication, and firmer discipline.
Apart from such wastes, becoming leaner will require changed attitudes and flexible thinking, suggests Ryder’s Salas.
“Tier ones are looking for a lean environment where they can impose predictability and Japanese-style heijunka,” he says. “But this means that they do need to not run their trucks sub-optimally when volumes change. It’s about making a fixed environment more dynamic–and not about trying to keep that fixed environment with its fixed costs and fixed requirements.”
Another area of potential improvement seems to be the ongoing mis-match between the primary thrust of tier ones management focus and attention, and the actual challenges facing the business.
APL’s Pilver, for example, sees tier ones focusing heavily on outbound logistics–the release of manufactured parts to a customer schedule, and shipping those parts on-time and in-sequence. A predictable enough emphasis from a commercial perspective, perhaps. Yet ironically, he points out, this aspect of their businesses is rarely the pain point that such a single-minded focus would suggest.
“Where I see tier ones suffer is on their inbound logistics, not their outbound logistics,” Pilver says. “They do a great job of releasing parts to avoid penalties–but their inbound flows are typically less well-planned, less-well structured, and more prone to a reliance on premium services.”
“Going forward, tier ones need to pay the same level of attention to their inbound supply chain as they do to their outbound supply chain logistics–which for many of them is going to be something of a cultural shock. They’re producing parts and materials on long leadtimes over intercontinental distances, and if there are any issues with quality or demand then they inevitably struggle, and have to revert to premium priced flows.”
Nor is the situation getting any better, he emphasises. “Logistics isn’t really a tier one competency, apart from in the very largest suppliers,” says Pilver. “Their management is focused on manufacturing, not logistics, and a lot of logistics expertise has been lost in the restructuring that followed the 2008-2009 recession.”
Inevitably the challenges of inbound improvement call into question tier ones’ relationships with their tier two suppliers, and the skills and abilities of those tier two suppliers.
“Tier ones are working to bring tier twos up to the same service levels as are expected of them–and while there has been a degree of improvement over the last couple of years, there’s still a lot of progress to be made,” says Ryder’s Salas.
That said, regional differences complicate the issue, says Peter Baumann, global director for automotive at logistics service provider Geodis Wilson.
“Tier two suppliers are at a different stage of development in Asia to what you find in Europe and North America,” he says. “In Europe, tier two suppliers are fairly well developed, although perhaps not to the extent found in North America. But in Asia, they’re further behind–which brings complexity into the supply chain, as they lack the training and understanding that is ideally required.”
In short, a complicated picture. And roll it all together, and these are opportunities best tapped across the total supply chain, suggests Bill Olver, vice-president for automotive at DHL Global Customer Solutions.
“A ‘no silo’ approach across the total supply chain, managed by logistics partners, and straddling raw material suppliers right through ‘n’ tier of suppliers to the OEM and their final customers, offers considerable advantage over freight execution purchased in individual pieces,” he points out.
“While still being reactive to demand and market requirements, such an approach could proactively manage and optimise elements such as strategic supplier management, materials management, tax and fiscal compliance, planning and forecasting, strategic carrier management, inventory management, control tower operations, connectivity with OEM systems and landed cost studies,” Olver adds.
Will this happen? Time will tell. What it is possible to say, though, is that the arguments for just such a development are becoming ever more compelling, propelled by a widelyreported desire by OEMs to see tier ones take a more active role in managing the OEM inbound supply chain.
For given some tier ones’ evident lack of skill–or even interest–in logistics and supply chain planning, abrogating the role to specialist partners who are better equipped to perform it makes excellent sense. It won’t happen overnight, and it won’t happen evenly, but the odds seem good that a push in this direction will be made.