While the automotive industry holds its breath over economic forecasts, DB Schenker Logistics is looking ahead with cautious optimism and expanding its contract logistics offering for the sector. Marcus Williams finds out why
The automotive sector has been through an unprecedented crisis and it is not out of the woods yet. Weak GDP growth in traditionally strong carmaking regions like the US, Japan and Germany, along with sovereign debt worries, are feeding financial forecasts that indicate another slowdown in the global economy, with car sales poised to suffer. Even China and India have shown signs of car sales retreating.
This has fed an overall pessimistic outlook. Tier suppliers, several of whom have struggled to maintain demand since the recovery started, could become more cautious about further investment. Likewise, logistics providers have already been cautious about investing in new capacity amidst falling freight rates, rising operational costs and uncertain production and sales volumes, hurting the ability of some to maintain the service levels that carmakers want.
So what grounds has Dr Detlef Trefzger, member of the board, contract logistics/SCM at Germany’s freight and logistics provider DB Schenker, to feel optimistic (albeit cautiously) about the immediate future?
One reason is that DB Schenker benefits from the very volatility shaking up the supply chain. For example, its supply chain services are tailored precisely for tier suppliers who lack the scale and purchasing power to efficiently manage logistics for suppliers further down the supply chain.
Market fluctuation is not a new thing for the company. “I think we always had manufacturing plants that were never stable. You always had a certain fluctuation and had to show flexibility,” says Dr Trefzger. “But the grade of flexibility required has increased due to the volatility of the different requirements that we see in the market. Not only from OEMs but also from the consumers.”
What has changed during the most recent crisis is the sustainability of business because of that volatility. The company has close ties to its customers’ manufacturing processes and pays close attention to OEM forecasts.
“We see the forecast but the volatility of the forecast and the manufacturing requirements have increased,” says Trefzger. “Through this increase in volatility, tier two and three suppliers came under pressure to be more responsive to it.”
DB Schenker is now offering these suppliers logistics services that enable them to respond quickly to the changing requirements of manufacturers, a trend Trefzger expects to increase in the future.
DB Schenker has served the automotive industry for more than 20 years with a network that provides rail freight, land, air and sea transport, as well as logistics services like warehousing and supply chain management.
The company created a separate business unit for contract logistics and supply chain management in early 2004, headed by Dr Trefzger, who has overseen the division’s growth from a small, Euro-centric concern to a unit that today ranks number five in the world and is active in 60 markets.
“When we started the business in 2004 we had a clear European focus,” says Trefzger. “That has changed. We will achieve an even situation between Europe and the rest of the world by next year with regard to revenue. And the biggest growth at the moment for automotive is in Asia.”
In 2010 DB Schenker Logistics had an annual revenue of €14.3 billion ($20.6 billion), of which the contract logistics division represented €1.3 billion. For the first half of this year the division has increased revenue by 13.4% to €695m.
Automotive makes up 20-25% of the business share for contract logistics, ranking equal with the electronics sector, ahead of fast-moving consumer goods (FCMG) and industrial, which the company says are picking up fast. Pharmaceutical and healthcare is the fifth vertical that contract logistics targets, making up around 10% of the division’s business.
These are carefully targeted sectors. According to Michael Harich, DB Schenker’s vice president of automotive, corporate contract logistics/SCM, the company is looking for the right business fit as it expands the division’s offering.
“We have to make sure that we have certain standards in our operations, not only visible but how we develop business and implement it and standardise processes,” he says.
Over its 5.3m square metres of global warehouse space, the company handles 28m outbound orders in the electronic sector and moves 1.3 billion boxes a year in the FCMG sector. For automotive, the company is involved in the manufacturing of more than 6.6m cars annually, including line feeding and production supply as well as light and heavy assembly.
The 20-25% business share in automotive is spread across a wide range of customers. “We have less than 3% dependency on one single brand, customer or group,” confirms Dr Trefzger.
“It is important for us that we have many different customers that we are able to serve and it is part of my task to see that we grow the customer base and develop existing relationships,” adds Harich. “It would be unfair to our other customers if we were only to focus on one name.”
Expansion through its increasingly global customer base across both established and emerging ‘BRIC-plus’ markets, led by Asia Pacific and South America, has been a major factor in DB Schenker’s stability during the downturn.
Russia is also of particular interest to the contract logistics division, as its new business unit in Kaluga, near Volkswagen’s plant, shows. According to Harich, Russia is going to be a significant market for DB Schenker over the next few years: “We are in close contact with our rail division and that is something unique about Schenker offerings: that we are able to combine all transport modes out of our own company.”
As its customer base grows, the transfer of concepts between the contract logistics division’s targeted sectors has seen a shift over the last two years, bringing solutions from the electronic sector into automotive.
“While, in the past, we were looking at the automotive industry with interest and trying to get to transfer solutions from automotive into electronics or consumer goods, this has changed significantly over the last two years,” says Trefzger. “We have PVMI (production vendor managed inventory) solutions in place for many of our electronic customers and have started to implement similar concepts for the tier two and three [automotive] suppliers, combining parts and the requirements of different OEMs in a certain geographic area and implementing similar solutions to the PVMI solution used in the electronics sector.”
“We were not discussing this three years ago, now we are implementing it for the automotive industry,” adds Trefzger.
This transfer of production and supply concepts between sectors is in demand at the tier two and three levels, which have struggled to meet demand following errors in capacity forecasting at the beginning of last year and limited raw materials. This has led to a limit in production capacity and a shortage of certain parts–a situation certainly hampered by the Japanese earthquake.
“We see restrictions here so we are able to come up with solutions for combined OEMs and tier two and three suppliers at the moment which we were not able to discuss two or three years ago prior to the crisis,” says Trefzger.
Central to this support is the company’s investment in IT. DB Schenker employs a range of globally-applied IT solutions, including a warehouse management system called SAPautomotive that ensures order processing and stock visibility. Its Flawless Execution Programme (FLEX), developed and implemented over the last four years, involves lean methodologies and tools such as 5S, Kaizen and 6-Sigma as standard in every one of its logistics operations.
The company is investing significantly in IT during a programme that runs for three years and enables it to cross-sell solutions from one industry to the other and deploy them more efficiently in all markets.
“We have invested a lot in IT and solution design, enabling us to operate solutions flawlessly,” says Trefzger.
A notable recent win that best exemplifies both DB Schenker’s geographic reach and the IT support underpinning it is seen in the €33m logistics centre in Leipzig, Germany, which the company has developed with property group Goodman for the supply of CKD component kits for BMW plants in China and South Africa. Ocean shipments will leave via the port of Antwerp for the Rosslyn plant in South Africa and via Bremerhaven port to Shenyang in China.
The company says that it is one of the largest projects in the history of DB Schenker. Supply from Leipzig to the plants is going live this autumn, though the company has already been involved with line feeding at the Shenyang plant for more than two years.
The 63,000m2 Leipzig warehouse will collect 8,000 different components using an integrated data communication network for containerised shipments to the plants at a rate of more than 50 containers a day. The new centre has provided employment for 600 workers, doubling the headcount in Saxony to more than 1,200.
Trefzger says that all of the company’s CKD competence has gone into the project and will eventually be combined with DB Schenker’s transport network capability.
Discussions about supporting these ocean shipments with rail transport of containers over the Trans-Siberian rail route are continuing.
Meanwhile, the company is working on services for spare parts and reverse logistics, an area that has seen some important changes over the crisis period and even strengthened as new car sales dropped and consumers extended the lives of their existing vehicles. DB Schenker’s offering in this area has been advancing along with the OEM service commitment to the end consumer.
Aftermarket logistics is also important in the Asian region. Trefzger points to Chengdu in Sichuan province, China as a location where the company wants each and every spare part that is needed by a brand OEM within a maximum window of 24 hours.
Schenker has also just approved a major investment in Asia for a regional spare parts centre serving the top three tiers of suppliers and is in discussions for an OEM spare parts centre according to Trefzger.
Facilities in non-established markets have grown and there is now continuous focus on establishing new production sites and growing existing ones.
“We now have markets east of Moscow, in India and Vietnam and they are sizable now, not mediocre, so it is not easy to supply spares from a hub in Hong Kong anymore. You need new spare and aftermarket solutions for this,” he says. “The structures for this have been established very quickly during the crisis and we continue to invest in aftermarket facilities supported with the right IT, and we are able to deploy production supply, not only in Europe but also in Asia Pacific.”
It is this presence in new markets that provides the grounds for the company’s optimism as it moves through the uncertain year ahead. While it is looking to grow business in the US and take advantage of the momentum provided by European OEMs expanding there, it is in the leading growth markets that the company is especially confident.
“I am optimistic because we have a strong footprint in Asia and Latin America,” says Dr Trefzger. “We see the growth in manufacturing there and the demand to transport finished vehicles, so we are optimistic, not only for the next 6-12 months but for the next 2-3 years.”
This outlook is not without caution, however, and Trefzger acknowledges that there are macroeconomic signals that indicate another cooling off period. “[There are] signs that a lot of the problems have not been solved. We still have a lot of open topics and it depends on many factors how they will be solved in the long term,” he says.
The company is finalising its budget forecast for next year and, while it is wary of making growth predictions in the current volatile climate, the expectation is for steady growth.
“Whether this is still true tomorrow I don’t know,” admits Harich. “Everyone is cautious in terms of planning.”
Cautious planning at the company will benefit from more accurate forecasting and from the increased flexibility the contract logistics division is able to offer tier suppliers in their search for solutions to fluctuating demand. The tailoring of standard contract logistics and supply chain solutions– including PVMI and FLEX–to meet the urgent needs of those suppliers and the ability to stay close to OEMs in growth markets as they develop around the world are key to the company’s ongoing stability.
And though financial markets remain uncertain, the company’s enthusiasm for the automotive sector is not in doubt, as Harich verifies: “We are developing this specific area at full speed and working closely together within the Schenker world, which is big, to make a successful use of existing resources and relationships.”