The heads of logistics for Volkswagen at its operations in the United States, Fabio Freccia, and in Mexico, Roman Müller, talk about how logistics and supply chain management are keeping apace with the OEM’s rapid growth in production in North America.

While the recovery in the North American automotive industry has brought with it a number of Cinderella stories – from American OEMs coming back from bankruptcy to reap record profits, to the resurgence of Japanese carmakers following tsunamis, floods and recalls – perhaps the most impressive pure growth story has been that of the Volkswagen Group.

The group’s US sales surge of more than 30% in 2012, including Volkswagen, Audi and Porsche, came on the back of a significant investment in North American manufacturing and supply chain capacity. Its new Chattanooga, Tennessee plant built more than 150,000 vehicles in its first full year of production last year, while the group’s sprawling manufacturing complex in Puebla, Mexico, some 130km east of Mexico City, has added even more volume, rising almost 40% from 2010 levels to surpass 605,000 vehicles inrising almost 40% from 2010 levels to surpass 605 000 vehicles in 2012. The Puebla plant is the largest car factory on the continent by far.

While the Volkswagen Group ranks eighth in total sales and seventh in production terms in North America, its recent growth and planned expansion mean the German carmaker is also going to have a supply chain to be reckoned with across the continent. In January 2013 it opened a new engine assembly plant in Silao, about 450km from Puebla, with an annual production capacity of 330,000 fuelefficient TSI engines to serve both Chattanooga and Puebla.

VW is also building Audi’s first factory in the Americas, in San Jose Chiapa, 70km from Puebla, and a MAN commercial vehicles plant in Querétaro, scheduled to open in 2016. Chattanooga could also see a second model, although this has not yet been confirmed.

Greater cost control

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Reducing inventory, both within the plant and at suppliers, is a key part of Puebla
Volkswagen’s expansion has made it imperative that more emphasis be placed on control, visibility and cost in the logistics chain. Fabio Freccia, general manager, logistics, production control and programme planning at Volkswagen Group of America’s Chattanooga Operations, points to improved routing and new IT tools that the carmaker will use to improve cubic utilisation and manage inbound truck lanes. The plant’s logistics team has already made considerable improvements in truckload factors and reducing inbound transport routes. Meanwhile, Roman Müller, director of traffic and transport at Volkswagen Mexico, also points to IT tools such as RFID as having helped the carmaker improve performance and communication with its third party logistics providers and carriers. Volkswagen Mexico has also been rolling out the Group’s ‘new logistics concept’ (NLK), which includes synchronisation of the supply chain from lineside movements to supplier production and deliveries. While the supply chains for each plant are managed separately – they are, after all, located some 3,000km apart – there is considerable cross-shipping between the US and Mexico, the flows for which are likely to grow further with the new engine plant and the eventual Audi plant. Improving the efficiency of such flows is a priority, including the potential for intermodal rail transport and improving backhaul efficiency. Last year, for example, Volkswagen Mexico introduced an intermodal rail service moving material from the US Midwest to Puebla.

Both plants rely heavily on their 3PLs to manage inbound material, particularly for overseas and long-distance transport, and the importance of these providers looks set to rise in the coming years as Volkswagen increases production. Also, while there are some differences in the logistics setups and processes for each location, they share the twin goals of making sure that the supply chain can absorb production growth without losing control of costs. A look across the operations of both suggests that each is successfully managing this task so far.

VW Chattanooga – supply chain overview
Volkswagen’s $1 billion Chattanooga plant, which opened in April 2011, is situated just west of the Appalachian Mountains near the border of the southern states of Georgia and Alabama. The plant rises out of a 1,400-acre (566-hectare) complex that is otherwise surrounded by lush, undeveloped wilderness. Following a production flow from north to south, the plant is almost entirely self-contained, incorporating a body shop, paint shop, assembly facility, technical centre, training academy and a supplier park. Only the press shop operates in a separate location nearby. In 2012, its first full year of production, the Chattanooga plant produced 152,400 Passats. Leading logistics and production control at the plant is Fabio Freccia, who previously managed another large inbound operation in the Americas, as logistics manager at Volkswagen Brazil. Volkswagen Chattanooga’s operations and supply chain have a largely local flavour with 90% of the plant’s suppliers located in the US, Canada or Mexico, including eight tier suppliers onsite at the plant’s supplier park. Freccia points out that to minimise supply chain costs, Chattanooga follows VW’s worldwide philosophy of sourcing locally to allow for the lowest total landed cost, with procurement and planning integrated to an extent with logistics and warehousing considerations. Nevertheless, the plant is the recipient of a complex international supply chain. About 15% of suppliers are from Mexico. Meanwhile, of the 10% of supplies from outside NAFTA, the majority is imported from Germany, with others from Poland, South America and the Asia-Pacific region. Volkswagen Chattanooga uses a number of different inbound transport modes, with full truckloads dominant. According to Freccia, the plant receives 117 full truckloads (FTL) everyday, or about 85% by volume. The plant also receives a relatively small amount (5%) of less-than-truckload (LTL) shipments, according to Michael Smith, assistant manager of logistics. As well as its NAFTA truck flows, Volkswagen Chattanooga also imports 50 to 55 containers per week through the port of Savannah in Georgia, with about 80% arriving from Germany. As for air shipments, Smith notes that Volkswagen Chattanooga has reduced this mode to less than 1% of its total inbound materials.

Receiving deliveries at the plant
To receive its inbound material, Volkswagen Chattanooga uses a combination of direct-to-plant deliveries and warehouse deliveries. Freccia says that 50% of its inbound supplies are delivered to either of its two warehouses, and then to the plant. For example, every day it brings in three FTLs of low-volume consolidations that pick up from 20 suppliers. The other 50% moves directly from the supplier to the assembly line, including nine or ten trucks per day of direct deliveries from Mexico. Freccia says the plant also receives three milkrun trucks daily, which include shipments from eight suppliers. Approximately 90% of Volkswagen’s inbound parts volume is for regular, part-by-part production, while 10% of parts serve for complete-knockdown (CKD) production. “Unlike with regular production, which contains more variables, with CKD production the inbound logistics system is highly planned. We know how long the entire process will take,” notes Smith. Once shipments have arrived at the plant, Volkswagen Chattanooga moves parts to its assembly line and from the warehouse to the assembly buffer line. For in-plant logistics, the carmaker uses kanban, just-in-sequence and just-in-time processes from the supplier park.

The role of 3PLs
3PLs play an important part in Volkswagen Chattanooga’s supply chain as they help to design the flows in coordination with the carmaker, according to Smith. For example, for its LTL shipments from within North America, Volkswagen uses Ryder Systems to operate its North American regional warehouse, which is located about 11km from the plant. Ryder manages the warehouse as well as routes from the suppliers to the warehouse.

For its overseas imports, Kuehne + Nagel is the freight forwarder for sea containers, handling CKD part shipments from Europe to Chattanooga. The plant has a CKD warehouse on site, which is managed by Team 3 Logistics, a joint venture between Germany’s Schnellecke Logistics and Chattanoogabased Kenco. Volkswagen also operates a consolidation centre in Mexico City that serves strictly as a crossdock centre without storage functions.

Better truck utilisation
Volkswagen Chattanooga’s logistics team has been focused on improving truckload and warehousing efficiency at the plant. “We try to achieve the highest cubic volume for our inbound trailers as well as for our overall routes. In fact, we have reduced our number of trucks by 20%,” notes Michael Smith. According to Miguel Angel Royo Vicente, general manager, logistics, for inbound, planning and pre-series, over the last year the carmaker has improved its load factor from 65% to 85% and reduced the number of inbound routes from 165 to 126. This has been done by consolidating its own material rather than seeking to consolidate inbound shipment with other manufacturers in the region, according to Freccia. Now that Chattanooga has ramped up its production levels, reducing transport costs has been a major focus and Freccia points to an update of the company’s supply chain IT systems. “Our information technology system focuses on lean logistics. We need to make final adjustments to our SAP supply chain software system in order to utilise the new tools properly and improve our logistics processes,” he explains. Smith predicts that the company’s IT system will help to improve its cubic volume utilisation and thus reduce the number of trucks it uses even further, although he says this will come more from a process of improvement and learning about the tools at its disposal rather than wholesale change or investment in the systems. “We will enhance our SAP system with cubic optimisation utilities that we plan to implement this year,” says Smith. “The fact is that there are no big changes underway – it is more of a customisation process.”

A push for more returnable packaging
One area that is being targeted with significant improvement is packaging, including the use of more returnable products. Currently, Volkswagen Chattanooga uses returnable packaging between the US and Mexico, while cardboard is used for small overseas shipments of CKD parts. By contrast, transmission pallets sent across the Atlantic are returnable. Freccia says that CKD shipments are an area in which to consider introducing more returnable packaging. Such an increase would be in line with the plant’s strong commitment to green logistics and energy efficiency, says Freccia, pointing out that the US Green Building Council’s certification programme, Leadership in Energy and Environmental Design (LEED), awarded the plant a platinum certification for its preservation of local nature, energy efficiency and other areas of waste control, making it the only automotive manufacturing plant in the world rated as such.

Potential for intermodal
Freccia, Smith and Vicente all say that Volkswagen Chattanooga would like to make more transport modal changes for its inbound supplies. Smith notes that all supplies from Mexico currently move to the plant by truck, although this could potentially change with the imported engines from Mexico. “We would like to use rail transportation,” Smith admits. “Our supplier in Mexico could offer a great number of opportunities. For engine imports, rail transport would avoid the weight restrictions of truck transport. However, one truck from Mexico to Chattanooga takes four days and rail, although it is cheaper, takes eight days, which is a problem.” Smith adds that there are limits to rail transport capacity from Mexico that could prevent switching more volume to it from trucks. “For example, for the upcoming Audi plant, the number of rail lines and shipping frequencies is currently limited. The only carrier available is Kansas City Southern Railways. Although the traffic flow is now stabilising, there is still a lot of volume coming into the United States and little going into Mexico, which makes an unbalanced system.”

VW Mexico – expanding logistics capacity
The other, dominant half of the Volkswagen Group’s North American system is its plant in Mexico. Production from Puebla, which exports vehicles not only to North America but also to Europe, South America and elsewhere, grew almost 20% in 2012 compared to 2011, to reach 605,608 units. In 2010, production was just 434,685 units. Reflective of the Puebla plant’s considerable growth rate, in 2012 Volkswagen Mexico transported more than 13m cubic metres of production material to the plant. According to Roman Müller, suppliers in Mexico provide the plant with 90% of its inbound material volume (nearly 70% of which is delivered using JIT processes). About 3.5% of supplies arrive from Germany and 3.4% from the US and Canada (nothing is currently imported from the Chattanooga plant). The rest includes material from other European countries, Brazil and Japan. The plant’s supply base is now even further integrated in Mexico with the launch of the Silao engine plant. Thanks to a particularly high production growth rate during the past two years, Volkswagen Mexico has required more logistics capacity for road and rail transport, as well as for warehouse and storage. “Finding reliable logistics partners is one of the common challenges that we encounter under this type of growth situation,” says Müller. “Our ability to develop external logistics infrastructure has been a key success element for managing so much volume.” Volkswagen Mexico has grown its logistics capacity together with primary providers, including Transportes Marva for truck transport and Ferrosur for multimodal rail transport. The company has been expanding its use of external sites to handle the increased material flow, including external container yards near the Puebla plant that offer parking or short-time storage capacity for several hundred ocean containers or truck trailers. “This infrastructure enables our internal logistics yards to breathe as long as we use them as buffers for the temporary receipt of material that we later programme for transportation to our plant,” says Müller.

Inbound 3PL management
3PLs are essential in maintaining Volkswagen Mexico’s logistics network, particularly over the carmaker’s international flows. As at Chattanooga, Volkswagen Mexico uses mainly road carriers for its imported material from the US and Canada, although it has also recently been able to increase the use of intermodal rail transport. Müller explains that all imported shipments from North America occur through a tender process for which the main goal is actually to integrate the entire transport chain under the control of one 3PL. The company currently has a bid out for managing material from the US and Canada to Mexico. Volkswagen Mexico has developed 3PLs in Europe, Asia, and South America whose functions are to collect material at the supplier’s factory, transport them to crossdocks or consolidation centres, and ship them to Mexico. “They are our eyes in all of the different locations in which we collect material,” Müller says. “Having proactive and responsible partners is the only way to avoid major problems such as finding ourselves with a lack of material without notice or needing to use expedited air freight in order to cover late or erroneous shipments.” For material from the US, Volkswagen Mexico’s 3PLs handle domestic transport, customs and border crossings and transport to the Puebla plant. Some of its suppliers have enough volume to ship full truckloads from the US, while LTL shipments are consolidated at Laredo, Texas before they cross the border. Volkswagen also uses a crossdock centre near its plant that helps it to consolidate smaller shipments. According to Müller, this operation helps to improve operations at Volkswagen Mexico’s central warehouse by allowing it to generate a steady onward flow to the line.

Integrating North America
There is currently a limited number of loads that can return full to the US, with most material and packaging sent oneway to Mexico. The Volkswagen Group has been able to find a degree of balance, however, by filling about one-third of all trucks coming to Puebla with spare parts exports for the US. Given that Volkswagen Chattanooga faces the inverse dilemma, with imported material from Mexico and little material to send back south, one might wonder whether there isn’t room for further integration between the material flows in opposite directions. However, the established supply base of Volkswagen Mexico – the plant was opened in the 1960s – and the geographic distances mean there is currently limited scope for such integration. “If we were to have the opportunity to integrate logistics concepts that help to create synergies between both plants, we and our colleagues in Chattanooga would support specific projects,” says Müller. “Volkswagen Puebla has established suppliers, so it is difficult to find synergies. If it happens, it would not be by design.” In 2012, Volkswagen Mexico made an important step in the development of its North American supply chain with the introduction of intermodal rail transport shipments from the US Midwest to Mexico through a joint project with Union Pacific Distribution Services (UPDS). “We are certain, after six months of monitoring its transit times and its reliability, that rail transportation should grow over the next few years. In fact, we are working on increasing the volume within the first half of 2013,” says Müller. He also states that increasing the use of intermodal transport has been an objective that the plant has worked intensively – and at times with difficulty – over the last years to achieve. “This has been a real challenge, not only because of the higher transit times of rail transportation, but also because of the highly sensitive logistics network that needs to be implemented by intermodal and rail providers that are not always used to serving the automotive sector,” he explains.

NLK – improving logistics from the inside out

In Mexico, as elsewhere, Volkswagen’s inbound logistics processes have been influenced by the on-going introduction of the ‘new logistics concept’ (NLK). Initially applied to Audi production in Europe, NLK typically begins with a lineside approach for smaller movements and then travels upstream through the synchronisation of deliveries with crossdock operations. The concept continues to be rolled out across the entire Volkswagen Group in Europe and applied, as appropriate, to global markets from China to North America.

For Müller, NLK means improving the logistics processes at Volkswagen Mexico from “the inside out” – making both in-plant and suppliers’ logistics more efficient and reducing total inventory, including that held by suppliers. “We reinforce our stable production by synchronising Vo l k s w agen’s supply chain flows. We optimise our costs by maintaining a stable delivery programme, reducing inventory in every step of the logistics flow and shortening lead times,” he explains.

A switch to using more intermodal transport, but without increasing safety stock, has actually been an important step towards maintaining stable delivery objectives. Müller says Vo l k s w agen Mexico has achieved this by working with its providers to improve their normal services and adding visibility to the entire process. He says Volkswagen also introduced a performance monitoring system and emergency plans that would allow the OEM to expedite any urgent containers in case of any delays in its delivery plans.

Another way the company has supported the NLK strategy has been through the use of a pick-up sheet concept. Müller says this approach ensures that loads delivered by suppliers will match in quantity, type, and frequency to the exact requirements of the production line. All parties must therefore receive Volkswagen Mexico’s demand information and be able to properly interpret and fulfil it without any deviation at each material pick-up point.

While such accuracy must be the basis for any good logistics system, the functionality to support it and other NLK processes is contained in the company’s  I T  system, which is highly integrated across Volkswagen Mexico’s plant, supplier and logistics providers. It communicates across supplier plants, consolidation centres, carriers, port operators, airports and custom brokers, and includes the use of technological tools such as satellite tracking, the internet and RFID.

NLK and logistics providers
NLK processes also have implications for how Volkswagen Mexico selects logistics service providers. Müller says that since the objective is to speed up inbound flows and reduce inventories all the way back from suppliers’ to the point of consumption at Puebla, the carmaker values stable business partnerships. Volkswagen Mexico is reviewing further how it could foster healthy competition among providers, what responsibilities providers should share, when to tender an operation and how to manage the growth or even the decline of providers.

The carmaker is currently tendering several logistics services. As well as a 3PL for inbound materials from the US and Canada, it is looking for a local milkrun system that will collect material from all Mexican suppliers. JIT/JIS operations are also under a bidding process, says Müller.

One of the most significant recent changes among providers for Volkswagen Mexico was the selection of Grupo Sese as its 3PL for Brazil. The provider took its first shipments from Brazil in February, says Müller, and is responsible for collecting material, consolidating it, and shipping it to Mexico.

A different approach for Chattanooga
While Volkswagen Mexico and the Chattanooga plant share many similar growth and efficiency objectives, they appear to be at different stages in their use of the NLK. Chattanooga’s Michael Smith admits that the concept is not yet fitted to the supply chain of the US plant. “While the NLK is in use for Audi’s inbound process in Europe, Volkswagen Chattanooga’s supply base is not used to it. In Europe, it works because the distances between suppliers and plants are shorter. However, in North America it would involve modifying how we order and deliver supplies to our plant,” explains Smith.

In the current ordering process, he explains, Volkswagen Chattanooga provides a six-month forecast to its suppliers as well as daily releases that detail what they should ship. This could be for shipments that are daily or thrice weekly.

For international shipments, it provides weekly releases. The purpose of submitting these updates is to reduce waste by ordering small lots of JIT deliveries at greater frequencies.

Nonetheless, Freccia adds that Chattanooga is working on improving its approach from lineside to its suppliers. He maintains that the plant is not looking to make radical changes to its systems, but to continue improving things such as load factors and cubic utilisation. “We notice an evolvement of increased cubic growth success. We are not looking for big changes. Rather, it is our job to look for continuous improvements,” says Freccia.

North American evolution

Screen Shot 2013-06-25 at 13.56.26The opening of a customs free trade zone will enable goods to be shipped into the Chattanooga plant more quickly
In the meantime, both the US and Mexican plants are making other process changes to improve their logistics flows. Among the most recent developments at the US plant is the opening of customs free trade zones at Chattanooga for air shipments in January and the following month for road shipments. Smith notes that these changes will facilitate the movement of goods to the plant more quickly.

Although Volkswagen Mexico has not announced specific plans to expand its production capacity at Puebla, it has made some adjustments to be able to produce 2,500 cars per day, according to Müller. For example, the plant built a new hall to expand its capacity for receiving full truckloads and sending empty containers back to its suppliers.

On the outbound side, Müller says that the Puebla plant is also preparing a new central courtyard for finished cars to increase capacity and centralise the location and availability of the cars for shipment to different worldwide destinations.

Although the specific approaches to inbound logistics at Volkswagen’s Chattanooga and Puebla plants vary in some respects, both are aiming to reduce waste in anticipation of further growth and both are striving to use more inbound rail transport. Plus, with the new Silao plant and the Audi and MAN truck plant in the works, there could soon be more opportunities for more intermodal transport, as well as integration and collaboration in Volkswagen’s North American supply chain.