You can find them round most large cities – parking lots crammed with brand new vehicles waiting for delivery to dealers and customers. To the uninitiated, such signs of automotive plenty suggest a healthy, vigorous industry. However, the massed ranks of gleaming windscreens are a testament to the difficulty the auto industry has in matching production with demand.
In other large scale manufacturing industries, such as electronics, companies have made big efforts to cut inventories by using information technology to help them build to order and reduce or eliminate costly inventory. In personal computers, for instance, Dell has led the way for many years in the way it uses IT to link the flow of customer orders directly with what happens on the factory floor.
Within hours of receiving an order by phone or over the Internet, Dell begins constructing a system using components supplied locally and often held in the back of trucks drawn up at factory loading bays. Later, peripherals like scanners and printers are married up with computers at local hubs in a carefully timed logistics exercise.
The automotive industry is a long way off such elegant supply chain balletics. For instance, when a friend recently showed me his new Fiat, he enthused about the extras he had got for no additional cost. He explained that when he visited his local dealer, the model he wanted was out of stock and the salesperson didn’t know when it would be available.
Knowing his prospective buyer would go elsewhere with his cash, the dealer sold him a much higher spec model for the same price. Good for my friend but bad for an industry that is obviously a long way from Dell’s direct sales, build to order approach.
That’s not to say that the automotive supply chain is inefficient. The best suppliers come close to executing perfect orders 98 to 99 per cent of the time – way above the 90 per cent achieved in many other industries, according to advisory company AMR Research. ‘Too many suppliers are struggling to better their perfect order performance,’ says Scott Lundstrom, chief technology officer, AMR Research. ‘They have bought into the notion that somehow they can implement their way into a better supply chain. They can not. Technology helps, but technology does not fix fundamental, underlying business process problems in the supply chain.’
Anyway supply chain efficiency may not be the issue. According to other observers the industry needs a different type of supply chain. ‘The industry has to change its entire perspective so that the pull signal is coming from the customer rather than being arbitrarily determined by the OEM,’ claims Karen Peterson, vice president and research director at research company Gartner.
But with up to 4,000 parts in the average car and a manufacturing process that involves welding, painting and stitching car seats, building a vehicle is much more demanding that slotting together electronic components.
However, according to Steve Keifer, vice president of industry and product marketing at e-commerce service company GXS, the automotive industry is not fundamentally different from the electronics business, where standard platforms – combinations of chips and software – are used to create a variety of systems. He sees no reason why OEMs could not adopt a similar standardised approach.
‘The dream of OEMs is to build a car to order and have it ready in seven to 10 days,’ says Keifer. ‘But it is still a build to stock world. The reasons for this are constraints placed on companies by stockholders, the restrictions of plant capacity and the contracts manufacturers have with their labour pool.
‘One of the big challenges is that each car model has its own unique supply chain and each model has its own parts and tools. The belief [in the industry] is that you can move manufacturing down one level to Tier 1 suppliers within five or 10 years. If that happens OEMs won’t be doing much manufacturing. They will be assembling vehicles from large modules; for example, the power train, the interior and so on with 75 per cent of the actual manufacturing being done elsewhere.
‘The technology is there today; it is a question of changing processes. The industry is locked into entrenched processes and the pension plans of its workers,’ opines Keifer. For example, most automotive customer data is found in dealer management systems, which are owned by the dealers themselves. Dealers have been very protective about their customer data, because they fear that OEMs may try to cut them out of the supply chain in future.
‘The good news is that customers are demanding more kiosks in dealerships and seven out of 10 buyers are going to a website before they buy,’ Keifer points out. ‘The challenge is capturing that information and using it. Here the industry hasn’t got its act together: it tends to look at data in isolation.’
However, elsewhere in the supply chain market forces are driving better collaboration. Most OEMs insist on Vendor Managed Inventory and have adopted one of the many systems for managing the forecasting and replenishment of stocks.
‘From a technical perspective it’s a complex decision when to manufacture and ship,’ Keifer admits. ‘Companies need a feed that monitors the production of parts and produces minute by minute forecasts of inventory and shipping requirements. That involves a lot of analysis and predictive modeling.’
He argues that the hosted e-commerce services such as GSX’s Trade Grid make life easier when it comes to information sharing since service providers can support smaller suppliers and act as neutral third parties in settling disputes. The ability to link smaller suppliers into the supply chain is especially important in emerging markets such as China, says GSX, where fewer than 25 per cent of companies in the automotive industry have ERP systems and IT awareness is at a comparatively low level.
For Clive Wilkinson, director, sector engineering automotive for TNT Logistics, adopting a pull model is no easy matter for the industry. ‘It’s a quandary for them. The automotive market is going through a difficult period with far more supply than demand. OEMs find it difficult to contract.’
Wilkinson points out that even with a pull model there is an element of forecasting required because globalisation has lengthened supply chains and made them more complex. ‘It’s a finely balanced game in the supply chain,’ he says.
However, the emphasis on trimming cost in the supply chain has gone about as far as it can. ‘The industry has recognised that the traditional way of dividing business between suppliers and lead logistics providers has reached the end of the line in cost reduction,’ he maintains.
‘The larger suppliers are looking at a solution that is more synergistic, because while the smaller players can live on low margins for the rest the lemon has been squeezed dry: there is no more juice and no more pips.’
It is time to move to end-to-end logistics with a single party responsible for managing data and material flows from the supply base through consolidation and on to shipping, argues Wilkinson. The change will involve third party logistics providers offering a total system capable of handling all the interfaces with other supply chain participants that are required.
‘Our industry has gone to a certain level of service, but I think the industry has recognised that to break the cycle of cost/value in the supply chain you have to do things differently,’ he says. Logistics providers will become much more closely involved with customers: by participating in the planning process, or by offering new services such as radio frequency identification (RFID).
TNT Logistics has been conducting RFID pilots in a number of industries. The company’s experience in the automotive sector has convinced it that the technology has a big contribution to make to extending lean manufacturing principals. In particular, TNT’s automotive group has homed in on important savings for OEMs in not having to employ checkers and being able to do away with laborious techniques for identifying parts such as hanging location tags.
‘The tangible benefit is in control: once you know what you’ve asked for you’ve got to know where it is. The beauty of RFID is that once you have assigned the information to a tag you don’t have to scan it any more,’ observes Wilkinson.
But the pilots have also taught TNT some important lessons. The company is convinced that, in automotive at least, users will need to adopt a combination of active and passive tags, particularly inside auto plants where being able to track materials could bring the biggest benefits. Additionally, TNT believes that RFID technology will refine the parameters of ‘lean’ logistics and ‘lean’ manufacture.
‘There is a lot of scepticism in the industry about RFID, but what’s gone wrong is that people have tried to put it on items and that has failed because of the quantity of metal involved,’ Wilkinson reports. In its main automotive pilot, TNT has opted to place single tags on the outside of parts containers or bulk packs that contain around 20 to 30 parts on average.
Case study: Ducati
Adopting lean principles
Motor cycle manufacturer, Ducati, leans hard into a fast bend
‘Lean’ principles have always influenced thinking at Ducati. While other motorcycle brands were busy adding power and weight to their machines, the Italian manufacturer always believed in keeping weight to the minimum; to improve stability when a bike is leaning hard over into a fast bend. Now the company has embraced lean principles throughout its manufacturing process as part of a major turnaround in its operations. And the results are impressive: production costs down by up to 25 per cent, throughput time shortened by 50 per cent and motorcycle build quality before delivery increased by 70 per cent.
These figures are the culmination of a three-year efficiency drive led by Giovanni Contino and Filippo Pellerey, joint managing directors of Ducati Consulting, which was set up to oversee the project.
The move to lean manufacturing followed the acquisition of Ducati in 1996 by the Texas Pacific Group (TPG). The new management wanted to increase production volumes from 12,000 bikes a year to 40,000 within five years. This would have to be achieved in the existing factory space, and without increasing the number of employees.
Ducati’s solution was to outsource as many non-core activities as possible and focus its own efforts on assembly and research and development. ‘We wanted to eliminate all non-value-adding activity, eliminate waste and improve quality, all without any major new investment,’ says Pellerey. ‘We decided that outsourcing and embracing lean principles were the keys to achieving these targets.
‘We started by adopting the kaizen philosophy and just-in-time methodology, whereby you can achieve major change without big investments by taking it one step at a time. We conducted a careful analysis of our production processes, which revealed all of our problems. For example, in the machining shop the machines were laid out in such a way that components had to follow a long and tortuous path to get to the various operations.
‘So we improved the material flow and the factory ergonomics and devised a total productive maintenance approach to improve machine reliability. Some of the most significant results in that department included an increase of up to 12 per cent in machine reliability and a reduction of 23 per cent in hourly costs.’
The Ducati team also changed the flow logic for the production lines, from ‘push logic’ to ‘pull logic’, using assembly kits carrying the materials needed for only one engine or one vehicle. The kits are made up in areas known as supermarkets that are themselves supplied via a kanban system. This has reduced inventory, obsolescence and error rates and improved flexibility. In combination, these changes have reduced defects by 70 per cent over the past three years.
‘As we worked through all these changes, we found that we could cut the cost of our product by 25 per cent, which was a great start,’ Pellerey said. ‘Since only eight per cent of the cost of our product was produced internally, it was necessary to extend, develop and implement the Kaizen philosophy and the JIT methodology to the supply chain.’
Since the greatest potential for improvement lay with the supply chain, the team was joined by Giovanni Contino, who at the time was Ducati’s purchasing and logistics director. He started to export the company’s new lean culture to its suppliers.
‘We had 380 suppliers, and the lean philosophy was new to most of them,’ Contino said. ‘We had to select only those suppliers who could follow our new approach, and so we ended up cutting back from 380 to just 175. To get them on board, we introduced an integration programme that involved Ducati people and supplier staff working in teams.
‘We considered our suppliers an extension of Ducati and so it has been necessary to connect them by the Web to exchange and accelerate the flow of information like production planning, parts price lists, invoices, quality reports and so on.’
Sixty percent of Ducati’s procurement comes from Italy, because of the long automotive heritage in Northern Italy, 25 per cent from other EU countries and the rest from Japan. At the moment, the first 100 suppliers are directly connected to Ducati’s IT network which is based around Oracle’s e-business suite.
The next step on Ducati’s journey is to move closer to the concept of a demand-driven supply network (DDSN). ‘Right now, that’s something we know we want,’ he said. ‘We want anyone who desires a Ducati motorcycle to be able to walk into a dealer and get one in the shortest possible time, but that will require further development of the information process between our dealer network and the factory. We are working on that now.’