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  • 8/22/2019 Auto WP Lean and Resilient

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    Lean and resiLientthe new automotive suppLy chain hybrid

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    In 2011, when the unthinkable happened the

    Fukushima tsunami and nuclear meltdown in

    Japan the global automotive industry was

    already busy recovering rom the U.S. fnancial

    crisis, dealing with a European market hobbled by

    the Eurozone debt crisis, and scrambling to meet

    demand in markets which are growing

    exponentially, like China and India.

    oyotas manuacturing was aected by the compound

    disaster in Japan. But some o its suppliers, including

    Renesas, were devastated. Renesas, explains Andrew

    Zolli, author o Resilience: Why Tings Bounce Back,1

    makes about 40 percent o the chip controllers that

    power todays new cars. It had a just-in-time delivery

    mechanism, where it delivered chips to the oyotasupply chain with a six-minute gap.

    But at the time, Renesas only made the chips in one

    actory in Japan. And when that actory was decimated,

    manuacturing or oyota shut down immediately all

    over the world. oyota literally couldnt get its hands on

    the processing chips to run its new cars.

    GM had a similar kind o exposure, with one critical

    dierence, Zolli notes. GM had built sucient

    redundancy into its supply chain so that it was able to

    dynamically recongure its supply and value network to

    ensure continued manuacturing o its most

    protable vehicles.

    Te result: GMs CEO, in the third and ourth quarter o

    2011, was able to report that the terrible disaster in Japan

    would have no impact on the companys earnings, even

    though it had roughly the same exposure, in terms o

    supply chain risk. By contrast, the quake cost oyota

    nearly $3,500 million (See Figure 1) and knocked the

    company rom its position as the worlds number one

    automotive manuacturer.

    Te automotive industry woke up to the act that, while its

    just-in-time (JI) business model and super lean, highly

    inter-dependent supply chains were wildly ecient, they

    also were brittle - susceptible to disruption on a potentially

    massive scale. Simply put, traditional just-in-time

    automotive supply chains were not resilient and, as a result,

    were at increasingly high risk o ailure.

    Quake Costs (Million Dollars)Source: U.S. Department of Energy, April 16, 2012

    1 Andrew Zolli, Resilience Strategies for a Volatile World, Harvard Business Review Interview http://blogs.hbr.org/ideacast, 2012/07.

    Mitsubishi

    Nissan

    Suzuki

    Mazda

    Subaru

    Honda

    Toyota

    0 500 1000 2000 30001500 2500 3500

    Figure 1: Financial losses of Japans seven major automakers, March 11, 2011 March 31, 2012

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    Te new resilient automotive supply chain recognizes the

    need or collective, rather than sequential, risk

    management; and acilitates collaboration on the new scale

    that is necessary or survival.2 It is built on true supply

    chain partnerships that create agility and contingent scale/

    capability, delivered in an on-call model. Tese

    partnerships span all players in the sector: OEMs, suppliers

    and supply chain service providers. Tey embody what

    Zolli reers to as the two dening aspects o resilience:

    Te ability to maintain a core purpose, or

    Te ability to restore core purpose in the ace oa disruption.

    T rlc mpratvActing on this knowledge, the industry and its supply

    chain partners have embarked on eorts to cra a

    revised operating model: Supply chains that are

    simultaneously lean andresilient. Tis model retains

    the principles o JI and lean, but adds in controlled

    redundancy and contingent options to improve

    resiliency and protect against ailure.

    Te evolution toward this hybrid supply chain model

    is ongoing. Automotive companies are re-balancing

    their supply chains to build in careully managed

    tolerances or volatility. Te goal is to build a supply

    chain that can tackle conditions o systemic volatility

    good and bad ranging rom the ordinary to the

    unthinkable. And do so while preserving orenhancing protability.

    2 Lisa H. Harrington, Sandor Boyson and Thomas Corsi, X-SCM: The New Science of X-treme Supply Chain Management, Routledge, 2010.

    Zolli notes GM's CEO was able to report that theterrible disaster in Japan would have no impact onthe company's earnings

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    A dtr xo understand this new hybrid automotive supply chain,

    let us rst look at the industrys market dynamics. Tere

    are our major trends re-shaping the sector.

    Trd #1: Glbal grwt ad mrgg mart

    Despite the drag eect o the debt crisis on the European

    market, global automotive production is orecast to hit

    record levels each year through 2017, with emerging

    markets driving the growth. Tis increased production is

    in direct response to demand caused by the rising

    auence o emerging market populations, and their

    ability to spend on vehicles.

    For the rst time in history, emerging market vehicle

    assembly exceeded established market assembly and isexpected to do so in the uture, observes consulting rm

    PwC in a 2012 report on the automotive sector.

    Looking urther out, vehicle assembly is expected to

    reach 100 million units around 2017 (see Figure 2). 3

    While the automotive sector is truly a global industry, it

    is also highly concentrated. Te top 10 global

    automakers account or roughly 80 percent o the

    worldwide production. oyota, General Motors and

    Volkswagen AG lead, with oyota recapturing rst place

    in 2012. Asia, especially China and India, will drive

    growth over the next ve to seven years. It is expected to

    account or 40 percent o the sectors overall expansion.4

    Part 1: Crrt tat ad drvg trd

    3 PwC, Consolidation in the Global Automotive Supply Industry 2012, p. 1-3.4 PwC, p. 1-3.

    140

    120

    100

    80

    60

    40

    20

    0

    100

    80

    60

    40

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    Millions

    Percentage

    Assembly volume Excess capacity Utilization (right axis)

    2007 2008 2009 2010 2011 2012 2014 2016 20182013 2015 2017

    Figure 2: Global light vehicle assembly outlook (20072018, millions)

    Source: Autofacts 2012 Q3 Data Release, from PwC, Consolidation in the Global Automotive Supply Industry 2012.

    Despite the drag eect o the debt crisis on theEuropean market, global automotive production isorecast to hit record levels each year through 2017

    Te worlds largest assembly market, China, will likely

    capture the biggest share o that growth. Analysts predictvehicle production will double during the next ve to

    seven years, according to PwC. Te underlying reality

    in China is that wealthier households are expected to

    grow the astest at over 20 percent compound average

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    o meet the need or speed, while at the same time

    reducing costs, VW is taking manuacturing

    fexibility one step beyond the mega-plant, multiple

    platorm model. Te German automaker is migrating

    to a new modular tool-kit assembly system that will

    allow it to build all o its vehicles using just our basic

    toolkits one or small city cars, one or midsize cars,

    one or sports cars and one or large cars and SUVs,

    according to a prole in Forbes.5

    VW believes its toolkit system will save at least 20

    percent a year in per-vehicle costs and cut assembly

    time by 30 percent.

    growth rate, tripling the number o potential

    automotive buyers every our to ve years, PwC states.

    At the same time, Chinas nascent domestic car-

    makers, typically joint ventures with global OEMs, are

    churning out growing volumes o low-cost vehicles

    designed or domestic-only consumption. Tis same

    trend is developing in India and, soon, Arica.

    Trd #2: Mga-plat ad mltpl platrm

    Across the industry, companies are shiing to

    producing multiple models or platorms in a single

    plant to gain fexibility, reduce costs and better utilize

    production assets. Tese mega-plants, based on the

    concept o building to a common engineering

    platorm, produce up to six dierent vehicles in onelocation. Tis improves capacity while reducing the

    need to build new plants, comments Mike White,

    Senior Vice President - Global Automotive Sector,

    DHL Supply Chain.

    Automakers are investing heavily in building these

    mega-plants in China, Mexico and elsewhere. For

    example, VW, along with its Chinese joint ventures, plans

    to invest almost $80 billion in 10 new plants (including

    seven in China).

    As OEMs build mega-plants in new geographies, theyare asking component suppliers to ollow them intosupplier business parks - or clusters in order toprovide greater support.

    At the same time, vehicle nameplate lie cycles are

    shortening. oday, a vehicle model lasts our to ve

    years vs. seven to eight years in the past. Tese shorter

    liecycles have orced automakers and their suppliers to

    re-vamp their business methodology in order to designand produce new vehicles on the shortened cycle.

    Essentially, every process in the automotive supply

    chain has sped up.

    5 Joann Muller, How Volkswagen Will Rule the World, Forbes, 4/17/2013, p. 1-3.

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    Reduced inbound logistics costs

    Improved supply stability

    Reduced risk rom long transit times, and

    Improved responsiveness to change

    Te supplier clustering model is well established in

    Mexico, or example, where there are 13 large clusters o

    suppliers and services or the automotive industry. Tese

    clusters serve both the passenger car and the commercial

    truck markets.

    Government requirements or local content will uel this

    clustering trend going orward. Governments o China,

    Brazil and other countries are passing regulations to

    require OEMs to use more local supply content in

    vehicles. Tis means supplier clusters will develop in thenew manuacturing locations, but the process is likely to

    take years. Even in developed markets like the U.S., it

    took several years to build the regionalized supplier base

    to support production in the Southeast.

    Despite this trend, experts estimate that eight to 15 percent

    o core components like engines and transmissions - will

    continue to be sourced rom strategic suppliers back in

    the OEMs home country. Tis may not sound like a lot

    o volume, one automotive supplier acknowledges, but

    these are critical components and the volume is

    signicant enough to add complexity to the

    supply chain.

    Critical components sourced rom aar also include an

    increasing percentage o electronics. As a result,

    automotive supply chains are now inextricably linked to

    supply chains outside the traditional automotive circle

    e.g., consumer electronics. Teir operating ability

    and ortunes - are now intertwined. And competitive

    cost challenges dictate that most o the electronics intodays vehicles are imported rom the traditional

    electronics manuacturing spots around the world

    e.g., Asia and Mexico.

    Tis modular approach will in large part

    determine whether VW can pass oyota or GM.

    Teres big risk here: I something goes wrong with

    a shared component, the problem can quickly

    multiply across VWs entire lineup.6

    As OEMs build mega-plants in new geographies,

    they are asking component suppliers to ollow them

    into supplier business parks - or clusters in order

    to provide greater support. Tis clustering conceptdelivers great benets to the OEMS, including:

    Reduced time to produce, translating into

    shorter time to market

    6 Muller, p. 1-3.

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    Jaguar Land Rover, or example, which saw export sales in

    China rise dramatically in the last year, decided to set up

    production in China. Te British car maker entered into a

    joint venture with Chinas Chery Automobile Company to

    build up to 200,000 vehicles a year in a new $1.65 billion

    manuacturing plant in Changshu, near Shanghai.

    Trd #3: Gttg clr t t ctmr

    OEMs are locating their new manuacturing plants closer

    to their end markets. Automakers have moved rom

    manuacturing in their home countries and shipping

    nished vehicles to market, to a model o geographically

    regionalized production i.e. manuacturing at, or near,

    the point o demand. Tis means the industry is setting

    up regionalized manuacturing plants and supplier

    clusters in new locations all over the world, explains

    Dennis Drinan, Vice President, Global Sector Products &

    Head o LLP Service, DHL Supply Chain.

    Automotive supply chains are now inextricably linkedto supply chains outside the traditional automotivecircle or instance, consumer electronics.

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    Te allure o building plants in emerging markets is not

    necessarily to take advantage o lower labor rates.

    Instead, the primary drivers are reduced supply chain

    costs, speed to market, access to market in response to

    government requirements or taris, and support or

    local content. Once sales volumes reach a certain point,

    it no longer makes sense to ship nished vehicles

    across oceans.

    In the near term, at least, regionalization o production

    immediately elongated and complicated the supply

    chain. For German automakers like BMW producing in

    their home country, all suppliers were nearby and

    things were relatively simple. Changes could be made in

    production schedules at short notice. Now, companies

    are building cars in the U.S. or China, with German orother oreign components. Tis approach requires a lot

    more discipline in the supply chain, Drinan says.

    Trd #4: Rltl ct prr

    Finally, there is one industry dynamic that permeates

    every acet o automotive industry operations

    worldwide: Relentless pressure to reduce costs.

    Logistics costs typically represent ve to 10 percent

    o manuacturing revenues in automotive. o be

    more competitive, companies must use every trick in

    the book to reduce costs and improve market share.

    Tis brings the discussion ull circle right back to

    risk and resiliency.

    Tere is tremendous pressure to be leaner to hold

    less and less inventory, while at the same time

    guaranteeing reliabilityandresiliency. Tose two

    objectives are oen in direct confict. I you wanted

    to be sae, observes an auto industry executive, the

    rst thing youd do is keep a lot o inventory nearby.

    But your other goal is to be lean, so that meanstaking away most or all o the saety stock.

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    As the entities charged with executing the automotive

    supply chain day-to-day, the global lead logistics provider

    (LLP) must have a portolio o solutions, alternatives,

    expertise and systems at the ready to deliver this tactical

    logistics agility. By way o illustration, consider

    automotive manuacturers' strategy to build cars to actual

    demand rather than to stock. Tis pleases the consumer,

    providing exactly the vehicle he or she wants, and also

    dramatically reduces nished goods inventory.

    Building a supply chain that is both lean and resilient

    means creating a new hybrid that balances the need

    to reduce costs with eective use o redundancy,

    contingent scale and capacity. Tis is no easy task,

    and the solutions are dependent on multiple

    variables. Tey dier by customer, by geography

    and by provider.

    In the automotive sector, however, certain attributes

    are emerging as the hallmarks o this lean-resilient

    supply chain hybrid.

    Glball agl xctSupporting the globally regional automotive supply

    chain with its need or leanness and responsiveness

    requires a new level o tactical logistics agility acrossa global ootprint. Te days o knowing what is going

    to happen 30 days out are gone. Tird-party logistics

    providers (3PLs) that support the automotive industry

    have to build supply chains that can switch gears at a

    moments notice, but not break the bank in doing so.

    Part 2: Bldg t la and rlt ppl ca

    Delivering this strategy means setting up a postponementsystem capable o eeding the production line with the

    right parts, even though the production schedule

    timeline is shortened and may change at a days notice.

    Tus, a manuacturing plant sends out a ve-day

    production plan to its suppliers to build a certain

    Tere is tremendous pressure to be leaner to holdless and less inventory, and at the same timeguarantee reliability and resiliency. Tose twoobjectives oen are in direct confict.

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    number o cars over a certain number o days. It is the

    LLPs job to manage the plants inbound-to-production

    material fow and coordinate all inbound movements.

    Te day prior to or even the day o the start o that

    schedule, the plant revises the plan based on new

    customer demand data. Te LLP immediately redesigns

    the inbound route and supply chain solution based on

    the new signal. o do this, it re-calibrates the

    inormation rom the master strategic plan, as well as

    the revised actual demand or the day o pick up, and

    reengineers to ulll the new need. In the process, the

    LLP must optimize the revised inbound delivery fow to

    make sure the manuacturer does not incur higher

    transportation cost.

    Tis kind o agility means LLPs have to be a lot closer

    to all o the supply chain data than they did in the past

    data rom their customers, their suppliers and their

    network. LLPs must be 100 percent aware o what is

    going on at all times. Tis visibility enables

    tactical agility.

    Pla r t wIt is impossible to plan or every specic natural

    disaster or major supply chain event. What companies

    can do is develop contingency plans around types o

    supply chain deciencies.

    o build these contingent solutions, best practice 3PLs

    perorm extensive what ifscenario modeling on a

    broad range o events and situations. Using such

    modeling scenarios, the LLP can test dierent solutions

    geared to specic customers, see what works, and learn

    how to best respond to minimize impact. Tus, when

    something does happen, like a major supply disruption

    rom a disaster, or i something seems likely to occursuch as a port strike, the 3PL network has the processes

    in place to react quickly and move material around to

    eliminate or mitigate impact on the customer.

    Ral-tm, mlt-tr vbltAs noted, supply chain resiliency is impossible without

    accurate real-time supply chain condition inormation.

    Visibility improves resiliency in a number o ways, as

    Martin Christopher, o the Craneld School o

    Management explains. It reduces uncertainty and

    enables the goal o a demand-driven supply chain to be

    achieved. Second, it reduces supply chain risk through

    shared inormation, both upstream and downstream o

    the rms operations.

    Best-in-class global LLPs can provide what amounts to

    an on-the-ground sensor grid in their countries o

    operations, geared to monitoring supply chain condition

    continuously. Teir supply chain soware solutionsdeliver visibility into supplier production, inventory and

    in-transit goods. Using this inormation, the LLP

    develops a supply logistics plan or every part all the way

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    Partr vatIn the automotive sector, resilient supply chain

    management is based on partnerships, particularly

    with the LLPs that implement the on-the-ground

    solutions. Tese are not the transactional buyer-vendor

    relationships o old. Tey are more akin to a marriage.

    Manuacturers have recognized that the old approach

    o squeezing vendors on price does not support their

    objectives. Instead, it is more about partnering to

    develop an innovative continuous improvement plan,

    which is backed up with the cost trade-o business

    case or that plan.

    An important component o this partnership is a

    mutual understanding o value at risk on a bigger

    to the production line. Tis plan incorporates cost per

    unit, which the LLP uses to understand two things:

    1 Te cost impact to the customer o a given supply

    chain deciency, and

    2 Te cost or alternate supply chain solutions and

    how that expense impacts the overall supply chain

    cost structure or the customer.

    I, or instance, the supply chain lost three days out o

    a 10-day lead time due to fooding, the LLP could ask

    the supplier to run a three-day level quantity increase,

    which the LLP would move by air reight over the

    next three-day period. While the solution increases

    transport costs, it prevents a production line shut-

    down well worth the incremental transportation

    cost increase.

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    enterprise-wide scale. Under this approach, the LLP and

    automotive company can assess supply chain risk in the

    context o what value is at risk i some or all o an

    organizations capabilities were destroyed and it had to

    start rom scratch. In other words, which market and

    product or service it would ocus on rst, and how the

    supply chain network should be shaped to operate in a

    way that supports the companys priorities.

    T p-d rlcTe automotive industrys journey toward creating

    supply chains that are simultaneously lean andresilient

    is still in its early stages. Te lessons learned over the

    past ew years rom disasters, disruptions and high levels

    o volatility make several points clear. Te increasing

    vulnerability o supply chains requires a new ocus onmanaging and mitigating risk which extends beyond the

    our walls o the single rm.7 Supply chain vulnerability

    is a network-wide issue, and must be addressed on a

    network-wide basis. Tis requires higher levels o

    inormation sharing across the supply chain, particularly

    with the LLPs charged with executing the collective 3PL

    supply chain operations.

    Best practice companies are partnering with global LLPs

    to re-balance the automotive supply chain, enabling it to

    fex and fux in response to volatility o any kind be it

    an unexpected sales spike or a re at a major supplier.

    Tis means building out capabilities, strategies, and

    tactics that:

    Deliver agility, appropriate redundancy, contingent

    capacity that can be switched on at a moments

    notice

    Develop cost-eective alternative solutions and

    scenarios to market or operating developments

    e.g., the port strike re-routing scenario

    Relentlessly improve visibility across the supply chainvia robust I architecture and close linkages into

    supply chain participants systems to enable a control

    tower view o what is going on in the supply chain,

    complete with proactive alerts on existing or potential

    problems, and

    Partner or mutual benets by collaboratively

    ocusing on metrics and continuous improvement

    Te LLPs job is to understand the unknown and

    engineer a portolio o ully costed alternatives and

    solutions that can be rapidly deployed across all parties

    in the automotive supply chain. Tis means having the

    people, systems, processes, capacity and tools in place to

    deal eectively with volatility.

    7 Martin Christopher and Helen Peck, Logistics Europe, February 2004, p. 17-21.

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    Abt t atr

    Strategic consultant, academic and co-author o three

    books, Lisa Harrington oers a global supply chainperspective.

    At the Robert H. Smith School o Business, University o

    Maryland, Lisa is Associate Director o the Supply Chain

    Management Center and Faculty Lecturer on Supply

    Chain Management. She also is President o the

    lharrington group LLC, a rm providing strategic

    consulting services across global supply chain strategy,

    operations and best practice.

    Lisas articles have appeared in Fortune, Industry Week,

    Te Economist, Inbound Logistics, Te European

    Business Review and many other publications.

    DHL T Lgtc cmpa r t wrld

    DHL is the global market leader in the logistics industry

    and Te Logistics company or the world. DHLcommits its expertise in international express, air and

    ocean reight, road and rail transportation, contract

    logistics and international mail services to its customers.

    A global network composed o more than 220 countries

    and territories and about 285,000 employees worldwide

    oers customers superior service quality and local

    knowledge to satisy their supply chain requirements.

    DHL accepts its social responsibility by supporting

    environmental protection, disaster management

    and education.

    DHL is part o Deutsche Post DHL. Te Group

    generated revenue o more than 55 billion euros in 2012.

    www.dhl.com/automotive

    Tose companies that embrace the new normal o

    continuous and sometimes radical supply chain

    volatility and risk, and put the processes and systems in

    place to better manage both, regularly outperorm their

    competitors. Companies that ignore or lag behind in

    addressing supply chain volatility do so at the peril o

    their bottom lines and their shareholder condence.

    As the lessons o oyota, GM and the Fukushima

    disaster teach us, Market volatility is a tremendous

    source o opportunity or companies that have

    developed the capabilities to not only manage risk

    but also respond to it more eectively than

    their competitors.8

    2013 | DHL Supply Chain Limited | All Rights Reserved

    8 Accenture, Corporate Agility: Six Ways to Make Volatility Your Friend, Walt Shill, John F. Engel, David Mann and Olaf Schatteman, 2012, No.3 issue of Outlook, p. 4.

    14 Lean and resilient