auto wp lean and resilient
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Lean and resiLientthe new automotive suppLy chain hybrid
J 2013
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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
20
0
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.
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