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Logistics: A Difference Between Winning & Losing

Logistics in the automotive industry is at a crossroads.

Logistics in the automotive industry is at a crossroads. It could get a whole lot uglier. Or, auto logistics could begin to work far more harmoniously within the enterprise and throughout the supply chain.

New technologies could significantly lower logistics costs. Far fewer clerical steps and much lower costs in other functional areas are possible through better logistics. Formidable, complex problems confront the industry, however. Internet-based solutions hold considerable promise but introduce new challenges in supply-chain execution.

Business upheavals are dramatically changing how the industry moves its mammoth amount of physical material every day. Sweeping changes will occur both in the planning and execution systems. New approaches should add visibility and optimize material flow. The hope is for truly "lean" logistics, all coordinated by a seamless flow of electronic information. Multiple vendors are jockeying to play bigger roles in tomorrow's logistics business.

Often overlooked is the sheer amount of material flowing in the industry. Ford Motor Co. alone has over 500 million tons of material in transit at any time. General Motors' logistics bill hovers around $4-billion a year. Furthermore, the industry operates not one, but three quite distinct logistics businesses. These are centered around moving:

  • Finished vehicles
  • Production parts
  • Aftermarket parts.

In some cases, freight costs exceed the cost of the material itself. This is the case for steel, coal, and other commodities, notes Stephen Harley, manager of Global Logistics Planning at Ford.

Diving into the flow of production materials to final-assembly plants reveals the immensity of the logistics problem. Participating in this dance are thousands of firms:

  • Parts suppliers (known as "shippers" in logistics parlance)
  • Carriers (typically trucking companies)
  • Third-party-logistics providers (3PLs)
  • Consuming plants, and others.

Identifying the best routes, setting schedules, and obtaining rate information must all be done before the shipments can begin. Executing a shipment requires a flurry of document exchanges that can be via electronic data interchange (EDI), e-mail, fax, postal mail, or phone. Furthermore, freight billing and payment information must also be exchanged to complete the transaction.

Complicating this whole exchange are incompatible data standards and business conventions. Depending on the company, different conventions are used for bills of lading, for payment, etc. In addition, multiple information systems feed and receive information from sources including from enterprise resource planning (ERP) systems, warehouse management systems, and supply chain management (SCM) systems.

Despite these automated systems, clerical workers must still translate one set of documents into another, unavoidably introducing errors in the process. Given this chaos, it is not surprising that is so hard to pinpoint where a particular part or pallet may be in the pipeline.

Other information uncertainties abound in today's logistics web. For instance, Yazaki, a wire-harness maker, can never know when a shipment may be delayed at the U.S.-Mexican border for up to 24 hours. Companies compensate for such uncertainty and variability by increasing safety stocks of inventory and through other costly remedies. Such practices insidiously raise the final delivered cost of a vehicle.

Tomorrow's logistics will not continue in the same vein as today's because of three major business drivers:

  • Cost reduction
  • Fast order to delivery
  • The push to "Lean."

Faced with severe cost pressures, OEMs could take a "blunt-knife" approach. They could unilaterally demand massive rate cuts, knocking some good carriers and logistics providers right out of business. Yet another major force is the push to take an order and deliver a finished vehicle in x days (versus several weeks). Last but not least is the industry's unrelenting drive toward "leanness." Lots of work remains to get the supply chains of the Big Three truly lean, contends University of Michigan Professor Jeff Liker (see AM&P, March '01, pp. 60-63).

The auto industry is surprisingly united on what it would like in logistics execution systems: one seamless web where information could be exchanged effortlessly among all parties. Manual intervention would only occur during exceptional conditions such as during a crippling snowstorm. This is far from the case today.

Given the industry's vision, the Internet may seem a godsend. It could connect any of the millions of combinations of shippers, carriers, and 3PLs that temporarily bond to make a shipment. Very appealing is the Internet's low cost and universal access.

Several vendor firms hope to become the linchpin for tomorrow's Internet-based logistics world. These include:

  • Transportation and courier companies
  • ERP vendors
  • Supply chain management (SCM) software vendors
  • Dedicated, Internet-based service providers.

As examples, Ford now taps Ryder, UPS, and FedEx from the transportation/courier camp. Among the SCM vendors Ford uses are Synquest and i2 Technologies.

Running logistics on the Internet, however, is not a cakewalk. Logistics execution in the auto industry is extremely demanding. A late UPS delivery to a home is only a mild annoyance. However, a late shipment to a just-in-time (JIT) plant can cost the plant millions of dollars in lost production.

Critical questions that a manufacturer must ask include the track record of the logistics provider and whether that vendor can guarantee a minimum level of service. Just as suppliers are severely penalized for a late shipment, so will tomorrow's Internet logistics providers.

One supply chain execution vendor, Descartes Systems, argues that an Internet-based logistics service provider must own and operate its own infrastructure, including data centers. Only then can it guarantee the highest levels of performance.

Descartes, for instance, can monitor every milestone to insure a shipment is on track. It will intervene when it is not. Furthermore, Descartes tracks the actual performance of carriers and others. This information is tapped, for instance, so a shipper knows what the real delivery times and variances are for a specific trucking company even on a specific route. Similarly, Descartes scans incoming information to root out or correct bad data, a common affliction when so many parties exchange information. Users such as Visteon pay primarily on a per-transaction basis for this global logistics network.

The ultimate goal is to optimize not just logistics as a standalone function but to optimize the entire business and supply chain. David Bakos, a veteran of dozens of General Motors' plant launches, notes that almost all major stages in a product launch impact logistics or vice versa. In actual practice logistics decisions are far too often done in isolation and too late in the product/process lifecycle.

In terms of what is possible, parts could be "designed for logistics." An example would be adding a hook to heavy parts, such as an engine; this could greatly facilitate its handling. Slight changes or additions to the product can similarly avoid costly custom containers constructed just to move those parts; an example is the instrument panel.

Supply chain vendors such as i2 Technologies can help identify bottlenecks in processes and make tradeoffs that optimize the enterprise, not a single function. For instance, in some cases, it is better to have smaller shipments even if it leads to half-filled trucks. Knowing when this is the case requires analysis of a vaster space than just logistics. Other factors to be considered include inventory carrying costs, plant schedules, manufacturing cycle times, and customer promise dates.

Given these substantial savings, logistics should be a high-priority area for improvement for every manufacturer. Many firms are facing both a significant drop in demand for their products and fierce, commodity-style pricing. In this harsh climate, logistics costs and differences in customer service often become the decisive factors in who wins or loses.