Cost-efficiency push fuels consolidation

Cost-efficiency push fuels consolidation

"Automotive manufacturing is concentrating on the development of single-site sourcing and transnational production, requiring a wider range of capabilities from logistics contractors, and investment, " said Tibbett & Britten chairman and CEO John Harvey, while announcing the group's withdrawal from the sector, back in May, with the sale of its £150m (€239m) turnover Axial automotive logistics subsidiary to AutoLogic.
According to Harvey, the group has grown so much that "the competition for financial and management resources has made it increasingly difficult to give Axial the focus necessary to develop the business".

In essence, investment has become more critical for logistics companies wanting to build, or simply maintain, a presence within Europe's automotive sector. At the same time, logistics operators cannot be immune to the problems of heavy competition, overcapacity and gloomy economic forecasts that are bedevilling a sector contemplating further consolidation and rationalisation.

Logistics providers are under pressure to achieve constant service improvements and, in many cases, to take on more of the workload. The latest Datamonitor survey of the automotive sector found that, far from trying to reduce the cost of outsourcing to logistics providers, more than 20% of companies in Europe expect to increase their logistics expenditure over the next five years.

Suppliers and third-party logistics providers are working closer than ever before with manufacturers and, could conceivably, become "the new vehicle manufacturers", says Barry Heslop general manager of P&O Trans European's automotive division.

"Manufacturers are outsourcing so many of their activities that it is going that way already. Some manufacturers say that they won't be in assembly in the future."

According to the Datamonitor report, more than 40% of Europe's automotive players outsource virtually all their logistics activities. No manufacturer has handed over all its assembly work to another party as yet, but the attraction is there, says Heslop.

"Manufacturers are effectively pushing investment costs and head count out to another party.

The downside for the manufacturer is that there is no going back, once this happens, because they will lose the expertise, " he says.

Heslop believes vehicle manufacturers will be left to concentrate on core activities such as designing the cars of tomorrow and policing the increasingly diverse brand values.

The more traditional manufacturing tasks could be handled by suppliers and logistics providers – who are already working closely with manufacturers – to source and deliver pre-assembled modules onto sequenced production lines, and who already "understand the time-sensitive manufacturing processes which drive the industry".

Supplier and logistics provider remits are already extended to co-ordinating and collecting components for specific modules from all over the world to meet tight, timedefinite delivery times, while keeping stock to a minimum.

Astonishing lead times are already being achieved, but talk has moved on to the "three-day" car, says Heslop.

However, this dream will not be realised in the short term unless customers accept they may have to pay more.

"To achieve the car in three days would mean having inventory permanently in the supply chain, rather like a rolling warehouse, " says Heslop. "This would increase the overall production cost of the vehicle as well as the supply costs."

Mark Morgan, marketing and corporate communications manager for AutoLogic, describes logistics costs as "one of the last battlegrounds" for manufacturers in their war on costs.

Picking up on the trend for logistics companies to take wider roles in the automotive sector, Morgan believes AutoLogic is "at the front of a wave of technical services", relating to post-production work on vehicles, which includes the installation of enhancements such as sun roofs, leather seats and window etching.

Morgan aims to grow his company substantially and believes it needs to be a panEuropean operation to be truly credible. In what is currently an extremely fragmented vehicle logistics market, manufacturers are increasingly seeking providers with the scale to handle all their needs – thus fuelling a demand for lead logistics providers (LLPs).

Economies of scale opportunities are available to larger companies, Morgan says. For example, in the low margin business of moving finished cars, his own company is able to tie up northbound deliveries for one manufacturer with southbound consignments for another producer, thus "cutting down on a lot of wasteful empty running" on the return leg.

The popular adage that "size matters" appears to be having increasing resonance in the automotive logistics market. With pressure on the supply chain to improve performance and costefficiency, a host of industry observers point to a growing tendency towards using larger service providers.

The Datamonitor report suggests that more than twothirds of Europe's automotive firms use five or less logistics operators, but almost a quarter sign up just a single logistics company. And while a competitive price emerged as an important consideration in the choice of logistics provider, the leading factor was the range of the services on offer.

Datamonitor research also found that almost 43% of automotive industry respondents use a single panEuropean logistics provider.

"Global sourcing in the automotive industry and the knock-on requirement for global and regional supply chain partners has pushed the need for wider geographical coverage on the part of logistics providers, " it says.

Heslop believes there will always be room for small companies able to fill a niche, but that medium-sized logistics companies now find themselves in "the danger area".

These sentiments are echoed by Leigh Pomlett, president of Exel Automotive Worldwide: "There will be consolidation in all areas – manufacturing, logistics and the supply chain. The big players will be okay because they can make both global and regional movements, as will the smaller companies with a niche. It's the middleground boys who will suffer."

Pomlett believes the majority of supply chains are "out of date" and that the automotive logistics emphasis in future will fall on "fewer and bigger".

The industry, she claims, is moving away from dedicated supply chain companies and is putting more emphasis on sharing operations and resources, both within the manufacturing sector and among operators involved in the supply chain.

He also points to the trend towards globalisation, with supply chains tending to have "more of an eastern pull than in the past, though the west is still predominant".

Therefore, consolidation of material flows should continue to take place but in many areas of the world.

Steve Bacon, automotive sector director at TDG, acknowledges the automotive industry's desire to source more components from eastern Europe, but expresses some concern about the robustness of the region's supply chains. Countries often need several years to establish their credentials and build confidence among automotive clients, he says.

Elaborating on this shift from local sourcing to other areas of the world, Bacon sees the advantages of using a single source for a particular component.

"It gives one point of quality and design control for a component that may be common to a number of [vehicle] models, " he adds.

"The downside for manufacturers is that all your eggs are in one basket."

Bacon also suggests some reluctance among manufacturers to adopt the LLP approach because "once you are in bed with an LLP, you could be restricted in your ability to react".

There has been a renewed focus on cost control over the last couple of years, as well as emphasis on increasing the level of agility within the supply chain to reduce lead times. The trend has therefore been towards developing a more "pick-andmix" supply chain approach which takes into account that required speed of delivery and inventory levels are not the same for all parts.

Looking to the future, he believes the push would be in the direction of global inventory management and demand systems to "interlink with all third-party providers and provide transparent systems".

IT is increasing playing a part in the automotive supply chain in terms of track and trace, and EDI connections between supplier and logistics operator, he adds.

However, purchasing over the Internet has not taken off as well as manufacturers expected.

Patrick Rohde, commercial marketing executive Europe, Richard Lawson Autologistics says: "Internet sales are still in their infancy. The car is an emotional purchase and the touch and feel aspect of it has been underestimated. It's the second most expensive item that people buy after a house.

"Customers will certainly browse on the web, but the ultimate purchase is not often done that way."

The company, a subsidiary of Wallenius Wilhelmsen, launched Evolution2 last July, a new distribution service aimed at the second-hand car market, targeting dealers, auction houses, leasing and car rental companies, fleet dealers and car supermarkets.

"Volumes of used cars are greater than new vehicles.

This service is ideal for dealers who are sourcing cars from an number of other companies, " says David Lawson, sales and marketing manager for Evolution2.

Posted: 01/10/2001