A drop in orders brings logistics to the surface
A drop in orders brings logistics to the surface
Ian Putzger
The most recent sign of distress following the decline in demand for cars came from Ford, which posted a profit warning in mid-September. "This is definitely a tough year for the automotive industry, " says Rosanne Esposito, senior VP of customs brokerage at Expeditors International.
The decline in business has prompted the automotive industry to intensify its quest to trim costs, and logistics expenditure has been a major target. "With the economy slowing down, there is a lot of focus on bringing down costs, " says Don McKay of APL Logistics.
As car manufacturers try to slash their logistics expenses, air freight is a prime target, since it is typically about 10 times the price of ocean transportation. Doug Foster, VP of sales and marketing at Emery Worldwide, says there has been a steady downward trend in automotive air freight volumes since the middle of 2000.
Automotive logistics specialist FX Coughlin, which was taken over by Exel earlier this year, has enjoyed relatively strong automotive growth this year, but the premium air freight sector is down substantially, according to executive VP Bill Larkin.
"Coughlin's normal business has been strong. What has been weak is the premium business, " he says.
He cites Coughlin's contract to handle the supply chain for the Jaguar S-type sedan, which is now in its third year. Initially there was plenty of air freight, but this year there has been very little, he says.
The air charter segment, which Larkin describes as "the last line of defence", has been hit particularly hard.
While regular air freight traffic was down about 35% in July, volumes moved by chartered freighter aircraft have plummeted as much as 75%, he says.
He attributes this in part to the industry's cost-cutting drive, but also to the fact that there has been an oversupply of inventory in the system, enabling car makers to move the parts they need at a slower pace.
"As the industry dropped off quickly, many companies have more products than orders. They have more time to get the product to the plant, so they've moved it on the ground, " agrees Foster, adding that he expects to see an increase in premium transportation as inventories deplete and orders pick up.
The main beneficiary of the drive to curb the use of air freight within North America has been the trucking sector.
"There has been a move towards premium less-thanfull-loads. In the past there was a lot of domestic automotive traffic going by air; now we see a realigning of the supply chain towards time-definite surface transportation, " says Jerry Levy, VP of marketing at BAX Global.
BAX has moved aggressively on that front.
Last November the company decided to take the knife to its aircraft fleet, cutting about 22% of its freighter capacity. Levy admits that the focus on slashing the use of air freight in the automotive industry played a large part in BAX's decision.
Since last November, the logistics company has put most of its efforts into setting up a time-definite trucking network. The US portion is fully up and running and BAX is planning to expand the surface set-up to Mexico, which it has covered exclusively by air so far, Levy says. "We have got to provide a mode-neutral alternative, " he adds.
The move from air to expedited surface transportation is facilitated by US car manufacturers' efforts to cluster their suppliers, as the Japanese automotive manufacturers have done for some time.
Ford is in the process of setting up a production complex at Aratu Bay in Brazil, which will be able to turn out 250,000 vehicles a year. As many as 29 suppliers will be housed under one roof, allowing immediate delivery to the assembly line.
Crowley Logistics, a subsidiary of Crowley Maritime, is developing a cargo terminal at a nearby seaport that will serve the Ford complex exclusively.
Both the production complex and the terminal are expected to open next year.
Some players have also seen attempts to shift some international loads from air to sea. However, that drive has been a lot less pronounced than the migration of domestic North American traffic from air to truck, mainly because of the significant difference in transit time, Levy believes.
"We haven't really noticed an increase in use of ocean, Esposito says.
One trend that is clearly continuing is the automotive manufacturers' desire to outsource as many of their logistics activities as possible.
Larkin cites materials management as a typical example. "Ten or 15 years ago, this was all done by the manufacturers. Now we have to interface with the suppliers, " he says.
As the amount of logistics functions being outsourced continues to rise, so too does the need for more sophisticated and comprehensive services. "We definitely see a move towards lead logistics, " says Foster.
Larkin agrees, saying that the automotive industry is moving from 3PLs to 4PLs that take control of entire geographical sections.
How closely auto makers and logistics providers are working together is difficult to gauge, since most contracts are shrouded in secrecy, thanks to confidentiality clauses.
"In general there's a trend in the auto industry to outsource functions that were traditionally kept inside.
What we do varies a lot from customer to customer, depending on how their supply chain is set up and what we do for them, " says Esposito, adding that most contracts have confidentiality clauses that bars Expeditors from revealing details of the co-operation.
Probably one of the most advanced tie-ins is Vector Supply Chain Management, a joint venture between General Motors (GM) and Emery parent CNF, plus CNF subsidiaries Menlo Logistics and Con-Way.
Vector is responsible for GM's inbound production material, vehicle distribution and the import/export business of the automotive manufacturer 's supply chain.
Naturally, this means that Vector actually farms out a lot of logistics services to other operators.
In a similar vein, APL Logistics has a joint venture with Toyota called Vascor.
The brief includes arranging and co-ordinating the just-intime movement of parts or sub-assemblies from suppliers to assembly plants, and the inspection and movement of finished vehicles from assembly plants to regional distribution centres. Vascor 's responsibilities extend to the final quality check as the product leaves the assembly plant.
Emery recently renewed a contract with GM subsidiary Opel that calls for the forwarder to consolidate automotive parts from the car manufacturer 's two major German source warehouses and from tier one parts supply vendors. The range of services spelt out in the deal includes parts inspection, pre-packaging, labelling and transportation management covering both air and ocean.
For logistics operators, this trend means that being good in one segment is no longer enough. Don McKay of APL Logistics says: "Over the past five years, we've seen a move away from single function providers. We've been asked to assume more responsibilities. Previously you could do one thing, for example, be a warehouse operator and do that very well and get business. Now you have to be adept at integrating different functions. You have to manage logistics in an integrated fashion."
This requires new skill sets from logistics operators. Staff need to combine industry expertise with a strategic view and a good operational background, he adds. They also need the ability to design and manage processes, to put the metrics in place and manage a supply chain, which includes adequate IT infrastructure to provide full visibility all the way along the chain, he continues.
Larkin believes there is still a lot of room for forwarders to be creative and eliminate waste from the supply chain. He recalled how Coughlin saved one customer US$3-4m ( t3.2-4.3m) in one year through the design of a sleeve that fitted into empty engine racks. Instead of sending the racks back in one shipment and parts in another, Coughlin placed the parts in the sleeves, combining the two traffic flows.
"Waste in the supply chain is still going to be the area where the biggest savings can be made, " he says. He sees the potential to save his customers a lot more money by mixing their traffic with cargo from other industry sectors.
"Maybe we'll get some aerospace and automotive traffic combined. It's the logistics companies that can bring automotive and aerospace together. They don't normally talk to each other, " says Larkin.
As the involvement changes, so does the way of remuneration. Coughlin prices its services on price per vehicle. Its performance is measured by how it can lower the overall cost of a vehicle.
"That is the way of the future, not just in the automotive industry, " he says.
Meanwhile, players are wondering what impact the Internet will ultimately have on the logistics strategies of the big car manufacturers.
The big three in the US have made a lot of noise about leveraging the Internet to drive cost out of the supply chain, especially through parts exchanges, but so far this has not really hit the logistics side.
Levy said that although elements like payment, receipts and documentation routinely move over the web, there has been no serious push on the logistics providers to move into that environment.
McKay believes it will take a while. "E-commerce is still developing. With logistics activities the methodology for asking for information from us has not changed. It's still evolving. Over the next two years this cannot be the only mechanism, only part of it."
In many areas the advance of e-commerce has been associated with downward pressure on price. However, Doug Foster of Emery is not concerned that the automotive manufacturers initiatives on that front might constitute a serious push to lower logistics costs.
"The automotive industry has always been price-conscious.
Today they are trying to find tools through the Internet that allow them to make better and faster decisions, " he says.
