Automakers Put Wheels On Supply Chains

Dec. 21, 2004
Industry intends to accelerate order-to-delivery times.

A recent flurry of activity in the auto industry is targeting speed-not of the vehicles themselves, but the time it takes to make and deliver them. For example, Toyota Motor Manufacturing North America Inc. is revamping its order-management system-as well as other processes-with the intent of reducing order-to-delivery leadtimes from 77 days to 12 to 16 days. The first phase of the program, which went into effect this fall, reduced the average leadtime to 49 days. Ford Motor Co. is importing to the U.S. a signaling system it uses in Spain and Belgium that allows line operators to push a button and electronically signal suppliers that parts are needed. Ford, General Motors Corp. (GM) and DaimlerChrysler Corp. all have joint ventures with logistics companies to cut in half from 14 days to seven days the time it takes for a new vehicle to reach the dealer's lot. At half the cost of a conventional assembly plant, GM's Lansing (Mich.) Grand River Assembly Plant, which recently began production of the Cadillac CTS, will meet world-class standards by using less than 20 hours of salaried and manufacturing worker time to produce each vehicle. And, if all goes as planned, the $1 billion assembly plant being built by Nissan North America Inc. in Canton, Miss., to begin operation in 2003, will be able to assemble and deliver a custom-ordered minivan, pickup truck or sport utility vehicle to a customer within 14 days. What's behind the efforts of automakers with North American operations to change long-entrenched processes and increase speed-to-market? It's the realization that cumbersome business processes have added countless inefficiencies and unneeded costs to operations, and have stretched the order-to-delivery cycle out so long-often to between eight and 10 weeks-that changes need to be made to the industry's mass-production business model. "The business model that is emerging is one that is extraordinarily fast and with a minimum amount of paperwork," says David E. Cole, director of the Center for Automotive Research (CAR), Ann Arbor, Mich. Automakers, he says, "need to get the product out to the customer quicker." Driving the change is the fickleness of U.S. customers: They will switch loyalties to get their cars sooner. "Sales incentives are not working well anymore because customers have too many choices"-more than 200 models and 50 brands from 18 different manufacturers, says Lee Pittman, vice president, industry relations, and chairman of the Automotive Industry Action Group (AIAG), Southfield, Mich. John Costanza, founder and CEO of JCIT Inc., Englewood, Colo., and the father of demand-flow manufacturing, agrees. "Brand-name loyalty has disappeared. The problem with the auto industry is that if [the dealership] doesn't have your car, it is four to six weeks until you receive it. Yet [automakers] are building cars every day without a [specific] customer" in mind. The prize that awaits the winner in this race to reduce order-to-delivery times and build more cars to customer orders is competitive advantage. "Whoever does it first would make it miserable for competitors because then the customer couldn't go across the street" anymore, says Costanza. "It would be a nightmare to catch someone who gets a head start." There also is enormous potential cost savings for those that succeed. AMR Research Inc., Boston, estimates that there are excess inventory costs in the auto industry of $700 billion and that the industry wastes $25 billion in sales incentives each year to clear cars off dealer lots. "The hidden agenda for manufacturers is inventory costs," says Kevin Prouty, AMR Research's research director, automotive strategies. "The closer they can get to build-to-order, the more they can keep inventory costs down. And making inventory vanish can give a huge boost to the bottom line." Fundamental Changes But while the potential gains are great, so are the challenges. Shifting from a mass-production model toward one in which cars are built based on customer orders would require numerous operational and organizational changes, not to mention capital investments, throughout the entire auto-industry supply chain. "The challenge lies in . . . changing auto assembly lines that are set up to mass produce one model," says Thilo Koslowski, San Jose-based lead automotive analyst for Gartner Inc.'s GartnerG2 research service. "To build cars to order, you need to be flexible. And that kind of a change takes dollars and requires automakers to think about what they can do to make that happen. They will need to design cars that are less complex and that use shared parts and modular components. And that will be difficult to do with existing plants. It will have to occur as automakers build new plants." What's more, automakers will need to establish-and are working toward-"an electronic interconnection between all the parties [in the supply chain] so that when an order occurs, everyone is aware of it," says CAR's Cole. "In manufacturing, the key ingredient is more flexibility so that manufacturers can change the mix of products and build a greater variety of production all on the same line." They also must overhaul today's cumbersome order-management processes and change an ingrained bureaucratic infrastructure, says former Ford executive Robert D. Austin, who is an assistant professor at the Harvard Business School, Cambridge, Mass. The industry has been tough on suppliers for a long time and "that is not conducive to a trust relationship-especially if you are going to information sharing. There are also incompatible information systems. Why, even the exchange of data between divisions is a relatively recent undertaking." Yet those obstacles haven't deterred automakers from plunging ahead. For example, there are initiatives to rework how vehicles are scheduled for production and when specifications for an individual car are "frozen," says AMR's Prouty. "Right now the car specs are usually frozen as soon as the order goes into the pipeline. But many automakers are thinking about freezing the specs later in the process and holding the body of a nearly finished vehicle in a storage area." Indeed, Gartner's Koslowski suggests there will be an evolution to "vehicle centers" that can finalize cars, trucks, SUVs and minivans to the specifications of customers. In addition, the U.S. operations of Toyota Motor Corp., Honda of America Inc., and Nissan Motor Co. Ltd. have the capability or are implementing systems to assemble more than one vehicle on the same line. They also are finding ways to creatively shrink supply links. GM's Blue Macaw plant in Brazil has 60% fewer suppliers and uses 50% fewer parts than a traditional auto factory. Nissan's plant in Mississippi will have nearby and on-site supplier parks. Ford is using a wireless kanban system, E-Smart, for parts replenishment at its power transmission plants in the U.S., with more than a dozen suppliers participating. And, says Costanza, instead of cars moving down a traditional assembly line, Tokyo-based Mitsubishi Motors Corp. is experimenting with production methods, where workers move to car stations to perform their tasks. But the bulk of activities-which for competitive reasons most automakers are reluctant to discuss-are internal changes in the order-management process, supply-chain linkages and outward-bound logistics systems that are aimed at taking time out of the order-to-delivery cycle. And clearly that's where the bulk of excess cycle time exists. For example, it often takes two to three weeks for a dealer's order to reach the production floor to be scheduled. And that's just the first stumbling block. It can take two to four weeks for information relayed from an automaker to reach suppliers below the Tier 1 level. And it takes upwards of two weeks for a car to get to a dealer's lot after it's manufactured. "You need better information systems for all three components," says W. Daniel Garretson, senior analyst, Forrester Research Inc., Cambridge, Mass. "That whole four weeks upfront"-getting an order from the dealer through sales and marketing to production and getting parts from suppliers so a car can be built-"could be reduced dramatically. "There is no end-to-end supply-chain visibility today because [production] information goes sequentially from Tier-One suppliers" down the line, says Garretson. "And there is [virtually] no tracking of vehicles after they are manufactured and no planning of how the cars will be shipped until they actually arrive" at each point of the shipping process-assembly plant holding yard, regional rail yard, truck terminal or regional dealer distribution center. In fact, the industry's back-end logistics are in such disarray that nearly every manufacturer with operations in the U.S. has partnered with a logistics provider in an effort to cut in half the average 14 days it typically takes to ship a car to a dealer. That reduction in time from auto plant to dealer could trim $1 billion or more in annual costs, says Forrester Research's Garretson. "Automakers want to invest billions and billions of dollars and connect everything to everyone," says Michael Heidingsfelder, partner in the Detroit, Mich., office of Roland Berger Strategy Consultants, which estimates excess inventories in the auto supply chain to be more than $230 billion. "But even if you could push a button at the dealership and start production of the car the next minute, you still need 14 days to get the car shipped to a dealer and as many as 20 days if the car is going from Detroit to the West Coast or the South. So until you correct that, the time it takes to build and deliver cars to consumers . . . will be unacceptable." Research from GartnerG2 says 15% of consumers won't wait at all to get a car made to order, while 27% are willing to wait two weeks, and another 27% are willing to wait two to three weeks. That's why AMR's Prouty thinks that "any outsourcing of outbound logistics will help. It can't be any worse that today's method of planning logistics in a vacuum without any concern for the carrier's other commitments. But at the same time Prouty cautions that "even with an efficient system, it will still take at least a week" to deliver newly manufactured vehicles to dealers because of an average train speed in the U.S. of 19 mph. "That is a national issue beyond the scope" of the automakers, he acknowledges. That's why automakers have centered many of their other time-cutting efforts around e-business and "the ability to share information immediately with the entire supply chain," says Brian M. Ambrose, national industry director of automotive and industrial products in the Detroit office of KPMG LLP. "Once you get all the parties from manufacturer to dealer to suppliers using a similar information flow, that will make [gains] easier. It could knock two to four weeks out of the cycle." "OEMs have always looked at information as a linear data transmission," adds AIAG's Pittman. "Now they have to get systems so everyone within [their organization] and the whole supply chain knows where everything is simultaneously." It's an inefficiency that automakers don't deny exists. "The information systems [we use] are not compatible," says Millie Marshall, assistant general manager for supply-chain planning, information systems, at Toyota's Georgetown, Ky., location. "Each is gathering information over different time frames. We are simply accumulating information and releasing it. Long-term we need common systems that talk to each other. Right now, we are focusing on pushing that information on as soon as it's available." That's also the thrust of Ford's Everest e-business initiative. "Right now, suppliers have a lot of difficulty getting the information they need," says Sue Aspinall, manager, purchasing and information technology at Ford. "By next year, we will have a common [online] system. We will not keep the old way. This will be the way we do business in the future. It is all about information flow and getting a streamlined way to make data available . . . in an easy fashion." But Pittman cautions automakers to "think through their processes and ask what is really needed and what adds value" so they don't spend billions of dollars in an unsuccessful attempt to link departments internally and link together everyone in the supply chain from dealers to suppliers to logistics providers. "I'd have more money than Bill Gates [if I had] a nickel for every $100,000 that has been wasted in putting in IT systems in the auto industry in the last 10 years," he says, "because the obstacle is not IT, but the business practices or systems. If I automate [inefficient] processes, I am just getting suppliers and customers the wrong answers quicker." E-Business Laggards Neither should automakers underestimate the challenge that linking the supply chain electronically presents to suppliers. "Suppliers below Tier One don't have the resources-and sometimes even the knowledge-to connect to electronic data systems," suggests GartnerG2's Koslowski. What's more, the majority of Tier 1 suppliers have similar problems. A recent survey conducted by the Center for Automotive Research, for example, found that just one out of three first-tier suppliers have the infrastructure to support e-business transactions. Another 44% said they do not even have an e-business strategy. A third problem: Suppliers must have systems that are compatible with each OEM. Still, don't expect automakers to back away from their build-to-customer-order, time-cutting initiatives. "They are less than 10% of the way there today," says Prouty. "But they have done a good job of laying the groundwork for success. I think that three years from now they will be about 30% to 40% toward where they need to be, and five to six years from now [they will be] about 50% to 60% toward where they need to be." "The changes won't occur overnight," adds John Hoffecker, global automotive industry practice leader in the Detroit office of A.T. Kearney Inc. "But automakers understand that they need to develop ways for real-time information to move in and out of applications and speed up the process." Despite the potential lucrative cost savings and market pressures to change, there's still skepticism as to whether the economics will ever exist for building cars to order for the U.S. market. "The billions and billions of dollars automakers want to invest in better transportation and logistics networks and more tightly linked supply chains is a huge amount of money," says Roland Berger's Heidingsfelder. "And I'm not sure the consumer is willing to pay even $50 more for a new car. The automakers should do these things to take costs and inefficiencies out of their system, but the industry can work its tail off and not know [in advance] whether [cars built to order] is something the consumer wants." Heidingsfelder thinks the auto industry should expand its current locate-to-order experiments and programs that pool cars in a region and make it easier for dealers to swap cars among each other. A case in point: Mitsubishi Motor Sales of America Inc. has slashed dealer inventories in half, decreased vehicle leadtimes by 60%, increased monthly sales by nearly 40% and decreased the average time a vehicle spends on a dealer lot from 166 to 38 days since shifting to a Web-enabled order-to-delivery system the last two years. "The OEMs would be better off to create transparency in the system so the consumer could see what's in the dealer network, what's in the distribution pipeline, and what's scheduled to be produced and pick out a car that's in the system," says Heidingsfelder. "It is a much more realistic scenario to change the specifications of cars being built or reroute cars already in the pipeline-even if they're already headed in another direction-than to reorganize the logistics system and the supply chain. And it is a much better, less expensive way of providing consumers in North America what they want."

Order-To-Delivery Cycle Under today's rigid production schedule a customer who orders a car from a dealer can expect to wait eight to 10 weeks to get the vehicle. According to this model from AMR Research Inc., it takes 35 days from the customer's order for all of the car's components to be ordered. It then takes another 33 days for those parts to be assembled into a car and delivered to the customer. Order-To-Components = 35 days
  • Consumer orders car Day 1
  • Dealer processes order Adds 5 days
  • OEM Regional Office processes order
  • Distribution Center & Outbound Logistics Adds 25 days
  • Assembly Plant checks component inventory Adds 2 days
  • Warehouse processes order Adds 2 days
Components-To-Vehicle-Delivery Cycle = 33 Days
  • Component Supplier produces and delivers components Adds 5 days
  • Warehouse Adds 1 day
  • Assembly Plant assembles and delivers car Adds 14 days
  • Distribution Center and Outbound Logistics
  • OEM Regional Office delivers car to dealer Adds 11 days
  • Dealer delivers car Adds 2 days

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