Automotive industry drives optimization in logistics

The unique requirements from manufacturers in the automotive industry make handling their logistics operations—both inbound and outbound—more challenging than most manufacturing industries. The manufacturing pace at many automakers requires a constant stream of just-in-time products to

keep production lines rolling and every day cost control becomes a bigger issue for automakers in a down market. The result is a list of logistics suppliers growing more customized to their automotive customers while those customers get more demanding in what they outsource to logistics organizations, both internal and external.

Kevin Prouty, analyst at AMR Research, says there are two main strategies at work in the automotive industry's logistics operations. One school of thought is to outsource logistics operations to third party providers while another is to keep the logistics in-house or establish a separate, but dedicated firm to handle logistics. For example, to help Nissan Motor strengthen and consolidate its North American network, Nissan Logistics Corp. (NLC) was established to handle logistics and procurement for North American-made parts. NLC acts as a distribution network, arranging for the consolidation and transportation of parts from suppliers to Nissan's assembly plants in Mexico and Japan.

Joint efforts

The specific logistics requirements of the automotive industry have led many OEMs to look into joint ventures in its logistics areas to combine logistics and automotive industry expertise in its supply chain. For example, Hyundai Automotive Group recently tapped the expertise of Korean logistics provider Hankook Logitech Co. to handle the logistics for the North American operations of both Hyundai Motor America and Kia Motors America under a new joint venture called HK Logistics America. The two automakers have 11 port operations, nine water ports and two inland processing centers, in eight U.S. states. HK Logistics America will start by consolidating the supply chain management operations for the two companies.

When Toyota Motor Manufacturing established its manufacturing plant in Kentucky in 1987, it needed two types of expertise in its logistics operations: a provider with knowledge of the Japanese market, where many of its production parts were coming from, and knowledge of the U.S. market, where its new manufacturing was set to take off. Two of its existing logistics providers combined to meet those needs: the U.S.-based 3PL APL Logistics and the Japanese maritime logistics firm Fujitrans. The result was Vascor (short for Value-Added Services Corp.), a third-party logistics provider that specializes in both inbound ocean shipments and domestic milk runs.

"We had a Japanese corporation that was very familiar with Toyota's production system and also had an American company with vast experience in the U.S. logistics market and requirements," says Jim Brutsman, manager of business development at Vascor. "So, it turns out the joint venture was stronger than the sum of the parts."

On the inbound side, Vascor logs more than 35 million miles of milk runs per year to support both individual assembly plants and crossdock facilities on a just-in-time (JIT) basis. It also provides daily monitoring and reporting on ocean carrier performance and performs a variety of assembly support services such as container positioning, and inbound freight sequencing.

Vascor has since leveraged the expertise it developed in working for Toyota and branched out beyond that relationship to work with other OEMs including General Motors and Daimler Chrysler as well as some tier suppliers for both inbound freight and finished product distribution. Brutsman says optimization is an area where logistics providers are able to make or break their relationship with an automotive manufacturer. For example, working under the Toyota Production System (TPS) means that inbound freight comes to factories in a small but constant JIT shipments, which is contrary to the logistics optimization model of consolidating into bigger shipments for cost efficiency.

"The movement of parts and transportation from supplier to the plant is all considered part of the TPS," Brutsman says. "But under the TPS principles, the transportation network is not designed for the lowest cost. It is designed for the small lots, many times. There are some suppliers that ship 16 times a day, once an hour for two eight-hour shifts. Because that is not optimized, it makes it our job to minimize the transportation costs. So we are always looking for ways to control costs."

Brutsman also notes that Vascor is often not the only milk run supplier being used by its customers, which requires that Vascor work closely with other milk run suppliers—including direct competitors—to establish the most effective methods of transportation.

"In one case, we worked with another 3PL to pool the trailers from both sides which lets us pick out routes, put them in our systems, link them and reduce the amount of resources required to pull those trailers," Brutsman says. "We'll operate a route and that trailer will be unloaded and when it is loaded back up, our competitor may haul it back—whoever is closest. We end up cutting our own miles, but the customer benefits from it."

Prouty says this kind of cooperation is becoming more common, noting that there are a host of tier one suppliers discussing centralizing logistics operations and sharing infrastructure to avoid duplication in shipping inbound products. But he adds that logistics providers know where to make up the dollars.

"The transportation companies bid on a contract based on a performance or parts plan, but they are never exactly accurate," says Prouty. "So the transportation providers make money on the changes that are made to the route. They try to get more accurate route planning and then get the changes out as quickly as possible because it all comes down to change management."

Starting from scratch

When Ford Motor Co. spun out the Visteon division in 1997, the new tier one supplier faced a major challenge in how to handle its logistics operations. The manufacturing facilities and expertise from Ford were going with Visteon, but much of the logistics expertise and infrastructure was staying put at Ford, leaving the new company to start from scratch in those areas. Visteon's management examined its options and came to the conclusion that outsourcing the logistics operation to a third-party provider would produce the fastest ramp-up time and provide the industry expertise lacking within Visteon. Charlie Kiesling, Visteon's global transportation and traffic manager, says the company began preparing an RFQ for a 3PL provider, when it decided that since Ryder Logistics was already in place at seven of its plants worldwide and had an existing relationship with Ford, it would make the best logistics provider.

After a successful one-year contract period, Visteon immediately signed a three-year deal for Ryder to handle carrier management, network optimization and transportation procurement for all Visteon-paid freight in North America. As Visteon transitioned each of its modes to its own logistics operation, it performed an analysis to decide if the individual lane or mode should re-bid.

Ryder handles the transportation procurement duties for Visteon and uses FreeMarkets to hold reverse auctions and do bid analysis before making its procurement recommendations to Visteon. All carrier contracts in North America are signed with Ryder directly which means Ryder is responsible for carrier management and performance evaluation. Other logistics providers are brought in to cover areas that Ryder does not cover such as premium and charter freight, but those providers are brought in through Ryder, who oversees the work.

Perhaps no other measure articulates Visteon's faith in Ryder than the unusually small six-person internal logistics operation at Visteon. That small of an organization is not capable of handling much of the massive logistics requirement if Ryder ever drops the ball.

"We do not have a team of people here to second-guess our logistics partner," Kiesling says. "If we have a problem, we go to Ryder and resolve it, because there's no one here to make it happen. It has to be them."

Kiesling sees only one potential drawback to such a total outsourcing arrangement — the internal logistics personnel at a company like Visteon do not gain the expertise of handling a full logistics load. But if a company is solely focused on its core competencies, then that is not a very big concern.

"I am more in favor of the third-party relationship today than when we started Visteon," Kiesling says. "I have been convinced that purchasing this skill set is better than building it."