Automotive Supply Chain
The first step in reducing supply chain costs is often attempting to renegotiate contracts with third-party logistics suppliers, followed by requesting tenders to compare prices between suppliers.
This approach may provide short-term benefits, but there are limitations to the savings that can be achieved by pressuring suppliers in the medium to long term.
An initial cost reduction can quickly turn sour when cost increases that are beyond the supplier’s or your control, such as fuel costs, market capacity imbalances, or increased logistics complexity, begin to have an impact.
Although optimization is widely seen as the way forward, the question remains: what is the optimal way to achieve it?
The companies that put their name on the final products, known as OEMs or original equipment manufacturers, have developed significant expertise in optimizing their inbound logistics. Generally, the OEMs coordinate the transportation of components from the Tier 1 supplier factories to the vehicle assembly plants.
As a result of OEMs optimizing inbound logistics, Tier 1 suppliers tend to locate their factories near the assembly plants to facilitate just-in-time manufacturing. This is because the OEM arranges the shipment of components from the Tier 1 supplier’s factory directly to the assembly line. Since many of these components are bulky and not easily stored, it is more practical to manufacture them on-demand rather than occupying warehouse space and incurring additional in/out logistics movements.
The transportation costs and logistics for the supply chain from Tier 2 suppliers to Tier 1 factories are more complex, as it is more likely that these suppliers are located elsewhere, even in a different country.
As an example, let’s take the supply of car seats from a Tier 1 supplier to an OEM’s assembly factory. The supplier is responsible for delivering seats to the factory under a contract with the OEM. The supplier’s factory is located in close proximity to the assembly plant, sometimes even within the same compound, which allows for easy transportation between the production lines using fork lift trucks.
It is not feasible for all factories within a supply chain to be located near each other, particularly when considering raw materials that may originate from agriculture or even from sources beneath the sea bed, such as oil used in plastic production. The smelting of aluminum, for instance, is an energy-intensive process that must occur near reliable, cost-effective power sources.
The process of supplying leather for car seats involves multiple suppliers who supply to more than one car seat factory and OEMs. Each supplier collects part loads (LTL – “less than full truck loads”) several times a week and delivers them to each factory they supply. The shipments are not always full truck loads, and the diagram below illustrates this process in simplified form.
Similar to the airline model of using a central hub and several spoke destinations
Direct, nonstop flights are usually available between major airports, but for smaller cities, there may not be enough demand for nonstop flights. In this case, travelers would need to connect through a hub airport.
The hub-and-spoke model can be used to optimize a supply chain, just as it is used by airlines to operate more efficiently. Since it is not feasible to fill an entire aircraft on a direct route multiple times a day, airlines can use larger aircraft to fly from smaller cities to a major hub airport. At the hub, passengers can then transfer to other flights that take them to their final destination.
Siting a distribution center in an appropriate location can significantly improve supply chain efficiency by reducing the number of less-than-full truckloads and direct shipments. This consolidation and reorganization of the flows help to minimize the number of required trucks. In addition, if input and output can be well-coordinated, the distribution center can serve as a cross-dock, eliminating the need for storage.
Having a distribution center in the supply chain can lead to significant savings and facilitate the coordination of just-in-time deliveries. However, the location of the distribution center must be carefully chosen to avoid excessively long transit times. Although the inclusion of a distribution center may increase overall transit times, this is not an issue once the supply chain is running and transit times are factored into the just-in-time planning. The end result is a simpler and more efficient supply chain.
It is essential to look beyond Tier 1 and consider the entire automotive supply chain to realize significant savings in transport and logistics costs. Inbound transport costs to both Tier 1 and Tier 2 are much higher than the outbound transport costs from the final assembly to the end customers. By optimizing the entire supply chain, including the upstream suppliers, it is possible to identify areas of improvement and reduce overall transportation costs.
Examining the lower tiers of the supply chain reveals that a significant portion of component costs is attributed to hidden expenses resulting from suboptimal supply chain management. Therefore, conducting a thorough analysis of the entire supply chain, including lower tiers, can lead to substantial cost savings by minimizing inefficiencies related to shipping incomplete loads instead of full loads.