Automotive Supply Chains ‘How close is too close?’ Relationships Automotive Supply Chains ‘How close is too close?’

Automotive Supply Chains Jessica Lomath Adrian Samarasinghe Hannah Sugrue Anirudh Suneel

Overview Lots of ways suppliers and assemblers work together to successfully manufacture and deliver the parts required to make a vehicle. Cutting out Tier 1 suppliers simplifies logistics Customisation at assembly increases as go towards modular consortia Suppliers deliver parts to factory Assembler subcontracts process of parts to number of suppliers (eg Ford parts collected from midlands and distributed to 22 plants around Europe) On site – distribution centre located near assemblers – improve material flow through plant (reduce congestion) and potential to ‘add value’ in d.c. Chain – increase speed of incoming s.c. higher speed = less inventory = less waste = less packing and containers (eg ALUK swaps full trailers for empty trailers every 4 hours from south spain to Burlaston) Supplier – Tier 1 manufacturer on supplier site near assemblers – subassemblies sequenced by signals - (eg Excel operation at VW plant near Barca – material movement controlled by IT systems) Modules – VW near Barca – tier 1 coordinate parts for complete module to be bolted (modules customisable) – reduces work in progress – less work for assembler – reduces process time – easier to meet demand of customer Modular – EG VW bus plant in Brazil - 7 modules, 7 suppliers (workers on sup payroll) – assembler further downsized - Mercedes smart car – 5 modules, 7 integrated suppliers (in final assembly), 16 non-integrated suppliers (do submodules/parts) – all admin/manufacture/logistics/distribution outsourced to Accenture)

Lamming’s 5 phases of customer relationships in the automotive industry Traditional (pre - 75) Nature of competition - gentlemanly, friendly Pressure - low/medium, steady, predictable Stress (72 - 85) Nature of competition - closed but deadly, chaotic Pressure - high/unbearable, volatile Resolved (82 onwards) Nature of competition - closed, some collaboration, strategic Pressure - medium, some sense of relief Partnership (90 onwards) Nature of competition - collaboration, tiering, still dynamic Pressure - very high, predictable Lean (late 90s?) Nature of competition - global operation, local presence contribution to product technology, organic growth, mergers & acquisitions Pressure - very high, self imposed The automotive industry case study describes a modern set of supply chain relationships, based around the world and more responsibilities for each supplier. We saw in lecture 11 Lamming’s 5 phases of customer relationships in the automotive industry, and although this doesn’t go quite up to the present day you can see that for the late 90s it mentions a global operation and mergers and acquisitions. The operations described in the case study are very global, giving one example of a joint venture between Canada’s Magna International and Japan’s CalsonicKansei to produce the “cockpit module” for the Nissan Micra in the northeast England.

Two Approaches to Supply-Chain Design TRADITIONAL APPROACH BY OEM Objective – lowest purchase price Arms-length, adversarial relationships Short-term contracts awarded using competitive tendering Multiple suppliers for every item Control of technology and product design retained by OEM Large purchasing and logistics administration costs If performance is unsatisfactory the contract is terminated Very large supply base PARTNERSHIP APPROACH Objective – lowest cost of ownership Open relationships with trust Longer term contracts awarded after lengthy evaluation process Single or dual suppliers for every item Design of sub-systems devolved to individual suppliers Reduced administration costs but more effort developing partnerships If performance is unsatisfactory the customer help develop the supplier Very small supply base From the case study, it becomes clear that the traditional approach has been replaced with more integration and coordination. There is a need for more open relationships with trust when suppliers are required to work so closely, an example of which in the case study is the plant assembling smart cars in France, where seven suppliers are fully integrated into the final assembly plant, with 16 non-integrated suppliers deliver submodules and parts. It also says that “increasingly, the supplier takes responsibility for designing and developing new products of increasing complexity in advance of new model programmes”. Furthermore, it says that the complexity of the automotive logistics operation has been greatly downsized by slashing the number of tier 1 supplier by broadening their responsibilities” and that the “ability of the assemblers to customise their finished products has increased”. This all shows that the automotive industry is moving towards a partnership approach as described in the lecture.

What is a tier 0.5 supplier? Three stages in the development of capabilities of tier 1 suppliers: Tier 1 basic Tier 1 synchro Tier 0.5 Tier 1 basic: suppliers with in house design capabilitye and project management capability who can ensure timely delivery and reasonable quality reliability (50ppm). Tier 1 synchro: suppliers who provide all of the basic capabilitys, but with virtually no safety stock. Additional capabilities for the supplier are synchro logistics and IT expertise which is closely integrated with the assembler, greater flexibility and more secure emergency procedures. They ooperate through ‘clone’ plants that are situated on supplier parks no more than 10 minutes travel time from the assemblers production line. Tier 0.5: full service providers, who integrate component manufacturing through supply chain management to achieve the optimum design of a given module. They carry out pre-emptive market research and develop innovative designs through shelf engineering. They are partners in major cost reduction projects at each model change, and in continuous improvement projects in between.

Advantages and risks of tier 0.5 Supplier gets to expand its scope. Downsized complexity of logistics operation. Modular designs Optimised designs of modules and increased quality consistency (50ppm) Work together with customers to reduce cost. Shorter lead time. OEM is less likely to switch suppliers due to established relationship and trust. Supplier gets to expand its scope and develop new capabilities. Downsized complexity of logistics operation- due to broadened responsibilities of supplier. Modular designs - less WIP, and considerably downsized process for the assembler. Optimised designs of modules and Increased quality consistency (50ppm)- better in the long run as you gain a more devoted customer base. Work together with customers to reduce cost and create a win-win situation. Shorter lead time due to less delivery time as supplier is doing most of the work. OEM is less likely to switch suppliers due to established relationship and trust.

Advantages and risks of tier 0.5 The costs associated with transforming into a tier 0.5 manufacturer Increased management costs and complexity due to greater tasks. Relocation of supplier. Risk to core component business. Possibility of OEM imposed suppliers. Tier 2 suppliers cannot afford expensive inspection and test resources, leading to high defect levels. This is a problem for 0.5 suppliers, who must guarantee delivery reliability to the assembly track, and module that fits perfectly. The costs associated with transforming into a Tier 0.5 manufacturer: The costs may be transferred to the OEM in the form of higher per module costs. This is to compensate for the investment in people, infrastructure, and technology, required for module production. Increased management costs and complexity due to greater tasks: This leads to an increase in associated costs (Recruitment costs, time consumed restructuring management, etc.) presents an enhanced level of supplier management duties and responsibilities for the module supplier. due to the increase in the number of component suppliers which now come under their control. There is a huge reliance from the OEM on the supplier’s ability to manage the module supply chain. Relocation of supplier: Tier 0.5 suppliers are typically located in close proximity to the OEM. Although this may not be a pre-requisite, close proximity will reduce costs associated with the logistics of operation. (Shorter lead times, lower transport costs, etc.) This however also means that a supplier may be forced to relocate in order to achieve tier 0.5 status therefore incurring large capital costs. Risk to core component business: It may not always be possible to manufacture modules whilst still maintaining focus on the original component business. Focus may be diverted to one at the expense of the other. Possibility of OEM imposed suppliers: OEM may dictate that a specific supplier be used, most likely due to available price discounts. This could cause a conflict for the module supplier, as there could be issues over who has authority over the supplier (i.e. OEM or module supplier). Also the preferred supplier could be a competitor of the module supplier in another aspect of their business.

‘How close is too close?’ Gabriel Ramos Maia Iara Santiago Braga

Context Company Top Line Inc. Customer Dynamo Tim Tree, senior VP of Supply Chain Management of Top Line Inc. Analyse this invitation Company Top Line Inc. Customer Dynamo Needs title…

Background Situation of the firm two years ago : Financial ruin; Quality levels; Productivity; Delivering the product. Top Line only survived because of 7 patents that protected the company`s key processes and product technologies. For the firm to survive, Tim and his team managed to improve the customer service capabilities. After the feedback Top Line embarked in a total quality campaign coupled with a lean logistics initiative.

Results and Consequences Quality defects dropped to 250 parts per million. Delivery performance 98% on time. Productivity increased by 15%. Sales increased by 30%. Market share of global market increased by 8%. Consequences: Supplier of the Year award Key Supplier status by Dynamo

Conclusion Conclusion: Tim is not confident that Top Line can live up to the new challenges because there are some tools that the company is not accustomed to doing. Communicate information in a real-time; Share technology; Integrate and plan production schedules; Dedicate resources to a costumer. Opportunity to grow Top Line

Recommendation Opportunities Threats Growing and learning with a consolidated partner Improving processes, capabilities, and customer service Technology, operational and planning gains Threats Not able to accomplish the challenges  loss of trust Dynamo would have access to Top Line technology and patents A failure could risk all the past 2 years improvement – Dynamo is the main customer Tim should accept the challenge. It is the most risky option, however, the collaboration is the future of supply chain. This is a unique opportunity of integration, and refusing the invitation could mean fall behind competitors.

Summary Other partners to replace Dynamo demand Yes Risky position Spend all the effort necessary to live up to expectations Resources, time and teams committed to Dynamo Increase trust in Dynamo No Conservative position Other partners to replace Dynamo demand Improve capabilities to possibly become a close partner in the future

Actions How to guarantee a successful partnership: Spend enough resources Support from high management Negotiation to possible shared goals – specially in the beginning Arrange frequent meetings with Dynamo Try to achieve reciprocal interdependence: too much dependence is not healthy