José Luis García Pérez
Vice President of Operations
DHL Supply Chain Mexico
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Resilience Strengthens Links in Supply Chain

Mon, 09/01/2014 - 13:05

Q: How have recent changes in global manufacturing and procurement strategies in the automotive industry impacted supply chain management strategies?

A: The emergence of new strategies geared toward the regionalization of production is a trend in the automotive industry. We are moving away from the scheme where cars were produced in one country and exported globally, and we see vehicles being produced regionally for a specific group of markets. Mexico is one of the major nodes of production in this industry, and it exports not only throughout the Americas, but also to Europe and even Asia and the Middle East. The government is also driving these changes with the major reforms that are taking place, including the ambitious program for infrastructure investment. We are waiting for the secondary legislation in order to understand exactly how the regulations will work. However, we expect the reforms will propel a positive change.

Q: What significance is the new hybrid of lean and resilient manufacturing having on procurement strategies?

A: This lean and resilient approach means that supply chains are becoming more and more complex to manage, and therefore companies must make sure they are very robust. There is an increased cost pressure, which results in keeping inventories as low as possible while not endangering supply to the market. Inventories in the automotive industry can be very expensive due to the high value of goods involved. Also, the product life cycle is becoming shorter, which means that in the past we used to see the same model being produced for around seven or eight years. Now we see far more frequent changes. The development cycle is also shortening; it used to be two to three years, but now the target is closer to less than a year. Shortened product and design cycles imply that you need to be much quicker to market, and inventories need to be much lower. This also suggests that the supply chain is constantly under much more stress than it used to be. Anything that happens globally may also affect your supply chain, such as a natural event that causes temporary blockages. Supply chains are also vulnerable to political unrest. Therefore, you have to be resilient in order to deal with these conditions and enable your supply chain to deal with more stress than it was designed for.

One way to create resilience is to target more than one supplier for a particular component during the procurement phase. For example, with an engine you have to find more than one source because it is such a critical component. You can also look at using alternate supply chains to have different methods of transportation like using trains, planes, and ships. The other crucial aspect of the supply chain is visibility, which means knowing where your product or raw material is at any given point in any time during the delivery process. If there is any issue with the documentation or another potential issue that may affect the transit time, you need to know so you will be able to calculate the impact at your plant or with your end user. Crucial times where the flow of goods is at its peak, such as Black Friday, are a good example of the relevance of supply chain visibility. This year the bad weather impacted supply chain times, and it is essential during these challenging times to be resilient.

Q: As a supply chain manager, what role do you play in process innovation?

A: In Germany, we are developing products to improve supply chain logistics. For example, we are creating delivery robots and humidity controls for warehousing. We also developed one of the best locks for containers, which can only be opened by satellite signals. One of the greatest values we bring to our clients is our engineering expertise, but ultimately we are logistics experts. We can cover the whole supply chain between our three divisions. We can move goods by any means of transportation, deliver express parcels, and manage the entire supply chain. At DHL Supply Chain what we do is manage transportation, inventories, warehousing, added value through subassemblies, re-labeling, re-packaging, and sequencing, all supported by the most sophisticated IT solutions. We advise our clients on the best strategies and design solutions, and provide them with options. If a solution is implemented, we also do shadow management in order to understand how the process is working. This helps us identify issues that the client may not have been aware of.

Q: What is your main advice to clients looking to plan a successful supply chain strategy?

A: The number one piece of advice that I can give is focused on the importance of finding a balance between the level of service you want to give a customer and the price you are willing to pay. A higher level of service requires a higher level of cost and every business has the privilege of balancing these factors, so we have to help them find that balance. Another interesting point is that in the supply chain you can adjust various levers for different results. You can increase your inventory, which will give you a quicker service but you incur a higher cost. At the same time, a lower inventory without an adequate supply chain can result in losses to your business, so you really need to adjust the two factors consciously and establish the right approach. Within the supply chain there are also different strategies; you can have all of your inventories in one place and supply from there or you can deploy part of the inventories to different geographical locations. This means that for some parts your service will be quicker but others may still require transportation. For carmakers the real need is a good distribution network, as they need to have such a broad geographic reach.

Q: What particular automotive trends are forcing changes in supply chain management?

A: The regionalization trend is changing the game when it comes to warehousing. There has also been a major increase in terms of the available options to configure a car, which means more parts. Hybrid electric vehicles also represent a new trend because the batteries are considered hazardous materials and therefore need to be stored and collected (recovered when useful life is over) carefully. We are currently developing a special technology to achieve that. Full electric vehicles will also bring in different requirements.

Q: To what extent do you provide customized solutions to customers?

A: We can customize solutions to a large extent, and this can be perfectly seen in our involvement in the logistics for Formula 1. In terms of how far we tailor services to our customers, it generally depends on the particular needs of the client. Sometimes the client himself does not know what his real needs are because they can be hidden behind excess inventories, for instance. In this regard, we have a broad portfolio of services we can offer to our clients. When you look at large OEM plants, we can provide maintenance, repair, and operations (MRO) support, which means having tools and consumables close to the actual production point. That can be as simple as having a single warehouse with those parts next to or inside the plant, or it can be as complex as having a number of automated delivery machines on site that stock tools and parts for immediate access. How far we go depends on a number of factors including the size of the plant, the expense on materials, and how far the customer

Q: How much development of Mexico’s infrastructure is required to meet demand?

A: Mexico has always had logistical challenges due to the geographic nature of the country. We do not have any domestic ship transportation within Mexico (cabotage), and that is a great area of opportunity. We only have four major ports, so they need to be expanded considerably. The development of the Port of Veracruz was a project that was held back for many years while the environmental impact assessment was completed. Now the permits have been released and that will go ahead. There are 60 airports in Mexico but four or five handle 80% of the volume. The airport of Mexico City needs to be developed as it is already operating over capacity. As far as ground transportation is concerned, 80% of it takes place by truck and that is a problem. We do not use trains enough while it is clear that rail is the most cost-effective transport when you are shipping distances over 450km. We need a lot more multimodal ramps to support this type of transportation too. All of this requires a lot more investment, especially if car production is going to increase by up to 40% over the next two to three years. Mexico also needs to reduce its logistics costs, as although the country is a logistics platform, these costs are still far too high. Logistics here make up 9-13% of the average cost of the industry, while in a developed country, this is generally closer to 6-7%. We participate in a number of forums with government and industry leaders in order to address this.