Automotive Sector

Executive Summary

As the Automotive sector’s competition becomes more global, innovation is moving from a firm-to-firm level to a supply chain versus supply chain perspective. In order to compete against low cost countries (such as China), Canadian firms from the Automotive sector must develop supply chain agility in a  Just-In-Time (JIT) and mass customization mode.

The lean JIT process was developed initially by the Automotive sector engineer Taiichi Ohno. The model consists of monitoring and controlling the production system to eliminate all sources of waste, in particular those related to inventory levels. Production is expected to equal demand at all stages of the process.

Logistics and supply chain management (SCM) are key components in the JIT Automotive sector. The two most preferred key performance indicators (KPI) by North American (NA) firms from that sector are logistics and SCM JIT related  (on-time delivery and inventory turns) while traditional production measures, such as manufacturing cycle time and cost per unit, are far behind.

While inventory turns is the main KPI for evaluating supply chain agility, logistics cost KPI allow firms to evaluate the efficiency of their logistics and SCM operations. The combination of supply chain agility and efficient SCM practices is key to long term competitiveness and prosperity of Canadian Automotive firms in a global supply chain (GSC) context.

Inventory Turns

Automotive Manufacturers, through the adoption of JIT and Lean, display high inventory turns rates, while wholesalers and retailers are far behind on that matter¹. The concept of an end customer-centric supply chain has not yet been incorporated in the Automotive sector. JIT is applied only throughout Manufacturing sectors, but not fully integrated into the Wholesale and Retail sectors.

Motor vehicles Manufacturing inventory turns (finished goods) boasts the highest growth for the 1992-2005 period (210 percent), as well as the highest overall inventory turns ratio for 2005. Manufacturers in this class keep on average a little more than a day’s worth of finished goods¹. The same sub sector also leads in raw materials.

Motor vehicles Manufacturing inventory turns (raw)’s growth was less than the industry average, with an increase of only 20.07 percent for the same period. This can be explained by the fact that motor vehicles manufacturers have embraced JIT processes prior to most sectors. Its inventory turns (raw) are still more than 3 times higher than the Manufacturing average¹.

In terms of sub sectors, in both cases (raw and finished goods), the motor vehicle body’s inventory turns are higher than the truck trailer’s inventory turns. There is also much more volatility on the finished goods side. This can be explained by the fact that firms usually control better their procurement processes and suppliers relationship management (SRM) than their customer’s orders processes in JIT mode.

The volatility of the motor vehicle parts manufacturers inventory turns ratios was largely reduced in all sectors in the last few years. This can be explained by the fact that parts assembler’s better master supply and demand in a JIT process and have been able to stabilize their flow of product in JIT process.

Finally, assemblers have developed different type of inventory management practices based on indicators such as the level of standardization of components, the sourcing location (North America’s JIT versus low cost country sourcing’s long lead time fulfillment) and total item level cost/shipping cost per unit. Assemblers may take the decision to have a higher inventory level of standardized parts, such as brake systems that can be used in most cars and light truck models, or have an on-order inventory management strategy for parts that would be unique to a specific end product.

Logistics Cost

The Canadian Automotive sector has a logistics costs distribution that is particular, in the sense that it is different, not only from the average logistics costs distribution for Manufacturing, but also from various selected sub-sectors.

The first difference is that there is a lot more logistics outsourcing in the Automotive sector. For instance, the Motor Vehicle Manufacturing sectors outsource five times more than the Aerospace sector in terms of internal logistics costs expressed as percentages of total logistics costs.

Furthermore, sectors that are adopting JIT processes with high inventory turns, such as the Motor vehicle Manufacturing sector, have significantly lower inventory carrying costs compared to total Manufacturing and Aerospace.

Motor vehicle Manufacturing is more efficient in terms of total logistics costs compared to most Automotive parts manufacturers.  It is also important to note that Motor vehicle manufacturing is the sector that has the highest inventory turns in all the Automotive supply chain³.

Technology

The adoption of technology and best practices initiatives is usually a success in the Automotive sector. Lean Logistics strategies that were implemented in NA actually met or exceeded expectations in more than 65 percent of the cases and the percentage of initiatives that failed was minimal².