For cars manufacturing, the North American region is becoming ever more integrated, boosted by near-sourcing and propelled by ever-growing demands for faster and leaner production. Manufacturers in the US, Canada and Mexico make thousands of separate car parts, stuffing containers that zip across the countries, linking parts manufacturers with car assemblers and each other. Logistics is a major force – some would say the major force – in this complex undertaking to fuse the industry regionally. Fine-tuning supply chain logistics across North America is critical to keeping costs down, productivity high and the assembly line humming. Manufacturers push aggressively for the most efficient possible just-in-time production, in which parts arrive at an assembly plant just before needed.
“There are growing demands for speed, accuracy and the ability to handle complexity,” said Foster Finley, a managing director and authority on supply chains with the consultancy AlixPartners LLC.
Automakers really pioneered supply chain management and just-in-time manufacturing. Some analysts maintain the industry continues to push its supply chain harder and more relentlessly than any other sector.
However, to keep its own transport and logistics-related investments down, the auto industry has turned almost entirely to third party logistics providers. According to Armstrong & Associates, a supply chain consultancy and research firm, American automotive companies alone spent $13.4 billion on 3PLs in 2015. Spare parts logistics globally accounted for another $11.7 billion, Armstrong estimated.
A single large contract with a 3PL can range from $150 million to $300 million, according to Evan Armstrong, the firm’s president, but come with it exacting demands.
“It’s not for the faint-hearted,” he said.
Manufacturers look to 3PLs for more than simply transportation and delivery. Logistics companies are tasked with inventory and time management and parts sequencing.
If anything, the industry’s dependence on 3PLs is growing. According to Robert Bommers, managing director of global logistics firm BLG Industrielogistik GmbH & Co., automotive companies “not only outsource their logistics process but also demand logistics companies like BLG pre-assemble parts to produce complete modules.”
In addition to this kitting of parts, some 3PLs actually do some sub-assembling of mufflers and lighting. A growing trend in the industry is to employ lead logistics firms, sometimes referred to as 4PLs, to manage, oversee and coordinate activities with other 3PLs.
One big goal for automakers, Bommers said in an email, is to reduce complexity at the assembly line itself. That helps cut labor hours needed to assemble a vehicle, the Holy Grail metric in car making.
What’s more, Bommers continued, BLG – like other major 3PLs – has established “large warehouse operations in close proximity to the [original equipment manufacturer’s] production plants in order to buffer a minimum stock of parts to ensure continuous production supply.”
Logistics requirements mount as the tasks become more complicated. Within logistics, technology is now ubiquitous and growing in both sophistication and usage. Information technology systems, for example, are becoming embedded in both production and logistics processes and these are being networked. Big data is being deployed to better predict demand.
Logistics companies now marry tracking software with GSP-based transponders, mobile bar scan readers and radio frequency identification devices, or RFIDs. The goal is to know where every part is without opening a container.
“The degree to which these things can be synchronized is inconceivable,” said Finley.
To describe just how cutting edge the whole exercise has become, Armstrong cited PINC Solutions, a San Francisco Bay-area company that provides advanced yard management, finished vehicles logistics, and inventory robotics solutions. In a contract with Daimler trucks, PINC uses drones that fly around warehouses tracking RFID tags. “They can tell where individual parts are on an individual trailer, where that trailer is, how long it’s been sitting there and what loading dock it should move to,” Armstrong said. “It offers significant visibility down to the SKU and item level.”
That kind of quest for better inventory management is indicative of the car industry’s size and complexity. It is America’s largest industrial sector. According to a recent US Commerce Department study, American auto parts exports almost doubled last year to $81 billion from 2009’s $43 billion. Of this, Canada and Mexico accounted for $59 billion, divided almost equally, although Mexico has begun to outdistance our northern neighbor. As Mexico builds up its car assembly capabilities, American auto parts exports are expected to continue to expand as well, the study predicted. And, the study emphasized, rapid advances in vehicle-related technologies, from self-driving to all-electric cars, bode well for the American auto-parts industry.
“There is massive intra-regional trade between the United States, Canada and Mexico in both [original equipment] and aftermarket parts,” the study concluded.
To understand just how complex this trade is, consider the following: The average car contains approximately 30,000 discreet parts, according to Toyota’s calculations. And that doesn’t even begin to account for aftermarket parts, which for Toyota alone in the US means more than 260,000 unique parts.
The US has almost 3,400 car parts and accessories manufacturers, while Mexico lists more than 2,500 auto parts companies. Mexico now exports more than $50 billion worth of auto parts to the US, while importing more than $30 billion from the US.
Contrary to popular view, fewer auto parts for the North American market are being sourced in China. That trend is likely to continue, analysts believe, as China’s labor costs rise and Chinese production moves inland, while Mexican manufacturing becomes more efficient and increasingly automated production continues across North America. In fact, China, in ramping up its own auto making industry has rapidly become a major consumer of American car parts exports.
Veracruz, Mexico is now the biggest North American port for vehicles. But fully one-third of these cars are imported from the US.
An integrated North American industry boasts several logistics-related advantages over one that is reliant on parts coming from Asia. For one, intermodal transport is simpler, faster and more reliable than shipping bound by lengthy ship travel and ports.
With sealed, containerized freight, there are few touch points in intra-North American cargo. That’s especially true compared to China, where parts are manufactured, then trucked or barged over long distances, before they can be loaded onto ships. On the US side, the whole exercise must be reversed. That process not only is time-consuming, but is more vulnerable to damaged goods or shipping-related mistakes.
Within North America, trucking and rail provide the lion’s share of cars and car-parts related logistics moving goods from country to country, although short sea is becoming a bigger factor in the transportation of finished vehicles from Mexico to the US.
Of course, moving parts across any border adds several layers of complexity. The trucking company and logistics firm Werner Enterprises calls the Mexico cross-border market “growing and more difficult to service.”
Clearing customs by rail is quick, maybe a 30-minute process. Hauling over road takes longer. That’s in part because of the need to transfer containers from Mexican to US trucks or vice-versa.
“It takes quite a lot of infrastructure, systems and capabilities to manage the interchange,” said Armstrong. He cited Ryder System, which manages 20,000 such interchanges every week. Ryder boasts a dedicated transportation contract from Toyota.
The North American industry will likely get even more assimilated in the years ahead. While Canada continues to be an important player in this trade, more and more of the action takes place between the US and Mexico.
Mexico now hosts ten car manufacturers, producing 40 brands and 500 models in 23 manufacturing plants around the country, according to the US Department of Commerce study. In August, according to Mexico’s car association, AMIA, the country exported about 235,000 cars, a 12% increase over August 2015.
That total is bound to grow. BMW is spending $1 billion on a new plant that will begin production in 2019. Existing manufacturers are pouring in more than $5 billion on new Mexican plants expected to be operational by the end of this decade.
Among other developments, this will likely boost short sea shipping, although congestion issues at Veracruz, North America’s largest car-handling port, are already worrying manufacturers. Rail capacity and congestion are major concerns. Currently, about 80% of all vehicles move from Mexico to the US and Canada by rail. Short sea shipping has traditionally been the fallback.