Rusty Links in the Supply Chain

Feature Article | May 30, 2007 by admin

In the past few years, automobile manufacturers have continuously reduced the extent of their own production by transferring more production, organizational, and development tasks to suppliers. According to the German Automobile Industry Association (VDA in its German abbreviation), German automobile manufacturers currently handle less than 25 percent of these tasks themselves, and the trend is accelerating. Today, many automotive components – including instruments, braking and security systems, and body components – are completely developed, produced, and delivered to manufacturers by external suppliers. That’s good news for the supplier industry.
But the good news is tempered by rising costs for raw materials and cost reductions demanded by manufacturers, which steadily increase the price pressure on automotive suppliers. Shorter and shorter development cycles also complicate their efforts. The average life cycle for a European model was nine years in 1990, but by 1999 it had fallen to fewer than seven years. The technical equipment in vehicles is also constantly becoming more complex, especially because of electronics and software to drive motors and telemetric services. An automobile used to consist of about 800 individual parts. Today that figure can reach 10,000 to 15,000 individual parts, depending on the manufacturer, product type, and optional equipment.

Optimization opportunity: electronic processes

“In the past few years, automotive suppliers have turned up the heat to reduce costs,” says Kai-Olaf Dammenhain, who follows automotive suppliers in central Europe at Capgemini, an IT and management consulting firm. “Production processes like the kanban principle and more economical warehousing like just-in-time delivery of materials are generally standard among automotive supplies today,” he adds. Additional improvements in productivity are difficult to achieve.
In the future, automotive suppliers will find future opportunities for optimization and savings primarily by replacing manual and paper-based transactions (such as order entry, delivery schedules, or change management) with electronic processes. For example, a study on the automobile industry by market researchers at Agamus Research shows that the costs of cross-enterprise processes handled by traditional methods range from €2 to €15 each – depending on the size of a company’s operations. The study showed that an automotive supplier with annual revenues of €20 million can save up to 1.25 percent of its income, or €250,000 in this case, by handling 80 percent of its processes electronically.

Frictional losses from manual coordination

Coordination with Vendors

Coordination with Vendors

Things haven’t gotten that far yet according to a survey conducted by Capgemini, “Transaction Costs in the Automotive Supplier Industry,” of about 50 managers in international supplier firms. The disillusioning bottom line is that suppliers continue to exchange change notifications for products or delivery schedules among purchasing, logistics, and development departments by e-mail, telephone, and fax. Some 59 percent of those surveyed still consider it important to coordinate with other suppliers on the telephone. Some 53 percent prefer e-mail and 17 percent perfer a fax for the same task.
Dammenhain looks to product changes and delivery schedules to illustrate the resulting frictional losses along the supply chain. In both areas, suppliers have complained about an enormous increase in the required time in the past few years. Automobile parts experience numerous changes throughout their life cycles. For example, if the size of a vehicle engine changes because of a new design, the supplier who makes a fitting for the engine must be informed of the change. If the employees of a tier-one suppler transmit the current drawings for the fitting to the vendor, the vendor’s employees who are involved in the process step will spend an average of 15.6 percent of their annual working hours on the changes – for checks, comparisons with earlier versions, management, and documentation.

Loss of working time

An employee in purchasing who works 200 days a year therefore spends about 31 days on tasks “that have absolutely nothing to do with the core business,” says Dammenhain. “The purchaser loses important working time that is really needed to evaluate and select vendors and for pricing.” This situation drives up costs. An automotive supplier spends roughly €50,000 to €60,000 each year for an employee in purchasing for services and to provide working space. If the employee spends more than 15 percent of the time on non-core activities, the company wastes an average of €7,800 to €9,300. That might not seem like a lot of money at first glance, but over time the figures become significant. A supplier with only 50 employees in purchasing would lose more than €46,000 every year in such a scenario.
The situation is similar for orders or delivery schedules. Consider the following case. An OEM sends an order to a tier-one supplier to delivery 5,000 engines in three months for a new model. If the OEM orders the required parts from the vendor by telephone or mail, it generally has no information on the current delivery status of individual components. Just monitoring dates requires about 26 percent of a logistics employee’s time. “To check on dates and make sure that the goods on order will be delivered on time, logistics employees spend a lot of time on the telephone following up on orders,” says Dammenhain. When the numbers are totaled, an employee spends 52 working days a year just following up on orders.

Competing standards

“Another reason for the high cost of transactions between vendors is the multiplicity of national and often competing standards for electronic data interchange (EDI),” says Dammenhain. “More than half of the suppliers surveyed see a significant obstacle to mutual collaboration here.” Suppliers involved in international development and production cooperatives often can’t agree on a uniform standard for EDI. German suppliers use the VDA standard, American suppliers use Ansi X12, and Japanese suppliers use EIAJ.
This situation ultimately leads to point-to-point connections between vendors, which often end in unmanageable interface landscapes. “That would be like requiring every person involved in a conference call to set up an individual connection to each one of the other participants,” says Dammenhain. SAP estimates that maintenance of a single interface costs more than €7,000 each year.

Tracable documenation of changes

In all three cases, the processes between suppliers can be standardized, simplified, tightened, and made more transparent. For change management, the SAP Product Lifecycle Management (SAP PLM) application provides the required standardization of change notifications, which avoids media breaks. SAP PLM also provides Collaboration Folders (cFolders), a virtual collaboration environment with standard work rooms to display, exchange, and document new changes. cFolders ensures that internal employees in development and construction, purchasing and sales, quality management, and production along with external suppliers can work with the current, valid change status. If a document is changed, the attachment of a new version ensures that the new version is documented and that it can be traced by all parties involved.
The setup of vendor-managed inventory scenarios simplifies delivery schedules, like those enabled by SAP Supply Network Collaboration, which is part of SAP Supply Chain Management. The procuring supplier can use the application to give vendors access to inventory levels and supply data. Delivery schedules for vendors are set by coordinated parameters like lowest or maximum inventory. In an ideal case, a manufacturer’s schedules can be included in a vendor’s sales plan.

Central data hub

Saving Working Time

Saving Working Time

Unlike manufacturers, tier-one system suppliers who collaborate with and monitor a variety of vendors often can’t agree with them on a uniform standard. A central data hub like SAP NetWeaver Exchange Infrastructure (SAP NetWeaver XI) offers an option to standardize EDI with partners and make it significantly more cost-effective. SAP NetWeaver XI contains mapping functions that cover various EDI standards in one environment. SAP NetWeaver XI reads incoming messages and coverts them into SAP-conforming IDocs or XML formats. Outgoing messages are converted into the EDI message format that the recipient uses.
“If uniform data exchange formats, better system support for business partners, and standardized processes are implemented, automobile suppliers can save 15 percent to 20 percent of an employee’s working time every year,” concludes Dammenhain.

Dr. Andreas Schaffry

Dr. Andreas Schaffry

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