Description
Knowledgeable observers say that many, though not all, automotive companies are running their supply chain well. American and European automotive companies are losing their shares and profits whereas Japanese companies are increasing world market shares and gaining more profits. Therefore, the present is considered to be a transitional period for the automotive industry.
Abstract— Knowledgeable observers say that many, though
not all, automotive companies are running their supply chain
well. American and European automotive companies are losing
their shares and profits whereas Japanese companies are
increasing world market shares and gaining more profits.
Therefore, the present is considered to be a transitional period
for the automotive industry. The purpose of this article is to
present the weak points of current systems in the automotive
industry as a whole, and provide solutions and suggestions for
the industry to become more profitable again. In addition, we
will focus upon the unique supply chain and logistics concepts
implemented by Japanese automobile companies that have
allowed them to become successful, and a model of best
practices for the industry.
Index Terms — Automotive Industry, Supply Chain
Management, Lean Manufacturing, and Toyota Production
System
I. INTRODUCTION
The automotive industry is the world’s largest single
manufacturing activity [1]. It uses 15 percent of the world’s
steel, 40 percent of the world’s rubber and 25 percent of the
world’s glass. It also uses 40 percent of the world’s annual
oil output. From 1951 to 1972, there was a very high
production growth rate of approximately 5.9% annually for
the automotive industry. But after 1973, the year of the first
oil shock, the growth rate declined to about 1% per year until
2002, and came to a halt in 2003 [2]. The declining growth
rate has been partly attributed to the oil shock, but the major
reason for the decline was due to the saturation of the market
in developed-countries. More than 70 percent of all cars and
trucks are still sold in the developed world. Of course, there is
high potential market growth in the developing world. But
the problem is that these countries are still constrained by low
income levels. Unless these developing countries reach
sufficient income levels to support car consumption, they
will not see the mass motorization that the developed world
has. The widely expanding production capacity of major
automotive companies together with the sluggish world
demand results in car surpluses, and low utilization of
production capacity. As a result, the profits and financial
performance of many major automotive companies are
deteriorating. This leads to a heavy burden of debt in the
industry and makes investors wary.
Manuscript received December 11, 2007. This work was supported by the
University of the Thai Chamber of Commerce.
Nanthi Suthikarnnarunai is with the Department of Logistics, School of
Engineering, University of the Thai Chamber of Commerce, Bangkok,
Thailand (phone & fax : 662-2754852; e-mail: [email protected],
[email protected]).
Today, the automotive supply chain practice is in a
transition period. The common practice in the automotive
supply chain for most of the automotive companies is that
every chain is mainly tied to forecasts. The vehicle
manufacturers must match supplies with demands from the
first chain, raw material suppliers, to the last chain, car
buyers. The variation or uncertainty of demand due to
forecasting is produced from chain to chain causing bullwhip
effect. The new direction for automotive supply chain is still
based in part, on the forecast and, in part, on the capable and
responsive supply chain with a greater strategic emphasis,
and subsequently, on the logistics operations [3].
II. THE AS-IS PROCESS FOR THE AUTOMOTIVE
INDUSTRY
The current systems of the automotive industry mostly rely
on build-to-forecast and/or build-to-delivery as in the
following diagram.
=Information Flow
=Materials Flow
Purchasing Programming Marketing
Order
Schedule
Sequencing
Plan Plan
Schedule Schedule
National
Sales Co.
Second Tier
Supplier
First Tier
Supplier
Inbound
Logistics
Body/Paint/
Assemble
Outbound
Logistics
Dealer
Inventory
Customer
Figure 1: Build-to-forecast and build-to-delivery [4]
A. Build-to-forecast
- Sales Forecasting aggregates all dealers and national
sales companies’ forecasts and uses them as an input for
production programming. The method is the bottom-up
approach. Typically, aggregate demand forecast are more
precise [5].
- Production programming is the process of
consolidating forecast market demand to available
production capacity to get the framework that defines how
many vehicles will be built in each factory.
- Order entry is the stage in which orders are checked
and entered into an order bank to await production
scheduling.
- Production scheduling and sequencing fit orders from
the order banks into production schedules. These orders are
used to develop the sequence of cars to be built on the
scheduled date.
Automotive Supply Chain and Logistics
Management
N. Suthikarnnarunai
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
- Supplier scheduling is the process whereby suppliers
receive forecasts at various times, actual schedules, and daily
call-offs.
- Inbound logistics are the process of moving
components and parts from supplier to assembly plant
- Vehicle production is the process of welding, painting,
and assembling the vehicle.
- Vehicle distribution is the stage at which the finished
vehicle is shipped to dealers.
In conclusion, build-to-forecast uses the forecasts as input
and to drive production planning and scheduling.
Consequently, the number of vehicles being produced and
delivered to dealers is based on the qualitative method of sale
forecasts. If the forecasts are significantly different from the
actual sales, then there will be many vehicles stockpiled at the
dealers.
B. Build-to-delivery
- Sales Forecasting starts with the national sales
company asking dealers to supply their annual volume
forecast several months before the end of the calendar year.
Then, the national sales company resolves the sales forecasts
into monthly or bimonthly groups from the dealers’ baseline.
Afterwards, the national sales company visits dealers to
establish the discrepancies between actual sales and forecast
sales. The demand forecasts become the basis or input for
production programming. The dealers are responsible for
supplying orders in accordance with their forecast volume up
to 90 days ahead of production. The dealers must also
identify certain features early on, such as model and engine
type. However, they can postpone the decision on external
options such as radio and air conditioning. Consequently,
dealers push products in stock to the final customers by using
discounts and promotion incentives.
- Production programming reconciles the production
capacity and dealership sales requests. The allocation of
resources is another task of production programming. The
program allocates to markets major items such as engines, air
conditioning, and heated windscreens. Moreover, the
program can allocate short supply products to the most
profitable markets. Some markets can absorb higher priced
vehicles, so the volume is pushed to those markets. The
decisions for production programming will be made three
months in advance, and every effort will be made to adhere
to them. At the latest, decisions can be changed one month
before production. Such changes are usually due to
unanticipated constraints, such as market, suppliers, and
work stoppage. The volume and model type, such as sedan or
station wagon, are determined by the manufacturer
approximately three months before production, while
decisions on power train and transmission are made two
months before production. The decisions on color, trim and
option choices are made one month before. This process is
general for the automotive industry, but varies by ordering
time length. As a result, the current production programming
allows only minor changes in the month before actually
building a car.
- Order entry begins when a salesperson enters a
customer order into the system. Then, the order is passed on
from the dealer to the national sales company and
subsequently to the manufacturer’s headquarters. An
allocation check is done at the national sales company to see
if the desired vehicle is available or not for the dealer and that
market. Then, a build-feasibility check, which is the process
of checking whether the special options and specifications
are feasible for the production, follows to determine whether
special options and specifications are available for that
vehicle in the market. If not, the system rejects the order and
the dealer must make the necessary order correction.
Bill-Material-Conversion is the process of converting the
orders received from the dealer to a bill of materials. This
tells the manufacturers what kind of components they need to
build the vehicle. The final stage in order entry is to transfer
the order as a bill of material to the order bank. The order will
stay in the order bank until the system transfers it into the
plant’s production schedule. Dealers can still make some
amendments when the order is in the order bank. Then the
forecast orders will be matched to the actual orders received
from customers and the orders are transferred into a
production schedule. However, if the forecast orders remain
in the pipeline and can not find a customer to match within
time to be altered, the manufacturers tend to build these
vehicles despite the lack of demand.
Figure 2: Steps in order entry [6]
- Production scheduling and sequencing determines the
source of all needed components from suppliers. The
scheduling process fits the orders in the order bank into a
weekly and later into a daily build schedule. Later, a human
scheduler converts it to a production sequence. In addition,
the scheduler tries to assign orders to each plant based on
available production capacity. In addition, the production
scheduling must be created based on the plants’ overall mix
and capacity constraints.
- Supplier scheduling is the process of communicating
the component and material needs to first-tier and
raw-material suppliers. Firstly, a production program driven
by a long term forecast of up to 12 months is sent to the
supplier. Secondly, weekly supplier schedules with 6-10
weeks of planning information are sent to supplier. The
schedules provide only approximate guidelines for the
plant’s planned production. Lastly, the daily vehicle
production schedule or “call-off” which is provided 2-10
days before production starts is sent to suppliers. However,
the call-off is still inaccurate because it does not include the
final assembly sequence, which cannot be determined until
the vehicle exits the painted-body store. Consequently,
suppliers view the information received from manufacturers
as too much variation to use in planning. No one knows what
is required until the actual assembly sequence is set.
Therefore, suppliers generally keep higher buffer stocks, and
locate their facility in proximity to the suppliers to reduce the
component’s delivery time.
- Inbound logistics is the process of moving components
and parts from supplier to manufacturer. The cost of inbound
logistics can be as high as 10 percent of the plant’s
manufacturing costs and thus 1.4 percent of the finished
vehicle cost. Nowadays, suppliers are pushed to send
components in smaller lots with higher delivery frequency.
This typically can creates higher cost per shipment for
suppliers [7].
Order Entered
into System
Allocation
Check
Build Feasibility
Check
Bill-of-materials
Explosion
Order
Bank
Dealer
National Sale
Company
Vehicle Manufacturer
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
- Vehicle distribution or outbound logistics is the process
of transporting vehicles from the assembly plant to the
dealership or final customer with large fleets. The outbound
distribution logistics is always done via train, truck, and ship.
Figure 3 illustrates the main volume routes - from the plant to
market compounds or distribution centers, and then to
dealerships or customers. The routes from assembly plant to
regional distribution center and national compounds account
for approximately 90 %, while the vehicles being directly
transferred to local dealership account for just 1 %.
Customers coming to pick-up the vehicle at the dealership
account for 65%, while distribution centers delivering the
vehicle directly to end users accounts for 25%.
Figure 3: Outbound logistics
(an example from UK market) [8]
III. THE PAIN-POINTS AND PRACTICES
As mentioned earlier, the automotive industry today is
struggling for growth and profitability in a setting that
features both increasing costs and declining profit margins.
There are many problems that need to be resolved, known as
pain-points. The pain-points are weak points in current
practices that have an impact on the AS-IS process and
manufacturing performance, leading to declining
profitability for the whole industry. Hence, the automotive
industry should try to find new practices to make the industry
thrive again.
This section presents the pain-points existing in current
automotive industry practice, followed by suggested reforms
to cope with those pain-points.
A. The inaccuracy of sales forecasts
The inaccuracy of sales forecasts from dealers is one
pain-point that affects the downstream units. Generally,
manufacturers build vehicles based on sales forecasts from
dealers. If actual sales are in accordance with the sale
forecasts, the vehicles produced by manufacturers will be
used up by customers. But if actual sales are below sales
forecasts, dealers will end up stockpiling vehicles that
customers do not want. The inaccuracy of forecasts is a
common problem that exists in every industry. The variation
between actual and forecasts results in the excess or shortage
of inventory of goods.
B. A disconnection between manufacturing and customers
This is another major pain-point for the automotive
industry. Lean manufacturing can create a very efficient
production process with lower inventory levels. However,
because it is not linked to the actual demand from customers,
the dealers end up with the high stock piling in their
warehouses. Manufacturers produce cars that exceed demand
and hence the savings from the efficient manufacturing may
be more than offset by 1) the cost of stock holding and 2)
incentives offered to final customers to move the stock.
C. The self-fulfilling cycle to provide an inaccurate sales
forecast, and the increasing cost of sales from incentives
This pain-point is the result of the first two pain-points.
When dealers have high levels of undesired vehicle stocks,
they try to push those vehicles to customers using discounts
and promotions. These kinds of incentives can distort
original demands because customers may accept and buy
vehicles that they don’t like in order to get incentives. Then,
those distorted demands will be used to make a forecast
which will be inaccurate since it does not capture the real
demand from customers. The cycle is self-fulfilling with
endless problems. Finally, incentives also end up increasing
the cost of sale.
D. The vulunerable and unreliable information or
scheduling from manufacturer to suppliers
Suppliers cannot rely on the scheduling sent to them by the
manufacturer. Schedules rarely match previously received
forecasts, which in turn do not match the final call-offs, the
process by which the assembly plant asks the supplier to
deliver the components to the plant. Even the assembly plant
itself does not know what the sequence of production will be
until the order passes the painted-body store. In just-in-time
methodology, suppliers are given only 8-10 hours before the
final call-off sequence. This can create very high buffer
stocks at suppliers
E. The delay in order entry
Actually, the allocation and checks take only about 2 hours.
But, orders require days before being converted into the lists
of required parts. The national sales company often batches
orders. The average delay from order entry is 3.8 days[2].
F. The delay in order processing and scheduling process
Once the order is in an order bank, it must spend
approximately another 8 days waiting for actual orders to
come to match with it. In addition, the manufacturer must
take into consideration the order priorities as well as factory
and labor constraints to create a feasible production schedule.
The order spends 15.1 days in scheduling and another 6.5
days in sequencing. The total delay for order processing and
scheduling is 30.4 days.
G. The delay from distribution
This is another delay pain-point with average delay about
10 days. According to research in the UK [9], a vehicle waits
0.9 days in the factory before being loaded onto a transporter
and another 3.8 days en route to the dealer. Surprisingly, the
actual movement time for transport is less than 24 hours.
Overall, the time spent on non-value-adding activities in the
distribution process accounts for 9 days.
The suggested solution to cope with pain-points 3.1 to 3.7
is to replace build-to-forecast and build-to-delivery with
build-to-order. Build-to-order uses the real order instead of
sale forecasts to trigger the entire value chain. However,
before implementing build-to-order, an infrastructure must
first be established to support it. The recommendations for
Build-to-order include demand visibility, capacity flexibility,
supplier flexibility, and logistics flexibility.
Assembly
plant
Local Dealer
Regional DC /
Compound
Import/Export
via ports
Dealer Customer
National DC /
Compound
1%
49%
unsold stock
Dealer transfer 15%
65% customer pick-up at dealer,
10% via leasing companies
25% direct delivery to end user
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
Demand visibility is one building block for build-to-order.
Customer’s need must drive the entire value chain.
Therefore, demand visibility must be communicated to all
units in the supply chain. In the current system, order banks
operate in batch mode, and orders wait a day at each batch
operation before being sent to scheduling. For build-to-order,
the actual order must be communicated to each unit in the
chain in real time without any distortion or delay. The
automotive industry can use a direct order booking system to
deal with demand. Available capacity becomes the number of
free slots. Once the dealer assigns a customer a build slot, the
stability of that order in that slot helps avoid information
distortion in supplier schedules. Then, suppliers will know
exactly how many components will be needed in the
assembly plant. In addition, logistics companies plan and
optimize their loads based on the complete date of production
from locked assembly slots. There are two advantages for a
direct booking system. Firstly, the dealer can give the
customer a reliable delivery date at order entry. Secondly,
order banks, scheduling and sequencing will be merged into
one system which reduces the processing time. Because
direct order booking locks in the build sequence once it is set,
demand stays stable and visible to suppliers and logistics
service providers.
Capacity flexibility is another building block for
build-to-order. The plant should have a capability to alter
capacity levels at relatively low costs. The flexibility may be
attained by re-allocating work, and reducing reliance on
massive investments. Another way to manage demand and to
increase responsiveness is to integrate large and small
operations. Small-scale facilities can be used to produce the
lower-demand products with high variants that do not justify
the use of large-scale facilities. For example,
DaimlerChrysler’s East London plant in South Africa
produced all right-hand-drive vehicles for the
Mercedes-Benz C-Class models. Another way to manage
capacity is hour banks that are widely used in European
countries. Workers make contracts with employers to work a
certain amount of time each year. Workers might be asked to
work more hours during high-demand periods and work
fewer hours at other times.
Supplier flexibility is the third building block for
build-to-order. Suppliers must be triggered by real orders,
and the slotting orders. At the same time, suppliers must be
able to provide high responsiveness. Some co-location is
necessary for a successful build-to-order system. A
manufacturer cannot build the car in days if it takes the
supplier a week to manufacture and ship customized
components.
Lastly is logistics flexibility. The logistics system for
build-to-order should be able to transport vehicles in a
smaller lot than the ones in the current system. The larger the
transporter, the longer the time required to fill the order. The
benefits of applying this solution are lower cost of sale
incentives and lower inventory cost for the entire chain. This
is especially true for vehicle stocks at dealerships. Another
major benefit is the increase in customer satisfaction.
Customers can get the types of vehicles that they really want.
On the other side of the coin, the cost of the higher cost
resulting from smaller truckloads will be more than offset by
the benefits of higher satisfaction and shorter cash
conversion cycles.
H. The high inbound and outbound logistics cost
The cost of inbound logistics can be as high as 10 percent
[10][11] of the plant manufacturing costs. This is two fold.
One is because suppliers ship out many parts and
components. The other is because assembly plants always
require smaller lots with much higher delivery frequency.
The distribution cost of vehicles is extremely high at 30 % of
total cost, while the distribution cost of commercial airlines is
lower than 10%. The major cause of high outbound logistics
cost is that there are too many franchised dealers and each
one wants to establish its own individuality. This high cost
comes from the redundancy of jobs and processes done by
many small dealers. The operating cost per vehicle of a small
dealer is relatively higher than that of a large dealer. At the
same time, large dealers can keep significantly lower levels
of stock than many small dealers do to support the same
customer service level.
One solution to counter high inbound logistics costs is to
create a cross dock between suppliers and the vehicle
assembly plant. This is shown in Figure 4.
Figure 4 Cross docking [12]
The cross dock is built on a location close to suppliers.
The Milk-Run Collection truck will be sent from the cross
dock to pick up components from more than one supplier, for
example are suppliers A, B, and C in Figure 4. Upon its
return back to the cross dock, the components will be
consolidated and sent to the vehicle assembly plant in a single
truckload. This strategy enables firms to use trucks more
efficiently. It also allows more frequent deliveries. This
yields decreased logistics costs and allows assembly plants to
maintain supply stocks.
Another solution is to allow franchise dealers to offer more
than one brand to customers - a “car supermarket” concept.
J ob redundancy will be reduced by combining different
franchised dealers together, and customers will have a
centralized place for automotive shopping. The
conglomeration of dealers will enable them to offer a wide
range of products, lower overhead cost structure, reduce
management and stock holding, and increase economies of
scale. Furthermore, incentives costs will be lower because
dealers can supply vehicles that customers really want.
However, dealers should conduct extensive market research
before implementation to determine the optimal number of
brand offerings so that they minimize total costs and
maximize customer satisfaction. As a result, the operating
cost of the dealer industry as a whole will be decreased. In
addition, the service level will be increased with lower costs
and reduced customer purchasing cycle time. The customer
service level is directly related to the probability that no part
will be out-of-stock [7].
Supplier A
Supplier B
Supplier C
Cross Dock
Milk-Run
Collection
Overseas
Suppliers
Vehicle
Assembly
Plant
Consolidated
Delivery
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
I. Product proliferation
This is the last pain-point of the automotive industry. To
counter the low rates of expansion since the 1970s, vehicle
manufacturing has responded by increasing the content of
their vehicle. They have also immensely increased the range
of models available, in the hope of stimulating more buyers,
regardless of the added economic cost. The increasing
number of content and models result in higher production
costs, because of the changeovers [13]. Furthermore, the
greater the variety of contents and parts, the higher the cost of
stocking these items [14].
The recommended practice to cope with product
proliferation is to reduce the internal variety. The internal
variety is the variation in processes and parts to create
products while the external variety is what the customer sees.
Body style, engine, exterior color, and radio type are the most
considered features, while other features and options are less
critical. For example, customers cannot see the difference
between the less than 1,000 variants of the Honda Accord
and the trillions of variants on the Mercedes E-class [15]. In
other words, the downstream value chain is quite important.
However, customers do not recognize the variants between
Honda and Mercedes. Thus it is preferable to deal with
Honda’s 1,000 versus Mercedes 17,424 variations.
BIW (body-in-white) is a welded steel monocoque (shell)
which is the starting point of most vehicles. BIW might vary
based on the engine type or the presence of air conditioning,
sunroof, and other options. The more options offered, the
more varied BIW becomes. According to research, the BIW
variety does not correlate with the number of body styles
offered in the market and has little relation to external variety
overall. Consequently, as buyers focus on external variety,
the automotive industry can reduce the cost of proliferation
by reducing the number of BIW variants. Furthermore,
another benefit from reducing the number of BIW variants is
flexibility. Plants can separate body and paint before
assembling, and use the interim paint-body store to house
bodies that are ready to be customized. Lastly, we can also
increase the number of vehicles and body types per platform
to improve the average production volume per platform.
Another solution to deal with product proliferation is to
create mutable support structure. This means that the
components have been designed to support multiple product
configurations. Mutable structures have standardized and
generic interfaces, but they do not require standardized parts.
The plant can swap one support structure for another that
makes the assembly sequence more predictable and stable.
Decreasing internal variety will lead to a lower production
cost and a lower inventory cost for both suppliers and
assembly plants. Suppliers will be able to keep fewer kinds of
components and raw-materials for final components
production that goes into the vehicle. At the same time,
assembly plants will be able to lower BTW and platform
stock levels to satisfy dealers and customers.
IV. TOYOTA: THE WORLD’S GREATEST
MANUFACTURER
Toyota’s production system has been held as a model for
the industry based on market share and the profitability of
J apanese manufacturers. There are three elements here: lean
manufacturing; the Toyota production system (TSP) and
theory of constraint; and the lean product development of
Toyota.
A. Lean manufacturing
Lean manufacturing is the concept created by Toyota to
make production development and the production system
more efficient and remove waste from the process. It consists
of three building blocks – creating continuous process flow,
the pull system, and leveling out the workload.
The first building block for implementing lean
manufacturing is to create continuous process flow to bring
problems to the surface. Most business processes are 90%
waste, and 10% value-added work [4]. Firms can conduct a
process mapping to find the non-value-adding activities, and
remove them. Shortening the elapsed time from raw materials
to finished goods will lead to the best quality, lower cost, and
shortest delivery time. The lower inventory levels can also
expose problems. The goal of lean environment is to create
one piece flow. The traditional mass production thinking
focuses on grouping similar machines and similarly skilled
people together. The production is done in large batches
which leads to overproduction and inventory sitting idle. On
the other hand, lean manufacturing focuses on optimizing the
flow of material so it can move more quickly through the
factory. Consequently, the batch size will be reduced. In
addition, when a defect occurs manufacturers can solve the
problem immediately because the product is built piece by
piece. In contrast, producing in large batches creates high
number of parts that are work-in-process; if there is a defect
in the product, correction comes far too That is, a batch of
100K parts produced will not be identified until much later in
the supply chain. This means instead of correcting maybe 100
items, the manufacturer will correct 100,000 items.
The second building block for lean manufacturing is the
pull system. Toyota borrowed this concept from super
markets. Once the order is purchased from the shelf, it will
trigger the supermarket to replenish the product. The
inventory replenishment will be done based on the demand,
rather than using a push system. However, since there are
natural breaks in flow from transforming raw materials into
finished products delivered to customers, some inventory is
necessary.
The third building block is leveling out the workload. If
product is built exactly to the quantity ordered, it may be
building huge quantities in one week, which the company
ends up paying for with overtime; employees and all
equipment are over worked. Then if orders are light the
following week, workers will have little to do and the
equipment will be underutilized. Lean manufacturing instead
takes the total volume of orders in a period and levels them
out so that the same amount and mix of products are being
made each day.
B. Toyota production system and theory of constraint
Obviously, Toyota has successfully applied Theory of
Constraint to develop lean manufacturing. Constraint
management is a framework for managing the constraints of a
system in a way that maximizes the system’s accomplishment
of goals or throughput. Throughput is defined as the rate at
which the system generates money through sales. Constraint
is the part of the system that determines the output. The rate
of throughput of the whole system is equal to the rate of the
throughput of the constraint. Once one constraint is removed,
it will be moved to another part of the system, and so on.
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
Formerly, manufacturers produced vehicles based solely on
sales forecasts. If the sale forecast was inaccurate,
manufacturers would produce cars that customers did not
want, and as a result end up with high stock at dealerships.
Manufacturers might have a very high-tech and extremely
efficient production system. Moreover, manufacturers
always produced the vehicles in the same model with very
high volume in order to gain the economy of scale. However,
those efficient productions would lead to very high end
vehicles that no one wanted and hence vehicle manufacturer
would lose profit. The constraint was the lack of linkage
between manufacturing and customer demands that lead to
excessive inventories at dealerships. Toyota knew about this
problem, and had developed the lean manufacturing and the
Toyota product development system to counter such
problems. Toyota had put customers into the first process of
production development by creating customer-defined value,
and using it as a core value to drive other processes. This
ensures that the vehicles Toyota manufactures would be as
close to customer preference as possible. In addition, Toyota
created the standardized product platforms that can be used
with various vehicles’ models so they can produce a large
volume of product platforms to achieve the economy of scale,
while still being able to customize the product in the
assembly process with respect to customer preference.
Another technique created by Toyota to counter this
constraint is transforming the batch processing to continuous
flow. This creates tremendous flexibility for manufacturers
so that they can adjust production in accordance with
demand. This is because manufacturers produce one piece at
a time. Implementing these techniques enabled Toyota to
remove the linkage constraint between manufacturer and
customer demands, maximize the throughput and minimize
inventories and operating expenses that leads to a higher
return on investment.
C. Lean product development of Toyota
The Lean Toyota Production System has been applied not
only to the manufacturing function, but also to the product
development. There are many companies which try to apply
the TPS, but never succeed because they replicate only the
surface parts of the Toyota methodologies. The lean in the
point of view of Toyota is much broader than manufacturing.
It includes customer focus, continuous improvement through
waste reduction, and tight integration with upstream and
downstream processes. Obviously, improvements at the
early stage of product development will have much higher
impact than the improvement in later stages. Consequently,
Toyota has applied and created the lean concepts and
principles for the product development stage.
The first principle is that the right process will yield the
right results. Customer-defined value should be established.
The customer is always the starting point for any process.
Any processes that do not add customer value should be
eliminated.
Front-loading the production development process is also
very important for the lean concept. This concept is about
doing it right the first time to avoid very costly downstream
design changes. Exploration should be conducted in an early
stage with a wide range of potential problems and alternative
solutions.
Creating a leveled product development process flow is
another element for lean product development. Like the
manufacturing process, Toyota views product development
as a process.
There are a number of recurring cycles of activity, and
improvement could be achieved by reducing them. The
workflow is especially erratic. Sometimes, there is more
work than people or machines can handle, while at other
times there is not enough work. The work load should be
evened out to create a smooth process flow.
Another aspect of lean product development is using
rigorous standardization to reduce variation and to create
flexibility and predictable outcomes. The challenge in
production development is to diminish variation while
preserving the creativity that is essential to the creative
process. Toyota creates higher-level system flexibility by
standardizing lower level tasks. Standardization of platforms
allows Toyota to share critical components, subsystems, and
technologies across vehicles platforms. Standardization of
skill sets of engineers gives flexibility in staffing and
program planning, and minimizes task variation.
The next backbone of lean product development is to adapt
technology to fit people and processes. Toyota recognizes
that technology seldom provides a significant competitive
advantage. It is more important to ensure that the technology
fits and enhances already optimized and disciplined
processes, and highly skilled people.
Lastly, integrating people, process, and tools and
technology into a coherent system is a key element of lean
production development. The excellence of each small part in
the system may not lead to system excellence. There must be
an alignment and integration of each element in the system to
provide the optimized outcome.
V. CONCLUSION
As mentioned earlier, the automotive industry is presently
in a period of transition. It is useful to see the picture and the
problems of the automotive industry as a whole. This paper
assembles weak points and suggestions on how to solve
them. These suggestions have been implemented by different
automotive companies and other industries. Many papers
state that the current practice in the automotive industry lies
in between build to forecast and build to delivery, and build
to order. However, none have been completely transferred to
the complete build to order process. Therefore, it is argued
here that the concept of build to order is considered the key
reform of the current automotive industry’s supply chain.
Another important issue in our paper is about lean
manufacturing and Toyota production system. Several
automotive companies and other industries have attempted to
study and implement these concepts, with a high return on
investment. Yet their effort is still considered as the
implementation of only the surface core concepts. Therefore,
this paper argues for introducing the concepts of lean
manufacturing and Toyota production system in product
development as well as manufacturing. Such reforms will
improve the financial health of the industry at large.
ACKNOWLEDGMENT
I would like to express my appreciation to University of the
Thai Chamber of Commerce, Thailand for financially
supporting in this paper presentation. I also would like to
thank Prof. J ohn K. Evans from the University of Minnesota,
Twin City for polishing my English.
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
REFERENCES
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[2] G.P. Maxton & J . Wormald, Time for a model change (Cambridge,
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25(2), 2004, 171-197.
[4] J .K. Liker, The Toyota way 14 management priciples from the world’s
greatest manufacturer (Madison, WI, McGraw-Hill, 2004).
[5] G. Ghtani, G. Laporte, & R. Musmannu, Introduction to Logistics
Systems Planning and Control (West Sussex, England, J ohn Wiley and Sons,
2004).
[6] T. Ohno, Toyota production system beyond large-scale production
(Tokyo, J apan, Diamond Inc., 1978).
[7] D.M. Lambert & J .R. Stock, Strategic Logistics Management
(Homewood, IL, IRWIN, 1993).
[8] M. Holweg & J . Miemczyk, Logistics in the three-day car age: accessing
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[9] M. Holweg & F. K. Phil, The second century reconnecting customer and
value chain through build-to-order (Cambridge, The MIT Press, 2004).
[10] G. Lapidus, E-Automotive: gentlemen, start your search engine (New
York, NY: Goldman Sachs, 2000).
[11] P.E. Wells & P. Nieuwenhuis, The automotive industry-a guide,
(London, UK: British Telecommunication, 2001).
[12] D. J . Bowersox, D. J . Closs, & M. B. Cooper, Supply Chain Logistics
Management, (New York, NY, McGraw-Hill Companies Inc., 2002).
[13] S. Chopra and P. Meindl, Supply Chain Management: Strategy,
Planning, and Operation (Upper Saddle River, NJ : Pearson/Prentice Hall,
2007)
[14] IBID, 261-296.
[15] F.K. Pil & M. Holweg, Linking product variety to order-fulfillment
strategies, Interfaces, 34(5), 2004, 394-403.
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
doc_692901104.pdf
Knowledgeable observers say that many, though not all, automotive companies are running their supply chain well. American and European automotive companies are losing their shares and profits whereas Japanese companies are increasing world market shares and gaining more profits. Therefore, the present is considered to be a transitional period for the automotive industry.
Abstract— Knowledgeable observers say that many, though
not all, automotive companies are running their supply chain
well. American and European automotive companies are losing
their shares and profits whereas Japanese companies are
increasing world market shares and gaining more profits.
Therefore, the present is considered to be a transitional period
for the automotive industry. The purpose of this article is to
present the weak points of current systems in the automotive
industry as a whole, and provide solutions and suggestions for
the industry to become more profitable again. In addition, we
will focus upon the unique supply chain and logistics concepts
implemented by Japanese automobile companies that have
allowed them to become successful, and a model of best
practices for the industry.
Index Terms — Automotive Industry, Supply Chain
Management, Lean Manufacturing, and Toyota Production
System
I. INTRODUCTION
The automotive industry is the world’s largest single
manufacturing activity [1]. It uses 15 percent of the world’s
steel, 40 percent of the world’s rubber and 25 percent of the
world’s glass. It also uses 40 percent of the world’s annual
oil output. From 1951 to 1972, there was a very high
production growth rate of approximately 5.9% annually for
the automotive industry. But after 1973, the year of the first
oil shock, the growth rate declined to about 1% per year until
2002, and came to a halt in 2003 [2]. The declining growth
rate has been partly attributed to the oil shock, but the major
reason for the decline was due to the saturation of the market
in developed-countries. More than 70 percent of all cars and
trucks are still sold in the developed world. Of course, there is
high potential market growth in the developing world. But
the problem is that these countries are still constrained by low
income levels. Unless these developing countries reach
sufficient income levels to support car consumption, they
will not see the mass motorization that the developed world
has. The widely expanding production capacity of major
automotive companies together with the sluggish world
demand results in car surpluses, and low utilization of
production capacity. As a result, the profits and financial
performance of many major automotive companies are
deteriorating. This leads to a heavy burden of debt in the
industry and makes investors wary.
Manuscript received December 11, 2007. This work was supported by the
University of the Thai Chamber of Commerce.
Nanthi Suthikarnnarunai is with the Department of Logistics, School of
Engineering, University of the Thai Chamber of Commerce, Bangkok,
Thailand (phone & fax : 662-2754852; e-mail: [email protected],
[email protected]).
Today, the automotive supply chain practice is in a
transition period. The common practice in the automotive
supply chain for most of the automotive companies is that
every chain is mainly tied to forecasts. The vehicle
manufacturers must match supplies with demands from the
first chain, raw material suppliers, to the last chain, car
buyers. The variation or uncertainty of demand due to
forecasting is produced from chain to chain causing bullwhip
effect. The new direction for automotive supply chain is still
based in part, on the forecast and, in part, on the capable and
responsive supply chain with a greater strategic emphasis,
and subsequently, on the logistics operations [3].
II. THE AS-IS PROCESS FOR THE AUTOMOTIVE
INDUSTRY
The current systems of the automotive industry mostly rely
on build-to-forecast and/or build-to-delivery as in the
following diagram.
=Information Flow
=Materials Flow
Purchasing Programming Marketing
Order
Schedule
Sequencing
Plan Plan
Schedule Schedule
National
Sales Co.
Second Tier
Supplier
First Tier
Supplier
Inbound
Logistics
Body/Paint/
Assemble
Outbound
Logistics
Dealer
Inventory
Customer
Figure 1: Build-to-forecast and build-to-delivery [4]
A. Build-to-forecast
- Sales Forecasting aggregates all dealers and national
sales companies’ forecasts and uses them as an input for
production programming. The method is the bottom-up
approach. Typically, aggregate demand forecast are more
precise [5].
- Production programming is the process of
consolidating forecast market demand to available
production capacity to get the framework that defines how
many vehicles will be built in each factory.
- Order entry is the stage in which orders are checked
and entered into an order bank to await production
scheduling.
- Production scheduling and sequencing fit orders from
the order banks into production schedules. These orders are
used to develop the sequence of cars to be built on the
scheduled date.
Automotive Supply Chain and Logistics
Management
N. Suthikarnnarunai
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
- Supplier scheduling is the process whereby suppliers
receive forecasts at various times, actual schedules, and daily
call-offs.
- Inbound logistics are the process of moving
components and parts from supplier to assembly plant
- Vehicle production is the process of welding, painting,
and assembling the vehicle.
- Vehicle distribution is the stage at which the finished
vehicle is shipped to dealers.
In conclusion, build-to-forecast uses the forecasts as input
and to drive production planning and scheduling.
Consequently, the number of vehicles being produced and
delivered to dealers is based on the qualitative method of sale
forecasts. If the forecasts are significantly different from the
actual sales, then there will be many vehicles stockpiled at the
dealers.
B. Build-to-delivery
- Sales Forecasting starts with the national sales
company asking dealers to supply their annual volume
forecast several months before the end of the calendar year.
Then, the national sales company resolves the sales forecasts
into monthly or bimonthly groups from the dealers’ baseline.
Afterwards, the national sales company visits dealers to
establish the discrepancies between actual sales and forecast
sales. The demand forecasts become the basis or input for
production programming. The dealers are responsible for
supplying orders in accordance with their forecast volume up
to 90 days ahead of production. The dealers must also
identify certain features early on, such as model and engine
type. However, they can postpone the decision on external
options such as radio and air conditioning. Consequently,
dealers push products in stock to the final customers by using
discounts and promotion incentives.
- Production programming reconciles the production
capacity and dealership sales requests. The allocation of
resources is another task of production programming. The
program allocates to markets major items such as engines, air
conditioning, and heated windscreens. Moreover, the
program can allocate short supply products to the most
profitable markets. Some markets can absorb higher priced
vehicles, so the volume is pushed to those markets. The
decisions for production programming will be made three
months in advance, and every effort will be made to adhere
to them. At the latest, decisions can be changed one month
before production. Such changes are usually due to
unanticipated constraints, such as market, suppliers, and
work stoppage. The volume and model type, such as sedan or
station wagon, are determined by the manufacturer
approximately three months before production, while
decisions on power train and transmission are made two
months before production. The decisions on color, trim and
option choices are made one month before. This process is
general for the automotive industry, but varies by ordering
time length. As a result, the current production programming
allows only minor changes in the month before actually
building a car.
- Order entry begins when a salesperson enters a
customer order into the system. Then, the order is passed on
from the dealer to the national sales company and
subsequently to the manufacturer’s headquarters. An
allocation check is done at the national sales company to see
if the desired vehicle is available or not for the dealer and that
market. Then, a build-feasibility check, which is the process
of checking whether the special options and specifications
are feasible for the production, follows to determine whether
special options and specifications are available for that
vehicle in the market. If not, the system rejects the order and
the dealer must make the necessary order correction.
Bill-Material-Conversion is the process of converting the
orders received from the dealer to a bill of materials. This
tells the manufacturers what kind of components they need to
build the vehicle. The final stage in order entry is to transfer
the order as a bill of material to the order bank. The order will
stay in the order bank until the system transfers it into the
plant’s production schedule. Dealers can still make some
amendments when the order is in the order bank. Then the
forecast orders will be matched to the actual orders received
from customers and the orders are transferred into a
production schedule. However, if the forecast orders remain
in the pipeline and can not find a customer to match within
time to be altered, the manufacturers tend to build these
vehicles despite the lack of demand.
Figure 2: Steps in order entry [6]
- Production scheduling and sequencing determines the
source of all needed components from suppliers. The
scheduling process fits the orders in the order bank into a
weekly and later into a daily build schedule. Later, a human
scheduler converts it to a production sequence. In addition,
the scheduler tries to assign orders to each plant based on
available production capacity. In addition, the production
scheduling must be created based on the plants’ overall mix
and capacity constraints.
- Supplier scheduling is the process of communicating
the component and material needs to first-tier and
raw-material suppliers. Firstly, a production program driven
by a long term forecast of up to 12 months is sent to the
supplier. Secondly, weekly supplier schedules with 6-10
weeks of planning information are sent to supplier. The
schedules provide only approximate guidelines for the
plant’s planned production. Lastly, the daily vehicle
production schedule or “call-off” which is provided 2-10
days before production starts is sent to suppliers. However,
the call-off is still inaccurate because it does not include the
final assembly sequence, which cannot be determined until
the vehicle exits the painted-body store. Consequently,
suppliers view the information received from manufacturers
as too much variation to use in planning. No one knows what
is required until the actual assembly sequence is set.
Therefore, suppliers generally keep higher buffer stocks, and
locate their facility in proximity to the suppliers to reduce the
component’s delivery time.
- Inbound logistics is the process of moving components
and parts from supplier to manufacturer. The cost of inbound
logistics can be as high as 10 percent of the plant’s
manufacturing costs and thus 1.4 percent of the finished
vehicle cost. Nowadays, suppliers are pushed to send
components in smaller lots with higher delivery frequency.
This typically can creates higher cost per shipment for
suppliers [7].
Order Entered
into System
Allocation
Check
Build Feasibility
Check
Bill-of-materials
Explosion
Order
Bank
Dealer
National Sale
Company
Vehicle Manufacturer
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
- Vehicle distribution or outbound logistics is the process
of transporting vehicles from the assembly plant to the
dealership or final customer with large fleets. The outbound
distribution logistics is always done via train, truck, and ship.
Figure 3 illustrates the main volume routes - from the plant to
market compounds or distribution centers, and then to
dealerships or customers. The routes from assembly plant to
regional distribution center and national compounds account
for approximately 90 %, while the vehicles being directly
transferred to local dealership account for just 1 %.
Customers coming to pick-up the vehicle at the dealership
account for 65%, while distribution centers delivering the
vehicle directly to end users accounts for 25%.
Figure 3: Outbound logistics
(an example from UK market) [8]
III. THE PAIN-POINTS AND PRACTICES
As mentioned earlier, the automotive industry today is
struggling for growth and profitability in a setting that
features both increasing costs and declining profit margins.
There are many problems that need to be resolved, known as
pain-points. The pain-points are weak points in current
practices that have an impact on the AS-IS process and
manufacturing performance, leading to declining
profitability for the whole industry. Hence, the automotive
industry should try to find new practices to make the industry
thrive again.
This section presents the pain-points existing in current
automotive industry practice, followed by suggested reforms
to cope with those pain-points.
A. The inaccuracy of sales forecasts
The inaccuracy of sales forecasts from dealers is one
pain-point that affects the downstream units. Generally,
manufacturers build vehicles based on sales forecasts from
dealers. If actual sales are in accordance with the sale
forecasts, the vehicles produced by manufacturers will be
used up by customers. But if actual sales are below sales
forecasts, dealers will end up stockpiling vehicles that
customers do not want. The inaccuracy of forecasts is a
common problem that exists in every industry. The variation
between actual and forecasts results in the excess or shortage
of inventory of goods.
B. A disconnection between manufacturing and customers
This is another major pain-point for the automotive
industry. Lean manufacturing can create a very efficient
production process with lower inventory levels. However,
because it is not linked to the actual demand from customers,
the dealers end up with the high stock piling in their
warehouses. Manufacturers produce cars that exceed demand
and hence the savings from the efficient manufacturing may
be more than offset by 1) the cost of stock holding and 2)
incentives offered to final customers to move the stock.
C. The self-fulfilling cycle to provide an inaccurate sales
forecast, and the increasing cost of sales from incentives
This pain-point is the result of the first two pain-points.
When dealers have high levels of undesired vehicle stocks,
they try to push those vehicles to customers using discounts
and promotions. These kinds of incentives can distort
original demands because customers may accept and buy
vehicles that they don’t like in order to get incentives. Then,
those distorted demands will be used to make a forecast
which will be inaccurate since it does not capture the real
demand from customers. The cycle is self-fulfilling with
endless problems. Finally, incentives also end up increasing
the cost of sale.
D. The vulunerable and unreliable information or
scheduling from manufacturer to suppliers
Suppliers cannot rely on the scheduling sent to them by the
manufacturer. Schedules rarely match previously received
forecasts, which in turn do not match the final call-offs, the
process by which the assembly plant asks the supplier to
deliver the components to the plant. Even the assembly plant
itself does not know what the sequence of production will be
until the order passes the painted-body store. In just-in-time
methodology, suppliers are given only 8-10 hours before the
final call-off sequence. This can create very high buffer
stocks at suppliers
E. The delay in order entry
Actually, the allocation and checks take only about 2 hours.
But, orders require days before being converted into the lists
of required parts. The national sales company often batches
orders. The average delay from order entry is 3.8 days[2].
F. The delay in order processing and scheduling process
Once the order is in an order bank, it must spend
approximately another 8 days waiting for actual orders to
come to match with it. In addition, the manufacturer must
take into consideration the order priorities as well as factory
and labor constraints to create a feasible production schedule.
The order spends 15.1 days in scheduling and another 6.5
days in sequencing. The total delay for order processing and
scheduling is 30.4 days.
G. The delay from distribution
This is another delay pain-point with average delay about
10 days. According to research in the UK [9], a vehicle waits
0.9 days in the factory before being loaded onto a transporter
and another 3.8 days en route to the dealer. Surprisingly, the
actual movement time for transport is less than 24 hours.
Overall, the time spent on non-value-adding activities in the
distribution process accounts for 9 days.
The suggested solution to cope with pain-points 3.1 to 3.7
is to replace build-to-forecast and build-to-delivery with
build-to-order. Build-to-order uses the real order instead of
sale forecasts to trigger the entire value chain. However,
before implementing build-to-order, an infrastructure must
first be established to support it. The recommendations for
Build-to-order include demand visibility, capacity flexibility,
supplier flexibility, and logistics flexibility.
Assembly
plant
Local Dealer
Regional DC /
Compound
Import/Export
via ports
Dealer Customer
National DC /
Compound
1%
49%
unsold stock
Dealer transfer 15%
65% customer pick-up at dealer,
10% via leasing companies
25% direct delivery to end user
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
Demand visibility is one building block for build-to-order.
Customer’s need must drive the entire value chain.
Therefore, demand visibility must be communicated to all
units in the supply chain. In the current system, order banks
operate in batch mode, and orders wait a day at each batch
operation before being sent to scheduling. For build-to-order,
the actual order must be communicated to each unit in the
chain in real time without any distortion or delay. The
automotive industry can use a direct order booking system to
deal with demand. Available capacity becomes the number of
free slots. Once the dealer assigns a customer a build slot, the
stability of that order in that slot helps avoid information
distortion in supplier schedules. Then, suppliers will know
exactly how many components will be needed in the
assembly plant. In addition, logistics companies plan and
optimize their loads based on the complete date of production
from locked assembly slots. There are two advantages for a
direct booking system. Firstly, the dealer can give the
customer a reliable delivery date at order entry. Secondly,
order banks, scheduling and sequencing will be merged into
one system which reduces the processing time. Because
direct order booking locks in the build sequence once it is set,
demand stays stable and visible to suppliers and logistics
service providers.
Capacity flexibility is another building block for
build-to-order. The plant should have a capability to alter
capacity levels at relatively low costs. The flexibility may be
attained by re-allocating work, and reducing reliance on
massive investments. Another way to manage demand and to
increase responsiveness is to integrate large and small
operations. Small-scale facilities can be used to produce the
lower-demand products with high variants that do not justify
the use of large-scale facilities. For example,
DaimlerChrysler’s East London plant in South Africa
produced all right-hand-drive vehicles for the
Mercedes-Benz C-Class models. Another way to manage
capacity is hour banks that are widely used in European
countries. Workers make contracts with employers to work a
certain amount of time each year. Workers might be asked to
work more hours during high-demand periods and work
fewer hours at other times.
Supplier flexibility is the third building block for
build-to-order. Suppliers must be triggered by real orders,
and the slotting orders. At the same time, suppliers must be
able to provide high responsiveness. Some co-location is
necessary for a successful build-to-order system. A
manufacturer cannot build the car in days if it takes the
supplier a week to manufacture and ship customized
components.
Lastly is logistics flexibility. The logistics system for
build-to-order should be able to transport vehicles in a
smaller lot than the ones in the current system. The larger the
transporter, the longer the time required to fill the order. The
benefits of applying this solution are lower cost of sale
incentives and lower inventory cost for the entire chain. This
is especially true for vehicle stocks at dealerships. Another
major benefit is the increase in customer satisfaction.
Customers can get the types of vehicles that they really want.
On the other side of the coin, the cost of the higher cost
resulting from smaller truckloads will be more than offset by
the benefits of higher satisfaction and shorter cash
conversion cycles.
H. The high inbound and outbound logistics cost
The cost of inbound logistics can be as high as 10 percent
[10][11] of the plant manufacturing costs. This is two fold.
One is because suppliers ship out many parts and
components. The other is because assembly plants always
require smaller lots with much higher delivery frequency.
The distribution cost of vehicles is extremely high at 30 % of
total cost, while the distribution cost of commercial airlines is
lower than 10%. The major cause of high outbound logistics
cost is that there are too many franchised dealers and each
one wants to establish its own individuality. This high cost
comes from the redundancy of jobs and processes done by
many small dealers. The operating cost per vehicle of a small
dealer is relatively higher than that of a large dealer. At the
same time, large dealers can keep significantly lower levels
of stock than many small dealers do to support the same
customer service level.
One solution to counter high inbound logistics costs is to
create a cross dock between suppliers and the vehicle
assembly plant. This is shown in Figure 4.
Figure 4 Cross docking [12]
The cross dock is built on a location close to suppliers.
The Milk-Run Collection truck will be sent from the cross
dock to pick up components from more than one supplier, for
example are suppliers A, B, and C in Figure 4. Upon its
return back to the cross dock, the components will be
consolidated and sent to the vehicle assembly plant in a single
truckload. This strategy enables firms to use trucks more
efficiently. It also allows more frequent deliveries. This
yields decreased logistics costs and allows assembly plants to
maintain supply stocks.
Another solution is to allow franchise dealers to offer more
than one brand to customers - a “car supermarket” concept.
J ob redundancy will be reduced by combining different
franchised dealers together, and customers will have a
centralized place for automotive shopping. The
conglomeration of dealers will enable them to offer a wide
range of products, lower overhead cost structure, reduce
management and stock holding, and increase economies of
scale. Furthermore, incentives costs will be lower because
dealers can supply vehicles that customers really want.
However, dealers should conduct extensive market research
before implementation to determine the optimal number of
brand offerings so that they minimize total costs and
maximize customer satisfaction. As a result, the operating
cost of the dealer industry as a whole will be decreased. In
addition, the service level will be increased with lower costs
and reduced customer purchasing cycle time. The customer
service level is directly related to the probability that no part
will be out-of-stock [7].
Supplier A
Supplier B
Supplier C
Cross Dock
Milk-Run
Collection
Overseas
Suppliers
Vehicle
Assembly
Plant
Consolidated
Delivery
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
I. Product proliferation
This is the last pain-point of the automotive industry. To
counter the low rates of expansion since the 1970s, vehicle
manufacturing has responded by increasing the content of
their vehicle. They have also immensely increased the range
of models available, in the hope of stimulating more buyers,
regardless of the added economic cost. The increasing
number of content and models result in higher production
costs, because of the changeovers [13]. Furthermore, the
greater the variety of contents and parts, the higher the cost of
stocking these items [14].
The recommended practice to cope with product
proliferation is to reduce the internal variety. The internal
variety is the variation in processes and parts to create
products while the external variety is what the customer sees.
Body style, engine, exterior color, and radio type are the most
considered features, while other features and options are less
critical. For example, customers cannot see the difference
between the less than 1,000 variants of the Honda Accord
and the trillions of variants on the Mercedes E-class [15]. In
other words, the downstream value chain is quite important.
However, customers do not recognize the variants between
Honda and Mercedes. Thus it is preferable to deal with
Honda’s 1,000 versus Mercedes 17,424 variations.
BIW (body-in-white) is a welded steel monocoque (shell)
which is the starting point of most vehicles. BIW might vary
based on the engine type or the presence of air conditioning,
sunroof, and other options. The more options offered, the
more varied BIW becomes. According to research, the BIW
variety does not correlate with the number of body styles
offered in the market and has little relation to external variety
overall. Consequently, as buyers focus on external variety,
the automotive industry can reduce the cost of proliferation
by reducing the number of BIW variants. Furthermore,
another benefit from reducing the number of BIW variants is
flexibility. Plants can separate body and paint before
assembling, and use the interim paint-body store to house
bodies that are ready to be customized. Lastly, we can also
increase the number of vehicles and body types per platform
to improve the average production volume per platform.
Another solution to deal with product proliferation is to
create mutable support structure. This means that the
components have been designed to support multiple product
configurations. Mutable structures have standardized and
generic interfaces, but they do not require standardized parts.
The plant can swap one support structure for another that
makes the assembly sequence more predictable and stable.
Decreasing internal variety will lead to a lower production
cost and a lower inventory cost for both suppliers and
assembly plants. Suppliers will be able to keep fewer kinds of
components and raw-materials for final components
production that goes into the vehicle. At the same time,
assembly plants will be able to lower BTW and platform
stock levels to satisfy dealers and customers.
IV. TOYOTA: THE WORLD’S GREATEST
MANUFACTURER
Toyota’s production system has been held as a model for
the industry based on market share and the profitability of
J apanese manufacturers. There are three elements here: lean
manufacturing; the Toyota production system (TSP) and
theory of constraint; and the lean product development of
Toyota.
A. Lean manufacturing
Lean manufacturing is the concept created by Toyota to
make production development and the production system
more efficient and remove waste from the process. It consists
of three building blocks – creating continuous process flow,
the pull system, and leveling out the workload.
The first building block for implementing lean
manufacturing is to create continuous process flow to bring
problems to the surface. Most business processes are 90%
waste, and 10% value-added work [4]. Firms can conduct a
process mapping to find the non-value-adding activities, and
remove them. Shortening the elapsed time from raw materials
to finished goods will lead to the best quality, lower cost, and
shortest delivery time. The lower inventory levels can also
expose problems. The goal of lean environment is to create
one piece flow. The traditional mass production thinking
focuses on grouping similar machines and similarly skilled
people together. The production is done in large batches
which leads to overproduction and inventory sitting idle. On
the other hand, lean manufacturing focuses on optimizing the
flow of material so it can move more quickly through the
factory. Consequently, the batch size will be reduced. In
addition, when a defect occurs manufacturers can solve the
problem immediately because the product is built piece by
piece. In contrast, producing in large batches creates high
number of parts that are work-in-process; if there is a defect
in the product, correction comes far too That is, a batch of
100K parts produced will not be identified until much later in
the supply chain. This means instead of correcting maybe 100
items, the manufacturer will correct 100,000 items.
The second building block for lean manufacturing is the
pull system. Toyota borrowed this concept from super
markets. Once the order is purchased from the shelf, it will
trigger the supermarket to replenish the product. The
inventory replenishment will be done based on the demand,
rather than using a push system. However, since there are
natural breaks in flow from transforming raw materials into
finished products delivered to customers, some inventory is
necessary.
The third building block is leveling out the workload. If
product is built exactly to the quantity ordered, it may be
building huge quantities in one week, which the company
ends up paying for with overtime; employees and all
equipment are over worked. Then if orders are light the
following week, workers will have little to do and the
equipment will be underutilized. Lean manufacturing instead
takes the total volume of orders in a period and levels them
out so that the same amount and mix of products are being
made each day.
B. Toyota production system and theory of constraint
Obviously, Toyota has successfully applied Theory of
Constraint to develop lean manufacturing. Constraint
management is a framework for managing the constraints of a
system in a way that maximizes the system’s accomplishment
of goals or throughput. Throughput is defined as the rate at
which the system generates money through sales. Constraint
is the part of the system that determines the output. The rate
of throughput of the whole system is equal to the rate of the
throughput of the constraint. Once one constraint is removed,
it will be moved to another part of the system, and so on.
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
Formerly, manufacturers produced vehicles based solely on
sales forecasts. If the sale forecast was inaccurate,
manufacturers would produce cars that customers did not
want, and as a result end up with high stock at dealerships.
Manufacturers might have a very high-tech and extremely
efficient production system. Moreover, manufacturers
always produced the vehicles in the same model with very
high volume in order to gain the economy of scale. However,
those efficient productions would lead to very high end
vehicles that no one wanted and hence vehicle manufacturer
would lose profit. The constraint was the lack of linkage
between manufacturing and customer demands that lead to
excessive inventories at dealerships. Toyota knew about this
problem, and had developed the lean manufacturing and the
Toyota product development system to counter such
problems. Toyota had put customers into the first process of
production development by creating customer-defined value,
and using it as a core value to drive other processes. This
ensures that the vehicles Toyota manufactures would be as
close to customer preference as possible. In addition, Toyota
created the standardized product platforms that can be used
with various vehicles’ models so they can produce a large
volume of product platforms to achieve the economy of scale,
while still being able to customize the product in the
assembly process with respect to customer preference.
Another technique created by Toyota to counter this
constraint is transforming the batch processing to continuous
flow. This creates tremendous flexibility for manufacturers
so that they can adjust production in accordance with
demand. This is because manufacturers produce one piece at
a time. Implementing these techniques enabled Toyota to
remove the linkage constraint between manufacturer and
customer demands, maximize the throughput and minimize
inventories and operating expenses that leads to a higher
return on investment.
C. Lean product development of Toyota
The Lean Toyota Production System has been applied not
only to the manufacturing function, but also to the product
development. There are many companies which try to apply
the TPS, but never succeed because they replicate only the
surface parts of the Toyota methodologies. The lean in the
point of view of Toyota is much broader than manufacturing.
It includes customer focus, continuous improvement through
waste reduction, and tight integration with upstream and
downstream processes. Obviously, improvements at the
early stage of product development will have much higher
impact than the improvement in later stages. Consequently,
Toyota has applied and created the lean concepts and
principles for the product development stage.
The first principle is that the right process will yield the
right results. Customer-defined value should be established.
The customer is always the starting point for any process.
Any processes that do not add customer value should be
eliminated.
Front-loading the production development process is also
very important for the lean concept. This concept is about
doing it right the first time to avoid very costly downstream
design changes. Exploration should be conducted in an early
stage with a wide range of potential problems and alternative
solutions.
Creating a leveled product development process flow is
another element for lean product development. Like the
manufacturing process, Toyota views product development
as a process.
There are a number of recurring cycles of activity, and
improvement could be achieved by reducing them. The
workflow is especially erratic. Sometimes, there is more
work than people or machines can handle, while at other
times there is not enough work. The work load should be
evened out to create a smooth process flow.
Another aspect of lean product development is using
rigorous standardization to reduce variation and to create
flexibility and predictable outcomes. The challenge in
production development is to diminish variation while
preserving the creativity that is essential to the creative
process. Toyota creates higher-level system flexibility by
standardizing lower level tasks. Standardization of platforms
allows Toyota to share critical components, subsystems, and
technologies across vehicles platforms. Standardization of
skill sets of engineers gives flexibility in staffing and
program planning, and minimizes task variation.
The next backbone of lean product development is to adapt
technology to fit people and processes. Toyota recognizes
that technology seldom provides a significant competitive
advantage. It is more important to ensure that the technology
fits and enhances already optimized and disciplined
processes, and highly skilled people.
Lastly, integrating people, process, and tools and
technology into a coherent system is a key element of lean
production development. The excellence of each small part in
the system may not lead to system excellence. There must be
an alignment and integration of each element in the system to
provide the optimized outcome.
V. CONCLUSION
As mentioned earlier, the automotive industry is presently
in a period of transition. It is useful to see the picture and the
problems of the automotive industry as a whole. This paper
assembles weak points and suggestions on how to solve
them. These suggestions have been implemented by different
automotive companies and other industries. Many papers
state that the current practice in the automotive industry lies
in between build to forecast and build to delivery, and build
to order. However, none have been completely transferred to
the complete build to order process. Therefore, it is argued
here that the concept of build to order is considered the key
reform of the current automotive industry’s supply chain.
Another important issue in our paper is about lean
manufacturing and Toyota production system. Several
automotive companies and other industries have attempted to
study and implement these concepts, with a high return on
investment. Yet their effort is still considered as the
implementation of only the surface core concepts. Therefore,
this paper argues for introducing the concepts of lean
manufacturing and Toyota production system in product
development as well as manufacturing. Such reforms will
improve the financial health of the industry at large.
ACKNOWLEDGMENT
I would like to express my appreciation to University of the
Thai Chamber of Commerce, Thailand for financially
supporting in this paper presentation. I also would like to
thank Prof. J ohn K. Evans from the University of Minnesota,
Twin City for polishing my English.
Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
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Proceedings of the International MultiConference of Engineers and Computer Scientists 2008 Vol II
IMECS 2008, 19-21 March, 2008, Hong Kong
ISBN: 978-988-17012-1-3 IMECS 2008
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