Its factories supply the world with shoes, sweaters, consumer electronics and toys. Now China is starting to emerge as a major supplier of auto parts. What will this mean for automotive supply chains?
Peter Bradley is an award-winning career journalist with more than three decades of experience in both newspapers and national business magazines. His credentials include seven years as the transportation and supply chain editor at Purchasing Magazine and six years as the chief editor of Logistics Management.
It's big in textiles. It's big in electronics. And China is rapidly becoming a major player in the automotive industry, a development that has enormous implications for automakers around the world. Automotive supply chains and distribution networks will inevitably undergo sizable shifts as China ramps up production of both automotive parts and finished cars—and develops a big appetite of its own for automobiles.
China's production of automotive products has lagged behind its output in other areas. Writing last year in McKinsey & Company's quarterly newsletter on China and India, analysts Marcus Bergmann, Ramesh Mangaleswaran and Glenn A. Mercer reported that OEMs around the world had been reluctant to use Chinese or Indian suppliers, largely because of quality concerns. As recently as 2003, the McKinsey report said, China exported just $4 billion worth of auto parts, and most of those were low-quality aftermarket items.
That is changing, albeit slowly. Driven in large part by the growth of their own car markets, Chinese and Indian parts suppliers have improved the quality of their goods (and the efficiency of their operations). Automakers and their top suppliers, which are leaving no stone unturned in their search for cost-cutting opportunities, have taken note. Mercer and Stefan Knupfer, a McKinsey director, wrote in a McKinsey newsletter in September that U.S. imports of Chinese parts alone now total about $4 billion a year—a figure growing by about 25 percent annually. That's still a small piece of the action. The U.S. automotive supply industry produces about $250 billion in parts each year, according to McKinsey.
The shift to Chinese or Indian sources may be slow, but the McKinsey analysts believe it could have a huge effect on automakers' costs. "The cost savings may be enormous: carmakers could cut their parts bills by up to 25 percent," they wrote last year. "A company that manufactures about five million vehicles a year could theoretically lighten the tab by more than $10 billion annually."
But even as they issued those heady savings projections, the consultants cautioned that shifting to overseas suppliers carries some risks. For one thing, the savings could be largely offset by high shipping costs. For another, there are the potential delays caused by an immature (although fastdeveloping) logistics infrastructure in China and by constraints on the U.S. transportation infrastructure's ability to handle the surging tide of imports.
Staying the course
One company that's keeping a close eye on developments in China is Vector SCM, the lead logistics provider for General Motors. Vector SCM, a five-year-old joint venture between GM and CNF Inc. (and part of CNF's Menlo Worldwide third-party services division), manages GM's logistics supply chain in North America, overseeing the flow of production materials and finished goods. The company also jointly manages supply chain operations with GM in Latin America, Europe and the Asia-Pacific, where Vector SCM is firmly established. The company's Asian operating divisions include Vector SCM Asia-Pacific, which is based in Singapore, and Vector SCM China, which is based in Shanghai.
Greg Humes is president and CEO of Vector SCM, based at its Novi, Mich., headquarters. "There is a great focus on China," he acknowledges, but he warns that the rush to source low-cost parts from overseas raises some problems of its own. "One is infrastructure capacity," he says, "not only international capacity, but import and export capacity as the supply base footprint [shifts more to] China ..." Humes is particularly concerned about the implications for ocean freight."Have we got the ocean capability and capacity?" he asks. "Are [the carriers] able to keep up with the [fast-paced growth]?"
A second worry—one that bedevils importers regardless of industry—is U.S. port capacity, both at the docks and at landside operations. It's an open question right now, says Humes, whether the ports will be able to handle shipments on a timely basis. Faced with the prospect of congestionrelated shipping delays, Humes and other supply chain executives say their challenge is to find alternatives to some of those bottlenecks. That won't be easy. Despite their size, automotive giants like GM and Ford have less leverage with ocean carriers than you might expect. The automakers ship a relatively small volume by ocean compared to, say, the big retailers.
Even so, Humes reports that this year, his company hasn't experienced any major problems in the flow of goods from the Asia-Pacific into North America. But that doesn't mean he isn't worried about the future. "What becomes more of an issue is staying up for the future, the protection of supply," he says. "We're constantly monitoring things." Right now, he reports, Vector SCM monitors the flow of goods at 19 checkpoints for any hint of supply disruption.
Despite the uncertainties, Humes' faith in outsourcing remains unshaken. He insists that GM and Vector SCM have no intention of abandoning offshore sourcing and stockpiling inventories closer to home. "Our strategy is to watch those critical milestone points to maintain lead times," he says. "GM is not planning on building up huge inventories in its plants or warehouses."
Ford retools its supplier base
In what may or may not turn out to be a better idea, Ford Motor Co. last month announced a major shift in its sourcing strategy. The automaker plans to sharply reduce the number of suppliers it uses for key commodities and to develop long-term strategic partnerships with those that make the cut. Over time, Ford said, it expects to cut the ranks of suppliers, which now number about 200, in half.
Thomas K. Brown, Ford's senior vice president of global purchasing, refused to say how much the company expects to save, noting only that the amount would be substantial. Brown was also reluctant to point to a model for the strategy, which bears some resemblance to Japanese automakers' purchasing practices. "We have not explicitly said that we want to do what someone else is doing. We said the problem with our business model is that it was not working effectively for [suppliers], and was not working effectively for us," he said during a press conference following the announcement.
Though the announcement undoubtedly left many of Ford's suppliers feeling a bit unsettled, at least a few can heave a sigh of relief. The automaker has already announced the first group of suppliers selected for the program, which it has dubbed the Aligned Business Framework. They are Autoliv, Delphi, Johnson Controls, Lear, Magna, Visteon and Yazaki.
Ford says the agreements that it will forge with its suppliers spell out business practices designed to increase future collaboration, including phased-in up-front payment of engineering and development costs. It will also ask suppliers to commit to developing technological innovations that will benefit both parties.
The new program also calls for earlier supplier involvement in the product development process. Ford hopes that involving suppliers earlier in the process will help the automaker compress its time to market, Brown explained. "Our expectation is that our suppliers will offer us better technology sooner and faster."
E-commerce activity remains robust, but a growing number of consumers are reintegrating physical stores into their shopping journeys in 2024, emphasizing the need for retailers to focus on omnichannel business strategies. That’s according to an e-commerce study from Ryder System, Inc., released this week.
Ryder surveyed more than 1,300 consumers for its 2024 E-Commerce Consumer Study and found that 61% of consumers shop in-store “because they enjoy the experience,” a 21% increase compared to results from Ryder’s 2023 survey on the same subject. The current survey also found that 35% shop in-store because they don’t want to wait for online orders in the mail (up 4% from last year), and 15% say they shop in-store to avoid package theft (up 8% from last year).
“Retail and e-commerce continue to evolve,” Jeff Wolpov, Ryder’s senior vice president of e-commerce, said in a statement announcing the survey’s findings. “The emergence of e-commerce and growth of omnichannel fulfillment, particularly over the past four years, has altered consumer expectations and behavior dramatically and will continue to do so as time and technology allow.
“This latest study demonstrates that, while consumers maintain a robust
appetite for e-commerce, they are simultaneously embracing in-person shopping, presenting an impetus for merchants to refine their omnichannel strategies.”
Other findings include:
• Apparel and cosmetics shoppers show growing attraction to buying in-store. When purchasing apparel and cosmetics, shoppers are more inclined to make purchases in a physical location than they were last year, according to Ryder. Forty-one percent of shoppers who buy cosmetics said they prefer to do so either in a brand’s physical retail location or a department/convenience store (+9%). As for apparel shoppers, 54% said they prefer to buy clothing in those same brick-and-mortar locations (+9%).
• More customers prefer returning online purchases in physical stores. Fifty-five percent of shoppers (+15%) now say they would rather return online purchases in-store–the first time since early 2020 the preference to Buy Online Return In-Store (BORIS) has outweighed returning via mail, according to the survey. Forty percent of shoppers said they often make additional purchases when picking up or returning online purchases in-store (+2%).
• Consumers are extremely reliant on mobile devices when shopping in-store. This year’s survey reveals that 77% of consumers search for items on their mobile devices while in a store, Ryder said. Sixty-nine percent said they compare prices with items in nearby stores, 58% check availability at other stores, 31% want to learn more about a product, and 17% want to see other items frequently purchased with a product they’re considering.
Ryder said the findings also underscore the importance of investing in technology solutions that allow companies to provide customers with flexible purchasing options.
“Omnichannel strength is not a fad; it is a strategic necessity for e-commerce and retail businesses to stay competitive and achieve sustainable success in 2024 and beyond,” Wolpov also said. “The findings from this year’s study underscore what we know our customers are experiencing, which is the positive impact of integrating supply chain technology solutions across their sales channels, enabling them to provide their customers with flexible, convenient options to personalize their experience and heighten customer satisfaction.”
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
As the hours tick down toward a “seemingly imminent” strike by East Coast and Gulf Coast dockworkers, experts are warning that the impacts of that move would mushroom well-beyond the actual strike locations, causing prevalent shipping delays, container ship congestion, port congestion on West coast ports, and stranded freight.
However, a strike now seems “nearly unavoidable,” as no bargaining sessions are scheduled prior to the September 30 contract expiration between the International Longshoremen’s Association (ILA) and the U.S. Maritime Alliance (USMX) in their negotiations over wages and automation, according to the transportation law firm Scopelitis, Garvin, Light, Hanson & Feary.
The facilities affected would include some 45,000 port workers at 36 locations, including high-volume U.S. ports from Boston, New York / New Jersey, and Norfolk, to Savannah and Charleston, and down to New Orleans and Houston. With such widespread geography, a strike would likely lead to congestion from diverted traffic, as well as knock-on effects include the potential risk of increased freight rates and costly charges such as demurrage, detention, per diem, and dwell time fees on containers that may be slowed due to the congestion, according to an analysis by another transportation and logistics sector law firm, Benesch.
The weight of those combined blows means that many companies are already planning ways to minimize damage and recover quickly from the event. According to Scopelitis’ advice, mitigation measures could include: preparing for congestion on West coast ports, taking advantage of intermodal ground transportation where possible, looking for alternatives including air transport when necessary for urgent delivery, delaying shipping from East and Gulf coast ports until after the strike, and budgeting for increased freight and container fees.
Additional advice on softening the blow of a potential coastwide strike came from John Donigian, senior director of supply chain strategy at Moody’s. In a statement, he named six supply chain strategies for companies to consider: expedite certain shipments, reallocate existing inventory strategically, lock in alternative capacity with trucking and rail providers , communicate transparently with stakeholders to set realistic expectations for delivery timelines, shift sourcing to regional suppliers if possible, and utilize drop shipping to maintain sales.
National nonprofit Wreaths Across America (WAA) kicked off its 2024 season this week with a call for volunteers. The group, which honors U.S. military veterans through a range of civic outreach programs, is seeking trucking companies and professional drivers to help deliver wreaths to cemeteries across the country for its annual wreath-laying ceremony, December 14.
“Wreaths Across America relies on the transportation industry to move the mission. The Honor Fleet, composed of dedicated carriers, professional drivers, and other transportation partners, guarantees the delivery of millions of sponsored veterans’ wreaths to their destination each year,” Courtney George, WAA’s director of trucking and industry relations, said in a statement Tuesday. “Transportation partners benefit from driver retention and recruitment, employee engagement, positive brand exposure, and the opportunity to give back to their community’s veterans and military families.”
WAA delivers wreaths to more than 4,500 locations nationwide, and as of this week had added more than 20 loads to be delivered this season. The wreaths are donated by sponsors from across the country, delivered by truckers, and laid at the graves of veterans by WAA volunteers.
Wreaths Across America
Transportation companies interested in joining the Honor Fleet can visit the WAA website to find an open lane or contact the WAA transportation team at trucking@wreathsacrossamerica.org for more information.
Krish Nathan is the Americas CEO for SDI Element Logic, a provider of turnkey automation solutions and sortation systems. Nathan joined SDI Industries in 2000 and honed his project management and engineering expertise in developing and delivering complex material handling solutions. In 2014, he was appointed CEO, and in 2022, he led the search for a strategic partner that could expand SDI’s capabilities. This culminated in the acquisition of SDI by Element Logic, with SDI becoming the Americas branch of the company.
A native of the U.K., Nathan received his bachelor’s degree in manufacturing engineering from Coventry University and has studied executive leadership at Cranfield University.
Q: How would you describe the current state of the supply chain industry?
A: We see the supply chain industry as very dynamic and exciting, both from a growth perspective and from an innovation perspective. The pandemic hangover is still impacting decisions to nearshore, and that has resulted in a spike in business for us in both the USA and Mexico. Adding new technology to our portfolio has been a significant contributor to our continued expansion.
Q: Distributors were making huge tech investments during the pandemic simply to keep up with soaring consumer demand. How have things changed since then?
A: The consumer demand for e-commerce certainly appears to have cooled since the pandemic high, but our clients continue to see steady growth. Growth, combined with low unemployment and high labor costs, continues to make automation a good investment for many companies.
Q: Robotics are still in high demand for material handling applications. What are some of the benefits of these systems?
A: As an organization, we are investing heavily in software that will allow Element Logic to offer solutions for robotic picking that are hardware-agnostic. We have had success deploying unit picking for order fulfillment solutions and unit placing of items onto tray-based sorters.
From a benefit point of view, we’ve seen the consistency of a given operation improve. For example, the placement accuracy of a product onto a tray is far higher from a robotic arm than from a person. In order fulfillment applications, two of the biggest benefits are reliability and hours of operation. The robots don't call in sick, and they are happy to work 22 hours a day!
Q: SDI Element Logic offers a wide range of automated solutions, including automated storage and sortation equipment. What criteria should distributors use to determine what type of system is right for them?
A: There are a significant number of factors to consider when thinking about automation. In my experience, automation pays for itself in three key ways: It saves space, it increases the efficiency of labor, and it improves accuracy. So evaluating which of these will be [most] beneficial and quantifying the associated savings will lead to a “right sized” investment in technology.
Another important factor to consider is product mix. With a small SKU (stock-keeping unit) base, often automation doesn’t make sense. And with a huge SKU base, there will be products that don’t lend themselves to automation.
With any significant investment, you need to partner with an organization that has deep experience with the technologies that are being considered and … in-depth knowledge of the process that is being automated.
Q: How can a goods-to-person system reduce the amount of labor needed to fill orders?
A: In most order picking operations, there is a considerable amount of walking between pick faces to find the SKUs associated with a given order or set of orders. Goods-to-person eliminates the walking and allows the operator to just pick. I have seen studies that [show] that 75% of the time [required] to assemble an order in a manual picking environment is walking or “non-picking” time. So eliminating walking will reduce the amount of labor needed.
The goods-to-person approach also fits perfectly with robotic picking, so even the actual picking aspect of order assembly can be automated in some instances. For these reasons, [automation offers] a significant opportunity to reduce the labor needed to fulfill a customer order.
Q: If you could pick one thing a company should do to improve its distribution center operations, what would it be?
A: Evaluate. Evaluate the opportunities for improving by considering automation. In my experience, the challenge most companies have is recognizing that automation is an alternative. The barrier to entry is far lower than most people think!