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Evolving Third-Party Logistics in the Auto Industry

Automotive Site Guide 2007
The field of logistics was at one time only used in context with the military. It is said the term was first defined as the military's need to supply itself as soldiers and equipment moved from their base to a forward position. Logistics involved the movement of troops, food, equipment, and machinery to and from a battle zone to provide the necessary supplies to compete efficiently in war activities. Even today, troops rely on having the correct and sufficient supplies - logistics plays a life-and-death role in their survival.

Over the years, logistics has become a household word used in nearly every industry and for personal as well as corporate functions. Logistics is the art and science of the integration of information, transportation, inventory, warehousing, material handling, and packaging. In simple terms, it is getting materials to the right places in a timely fashion - getting supply to where there is demand with an optimization of resources at a minimum of cost. Logistics has transformed our culture and placed incredible power with those who do it well and for those who have a vision for continued success.

In the automotive industry these days, many companies are looking at strategic advantages in logistics to reduce costs. For some, it is a near life-or-death proposition for their survival. The battle zone for these companies is in reducing inventory and supply chain costs at each transaction and for their customers in the field, on the ground and in the trenches. We are not patient people willing to wait for supplies - it's a struggle each day.

Today a broad group of activities are available to automotive manufacturers that represent logistics services such as inbound material flow management, inventory control, kitting, container management, packaging, reverse logistics, cross-docking, just-in-time delivery, warehousing, and transportation. All of these activities can be performed in-house or outsourced to third-party logistics providers (3PLs).

Logistics outsourcing has grown in size and scope over the past 20 years. This has occurred largely because manufacturers across many industry sectors - including automotive - have found it more cost-effective to have third-party experts handle supply chain matters while they focus on competencies more central to their core business. Through the passage of time, many people have forgotten that the roots to logistics outsourcing were actually born within the auto industry.

The Evolution Begins
In the 1970s, the U.S. auto industry was hurting. A domestic gas crisis forced people to re-evaluate the kind of cars they bought. Quality and value concerns grew as inflation took its toll on the pocketbook of the American family. Labor and benefits costs were increasing at near double-digit levels. The public was challenged to find the best value in their purchases.

The traditional process of "build it and they will come" within the domestic car companies suddenly did not work as a business strategy. There was an entire group of people on each coast challenging the norm and looking for vehicles that represented their smaller spaces for parking and need for higher gas mileage - driving was the only way to get around in California. At the same time, the domestic firms saw a challenge as the once stereotyped, poorly-made, rusting Japanese cars were substituted with smaller vehicles achieving greater fuel economy.

For the domestic car companies, the way to be competitive and react to the changes of the '70s was to reduce the cost of vehicles. Companies began to improve productivity and eliminate waste, such as the cost of inventory. With inflation at record highs, inventory became quickly noticed on financial statements. "Every part, every day" mantras grew as logistics professionals were challenged to reduce stock and deliver it live to their docks, "just in time." New "milkrun" pickup methods were used by carriers to increase frequency, reliability, and service. Having smaller quantities ordered enabled quicker-to-market engineering changes to correct quality problems. And no longer were there boxcars of materials waiting on demand. The lower inventory costs were used to justify and offset costs for a near-expedite method of receiving materials. The elimination of the monopoly of various carriers using tariff arrangements added competition to logistics, helping the nation reduce inflation. And carriers were free to bid against each other for cost and service.

The 1980s also brought about more outsourcing of non-core functions. Just-in-time operations for feeding raw materials to automobile manufacturing plants began taking hold. And a number of 3PLs that specialized in these services started to populate the landscape.

Auto manufacturers began forming partner relationships with 3PLs as the '80s turned into the 1990s. As they began to re-engineer and redefine their business processes, they realized their logistics deserved closer attention. The "simple" management of incoming and outgoing goods accounts for about 10 percent of the total cost of many products. More often than not, the level of throughput (bulk of products moving from the warehouse to the destination) of an individual manufacturer is not sufficiently high to achieve economies of scale, and thus affects product margins.

Automobile manufacturers that outsource their logistics services today have fared even better - generally managing to reduce their operational costs by more than 20 percent. The 3PL manages the storage, distribution, and inventory level, sometimes integrating procurement, processing, warehousing, marketing, and distribution with finance.

So why, specifically, did these relationships begin to grow and flourish? How did third-party logistics become such a staple within the automotive industry?

Cost Reductions
As with most everything in business, cost is the primary driving factor for changing a logistics strategy. Labor and physical assets are the most obvious ingredients to these costs. In the auto manufacturing business, they're huge, and the need to lower these costs became evident in the '80s.

But there are other product handling costs that go beyond real estate and people. These include information technology, security, maintenance, utilities, taxes, government compliance, licensing fees, and legal fees, among others. Once these costs are fully considered, the dollar-for-dollar comparison between logistics handled in-house and logistics outsourced to a 3PL often creates a large gap.

In the '80s and '90s, automotive companies reviewed their total distribution costs and discovered that experienced 3PLs can often perform at equal or lower cost because managing logistics is their core business. And because they work within a range of businesses, they can apply the cost saving and productivity measures learned from one client to the operations of others.

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