By Karen Thomas
DHL Exel Supply Chain has forged a deal with luxury car seat manufacturer Recaro to take over modular manufacturing and supply chain management. It’s the development that industry analysts have long predicted. Karen Thomas investigates
To some it is the logical conclusion of market moves towards closer integration between logistics service providers (LSPs) and manufacturers. To others, it is a step too far in an industry where pressure on costs threaten to push the LSP out of its comfort zones to become a ‘jack of all trades’.
Whatever your view, the details of the agreement in principle between DHL Exel, part of Germany’s giant Deutsche Post World Net, and Kircheim-based Recaro are starting to emerge. Recaro is a luxury brand, based on the outskirts of Stuttgart, with an annual turnover of €180m ($283m). It produces 150,000 car seats a year for clients including Lamborghini, Ferrari, Aston Martin, Opel and Ford. DHL already carries out assembly services for several automotive customers, pre-assembling door side panels for the Audi A4 and A6 models. The two companies are currently pitching together to OEMs and Tier One and Tier Two component suppliers, to land their first joint contract.
Many believe that the new partnership heralds a new era in modular production and logistics. The two companies will become more integrated. DHL Exel will handle inbound and outbound logistics, taking over the assembly of seating systems and setting up and managing module centres near major car plants. Together, they aim to cut delivery times, even for large and varied product ranges, delivering significant reduction in costs. Once contracts are in place, the deal could evolve into DHL Exel sourcing additional automotive components and systems through the module centres.
Knowledge transfer
“When Recaro bids for new business in manufacturing and supply chain logistics for luxury car seating, we will come in as a logistics and manufacturing partner,” says Gary Keatings, DHL Exel Supply Chain Director of Solutions Manufacturing and Facilities, Automotive and Industrial Sector, EMEA.
“Recaro wanted to get out of the logistics business. We will receive the material they order, then manufacture and deliver product just-in-time, to order and in sequence, to the OEM. “The partnership is a knowledge transfer. Recaro has engineering and manufacturing knowledge, and will train us in those activities. DHL is the biggest supplier of automotive logistics services. Now, we aim to increase our skills, knowledge and operational credentials to become trusted advisors to new plants, and taking cost out of existing plants.”
The automotive industry’s need to cut costs lies at the heart of the partnership. Senior executives from DHL Exel and Recaro are delivering joint presentations to prospective customers. Ideally, says Recaro’s Managing Director Bernhard Strunk, they will sign their first customer this year, starting production in 2010/2011. “We aim to use our logistics and manufacturing capability to assemble in Eastern Europe, moving material as quickly as possible to the customers’ premises,” says Toni Fondevilla, DHL Exel Supply Chain Business Development Director, Automotive and Industrial, EMEA. “We plan to shift this to Poland, the Czech Republic and Slovakia, to provide cost savings to OEMs in western Europe. We are looking to set up sales operations and assembly in these countries for Tier One suppliers, manufacturers and other automotive companies in western Europe. “There is potential for similar supply lines between North Africa and southern Europe. We could work for Tier One suppliers out of North Africa for things such as wire harness production that are highly labour intensive. And South Africa is also proving to be very dynamic.”
Return and reinvestment
Now, the challenge is to win over customers. Keatings says that talks are underway with several OEMs, including some preparing for launches in 2009/2010. Subject to strict confidentiality agreements, the talks focus on how Recaro and DHL can build their services into existing and new supply chains. “One of the biggest issues in the industry is investment constraint,” Keatings says. “Even profitable companies are reluctant to reinvest in infrastructure and supply chain. We want to maximise our customers’ return on investment – and we approach that in a way that makes return on investment clear to everyone. “We are taking a longer and broader view, going beyond dividing the supply chain into bite-sized chunks, to sub-optimise costs at each point. We map out the whole process, to see how many people touch each separate unit, and use actual demand data rather than forecast data. “Then, the supply chain can be further streamlined by making greater use of shared assets and networks. It has been difficult to persuade competing OEMs to collaborate over supply chain issues. But we see a definite opportunity for companies to collaborate outside their own manufacturing groups.”
New generation
One reservation expressed by several players is that the move towards manufacturing will dilute DHL Exel’s core expertise – trying to be all things to all customers. Keatings is quick to deny this. “What DHL isn’t doing is claiming to be an expert in areas outside its core business,” he says. “Our skill lies in building relationships and having the strong management to create an umbrella of experts to design and equip solution packages. We are creating a new generation of supply chain logistics.” For Recaro, the partnership marks a fundamental change in corporate strategy. “The car seats we produce in Kircheim are distributed across Europe by truck, to Italy, Belgium, the UK and so on for some 15 major customers,” Strunk explains. “That has been possible, because it is a low-volume business. “Now, we want to get into higher volume business and to save money for ourselves and our customers. That means setting up new plants closer to the customer, which is always expensive. Without volume, we had to clarify the question – do we go for distance, as we do now, or do we find another solution?” In 2006, Recaro entered into talks with Exel (prior to its takeover by Deutsche Post). “They had experience with automotive customers and could let us use their facility as a hub,” Strunk continues. “We decided to combine core competencies. “Now, the third party in that arrangement is the customer. OEMs are shortening their lead times and model cycles, moving towards more complex vehicle models. At the same time, they want to diversify their models. But they cannot work with normal suppliers who require high-volume clients. Low volumes are more complex.”
Design and delegation
Known in the automotive industry as an upmarket, luxury brand, Recaro scorns the notion that outsourcing assembly to DHL Exel will jeopardise either quality or brand status. “When it comes to manufacturing seats, the materials make up some 70-80 per cent of the cost,” Strunk says. “The process of assembly makes up 6-8 per cent. It looks complicated because some 150 parts are involved, but using suppliers to source sub-components reduces this to 80-100 pieces to assemble. “Ten years ago, most parts came from German suppliers. Now they come from low-cost countries in Asia and eastern Europe. The weak dollar makes it viable to buy parts in the US. The greatest cost savings come from turning to low labour-cost countries. So DHL can use their logistics systems to collect and deliver just-in-time. “Logistics makes up something like 4-5 per cent of the seats’ final cost. By joining forces with DHL Exel, we can make savings of 20-30 per cent on logistics costs… We do not see any risks in delegating work to DHL. For our core competencies, the most important things are good design and technique, and reliable suppliers. “What counts is our project management skills. We can develop a seat within 18 months. That is our unique selling point – not our ability to assemble the seats. That must be done carefully, it’s true and there are issues of quality of leather and of the finish of the seats, but transferring those skills to DHL Exel will not be a problem.”
Contact with the customer
Recaro will protect its brand identity and customer relations by retaining its position as point of contact with the end customer. If the customer runs into problems they will take it up with Recaro and it will be handled as an internal problem, rather than a problem with DHL Exel. So far, Strunk says, prospective clients have been very encouraging: “We have found that customers are open to our ideas. They know it is not easy to reduce prices without making major changes. But while everyone wants to reduce costs, they also want to achieve that with one-year agreements. “An Italian company asked us to pitch for a contract for 5,000 cars a year, based on Recaro coming to Italy to start a plant there. But the issue there for us was one of critical volume – to set up a new operation from scratch would require a contract for 40-50,000 cars, needing more than 100,000 seats a year.” The deal with DHL, Strunk concludes, will give Recaro the flexibility to enter new markets for contracts of varying size.
Evolving role of the LSP
Over the last decade, OEMs and components suppliers have handed over more and more functions to their LSPs, using outsourcing to drive down costs. The role of the LSP has evolved from a transporter of raw product and finished materials to a more sophisticated receiving and line-feeding role. Playing a greater role in manufacturing and assembly, then, could be the next logical step.
“For LSPs, there’s a good opportunity to take a larger portion of the OEMs’ and the suppliers’ work and provide an interface that will work even better,” says Birgit Seeger, Managing Consultant at German-based PA Consulting Group. “Right now, there are many issues affecting that interface. “Companies such as DHL Exel have an opportunity to offer more than in-sequence transport and to move into automotive companies’ none-core competencies. This will ease costs on salaries, for example, and help with issues such as relations with trade union relations. LSPs are generally smaller companies that can also be more flexible.
“If you compare OEM labour costs of with those of logistics companies, a logistics worker is paid up to three times less than the OEM employee. So then it becomes a question of whether the LSP offers the same quality.
“The really interesting question is how far an LSP can go down this road. If cars are becoming more and more complex, they are also becoming more difficult to assemble, and currently, LSPs do not have knowledge of or experience in manufacturing.”
Module-based manufacturing
Offsetting this growing complexity is the fact that many manufacturers are adopting a module-based approach that moves manufacturing towards simpler, plug-and-play methods, says Mike Tickle, Seeger’s colleague at PA Consulting Group. Seeger believes that cost alone will drive LSPs towards a manufacturing and assembly role – but that the trend will evolve more slowly than many industry commentators initially expected.
“The most important factor in forecasting future demand for this kind of service extension is to look at the carmakers’ workforces,” she says. “They have too many people involved in European production and need to shed jobs. But if they do more outsourcing, the problem is what to do with their own people? That will slow this trend. The other point is the more complex demands being placed on LSPs who do not have the right expertise yet. That raises the question whether there are still cost benefits to be gained.”
And there lies the nub of the debate. With such huge costs attached to automotive assembly, the consequences of supply chain failure are hugely expensive. Little wonder, then, that the major carmakers and components suppliers are taking time to weigh up the benefits and are in no hurry to implement deepseated change.
“It always has been a very sensitive interface between the LSP and the OEM,” says PA Consulting Managing Consultant, Peter Busch. “There is the risk that the OEM will not get the right parts in the right order, and that makes these companies very cautious about placing work outside. “There is a clear trend towards outsourcing going further in future – but the trend will spread more slowly than many expect. The two fundamental questions are, what do the carmakers do with their own people and how close a relationship can they build with their service providers? Only then can outsourcing really start to grow.”
