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Low cost and low stock – balancing the equation

30 May 2008

While the automotive industry has made great strides in securing lower-cost production of components in certain countries, doubts about the robustness of the new supply chains are resulting in the industry not realising the full potential savings. It is for this reason that many OEMs and tier ones need to trust in the services offered by emergency logistics specialists, in the same way they do with the traditional manufacturing base, and tip the scales firmly in favour of the 'low-cost' option. With many OEMs turning to suppliers based in countries with more competitive labour rates, the potential for cost savings is huge. However, as witnessed by Evolution Time Critical, many of these savings are being effectively cancelled out by the contingencies put in place to counter potential supply problems. New research shows that many car makers and suppliers, concerned by the increased fragility of extended supply chains, have been building in additional stock; increasing production buffers and extending delivery windows. These changes have had a significant impact on the savings achieved though lower production costs. Reliability of these supply chains has so far been excellent, but sometimes at a price. "The automotive industry is naturally risk averse and this shows very clearly in its strategy to manage supply chains from lower-cost regions," explains Brad Brennan, managing director of Evolution Time Critical, the company that conducted the research. "The true benefits of manufacturing in these regions will only be felt when supply-chains can be leaned to world-class levels. "The main problem is that many companies perceive that physical contingencies – such as emergency stock or increased production buffers – are the only way to address any potential issues that affect lean operations. In actual fact, this is far from the truth. Many leading manufacturers and suppliers are yet to realise the benefits that agile emergency logistics providers can offer – not just for one-off emergency deliveries, but also in helping them to smooth out the peaks and troughs in some long distance logistics chains. Indeed, the service we provide can, in many cases, capably handle these 'what if' scenarios in a far more cost-effective manner. "There will always be an increased level of inventory, in line with the additional time that material spends in the logistics pipeline, especially as the supplier base moves further away. However we are talking here about 'safety buffer stock', which can be trimmed as confidence improves – thanks to stability and the knowledge that emergency logistics firms are always on hand." Indeed, emergency logistics are becoming part of the norm in production scheduling in the automotive industry, with both suppliers and OEMs specifying a preferred partner at the front end of any schedule development. Emergency logistics companies give suppliers and OEMs the peace of mind to be able maintain lean production practices without emergency stock being kept at the point of manufacture. Instead, any troughs in the supply route are simply ironed out, thanks to the actions of the emergency logistics specialists. The one-off costs of this type of remedial action are far lower than those associated with increased stock holdings and potential punitive actions from the OEMs, meaning that many OEMs can still reap the benefits of lower cost production.





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