Automotive Logistics October 2012: The Mexican Auto Parts Rush

Based on an Interview with Entrada Group’s Doug Donahue

Mexico is resurgent as a manufacturing and export base for the automotive industry. While the country has suffered from violence and security issues relating to drug crime in recent years, the automotive market has been growing steadily, the peso has remained stable to the dollar, and the climate for doing business has been seen to improve. The evidence for this is clear in the recent spate of plant investment in the country, with Mexico set to add around 1.5m additional units to production by 2016, which means it could see more vehicle assembly growth than the US in the coming years.

Mexico’s central region looks set to become even more of a stronghold for automotive production. Known as El Bajio, it includes the states of San Luis Potosi, Queretaro, Aguascalientes and Guanajuato. Honda and Mazda are locating their new plants in Guanajuato and Nissan in Aguascalientes (where it already has a factory). Audi is building a new plant in the east-central state of Puebla, which is also the location of its group partner, Volkswagen. The VW Group is also building a new engine plant in Silao, Guanajuato, which will supply North American production.

To meet this demand, Mexican based manufacturers are lookingto develop a leaner and more sophisticated network for their inbound logistics, including more intermodal and rail logistics within the country. Strong growth and OEM localisation are heightening demands on Mexico’s logistics infrastructure.

As production volumes grow, there has been a greater need to expedite shipments to production facilities on a more frequent basis. A solution has been the expansion of intermodal transport designed to serve inbound destinations in a reliable and costeffective manner, although rail alone has yet to prove its speed and reliability for transporting shipments within Mexico. Another challenge is the need for access to secure highway infrastructure, since most inbound movements still move by road.

Ford’s load factor improvements
One carmaker that is taking a leaner approach to inbound logistics is Ford Motor Company. Ford’s vehicle assembly plants are located in Hermosillo (in the northwest) and Cuautitlan (near Mexico City) and its engine plant is in Chihuahua, in northern Mexico. Ford uses its crossdock facility in San Luis Potosi, at which it has recently increased its flow of ocean freight thanks to growing production volumes, says Roger Huff, material planning and logistics manager for North America. Ford works with several third-party logistics providers for various functions, including Penske, DHL, UTi, and Seglo, which provides in-plant logistics services for its vehicle plants. It also contracts with 17 dedicated carriers for inbound logistics, which use ocean, truck, milkruns, and rail intermodal just-in-time delivery.

Huff explains that Ford is aiming to increase its load factor to exceed 95%, as well as to increase its intermodal volume, develop dedicated loops, return its racks and dunnage and reduce inventory. Ford’s fastest growing services for inbound logistics include ocean imports, thanks to the growth of its global platforms in Mexico. The use of its San Luis Potosi crossdock for overseas material resulted in a freight cost reduction of $660,000 and a transit time reduction of seven to ten days.

“Ford made these improvements because we did not need to use a Michigan facility to receive material from international sources in the US and then transport it to Mexico,” Huff says. “We receive internationally sourced material in San Louis Potosi and send it directly to our Mexican plants.”

For Ford, highway infrastructure and safety are also challenges, as is the need for 24-hour customs operations at its border crossings where they are not currently present. Huff says that Ford is trying to do more co-loading with its suppliers and possibly other vehicle manufacturers. He foresees cost-saving opportunities from higher load factors on consolidated routes and from the conversion of more consolidated routes to direct routes.

Intermodal investment
Another of Ford’s growth areas is intra-Mexico intermodal transport, but it faces challenges from the lack of infrastructure and chassis equipment for such flows. However, along with partners such as rail carrier Ferromex, Ford has invested in intermodal infrastructure at its Hermosillo and Chihuahua plants, which has allowed the OEM to increase its intra-Mexico intermodal volume between suppliers in Mexico, KCSM and Ferromex. “UPDS manages shipments that cross the border by truck from Laredo or El Paso as well as shipments that cross by rail to interior rail terminals in Monterrey, San Luis Potosi, Toluca, and Mexico City,” she says.

UPDS has seen higher demand throughout Mexico. “Our intermodal products are growing – particularly our transborder service in which we ship to a rail destination in Mexico. Demand for this service is increasing due to a tightening of truck capacity and the security benefits,” says Betsworth.

UPDS also offers a service that uses rail to the US-Mexico border and truck to Mexico. Its intra-Mexico service ships to and from a rail terminal within Mexico. Betsworth says that improved visibility is an important way to address inbound logistics challenges in Mexico. “By the years’ end, we will have a new version of our online ShipmentVision system which will provide visibility to the entire shipment cycle. Instead of verbal exchanges based on data pushed to the customer, the customer will be able to pull their necessary data in real-time,” she says.

GM’s intercontinental material network
General Motors has been adapting its logistics networks to accommodate growth in ocean freight. The OEM operates plants in Ramos Arizpe, San Luis Potosi, Silao and Toluca. Approximately 20% of its inbound material comes from overseas. “The biggest change to our network within the past year has been the growth of intercontinental material for our Mexico plants, which is being driven by global platforms for those vehicles. This has led to an increase in ocean freight, port handling, intermodal, truck delivery and premium air freight,” says Jeffrey Morrison, GM’s director of materials, logistics, and containers. He says that GM is focused on reducing transport costs and inventory for Mexican production.

Martha Lorenzini, GM Mexico’s logistics supervisor, says that its annual inbound ocean freight has increased by 50% since 2010 to approximately 28,000 TEUs. GM’s main ports are Altamira, Lázaro Cardenas and Manzanillo. “Within the past six months, we moved most of our containers from the ports to Ramos, Silao and San Luis Potosi by rail instead of road, which generated $2m in savings,” says Lorenzini.

Besides ocean imports, approximately 80% of GM’s material flow from the US and Canada to Mexico is intermodal. But the carmaker struggles with insufficient infrastructure. “Logistics service providers, especially rail carriers, will need to increase capacity in order to meet higher demand levels,” says Morrison. “Truck capacity is also a challenge. Since we cannot influence fuel costs, we seek to optimise our fuel usage by focusing on mode optimisation and cube utilisation. We also see an opportunity to increase our freight consolidation services in Mexico, which would enable us to consolidate closer to the origin locations than we do today.”

Furthermore, security and safety is a top focus for GM. “As a means of achieving this, we are leveraging the experience of our logistics suppliers and our interaction with federal or state governments in order to promote the right infrastructure,” says Morrison.

Visteon at the border

Tier one supplier Visteon Corporation operates three climate plants in Juarez, located on the Texas border, and two electronics plants in Chihuahua. Its 3PL provider, Ryder
System, manages Visteon’s southbound supply chain, which runs through the supplier’s distribution centre in El Paso, Texas. This facility handles all crossdocking, inventory storage,
loading and customs paperwork for more than 700 shipments per month, according to Patrick Bauer, global director, material planning and logistics, indirect purchasing and MDS (Master Data Services) at Visteon.

“About 70% of our southbound freight originates from outside of North America. Most of this freight moves as either FCL or LCL [full container load or less-than-container load] through our freight forwarder Ceva Logistics. About 30% of our inbound freight in Mexico is domestic, which we primarily consolidate to our distribution centre through ProTrans International,” says Bauer.

Whereas the above systems account for 90% of Visteon’s inbound freight costs, direct truckload, LTL, and parcel equal about 10%.

Visteon is in the process of shrinking its El Paso distribution centre, which will save on leasing costs and on common area maintenance costs. “Since 2011, we have reduced our transportation spend for our Mexican plants by 12% and we plan to reduce our annual El Paso distribution costs for both southbound and northbound freight by 20% beginning this year,” reports Bauer.

Bauer says that an important part of Visteon’s competitiveness in Mexico relies on international trade and customs programmes that minimise delays. Bauer points to several initiatives, including AES Option 4, Nuevo Escquema de Empresas Certificadas (NEEC), and C-TPAT that have enabled Visteon to use expedited border-crossing programmes. “We are watching the US government’s position on limiting ‘Option 4’ export processing, which currently enables us to file our commodity data up to ten days after the export date. Removing the programme or diminishing its benefits could have a detrimental impact on how we operate at the US-Mexico border,” reveals Bauer.

Besides changing border-crossing initiatives, Bauer has been disappointed by how few US-based trucking companies have been willing to transport freight into Mexico. Another challenge is that the intra-Mexico logistics network consists primarily of LTL and truckloads, which can be inefficient. Bauer says that the locations of Visteon’s suppliers in Mexico are spread out and do not lend themselves well to the use of milkruns.

“Recently, we have seen a growing push by other tier one suppliers for a consolidated network through which tier ones can share the same network of Mexican suppliers to our plants and potentially to our customers. This will enable lower transportation costs and higher shipping frequencies and would cause minimal impact on transportation times,” states Bauer.

Consolidating networks
One company that enables tier suppliers to improve their logistics efficiency in Mexico is the Entrada Group, a shared services provider based in Zacatecas, Mexico that helps smaller tier ones and tier twos improve their viability in the Mexican supply chain. “Traditionally, these types of tier suppliers ship smaller quantities that need consolidation, which takes place at crossdocks at the US-Mexico border, according to Doug Donahue, vice-president of business development. He says that their logistics networks can be more complex than those of large tier ones and OEMs. “Transactional costs of moving goods across the border are based on the transaction and not the shipment size, which places a heavier burden on smaller shippers,” he explains.

The Entrada Group offers logistics expertise through economies of scale. “We help these companies reduce their freight costs and transactional costs by bringing suppliers into our manufacturing park. We can then negotiate rates as a group, which reduces costs.” For example, Entrada would buy a 40ft trailer and each client would use a portion of it. It would then ship the trailer to Entrada’s crossdock at the border at Laredo, consolidate it, and bring it across in one transaction. It also has a department that focuses on meeting Mexican compliance issues. Donahue says that Entrada has reduced transaction costs by 20% for its tier supplier customers between 2011 and 2012.

Read more of this article here: Automotive Logistics October 2012

 

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