Fabio Yukio Takeno
Universidade Nove de Julho, Brazil
E-mail: ftakeno82@gmail.com
Wagner Cezar Lucato
Universidade Nove de Julho, Brazil
E-mail: wlucato@uninove.br
Rosangela Maria Vanalle
Universidade Nove de Julho, Brazil
E-mail: rvanalle@uninove.br
Milton Vieira Júnior
Universidade Nove de Julho, Brazil
E-mail: mvieirajr@uninove.br
Submission: 03/06/2015
Revision: 15/06/2015
Accept: 08/07/2015
ABSTRACT
The modern literature shows
that the Just in Time (JIT) utilization in the relationship between client and
its supplier aims at optimizing the flow in the supply chain. Nevertheless,
there are other aspects to be considered for the full utilization of the lean
supply practices. Among those, the proximity tries to improve the liaison
between the client and its provider of materials and components as a possible
response to an increasing competitiveness level. To explore this subject this
work had the objective of evaluating the determinant factors that could
possibly explain the partial relocation of a manufacturing facility to create
proximity conditions with one of its clients. For that purpose, a case study
was developed in which a Brazilian auto parts manufacturing company belonging
to the first tier of the automotive supply chain was considered. Because of
such study, it was possible to conclude that the strategic advantages resulting
from the proximity overpassed the conventional reasoning of considering
financial gains as a key factor to justify such a decision. In fact, the cost
savings obtained with the plant relocation were not enough to justify the
investment made.
Keywords: JIT, proximity, lean supply, automotive
industry, autoparts manufacturing, lean logistics
1. INTRODUCTION
Despite the utilization of
Just-In-Time (JIT) in the relationship between customer and suppliers to
optimize the supply chain flow, there are some aspects that need to be
considered for a robust utilization of the lean logistics. Opposing what was
presented by Rego and Mesquita (2011) in relation to the inventory management
for the automotive aftermarket, the supply of parts for the automakers requires
higher levels of quality and management. Besides, the life cycle of those
products can be forecast, not requiring higher time buckets and involving very
low risk of production interruption due to obsolescence (PACHECO et al. 2012).
These principles allied to the supplier proximity improve significantly the
relationship with potential customers, as a way to respond to increasing
competitiveness levels resulting from the international trade integration
(AYMARD; BRITO, 2009). In this context, the geographical distances and a better
potential localization define a slim line between the minimum cost of a new
plant and a maximum service level to the customer (BENNET; KLUG, 2009; LEE;
LEE, 2011). This particular point should be analyzed as part of the lean
supply.
In recent years the restructuring of
the automotive supply chain has been widely explored in the literature
(GUARNIERI; HATAKEYAMA, 2010; VANALLE; SALLES, 2011; SALERNO et al. 2001)
aiming at reducing inventory and logistics costs and improving service levels.
Using JIT concepts, customer and suppliers work in a more cooperative manner,
synchronizing the delivery of small lots as a way to minimize the total cost of
the supply chain (OMAR et al. 2012). Those benefits added to a reduced distance
between customer and supplier (GEBENNINI et al. 2009) induce better practices
in the lean logistics.
According to Corrêa and Gianesi
(2012), the inventories can provide independence in each step of the production
process and JIT has the main objective of eliminating wastes in terms of
manufacturing space, in-process inventory and excessive transportation. Hence,
besides reducing costs, JIT contributes to avoid process variations, being not
only a tool that provides materials when they are strictly required, but also
an optimization technique applied to the production planning and control of
products in the customer assembly line (SANTORO; FREIRE, 2008). The inventory
levels with JIT utilization are widely employed in the automakers as a way to
reduce costs because of small lot sizes, small space dedicated to in-process
inventories and reduced reposition cycles, factors that are optimized if
proximity between supplier and customer exists (GUARNIERI; HATAKEYAMA, 2010).
However, it is relevant to mention that even when the JIT approach is used, it
is necessary to recognize that some level of inventory is required to assure
production continuity. An adequate management in this area needs to establish
the right purchasing and production lot sizes through the balance between the
inventory carrying costs and the fixed costs to obtain them (CORRÊA; GIANESI,
2012).
Guarnieri
and Hatakeyama (2010) state that quality and reliability are prerequisites for
the JIT technique, in addition to a good supply chain management aiming at
reducing inventory costs. Despite those advantages, the lean logistics is not
present in a significant number of tier 1 suppliers in the Brazilian automotive
supply chain (MESQUITA; CASTRO, 2008). Corrêa and Gianesi (2012) suggest that
the distance between customer and supplier could be a restriction to a wider
utilization of JIT. Long distances require large transportation lot sizes to
minimize unit transportation costs. As per Lee and Lee (2011), the investment
allocated to a new facility is a crucial factor to be considered in the
construction of a new plant, taking also into consideration the minimum number
of customers to be served and the profitability level of the new facility.
Nevertheless, it is important to
point out that in many instances institutional pressures exerted by the
customer is a key reason for a new supplier facility to be implemented, since
according to Vanalle and Salles( 2011) the supplier location inside or close to
the industrial park where the automaker is operating has become an important
factor in the customer-supplier relationship. Aymard e Brito (2009) confirm
this consideration saying that the customer decision in relation to a given
supplier can be made solely because of proximity. Bennett e Klug (2012)
reinforce the concept proposing that proximity narrows the trust between the
automaker and its suppliers. Tontini e Zanchett (2010) indicate 13 relevant
attributes of the logistic services. Among them, the most important would be
delivery reliability, which is also affected by the supplier localization.
Gebennin et al. (2009) observed another relevant indicator of geographical
distance and logistic efficiency. They
identified the correlation between cost reduction and plant relocation as a
decisive factor for the maintenance of competitiveness.
Based
on this context, this paper aimed at evaluating the details that justify the
construction of a new plant dedicated to the manufacture of auto parts in a new
location, creating proximity conditions with one of its main customers. To
accomplish that a case study was developed considering a national company
belonging to tier 1 of the Brazilian automotive industry. Thus, the central
research question posed by this study was: Which
determinant factors justify the proximity between a customer and one of its
suppliers within the Brazilian automotive supply chain?
2. RESEARCH METHODOLOGY
To reach the proposed objectives of
this paper, this research can be classified as a case study because it
investigated questions relating to “how” and “why” and comprised aspects where
the boundaries between the phenomenon and its context were not clear (YIN,
2009). To support the case study a company located in the city of Sao Paulo,
Brazil, and belonging to the tier 1 of the automotive industry was chosen. This
firm is a traditional manufacturer of windshield wipers supplying this
component to the main automakers located in the country. It currently employs
around 800 employees. It recently implemented a second manufacturing facility
about 300 miles far from its original location, but very near its main
customer, as a way to create proximity. The financial advantages resulting from
this new unity are the central objective of this investigation.
The
criteria used to select this company encompassed the availability of data
(MARKONI; LAKATOS, 2010) and the utilization of purposeful sampling according
to Patton (1990), i.e., selecting a case from which the researcher could
extract relevant and significant information for the subject under
investigation. To collect the data during the case study the documental
research and semi-structured interviews were used as per Marconi and Lakatos
(2010) recommendations. The documental information obtained involved sales
data, orders generated by EDI, inventory levels and logistic costs. They were
acquired through semi-structured interviews performed with production managers,
product manager, financial manager, logistic coordinator, purchasing
coordinator and production planning and control coordinator. To enable a wider
understanding of all aspects associated to the central problem under analysis,
three managers of the automaker customer were also interviewed: production
planning and control, purchasing and production.
3. CASE STUDY
The case study was divided in three parts. Initially the cost savings
resulting from the inventory reduction allowed by the proximity with customer
were evaluated. Then the economies obtained due to the reduced logistic costs
were identified. Finally, the additional operating costs of the new facility
were determined. Details of each step follow:
To analyze the economic
advantages resulting from the inventory reduction obtained by the new and
closer to the customer facility, the researchers initially identified how the
inventory was managed before the new plant was implemented. For that purpose, a
part A with a weekly consumption of 7,500 units was considered. Originally, its
production was totally performed in the city of Sao Paulo, 300 miles far from
the customer plant, at a rate of 3,000 units per day, with deliveries to the
customer every Tuesdays and Thursdays.
It is possible to note that the plant was producing in
one week the consumption required for two weeks or 15,000 parts. The remaining
days of a given month were dedicated to the manufacture of other product models
in the same set of equipment. Furthermore, there was a safety inventory
equivalent to one-day production or 3,000 parts. A typical monthly schedule and
respective inventory levels are shown in Table 1. The part A supplied to the
customer directly from the Sao Paulo plant required an average monthly
inventory of 10,300 parts.
According to Corrêa and
Gianesi (2012), the traditional way to calculate the inventory carrying cost
includes the total storage costs (TSC) which are obtained through the
multiplication of the unit inventory maintenance cost for a given period (mc)
by the average quantity of inventory (iq) in the same time span:
(1)
where TSC is the total storage costs, mc is the unit inventory
maintenance cost and iq is unit inventory maintenance cost.
Table 1: Monthly schedule and
inventory levels before plant relocation – Part A
Source: Researched company.
As part of the evaluation made, it was possible to determine that the unit
inventory maintenance cost (mc) for the chosen part A was $ 3.45 per
unit kept in inventory. As the average monthly inventory was 10,300 parts (see
Table 1), it was possible to calculate the total storage costs (TSC) which
reached $ 35,535 ($ 3.45 x 10,300). As the company under study had an
opportunity cost of 20% per year, that average level of inventory represented a
$ 7,107 per year of carrying costs.
When the new facility, close to the customer, started its comercial
operation, it was possible to implement a significant reduction in inventory
levels. The daily production of part A was reduced to 1,500 units, five days
per week, four weeks per month. Delivery was scheduled to be made twice per day
(morning and evining), confirming what had been stated by Vanalle ans Salles (2011)
indicating that most automakers in Brazil were receiving parts and components
from suppliers several times a day. One-day production (1,500 parts) was now
kept as a safety inventory. This new scheduling and delivery strategy reduced
the monthly average inventory to only 1,500 parts as can be seen in Table 2.
Reproducing the same calculations as above but
considering now the production made in the new facility, the total
storage costs (TSC) was reduced to $ 5,175 ($ 3.45 x 1,500) and the new average
level of inventory represented a $ 1,035 per year of carrying costs, generating
total savings of $ 6,072 per year only for that part.
Table 2: Monthly schedule and inventory levels after plant relocation –
Part A
Source: Researched company.
During the case study, the researchers analyzed
another factor that could justify the implementation of a satellite plant to
create proximity with customer: transportation costs. Table 3 shows the
transportation costs for Part A to move them from the original plant to the
customer located 300 miles far.
Table 3: Transportation costs for Part A
Transportation
costs from original plant to customer – Part A |
||||
Freight
cost - Going ($ / ton) |
Weight /
trip (ton) (racks +
parts) |
$ / Trip |
# of
trips per month |
Total |
$ 198.00 |
4.0 |
$ 792.00 |
8 |
$ 6,336.00 |
Freight
cost - Return ($ / ton) |
Weight /
trip (ton) (racks +
parts) |
$ / Trip |
# of
trips per month |
Total |
$ 162.00 |
1.0 |
$ 162.00 |
8 |
$ 1,296.00 |
Total
transportation cost from the original plant to the customer |
$ 7,632.00 |
Source: Researched company.
As a result of the implementation of the new plant
close to the customer, the transportation costs shown in Table 3 were
eliminated because the parts were made at the new facility. However, in the
supplying agreement it was established that the customer would provide a milk
run service covering 50% of the needed daily deliveries. The manufacturer
should provide the balance. To support that, the supplier made available a
small size truck with a driver and an assistant. The truck monthly costs
(operation + maintenance + depreciation) to deliver only part A averaged $
1,740.00. The driver + assistant salaries plus benefits and social costs
allocated to that part amounted to $ 2,400.00. As can be seen, the new location
generated a total saving of $3,492.00 per month ($ 7,632.00 - $ 1,740.00 - $
2,400.00) or $ 41,904.00 per year only considering part A.
The proximity and the lean logistics
supported by the JIT technique aim at reducing manufacturing costs through
decrease in inventory levels and transportation charges, as could be verified
for part A above. However, it is important to mention that the new facility was
producing five different types of parts, all them for the same customer. Based
on the production schedules defined for each part it was possible to replicate
the same analyses and calculations made for part A for the other four models
produced in the new facility. Total cost savings obtained are reported in Table
4.
Table 4. Annual cost savings resulting from new plant location
Source: Researched company.
It is
interesting to note that the decline in transportation costs is significantly
higher than the savings in terms of inventory reduction, as can be seen in
Figure 1. From the $ 200 thousand annual cost savings, almost 90% came from
shipping. Nevertheless, this reduction was somewhat surpassed by the
administrative costs required to operate the new facility which indicate that
the decision to create proximity with one of its most important customers was
not a direct consequence from the cost reductions achieved.
In
fact, because of the interviews conducted with some supplier executives, the
researchers learned that the decision to relocate part of the manufacturing
facilities was primarily made due to strategic reasons, being the cost savings
an additional (but not fundamental) reason. This fact reinforces what Salerno
et al. (2001) and Vanalle and Salles (2011) stated. Actually, proximity between
supplier and its customer is vital to reinforce relationship, allowing the
supplier to have preference in terms of volumes, product mix and new
developments.
Figure 1: Economies obtained in the new location.
Source: Researched company.
4. CONCLUSIONS
Despite generating more than $ 200
thousand annual cost savings resulting from the plant relocation, the case
considered in this work has suggested that the real motivation of the supplier
to create proximity with one of its most important customers was to straighten
the long-term relationship. The actual objective was to generate strategic
advantages derived from proximity to better position the supplier to augment
its integration and business volumes with its customer. Henceforth, the cost
reductions obtained were just upside potentials used to minimize in the
short-term the impact of the additional costs of the new facility and not the
primal reason to justify the new location.
The study developed herein generates
contributions to both theory and practice. In terms of generation of new
knowledge, this paper shows that the long-term competitive advantages resulting
from the supplier-customer proximity transcend the conventional reasoning of
considering the short-term financial return as the sole viability factor to
sustain the decision to build a new plant close to the customer premises. On
the practitioner’s side, the auto parts company managers can recognize that
fact as an opportunity to create strategic gains coming from a closer and
reinforced relationship with their key clients.
Finally, it is relevant to mention
that this work has some limitations. Firstly, the conclusions established here
cannot be generalized because they are supported by a single case study,
considering a manufacturer of a single type of product in the context of the
Brazilian auto industry. Hence, it is suggested that additional research be
developed expanding the number of auto parts producers, involving different
kinds of products and/or components in different countries. Only then, it will
be possible to verify if the conclusions established here would have a higher
degree of generalization.
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