Powering Volkswagen through improving port operations

Michael D'Angelo, Manager of Port Operations, Vehicle Logistics at Volkswagen Group of America tells Simon Duval Smith about the challenges of the finished vehicle supply chain coming through ports in the region and how improvements in infrastructure and advanced IT could help to speed the process

Few finished vehicle operations have changed over the last twenty years as much as that of the Volkswagen Group. In 1997, although Volkswagen already had plants in Mexico, South Africa, China and Brazil, the group’s supply chain and sales markets were mostly concentrated in Europe. In 2018, while Germany and Europe remain its home base, VW’s all-important US sales have been buttressed by manufacturing plants and advanced finished vehicle operations.

Bottlenecks - bouquets and brickbats
Larry Johnson
Michael D'Angelo

With the number and size of ports used by Volkswagen in North America being finite - new facilities take a long time to build and join up with railheads - so bottlenecks in finished vehicle transport through the existing ports are inevitable as Michael D'Angelo tells me. “I don't find capacity restraints on the port side as much as I find them on the trucking and rail side. We can receive and process vehicles faster than we can ship them out and that is an inherent bottleneck. Our challenge is getting vehicles out onto road and rail quickly to support the volume of vessels coming at us in order to meet our aggressive sales objectives. With ports, yes, there is a finite number but I think there are enough of them spread throughout the country to allow for an even distribution pattern. Our processors have largely risen to the challenge of investing in their operations to push the product at the rate that we require.

“It is up to the OEMs to put themselves into the proper ports and size them accordingly. For example, if you are heavier on the East coast, there are other options that you can right-size and realiSe savings by not shipping long distances.”

I press D’Angelo to single out ports and facilities that are particularly useful; those that are growing rapidly and improving in efficiency. He takes me on a virtual tour of North America’s facilities: “The Gulf Coast is making interesting gains; there are some promising opportunities in that region with accessible land that is competitively priced. There are a few areas in the mid-Atlantic that still have some available space for OEMs who are looking to expand. 

“The north-east and west coast are more or less fully built-up and any new land development comes with excessive costs. There is not much capacity left in New Jersey or New York and New England ports are few, but there are some decent options if your market supports a port that far North. West Coast ports are more or less spoken for and only inland port operations are largely available for new operations.

“The Pacific northwest such as Seattle, Washington and Oregon might have some opportunities but is in a similar situation to the northeast - rather remote from our target destinations. We just opened a port in Benicia to serve Northern California, which serves a boutique, albeit important, location for us. “The southern ports also have challenges, as the market in that region is heavily biased towards trucks and SUVs. Customers there have tended to shift towards heavier vehicle models, so it is critical to have the right product mix to justify a port operation in that territory.” 

The SUV size challenge

Speaking of SUVs and light trucks, in the past few years, helped by falling fuel prices, the US vehicle buyers' appetite has moved towards SUVs and away from sedans. I ask D’Angelo what pressures has this put on him and his team in handling vehicles in and out of ports? He says that the problem is a fairly straightforward mathematical one. “We don't get as many SUVs on trucks but once they get to the port it is not a big deal. Of course, as one or two fewer vehicles can be shipped out on each truck, that compounds over days and weeks. A truck fully loaded with trucks/SUVs holds nearly 25% less product than a truck filled with sedans and, over time, we do end up with a bottleneck. With the trucking constraints in many regions, we cannot afford to leave a single vehicle off a truck. Maximising utilisation and velocity are the main goals of any logistics professional. As heavy vehicle sales increase, so too must our trucking capacity. Proportionally, railroads are challenged with providing more bi-levels, after years of steady tri-level demand by OEMs. The market certainly does not have much sympathy for our transportation providers and we continue to struggle to fight for our share of the capacity.” 

Linking ports and railheads is obviously a major priority for any OEM in its finished vehicle chain but with the growing market for SUVs has caused an increasing use of road-hauling as there are apparently not enough bi- and tri-level level railcars capable of carrying enough larger vehicles. D’Angelo says that ports serviced by railroads cannot fully realise the strategic advantage of rail because of the lack of crews, engine, and railcars supply. “Vehicles meant to be shipped by rail are finding themselves on the back of a truck which further compounds the trucking crisis we find ourselves in currently. Railroads are prioritising container and commodity shipments over auto, which means we are not only battling for capacity with other OEMs, but also amongst players in other industries. It is a problem at present but it may level out in the future. With all that said, a port operator simply cannot afford not to have a Class I connection.  

“Future sales trends indicate a continuation of high SUV sales and, therefore, we will not get out of this contrition environment any time soon.”

Cautious investments

With the volatility of the market in mind, I ask D'Angelo if he feels that truck and rail providers are making sufficient investments in infrastructure; are they being too cautious? "I would be cautious if I were them and I cannot blame them for being so. 2008 was 10 years ago but it still resonates today with those of us who were around during the downturn. We have seen several auto carriers close their doors in recent months and with no strong entrants into the marketplace our options are contracting before us.

“On the rail side, the problem is not so much the supply of work - that is an issue of course - but from what I understand, it is more a power [engine] and crew problem. Automotive is not the only commodity that is 'spiking' at present; container shipments have increased considerably and agriculture shipping has also grown. Automotive is actually a very small percentage of the book of business for a railroad and, plainly stated, as an industry we do not get the crews, the trackage and the power to move our product. 

"You can have all the bi-level and tri-level railcars in the world but if you don't have a crew, an engine or a track to get the load to its destination, you can't move the vehicles.”

Added to these challenges is the issue of car-carrying railcars often taking some time from being ordered and specified to becoming operational as D'Angelo confirms: "Yes, it is a multi-month process and there are only a few outfits in the country that produce these railcars, and every year they are booked up.

"Overall I would say that the railroads are making the investments in railcars, but one must remember that once the railcars are on the tracks, they have to get to their destination and that is a problem that no-one is really talking about.  

“Also, there is a high percentage of old railcars being retired each year, so the net additions remains a question. Investments in rolling stock are one thing but I would like to see more investment in crews and engines to push the product through and utilise the equipment better."

Can advanced IT help power the product?

Considering the finite nature of the major infrastructure in finished vehicle logistics, carmakers such as BMW are looking hard at how advanced IT solutions can speed their vehicle shipping movements. D'Angelo says that the automotive logistics business is holistically lagging behind in the use of so-called connected distribution and Blockchain. "When you consider Blockchain, ride sharing, fleet sharing, artificial intelligence and streaming connectivity, we as an industry are not leveraging the technology that is available, we are not utilising it effectively or in a timely manner. Our customers expect us to exploit these technologies. We live in an age of instant gratification and as an industry, we are still working off Excel spreadsheets.

"Our cars can communicate with us; some OEMs are sending over-the-air updates to their vehicles. Most other OEMs have to plug their cars into a computer at the port or at the dealer to do the same thing. We can communicate with the vehicle so obviously it can communicate with us. What we need is an IT infrastructure that will allow for such information to be shared and once it is shared, make sense of the big data. This could be the car telling us it has a flat tire or a discharged battery, and the car could help us sequence deliveries by telling us which dealer it is destined for and which other vehicles in the lot it should travel with, and in which order. Some steps are being made to get better in this space, but it’s not nearly enough.”

This level of IT sophistication could also help with such ostensibly simple tasks as a trucker more quickly finding the right vehicle to collect, when vehicles scheduled for collection are not already marshalled into a collecting area. Self-parking is also an attractive possibility, enabling tighter and more efficient parking with no damage caused by human driving errors.

This could extend to self-delivering cars which might drive off the ship, go through processing and drive themselves to the dealer or even the end customer who has ordered the vehicle online, as D'Angelo says. "The possibilities are great and as an industry, we really need to harness these new technologies. Amazon is going to be delivering their packages by drone and our industry will still be working pivot tables in Excel.”

Outsourcing preparation and customisation

There have been shifts in the balance of outsourcing vehicle preparation and general pre-delivery work on Volkswagens and Audis in the US and I ask D'Angelo how this is progressing and whether he feels that much of this work should remain a core competence of the OEM. He says that outsourcing is going down as vehicles become more sophisticated: "Customisation is very important for the VW Group. We like to have each vehicle remain flexible in its specification up to the last possible point that we can install an accessory. Customisation is a revenue generator for us but our system also reduces the work at the dealership; the vehicle arrives ready to go, in the specification that the customer wants. 

“Delivering add-on parts to a port is much easier than to many dealer destinations. The pre-delivery inspection (PDI) is always done at our dealerships and I think every port operator in the country would agree with me that we do not want to do PDI at the port as this would delay delivery. The dealers have the expertise and ability to prepare their vehicles for their specific customer base. Also, preparation at any point prior to the dealer would jeopardise security and quality during transport.  

"As to outsourcing, I believe the port processor model is here to stay, at least for the foreseeable future but, in smaller port operations or at a railhead where customisation is kept to a minimum, an OEM could and should run the operation themselves. On a larger scale operation, it is best to outsource to gain the economies of scale afforded by vehicle processors."

Damage and rectification

Damage to finished vehicles is an unfortunate reality in the delivery chain, whether it is from human error in driving and handling, or from natural events such as hailstones. Most vehicle logistics managers accept it as part of the process and D’Angelo deals with it using a mix of in-house and outsourced solutions, as he tells me: "We get a very manageable and low level of damage on our vehicles, under 1%. Our European production arrives in full body covers which protect them very well. We outsource hail dent repair at the port, however, all of our ports in the US have a full body shop and qualified personnel to make vehicles factory-fresh. Each port has Volkswagen quality managers on site to ensure proper repair of all vehicles.”

Pooling product for greater flexibility

Ford in Europe use a dealer pool system of marshalling vehicles on docksides and in holding areas, allowing dealers to source certain specification vehicles that may have been ordered (and/or over-ordered) by another dealer or dealer group, to speed getting the right vehicle to the customer more quickly. I ask D'Angelo if this is something that he and VW US have considered. "I think the pool system can work well if one is disciplined about it. We have to give our dealers a lot of flexibility and give them the models they want as quickly as possible to meet consumer expectations.

“We run what we call a market-based ordering system which will produce vehicles that are closest to what our research and our dealer body tells us the market wants and ultimately that is our aim - to get the vehicle to the dealer and thence to the customer; the right vehicle with the right specification, on time and in factory-fresh perfect condition.” 

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