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Car manufacturers are working to cut costs while building increasingly complex vehicles. The region’s economic outlook depends on their success.

Auto-Mobility sales in Europe on are the rise, and the industry’s future looks bright. At the same time, manufacturers in the region face a number of challenges, as they struggle to control costs and adapt to shifting patterns of demand.

The auto-mobility sector is hugely important to the economy of Europe. The turnover generated by the industry represents 6 percent of EU GDP, according to the European Automobile Manufacturers Association. It employs 12.1 million people - or 5.6 percent of the EU workforce, and supports a vast supply chain that provides a complex array of business services.

As it continues to recover from the 2008-2009 worldwide recession, the industry is seeing steady sales increases across the board, predominately in the member countries of the European Union. In fact, last year was a turning point for the automobile industry in Europe.

With a total of 12.6 million passenger cars registered, it marked the first positive annual result since the financial crisis began in 2007, according to the latest figures from the European Automobile Manufacturers Association (ACEA). This growth has been maintained throughout the first half of 2015, and the ACEA forecasts a 5 percent growth rate for the year overall. In terms of units, this translates into about 13 million cars – still well below the 2007 peak of almost 16 million cars. Gains should continue in modest increments through the end of the decade, reaching 13.5 million units.

The return to growth is good news for the industry – and for the European economy. For original equipment manufacturers (OEMs), however, the recovery won’t mean business as usual. Those in mature markets such as Germany, for example, must tackle the issue of high production costs.

At the same time, consumers are demanding a broader range of choices in their cars. Manufacturers are responding with a virtually infinite menu of options, including new accessories, detailing, interior and exterior color, entertainment systems and a host of other features. Assembly lines must adjust their production techniques accordingly.

The Bespoke Vehicle

According to Pavel Hendrych, Sector Director for Auto-mobility in Mainland Europe, Middle East and Africa, DHL Supply Chain, the age of the ‘bespoke’ vehicle – i.e. vehicles that are highly customized to consumer choices – presents OEMs with the “epic challenge” of balancing a surge of parts and components with the need for greater efficiency on the production line. One solution is to build multiple models on the same vehicle “platform”, a strategy that leads to “decreased vehicle architecture while still allowing for increased customization,” says Michael Martin, DHL’s Vice President of Strategic Development for Global Auto-mobility.

The supply chain implications of this strategy are immense. OEMs are placing new demands on their suppliers to provide the right parts at the precise moment they are needed on the production line. Tier 1 suppliers, in particular, are taking on increased responsibility for supplying value-added components, including many high-tech features, to the line.

Historically, auto-mobility supply chains were made up of multiple tiers of suppliers scattered around the globe. Increasingly, however, Tier 1 partners are placing their operations close to the point of production, in supplier parks clustered around assembly plants. Even makers of smaller components might be included in these clusters. At the same time, other suppliers – particularly electronics component makers – continue to be based in more-distant locations. Either way, the task of coordinating that complex supply chain is becoming more difficult to manage.

Many OEMs partner have opted to outsource the orchestration of this inbound flow to a third party logistics provider under a lead logistic provider (LLP) arrangement. The LLP has visibility into the supply pipeline, and as a result, can ensure that production lines operate at maximum efficiency, and that suppliers adhere to their commitments for timely and accurate delivery of parts. This coordinating capability is supported through the use of an information “control tower,” which monitors inbound flows across time zones and synchronizes deliveries from multiple suppliers, regardless of where they are located. “There are tremendous benefits to be gained by being able to look at the total supply chain to identify cost reduction opportunities,” notes Martin.

Two Success Stories

One global OEM was looking to implement a number of cost-saving initiatives, including a Lean manufacturing methodology, in its EMEA (Europe, Middle East and Africa) operation. At the same time, the automaker wanted to increase the number of new model launches, while crafting an inbound logistics network in support of flexible production with reduced lead times for line changeovers.

The OEM turned to DHL to help optimize the inbound network. It sought to manage all of its European operations with the help of an integrated supply chain team, drawing on internal staff as well as that of the DHL. The partnership, and the resulting successful optimization, allowed the auto manufacturer to achieve a 95 percent on-time arrival for parts, within 30 minutes of engineered time windows. The company also saw reductions in inventory levels, spending on premium transportation and carbon dioxide emissions.

In Eastern Europe, DHL teamed up with another global auto-maker to manage inbound receipt, storage, picking, kitting, sequencing, replenishment and delivery of materials directly to the assembly line. With the LLP’s help, the OEM was able to process 12,000 stock orders daily, even as it cut down on allocation errors, line stoppages and production downtime.

A Unique Trust

To an auto-mobility OEM with complex requirements, the LLP is more than just another vendor of services. The relationship requires a unique level of trust. After all, the information involved is highly proprietary and key to an automaker’s competitiveness. The OEM, Martin says, must believe that its LLP partner “has its best interests at heart, in terms of opening up and allowing us to see what’s happening. The more information you share, the greater the benefit. That’s the fundamental basis of a really successful relationship.”

How well the European auto-mobility industry addresses these challenges will have a direct bearing on the state of the region’s economy. According to Martin, however, auto-mobility OEMs won’t be in a position to contribute to the region’s long-term economic health without first addressing their own significant challenges, in the form of rising costs, more complex vehicles, extended supply chains, increasing customer demands and the need for an unprecedented degree of manufacturing flexibility.

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