Authored by: Vijendra Kargudri & Ashish Malik
In this Part-1 of a two-part blog on minimizing per unit transportation cost by the automotive industry with SAP TM implementation, we will explore the rise & shift of the automotive industry along with factors affecting its increased logistics costs.
The rise and shift in the global automotive industry
The manufacturing sector has been a key driver of the global economy since industrialization and the automobile industry has been at the core of its growth path. Over the last two centuries, the automobile industry’s dominance has moved eastward ― from USA, Europe, Japan and to now China. With every war, financial meltdown and a rise in crude oil price, the automobile industry has witnessed major innovations within the sector.
It is seen that the automobile industry is a highly cyclical one. Seasonal demands or rise/fall in economic condition corresponds with the rise/fall in the automobile industry; its sales usually suffer during the economic downturns. The robustness of the seasonal demands and economy is doubtlessly the major determinant of the automotive industry’s sales and profits.
Factors affecting the automotive industry’s increased logistics costs
The rise of globalization over the last century coupled with a shift in the automotive industry ― dominance moving from the west to the east, has resulted in increased logistics and long stretched supply chains across the automotive industry.
The emergence of far-flung global auto markets has necessitated multi-modal freight movement that is predominantly dependent on finite fossil fuels. At the core of today’s automotive industry’s challenges exist increasing logistics cost, the demand-supply imbalance of freight transport services ― aftermath of global trade growth. All these have that has outpaced the availability of transport services to an extent that it has resulted in serious issues of congestion and capacity constraint globally. The remarkable growth in international trade over the last 10 years has resulted in the rapid growth of traffic volumes throughout the world’s transport system, which is likely to get worse in the coming decades.
Also, international trade growth has been placing immense pressure not just on major gateway ports, but also on inland transportation systems and their service availability. Simply put, cross-border movement of goods through the ports entail increased domestic moves to deliver these goods to their final destinations. Over the decades the ships have increased in size, driving the growth for inland transportation services. Today the number of inland moves generated by a single ship is five times as large as that of past, leading to severe capacity constraints at the major truck and freight rail corridors that link major seaports to inland destinations.
This supply constraint is compounded by the fact that a variety of transportation-related taxes, viz., on fuel, tyres, heavy vehicle use, truck and trailer sales, and so forth are getting expensive and will inevitably & adversely affect the logistics costs. Also, constant oil price volatility and capacity constraints, high-priced transportation are here to stay! Hence, managing transportation costs is more important than ever before to sustain growing competition, preserve margins & profitability while meeting customer’s changing demands. This scenario has prompted the automotive industry to minimize per unit transportation costs.
With demands increasing from geographically distant markets for auto units manufactured elsewhere, there is a need for inbound and outbound delivery of auto units over various complex routes. Since the auto units are high-value luxury goods of varying sizes and volumes, the transportation challenges to geographically disparate destinations are large and complex.
Within the automotive industry, factors like the distance to the destination, load density, and shipment size are the key attributes to the transportation costs. To mitigate the challenges of transporting various size auto units, an automotive industry must determine the multi-modal transportation option.
In the following week, this Part-1 blog shall be followed by Part-2, wherein we will discuss how Krypt can help the automotive industry to minimize the per unit transportation cost by implementing SAP TM.
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