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ZF’s Transition from Lean to Supply Chain Resilience

By October 31, 2022Uncategorized

ZF Began their Digital Resilience Transformation 20 Years Ago!

I interviewed John Sobeck, Vice President Material Management Services and Supply Chain 4.0 at the ZF Group, about their digital supply chain transformation journey. It turns out ZF has been on this journey for over 20 years! They began this journey before the term “digital transformation” was even being used.

ZF is a Tier 1 supplier to the automotive industry. This technology company is headquartered in Friedrichshafen, Germany. ZF had sales of 38 billion euros in their last fiscal year. Among other things, ZF manufactures electrified powertrains, car chassis technology, active and passive safety systems, and advanced driver assistance systems. While most of their sales are to automotive OEMs, they also sell components that go into other products – trucks and busses, wind turbines, tractors, construction equipment, etc. ZF offers product and software solutions for established vehicle manufacturers and newly emerging transport and mobility service providers. Finally, they have an aftermarket parts division.

The ZF supply chain is complex. This manufacturer has 188 production locations across the world. These facilities receive raw materials and components from about 10,500 suppliers, about 1,000 of whom are strategic. ZF transforms those purchased products into over 2,000 products. If you look at the way the different components can be combined into their finished goods, you end up with over 7 million potential combinations.

ZF’s Digital Supply Chain

ZF has been working with a supply chain solutions provider called SupplyOn since 2001. SupplyOn provides multi-enterprise supply chain network (MSCN) solution. This is a key technology for improved collaboration across an extended supply chain.  A MSCN platform is built on a many-to-many architecture which supports a community of trading partners. MSCN solutions provide supply chain visibility, network-based applications, and network analytics.

According to Mr. Sobeck, the SupplyOn solution means that when you need to “register a supplier or to update their information, you only need to do that once instead of several times.” This information includes a supplier profile that sets out the criteria for which suppliers are used to support the manufacture of designated products, and which factories those vendors supply.

interviewed John Sobeck, Vice President Material Management Services and Supply Chain 4.0 at the ZF Group

But the visibility advantages, Mr. Sobeck explained, are even more important. “We  use digital call-off information in multiple ways. How many parts do we need? From whom? When?” ZF sends the call-off, along with the forecast, not just to their suppliers, but to their carriers and 3PLs. This enables carriers to optimize their transportation capacity to deliver the shipment on time at best price.

Mr. Sobeck stressed how interconnected the information flows were. When the supplier has produced the goods, they send an advanced ship notice (ASN) to ZF via SupplyOn. This ASN automatically kicks off a transport order that is sent from SupplyOn to the carrier that will transport that supplier’s goods to the designated factory. Because these are tightly integrated message flows, the process has added surety.

Then, Mr. Sobeck explained, “we have transport information.” Which ship are the components being shipped on. Which carrier is going to pick up the container and when is that scheduled to happen? Which truck will the goods arrive on? Goods flow to consolidation centers where their 3PL partners scan the parts into a container. Because of this, ZF understands which components are in which containers and then where those containers are on an ongoing basis.

This visibility to inbound shipments is married to ZF’s production system.  Will the needed parts arrive at their plant on time? If the delivery is a little short or will be a day or two late, is that still good enough?  Will ZF still be able to deliver to their customers on time?  “If anything changes, we have this end-to-end visibility.”

Prior to the use of this SupplyOn enabled solution, ZF relied on fixed lead times. “We were assuming a shipment from Hamburg to Shanghai  takes 14 weeks. We relied on that. After 14 weeks the ship will arrive, customs clearance and post-carriage will be done and we will get our parts.” That lead time, however, was far from exact.

Now because SupplyOn is processing the ocean vessel’s tracking information, they get new estimated times of arrival every day. Now, “we can give our colleagues in Shanghai updated information on when they will receive their parts.”

And this is not done by e-mail. It is fed directly into a planner’s system. “It pops up in his daily work screen.”  The planner sees the updated estimated time of arrival, the volume of parts that will be delivered, and can see whether they have the goods they will need to support the production plan. If there is a problem, the planner looks at the options. “Can we rearrange production? Or do we need to ship this by air?” Are there other options?

Having up to date information on an ongoing basis is the transparency ZF needed for more optimal decision making. But technology is not a magic wand. “Transparency is worth nothing,” Mr. Sobeck exclaimed, “if it doesn’t trigger decisions. And these need to be the right decisions to save money and ensure on time deliveries to customers”.

The platform has helped the company save large amounts of money. The solution has led to process efficiencies – fewer people required to do the same amount of work. More significantly, there have been substantial cost savings in transportation from using SupplyOn’s transportation solution. There are also avoided costs. If a planner knows that the necessary components won’t arrive on time by ship, and that air freight must therefore be used to expedite the shipment, “it makes a huge difference on air freight rates if you need to have a ton on the airplane next week versus in 4 weeks.”

The Transition from Lean to Resilience

No industry has been more committed to lean practices than the auto industry. One example is the demanding practice of delivering components to an OEM factory just-in-time, just-in-sequence. Lean cuts inventory out of the supply chain. But when things go wrong, lean can lead to large losses in sales because there are no just-in-case inventory buffers. In the last annual report, the company admitted that the chip shortage led them to increase inventories in their supply chains. This did adversely affect their financial results.

Even before COVID, Mr. Sobeck explained, forecast accuracy had been declining as product sales became more volatile. Decreasing forecast accuracy makes it more difficult to run a lean supply chain. Then COVID hit and the already declining forecast accuracy plummeted even further. The auto industry is now making the transition from being lean to becoming resilient.  Sourcing from more local suppliers and having shorter supply chains is part of the answer. ZF is now also continually checking the creditworthiness of their suppliers to safeguard their supply chain. But the granular supply chain visibility provided in the SupplyOn solution has also made the transition to operating a resilient supply chain easier.

One example of this is provided by the semiconductor shortage. This shortage plagued the entire industry and led to the loss of tens of billions of euros in revenues across the industry. Because of the digital call-off processes, also intercompany, ZF knew which chips were going into which products, which customers wanted those products, and how many they wanted. ZF had visibility into what shipments they could expect in 4, or 6, or 8 weeks. They could then clearly communicate what they could produce and how that production would be allocated across their customer base. ZF has a clear policy of providing a fair share to all their customers. This means, that the product in short supply that can be produced is allocated across all their customers according to their original share of the total volume.

While the policy is clear, being able to do the fair share calculation, and then executing it fairly, is not at all simple. The SupplyOn solution helped them to make this end-to-end transparency to their customers possible. Whenever customers asked, Mr. Sobeck said, “we could always share what their allocation was” based on the total amount of chips available and the formula. “We were able to be very transparent and prove that we followed our principles.” In some cases, external audits proved that ZF had played by the rules. If we had to communicate with “e-mail and Excel only, there is no way we could have accomplished this. Digital communication was the key for success in this area.”

The Path Forward

But more work remains to be done. SupplyOn is the defacto industry standard for Tier 1 automotive suppliers in Europe. That means that if a Tier 2 vendor is supplying ZF Group, Continental, Bosch and other Tier 1 manufacturers, they don’t have to be using different collaboration tools. But when it comes to the automotive OEMs, every OEM requires their Tier 1 suppliers to use a different portal.

Mr. Sobeck’s vision is that information should be able to flow out of a system like SupplyOn and into other similar systems, and that the information should be transformed automatically into a format usable by the other system. “It should be like the mobile phone world.” One person might be using an iPhone, another a Galaxi. The users can be on different cellular networks. And yet those two people can still communicate without any problems. Mr. Sobeck has high hopes for collaborative, open data ecosystem for the automotive industry based on common rules for data sovereignty according to GAIA-X.   A consortium called Catena-X is working to drive exactly this kind of seamless, cross portal, communication – and SupplyOn and ZF are part of it.

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