It isn't often that a well-known automaker gets to approach a major market with a clean slate. But that was the case when Mazda entered Mexico some two years ago.

Curiously, the Japanese manufacturer took its time before venturing into that promising market. Mazda has been selling in Canada since 1968, just one year after building its first rotary-engine vehicle, the 110S Cosmic Sport. In 1970, it set up a subsidiary for sales in the U.S. Within 12 years, it had sold its one millionth passenger car in that country.

Mazda's belated entry into Mexico was prompted by enactment of a free-trade agreement between that country and Japan in the spring of 2005. The treaty removed import tariffs on the company's shipments. Previously, any Japanese automaker without a factory in Mexico would be subject to substantial import fees.

Mazda opted to sell five models in Mexico, focusing on the urban centers of Mexico City, Guadalajara and Monterrey. Starting out with five showrooms, it quickly expanded to 10 dealerships, all exclusive to Mazda. (Just over 50 percent of the company's U.S. dealerships sell only Mazda vehicles.) Today the Mexican network stands at 12 dealers, with four more slated for the first quarter of 2008, according to Eric Johnston, vice president of sales and field operations with Mazda North American Operations (MNAO) in Irvine, Calif.

While Mazda has high hopes for the Mexican market, it decided to start small from a logistics standpoint, Johnston says. The company didn't jump in with a network of warehouses in Mexico. Instead, it chose initially to supply Mexican auto dealers with vehicles and parts directly from Japan and the U.S.

The small scale of the operation "allows us to be relatively efficient, using current systems and programs," says Johnson. But Mazda also has had to adapt to unique aspects of the Mexican marketplace, such as the country's high temperatures and often difficult driving conditions.

Starting with "a clean sheet of paper," Mazda assigned dealership profitability as its top priority. That decision would entail a high level of customer service, particularly when it comes to maintenance and repair work.

A crucial element in achieving customer satisfaction in the automotive business is having the right parts on hand for repair jobs. The fact that supplies would be coming from the U.S. and Japan, with all of the attendant complexities of international trade, made it even more essential that Mazda have a smoothly functioning supply chain to keep dealers stocked with parts. Says Johnston: "The Mexican market currently lives out of our [U.S. domestic] supply chain."

Mazda selected Morton, Ill.-based Caterpillar Logistics Services Inc. to manage the parts inventories that would support the Mexican dealerships. Cat Logistics was a familiar name to Mazda, having taken over operation of the automaker's U.S. warehouses several years ago. A subsidiary of Caterpillar Inc., the well-known maker of construction and farm equipment, Cat Logistics happened to be making a major push for business in that sector. Its other automotive clients today include DaimlerChrysler, Hyundai, Volvo, Kia and Ford Motor Co. (The last holds about a one-third ownership share of Mazda). In addition, says Johnston, MNAO's chief executive officer at the time had experience with Land Rover, another Ford affiliate that had worked with Cat Logistics since its own entry into the U.S. market nearly 20 years earlier.

The Local Expert

Mazda doesn't automatically outsource its warehouse operations, but in this case it deferred to a local expert. "Although we have very good competency in our supply chain in Japan, the U.S. is a very different market," says Johnston. "Cat Logistics helped us to capitalize on a unique situation here. Their competency is higher than ours in inventory and warehouse management."

Mazda's parts supply chain in the U.S. is marked by complexity. The company sources out of multiple plants, including a shared operation with Ford. (Mazda has produced a number of models either for Ford, or in partnership with the American automaker.) About half of all service parts are shipped from the U.S., with the rest coming from the parent company in Japan, Johnston says. There are about 300,000 parts numbers in the system. With the exception of the MX-6, which is made in Michigan, vehicles destined for the Mexican market are produced in Japan.

For repair parts feeding Mexican dealers, the main emphasis is on the U.S. domestic distribution network. "Having a local supply chain will shorten delivery time," says Johnson, adding that parts shipments can take 45 days to arrive from Japan.

Service parts in the U.S. are currently housed in three warehouses: in Goldsboro, Pa.; Ontario, Calif.; and Olive Branch, Miss. (The last, Mazda's "master facility," is divided into fast and slow-moving parts.) All are operated by Cat Logistics, which reduced the number of U.S. stocking locations when it took over Mazda's domestic facilities. Shipment frequency rose, however, with many Mexican dealers today getting three to five deliveries per week.

Cat Logistics runs the actual facilities, performing all of the tasks related to warehouse and inventory management. It shares some responsibility with Mazda for the parts supply chain, however. Information on any part that has been in the system for less than 24 months is tied directly into Mazda's service operation. That allows the automaker direct access to dealer and customer feedback, which can be used to make engineering changes in the parts themselves. The arrangement reflects the importance that Mazda places on parts for newer vehicles. Cat Logistics takes control of all parts that are more than 24 months old, managing inventories and overseeing their lifecycles. Both sides rely on Cat Logistics' inventory system to run the operation.

Mazda also runs a Dealer Management System separate from that of Cat Logistics. Johnston says it's crucial for the company to keep close ties to the fledgling network of Mexican sellers. "The most important inventory for us long-term is the dealers," he says. "We want [the relationship] to be healthy, lean and not tie up a lot of their capital."

In fact, Mazda views its mission to increase availability of parts as more important than how well it runs any particular warehouse. "The most important role for Cat Logistics," Johnson says, "is to enable an efficient operation and resupply the dealer once a customer has drawn on [dealer stocks]."

Mazda works with Automotive Dealer Management Inc. (ADMI) on a program known as Remote Managed Inventory. RMI's goal is to free dealers from the burden of inventory management while ensuring that they get the right parts at the right time. The results, according to the automaker, are better fill rates, less idle inventory and improved customer service.

RMI also places key decisions in the hands of Mazda. Based on its understanding of the total market for any given part, it makes sure that dealers don't order more items than necessary. "Information from the whole network increases the chances that the dealer has what he needs, yet doesn't over-order," says Johnston. "We don't create false demand in the system anymore."

From Push to Pull

The program is helping Mazda to move from a "push" to a "pull" model for supplying dealers. For example, it no longer permits the automatic ordering of full model-parts kits that might be returned a year later, or large groups of parts for which there is no specific use, and could therefore cause a reduction in working inventory.

The key question, says Johnston, is "how often the part is being ordered for immediate need." The answers change as the repair and maintenance business evolves. Warranty sales have fallen in the last five years, he says, but maintenance and light repair are on the upswing, leading to greater predictability of demand. Model recalls, too, can make it easier to plan. That's vital for an industry where 10 to 15 percent of parts are on backorder because of short-term problems of availability, Johnston says. Even so, the automotive parts supply chain is subject to a high degree of variability.

In viewing the performance of its parts supply chain, Mazda begins with the dealer and works backward. That perspective can lead to new approaches to service. Under traditional relationships with a supplier, for example, the automaker might view the number of daily line feeds as a legitimate measurement of supply chain efficiency. But efforts to reduce inventories through Lean techniques could cause traditional costs to rise.

"We want to let go of that," says Johnston. "The customer wants his car fixed right the first time, on the day he brings it in. So our order-to-delivery time needs to improve." Warehouse efficiency is a laudable goal, he says, but quick availability of parts is even more important. In the U.S., Mazda employs Lean techniques, the ADMI system and the expertise of Cat Logistics in order to make that possible.

Even with Cat Logistics running its warehouses, Mazda exercises tight control over its supply chain. It continues to make all transportation arrangements, both for vehicles and aftermarket parts. It also clears the way for goods to cross borders without delay. "We were satisfied through benchmarking about the competitiveness of the arrangement," Johnston says.

"Cat Logistics' responsibility is to manage the warehouses, [perform] inventory management and provide a computer system that's our key part of the supply chain," says Marianne Brown, the vendor's commercial manager. At the same time, she notes, there isn't always a clear line indicating who does what. Cat Logistics carries out extensive preparation work before parts leave the warehouse, in order to facilitate their movement across the Mexican border. "We work together to solve the issues," she says.

Now entering its third year, the partnership between Mazda and Cat Logistics appears to be going strong. Sales of Mazda vehicles in Mexico are relatively brisk, rising about 9 percent this year. That's better growth than any other major automotive brand in the Mexican market, Johnston says.

He says Mazda will keep striving to boost its service level to dealers in the Mexican marketplace. In the process, the relationship with Cat Logistics is expected to deepen. "As we evolve into more customer-centric thinking," Johnston says, "it's going to involve major changes on both sides."