Paccar's Hybrids: Building a Heavy-Duty Supply Chain: Special Report: Anatomy of a Product
Detroit was abuzz this past September when General Motors Corp. unveiled at its headquarters the product design for its Chevy Volt plug-in electric car. Critics have referred to the Volt as the car that could "save Detroit." While the Volt isn't scheduled to arrive in showrooms until 2010, U.S. automakers of another sort have already begun producing hybrid vehicles. These technologically advanced machines are produced by the commercial trucking industry, a line of business that doesn't garner nearly the amount of mainstream media attention for its environmental efforts as advancements in consumer auto production.
One U.S. manufacturer that's been at the forefront of hybrid long-haul truck production is Bellevue, Wash.-based Paccar Inc. The company began commercial production of hybrid medium-duty trucks through its Kenworth and Peterbilt divisions in September. Pilot programs have been underway for more than a year, most notably at Coca-Cola Enterprises Inc., which purchased 120 Kenworth hybrids for its fleet in February 2008. Paccar also has produced hybrid trucks in Europe through its Dutch subsidiary Daf Trucks NV.
Over the years, Paccar's efforts to develop fuel-efficient vehicles has earned the company praise. In 2006, President Bush presented the National Medal of Technology to Mark Pigott, chairman and CEO, for Paccar's development of lightweight, aerodynamic commercial vehicles. In 2007, Paccar received the Environmental Protection Agency's SmartWay designation for designing reduced-emissions trucks.
The company's history of ingenuity and forward thinking has paid dividends. In 2007, Paccar recorded its 69th consecutive year of profitability, though net earnings dropped 18% to $1.2 billion from the previous year. Revenue reached $15.2 billion in 2007, compared with $16.4 billion in 2006. In an October 2008 earnings call, Pigott attributed a slight drop in third-quarter profit to the cyclical trucking industry, which he says typically endures downswings every five years.
Hybrid vehicles likely won't boost Paccar's profit and revenue in the immediate future because they sell for about $40,000 more than traditional diesels, and the technology is new. But if gas prices continue to siphon profits from truck drivers and logistics providers, Paccar may have positioned itself for a major growth opportunity. That's because Paccar estimates its hybrid trucks can cut fuel costs between 25% and 50%, depending on the application. If the company's hybrid initiative is a success, its history of supply chain best practices along with lean manufacturing processes will play a significant role.
Getting Ramped Up
One of Paccar's closest supply chain partners is Eaton Corp., a Cleveland-based diversified industrial manufacturer. The two companies have worked together for more than 50 years, according to Chris Konkel, Eaton's account director for Paccar. So it was only natural that when Eaton established its hybrid systems business unit in 2000, Paccar quickly jumped on board. In March 2006, Paccar launched a hybrid vehicle program in conjunction with Eaton with the goal of improving fuel efficiency 30% for select medium-duty trucks by 2013.
Eaton's hybrid system combines an automated transmission and clutch with a lithium ion battery pack, a motor/generator and computer logic and controls to manage the interaction between the internal combustion power and electrical power. The challenge for Paccar was integrating the technology with customized trucks.
"If you're developing a Prius or an Escape, you get the same configuration all the time, and with the medium-duty and heavy-duty truck industry, since the customers' needs are so varied, you end up with a broad array of configurations, and that takes some planning and development," says Preston Feight, chief engineer for the Kenworth Truck Co.
Paccar builds to customer orders, meaning one truck might be assembled with aerial capabilities for utility-line applications, while another truck could be designed for pick-up and delivery functions. On the plant floor in Ste.Therese, Quebec, Canada, where Paccar produces its Kenworth and Peterbilt hybrids, adding these unique features to a new power source required some additional training for operations workers.
Initially, engineers supported operations by working with them during the assembly process to bring the line workers up to speed, says Marilyn Santangelo, Kenworth's assistant general manager of operations. "The engineers fly up there (Ste. Therese), and we have quite a bit of back and forth on how tools work or don't work given a certain location, and in the end we get the best solution," Santangelo relates.
Another potential issue was validation of the components to make sure there were no electrical voids, says Feight. Paccar conducted the validation tests at Eaton's technology center, its own and independent facilities, according to Feight.
Once Paccar's hybrids are operating in the field, the company monitors them closely to ensure the trucks are working properly, says Bill Kozek, Kenworth general manager and Paccar vice president. The company assigns engineers to each account to address any issues with the hybrid trucks, Kozek explains, adding that he receives a field report each Friday evening.
Top of the Supply Chain
When Paccar unveiled its hybrid truck initiative in 2006, Jim Cardillo, now the company's president, said the plan was to put hybrid trucks on the road by 2008. The company met that goal thanks in part to its highly efficient supply chain. The partnership between Paccar and Eaton is part of a supply chain that's been rated among the best in the nation by analyst firm AMR Research Inc.
Jane Barrett, AMR research director, points to Paccar's ability to intersect operations excellence with innovation. "They have operations excellence in many areas -- from working with dealers downstream to their ability to configure a truck to exactly what a fleet or individual wants, and they work very closely with their suppliers."
Paccar depends on supplier cooperation to facilitate its build-to-order production model. AMR's Kevin O'Marah recounts how Paccar coordinated customized orders at the company's operations near Seattle during a visit to the plant. "Metalsa (a Mexican supplier) gets CAD drawings direct from Paccar and cuts each set of holes, bends and notches specially into its steel frames before they show up sequenced correctly at the gate in Renton. This heavy, unyielding stuff then winds its way through the plant, out to the buyer, and onto the highways of America without ever losing its connection back to the manufacturer," O'Marah explains.
Paccar works similarly close with its suppliers on its hybrid lines. "It's a lot about us knowing our suppliers and our suppliers knowing us, and for many years now the suppliers we work with are familiar with our requirements -- forecasting four weeks or three weeks out -- that we're going to transmit orders, even as closely as two weeks out, to the very specific requirements we need on the very specific day that we need them," Santangelo says. "Even nuts and bolts come in on a very programmed, sequenced manner, and it takes the knowledge of our materials management folks and our purchasing folks to work through this."
In Eaton's case, the supplier works with Paccar even after the product is completed. Eaton assists educating Paccar's dealer base about repair and service issues, says Konkel. Eaton also helps Paccar inform its customers about tax credits available for hybrid truck purchases, which can get complicated with local, state and federal monies involved.
The Road Ahead
So far, customer reviews from two of Paccar's initial hybrid customers are thumbs up. Coca-Cola Enterprises, the largest Coca-Cola bottler, has realized a 32% improvement on fuel efficiency, a 30% to 35% reduction in emissions, and reduced maintenance costs from the Kenworth T370 Class 7 hybrids the company purchased in 2007, according to company spokesman Fred Roselli. The company expects a return on investment in three to four years.
At a Glance: Paccar Inc.
Founded in 1905 as the Seattle Car Manufacturing Co.
Renamed Paccar in 1972 after 55 years as the Pacific Car and Foundry Co.
CEO: Mark Pigott
Employees: over 20,000 worldwide
2007 Revenues: $15.2 billion
2007 Net Income: $1.2 billion
2006: Partners with Eaton Corp. to build medium-duty hybrid trucks
2007: Announces plans to build heavy-duty hybrid trucks
2007: R&D investment reaches more than $1 billion
Coca-Cola Enterprises was already experimenting with hybrid trucks before purchasing the 120 Kenworth hybrids, but chose the Paccar-owned brand because of the company's ability to customize the vehicles and overall quality, says Roselli. The hybrids are part of Coca-Cola Enterprises' long-term plan to add fuel-efficient trucks to its fleet, and the company expects to purchase heavy-duty hybrids, with a gross vehicle weight of 33,000 pounds, in the future when they become available. Eaton and Paccar said in August 2007 the companies are developing heavy-duty hybrids.
Dunn Lumber Co. in Seattle also reports positive results, with gas mileage doubling to nearly 10 miles per gallon, says Mark Geyer, the company's manager of fleet and crane operations. Dunn Lumber purchased one pilot hybrid in March 2007 for $90,000. The company received a $12,000 tax credit and a discount from Paccar, since the truck is a prototype. Geyer says additional hybrid purchases are in the company's future, particularly since the trucks have been dependable. "The key thing for me as a fleet manager is that when the driver gets in there, contractors and homeowners expect their load in the morning, and we haven't had one problem with that truck," Geyer says.
Those signs are encouraging for Paccar, but whether the company expands production of its hybrids in the future will depend on several factors. "We don't know where oil is going to go. We don't know how the technology in the batteries is going to develop," Feight says. "If oil goes up, lithium ion batteries become more prevalent and their cost goes down and economies of scale start to work, maybe this is a wide-ranging application."
International Truck and Engine Corp. and Freightliner Trucks are among several Paccar competitors that have partnered with Eaton on hybrid initiatives. But according to Konkel, Paccar has established itself as one of the leaders. "We have this technology available with our other customers," he says. "The key thing with Paccar is they've taken the approach to be much more aggressive with the hybrid technology."
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