INFO 667Logistics & Distribution Management

Texas A&M University

Value Chain Analysis of Tire Industry in US

Abhay Gupta

Abbas Kanchwala

Akshay Shiralika

Gowtham Ravisankar

Table of ContentsTitle Page

No.

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Introduction 31.1 Tire Industry in USA 41.2 Current Scenario of the Tire Industry 51.2.1 Tire Manufacturing at a glance in 2011 51.3 Products & Services 6

1.4 1.4 Problems of the Tire Industry 71.5 Major Markets of the Tire Industry 81.6 Major Business Locations in US 91.7 Major Companies 102.1 Demand of Replacement Tires 102.1.1 Consumer Substitution Possibilities 102.2 Cooper Tires & Rubber Company 112.3 Strategies of Cooper Tire 132.4 The Supply Chain 142.4.1 Suppliers 142.4.2 Manufacturing 142.4.2.1 Production Process 152.4.3 Distributor 162.4.4 Retailer 162.5 Simflex cost analysis of current & proposed scenario of CRTC’s supply chain 172.5.1 Assumptions 172.5.2 Current Scenario 192.5.3 Alternate (Proposed) Scenario 192.5.4 Results of cost analysis 203.1 Value addition in the supply chain 223.1.1 Value due to Alternate raw materials 223.1.2 Value added by using recycled rubber in Tire manufacturing 223.1.3 Value added by Recycling Manufacturing By-Products of Tire 223.1.4 Value added by Tire Retreading 223.1.5 Value added by Tire Recycling 233.1.5.1 Tire Derived Fuel 243.1.6 Value added by Warranty options 253.1.7 Value added by efficient ERP systems 253.1.8 Value added by sourcing alternatives 253.1.9 Value added by expanding facilities 253.1.10 Value added by new innovations 253.1.11 Value added long standing premium products 263.1.12 Value added by strategic production plans 264.1 Conclusions 275.1 References 28

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Introduction

A 'supply chain' is the system of organizations, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform raw materials and components into a finished product that is delivered. In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual value is recyclable and link value chains.

A value chain is a chain of activities. Products pass through all activities in order and gain some value at each stage. The chain of activities gives the products more added value than the sum of added values of all activities.

In this project we will present a Value Chain Analysis (VCA) for tire industry in the US. VCA is a useful tool for finding good business solutions while achieving significant environmental benefits by understanding relationships and challenges within any industry and by identifying the potential leverage points thereby increasing the product value.

In the US Tire Industry; Bridgestone, Michelin, Goodyear, Cooper are the major players and constitute 91.3% of the total revenues. These players have global manufacturing facilities and operations. Cooper Tire & Rubber Company; for instance; has three manufacturing plants in the US, one in Mexico, and two each in Europe and Asia. Current operation framework with respect to six major costs for purchasing, logistics, customs, inventory, overhead & administration, and risk & compliance from the regional perspectives compels these companies to balance their operational strategies with respect to outsourcing against offshoring.

We will discuss the tire manufacturing industry in the US, its major products, services, issues faced, business locations. Then we will review the market segments and business strategies deployed by Cooper Tire & Rubber Company. We have extensively used Simflex tool to compare these strategies.

Finally, after analyzing the supply chain and the results obtained from Simplex we will put forward recommendations for adding substantial value to the product from consumer’s perspective.

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1.1 Tire Industry in USA

The tire industry in the United States consists of companies that specialize in design and manufacture of tires which deliver specifics for aircraft and motor vehicle tires, inner tubes and tire repair materials. The finished products are then sold to aircraft and motor vehicle manufacturers and tire wholesalers. Operators within this industry do not retread tires.

The value chain categorizes the generic value-adding activities of an organization. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs and value drivers are identified for each value activity. The value chain framework quickly made its way to the forefront of management thought as a powerful analysis tool for strategic planning.

The primary activities

● Solid rubber tire manufacturing (Pneumatic and Semi Pneumatic) ● Inner tube manufacturing ● Motor vehicle tire manufacturing ● Tire repair material manufacturing● Aircraft tire manufacturing

The major products and services

● Light truck replacement tires ● Medium and heavy truck replacement tires ● Passenger original equipment tires ● Passenger replacement tires

The segmentation of various products and services offered by this industry is shown below:

Figure 1: Products and Services Segmentation of Tire Industry in US (2011)

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1.2 Current Scenario of the Tire Industry

After the economic slowdown that hit most manufacturing firms; the Tire Manufacturing industry is rolling on its way to a recovery. Increased demand for replacement tires in 2010 and 2011 has led to revenue growth, which made up for dips in 2008 and 2009. Overall, in the five years to 2011, revenue for tire manufacturers is expected to grow at an average of 1.2% annually to $19.0 billion. This growth has brought several major players out of negative income territory as demand has picked up. Additionally, consumers who were interested in fuel efficiency also bought tires at accelerating rates, amid a substantial rise in gasoline prices. In 2011, pent-up demand is expected to lead to growth in tire sales. As a result, new cost-efficient tires are flying off the sales racks, and industry revenue is anticipated to increase 6.5% from 2010 to 2011.

While revenue grew during the past five years, industry players have dealt with significant input price volatility. The price of rubber and synthetic rubber has mirrored other commodity prices over the five years to 2011: hitting highs right before the recession and gaining substantial ground during the economic recovery. As such, industry players have increased tire prices to sustain profit margins. The price volatility has also led to plant closures and outsourcing as firms search for ways to save money, including sourcing facilities abroad for cheaper labor and access to growing markets in emerging countries.

The next five years will likely be full of green lights for the industry. The US economy will gain strength, and consumer incomes will rise. In turn, people will get behind the wheel at accelerating rates. Pent-up tire demand will continue to flow the industry’s way as consumers change tires that were neglected during the previous five years. Tires that cater to cost-efficient consumers by making cars more fuel-efficient will still be popular among consumers, helping drive industry sales.

Industry players will invest in creating tires that cater to this demand as fuel prices rise and environmental awareness grows. Despite a projected increase in demand for tires over the next five years, industry outsourcing will continue as firms widen profit margins by moving facilities to countries with cheaper labor and proximity to key markets. As a result of these trends, revenue is set to grow at an average of 1.9% annually and total $20.9 billion in the five years to 2016.

1.2.1 Tire Manufacturing at a glance in 2011

● Revenues -> $ 19.0 billions● Annual Growth (06-11) -> 1.2%● Expected Annual Growth (11-16) -> 1.9%

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● Profit -> $723.7 millions● Exports -> $4.9 billions

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1.3 Products & Services● Passenger replacement tires

Passenger replacement tires are the industry’s largest product segment, accounting for 68.7% of industry shipments. Over the past five years, passenger replacement tire shipments have decreased 11.6%. The recession had consumers demanding fewer replacement tires, instead driving more on the tires they already own. Replacement tires fared better than original equipment tires through the recession. But the improvement of the economy and stabilization of the automotive sector in the latter part of the past five years has enhanced original equipment tire revenue, slightly decreasing the share of revenue consumed by passenger replacement tires.

● Light truck replacement tires Light truck replacement tires make up the third largest product segment, with 10.6% of total industry shipments. This segment accounts for the tires replaced on pickup trucks, SUVs, minivans and regular size vans. Over the past five years, light truck replacement tire shipments decreased 29%. Fewer light truck purchases have been made because many consumers in the US have opted for more fuel-efficient vehicles to save money on fuel costs. Since 2008, consumer vehicle demands have shifted toward environmentally friendly vehicles and away from light trucks. This shift has reduced demand for light trucks, and hence light truck replacement tires.

● Passenger original equipment tires The second largest segment is passenger original equipment tires, accounting for 11.5% of industry shipments. This segment consists of the tires purchased by automobile manufacturers for use on new passenger vehicles. Original equipment tires fell drastically in the midst of the automotive crisis during the recession but have recovered nicely in the latter part of the past five years. Rising unemployment and falling discretionary income have pushed consumers to buy fewer automobiles from auto manufacturers. Production was stifled at many of the major automakers and demand for original equipment tires dropped. Many automakers have recovered since then and vehicle sales are up as automakers have made a conscious effort to boost production in a newly-formed, cost-effective manufacturing environment. According to Ward’s Auto, vehicle production grew roughly 32.0% from 2009 to 2010 while auto sales grew 11.0% in the same year. This segment benefited substantially from the increased demand from automakers and helped enhance industry performance overall.

● Other Other products in this segment include light and medium to heavy original equipment tires sold along with freight trucks and aircrafts. Over the past five years, the relatively stable aircraft manufacturing industry helped keep demand for these tires intact. This mitigated the loss of demand from freight trucking, an industry that suffered severely during the recession. The loss of business activity during the downturn caused freight trucking companies to defer investing in new vehicles in order to maximize the longevity of their existing trucks. The freight truck production decline halted demand for these tires. Still, this loss over the period was not enough to greatly alter the share of revenue consumed by aircraft and freight truck manufacturers.

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1.4 Problems of the Tire Industry

● Per capita disposable income The consumer’s level of per capita income directly affects his or her decision to purchase automobiles and replacement tires. Lower the level of per capita income, less likely that the consumers will invest in a new vehicle or replacement tires for their current vehicle. This driver is expected to increase slowly during 2012, representing a potential opportunity for the industry.

● World price of rubber Industry firms purchase synthetic and real rubber inputs to manufacture tires. Higher rubber prices result in lower profit margins for most players. This driver is expected to increase during 2012, posing a potential threat to the industry.

● Total vehicle miles The number of miles driven is a strong indicator of tire wear. The higher the number of miles driven on a vehicle, the more likely it is that the motorist will need to replace their tires. This driver is expected to increase during 2012.

● Demand from motor vehicle manufacturing Motor vehicle manufacturers (original equipment manufacturers) purchase tires from tire manufacturers as part of the auto production process. The higher the demand for tires from US automakers, the greater will be the gross shipment of tires. This driver is expected to increase during 2012.

● Complicated tariffsThe US government passed a 35.0% tariff on Chinese tire imports in September 2009. These tariffs have mixed implications for the industry. On one hand, tariffs on imports reduce pricing pressure on domestic manufacturers. On the other hand, producers that compete in the US market are global companies that export and import tires; therefore, tariffs can negatively affect the industry.

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1.5 Major Markets of the Tire Industry

● Independent tire dealers The largest market segment is independent tire dealers, comprising 55.0% of the total market. Independent tire dealers have extensive community ties and strong wholesale relationships. This segment includes retail and wholesale distribution to consumers and vehicle manufacturers. Their market segment has declined over the past five years as financial difficulties forced many dealers to close shop.

● Tire stores Tire stores account for roughly 4.0% of industry revenue. This segment includes tire manufacturers who distribute tires themselves. Manufacturers realize cost savings on creating distribution channels, pushing the market share of this segment higher over the past five years. This has happened at the expense of small service stations that don’t have the wholesale relationships that the independent tire dealers have. Independent tire dealers are in a vulnerable position, since manufacturers that distribute tires might push wholesalers out of the market.

● Exports Exports are the second largest market segment at 25.6%. Over the past five years, the severely weak dollar has enticed more countries into purchasing abundantly more US-manufactured goods as exports consumed some 18.0% of revenue in 2006. US tire manufacturing exports have been significantly enhanced by neighboring countries Canada and Mexico that are already granted a tariff-free trade process with the United States.

●Other Other distributors account for 15.4% of the market. This segment includes mass merchandisers, warehouse clubs, auto parts chains, oil companies and other outlets that supply tires at the retail or wholesale level. Slumping consumer demand has caused the market share of other distributors to decline since 2006. Auto dealerships have increased their share of this segment, however. Many auto dealerships that survived the recession began distributing tires at higher rates during the economic recovery.

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1.6 Major Business Locations in US

The US Tire Manufacturing industry is primarily concentrated in the Great Lakes and Southeast regions. IBISWorld estimates these two regions will account for 51.8% of industry establishments. The primary reason for adopting this location is to minimize the inbound logistics costs as it is more than the outbound logistics costs and to reduce the harmful effects on the environment.

●SoutheastThe Southeast region accounts for 35.9% of industry establishments, with Florida and North Carolina accounting for 6.1% and 5.4%, respectively. Tire manufacturers in this region have positioned themselves close to Asian-owned auto manufacturers such as Toyota and Nissan. Auto manufacturers originally chose the location to avoid the union costs of the Great Lakes region.

●Great LakesThe Great Lakes region accounts for 15.9% of industry establishments. Ohio accounts for 37.1% of all the industry establishments in the Great Lakes region. Tire manufacturers in this region are close to the prominent US auto manufacturers, and are positioned to secure contracts for original equipment tires. The bankruptcies of large auto manufacturers have thrown tire supply contracts into question and industry operators might move elsewhere. However, original equipment contracts are a small portion of overall revenue.

●WestThe West region in the United States accounts for 10.9% of industry establishments. California accounts for 64.2% of those establishments. Asian-based auto manufacturers located in the West have created one of the largest domestic Asian import car markets. Industry operators have positioned themselves here to land supply contracts with these types of companies and gain access to a large population.

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1.7 Major Companies

●Bridgestone●Michelin●Goodyear●Cooper●Others

Figure 2: Major players in Tire industry, US.

These companies manufacture tires for two sectors; Original equipment tires sector and replacement tires sector. Here we have dealt extensively about the replacement tires sector and one of the major companies “Cooper Tire & Rubber Company” manufacturing it.

2.1 Demand of Replacement Tires

The overall market demand for replacement tires is relatively inelastic, because tire replacement is not an option that can be deferred for long, particularly when a tire is damaged. Further, the cost of replacement tires makes up a small percentage of the operating cost of a car. Market volumes for replacement tires are closely related to tread wear and vehicle miles driven. Technological improvements in durability and life have decreased the overall rate at which replacement tires are being purchased. While we expect inelastic demand for tires at the market level, individual producers ability to raise prices without losing market share is limited by competition among tires with similar characteristics. Some flexibility in pricing may be allowed by brand loyalty, but producers are not likely to be able to deviate much from the competitive price without losing sales.

2.1.1 Consumer Substitution Possibilities

Although there are no real substitutes for tires, consumers have choices with respect to replacement tires that can affect the demand for specific types of replacement tires. They can choose to purchase new tires or used tires, have their tires retreaded, or purchase high performance tires. At this level, the demand for a specific type of tire is probably elastic and more dependent on price. Specifically, higher prices for new replacement tires may lead some consumers to postpone replacing worn tires or to purchase used or retreaded tires.Vehicle manufacturers and consumers of replacement tires have several options as to the type of tire they put on a vehicle. They can choose from different qualities of tires, including high-performance and speed-rated tires, and they can also choose among different brands. High-performance and speed-rated tires have been increasing in popularity recently.

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These premium-priced tires, which produce wider profit margins for tire companies, now account for 36 percent of all original equipment passenger car tires and about 34 percent of all replacement passenger car tires. Although these premium tires are of radial design, they tend to wear out much faster than conventional radials and thus increase the frequency at which tires are replaced (Standard & Poor’s, 1998). This change in consumers’ preferences contributes to the demand for replacement tires.

2.2 Cooper Tires & Rubber Company:

A global competitor in the replacement tire industry, Cooper Tire & Rubber Company is a global organization having a diverse product offering of tires for passenger car, light truck, medium truck tires. Cooper has multi-talented teams that focus on design, manufacture, marketing and sales of tires. Cooper also owns stakes in subsidiaries that specialize in motorcycle and racing tires.

The Cooper brand is one of the most well established names in the automotive industry. The company always ensures that it is on the leading edge of industry innovations for quality improvement and production efficiencies in high-volume environments that produce thousands of tires each day. Although the functional purpose of a tire has remained the same for over a century, improvements to materials and design are allowing Cooper to bring a more effective, longer lasting tire to the market. To maintain its competitive advantage, Cooper is working to establish long term strategies for continuous improvement, operational effectiveness and product differentiation.

Cooper Tires globally operate 67 facilities which include manufacturing, sales & distribution centers, technical, with headquarters in Findlay, Ohio.

Cooper focuses its operations in three regions:

1. North America2. Europe3. Asia

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Figure 3: Cooper Operations worldwide.

Cooper has manufacturing facilities in North America, Mexico, Europe and Asia and its suppliers are spread all over the world. It is the third largest tire manufacturer in the United States (Market share: 12.5%). Cooper manufactures replacement tires for passenger and light truck vehicles. The company does not manufacture tires for sale to automobile manufacturers. The company operates four plants in the US, with a yearly tire production capacity of 47 million tires of which 70% is for US sales and 30% is for international sales.

Cooper tires produce a range of tires catering to different customer segments and in each segment it manufactures tires of different specifications and costs.

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Production (in a year):

Types Of tires US sales (in millions) International sales(in millions)

Passenger 16.45 7.05Light truck 6.58 2.82commercial truck 6.58 2.82winter 1.645 0.705

2.3 Strategies of Cooper Tire:

Cooper tires’ raw material procurement strategy is based on three principles:● maximum cost effectiveness● high quality● near source operations

Cooper procures bulk of its raw materials from China, since Chinese part producers are reliable in terms of quality and price. Cooper has its presence in China market. It has two production facilities and a robust distribution network. Cooper tires’ China operations are amongst top eight radial tire manufacturer in Chinese market. Further, the favorable trading conditions between China and US make Chinese manufacturers, an effective and secure sourcing option for Cooper tires USA.

Although Cooper tires operated manufacturing plants in China at lower manufacturing costs relative to US plants, it had to manufacture tires in US plants to sell large quantities within US than for international sales due to the additional tariffs on Chinese products. To remain competitive with its Chinese counterparts, Cooper had to price its products competitively. The additional tariff on the Chinese products gave them advantage in pricing.

Economic slowdown of 2008, badly affected automotive industry in USA. Most of the automotive Original Equipment Manufacturers (OEM) in USA faced high credit crunch with shrinking profit margins; some even reported heavy losses. This further affected ancillary part makers including tire manufacturing companies in USA. To help manufacturing sector recuperate, US government stepped in and took decisions to modify industrial framework including tax structure and custom duties. In order to protect US operations of tire manufacturing companies and to create employment opportunities in USA, the government imposed additional custom duties on tires imported from China which was in the order of 35-47 %.

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2.4 The Supply Chain:-

2.4.1 Suppliers:-

The major raw materials for tire manufacturing are natural rubber, synthetic rubber, carbon black, steel wires and fabric, Fabric, fillers, accelerators, anti-ozonants, etc. Most of these raw materials are available at a low cost in China and China is the major exporter of these raw materials to the United States. Cooper imports most of its raw materials from suppliers located in China.

The cost (from China) and weight distribution of the raw materials for a tire is as follows:-

Component Passenger Car Tire Cost/ton (in $)

Natural rubber 14 % 5947.96

Synthetic rubber 27 % 3850

Carbon black 28 % 2500

Steel 14 – 15 % 550

Fabric, fillers, accelerators, anti-ozonants, etc. 16 – 17 %

Average weight as new 25 pounds

Average weight as scrap 20 pounds

2.4.2 Manufacturing:-

In the United States, Cooper has manufacturing facilities located at four different locations. Out of these, the plant at Clarksdale, Mississippi is utilized only for the rubber mixing operation. These plants put together manufacture nearly 127000 units of tires each day.

The manufacturing facilities are located at the following locations:-

1. Findlay, Ohio, 2. Texarkana, Arkansas3. Clarksdale, Mississippi (rubber mixing)4. Tupelo, Mississippi.

The costs of operating these facilities and other costs involved are as follows:-

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Costs /unit(in $)

Raw material cost 78.72Labor costs 18.942Utilities 2.214Rent & depreciation 8.364Other costs 10.824Profit 4.674Total Revenue 123.78

2.4.2.1 Production Process

The rubber tire manufacturing process consists of 11 steps:

1. Mixing involves weighing and combining various ingredients (natural and synthetic rubbers, oil, carbon black, zinc oxide, sulfur, and other chemicals) to create a homogenous rubber compound that is discharged to a drop mill.

2. Milling creates warm malleable sheets that are cooled and coated with an “anti-tack solution.” These sheets are then fed into an extruder.

3. Extruding forces the rubber compound through a shaped slot called a die that forms the compound into various shapes.

4. Calendaring involves coating fibers of cloth or steel with a rubber compound, and then curing it in an irradiation oven that bevel cuts it to a desired length, width, and angle.

5. Bead making involves the creation of beads that provide a proper seal between the tire and the wheel rim when a tire is mounted on the rim and inflated. In the2-8bead building process, bundles of wire are passed through an extrusion die where a coat of rubber is added, and the wires are then wound into a hoop.

6. Cementing and marking processes are used at various stages throughout the tire building process. Cements (adhesives or solvents) are added to improve the adhesion of different components to each other throughout the process. Cement usage can vary significantly among facilities depending on the type of tire being manufactured and the process being used. Marking inks are used to aid in identifying the components being managed. Typically they are applied to

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extruded tread stocks to aid in identifying and handling cured tires. Marking practices can also vary significantly among facilities.

7. The various tire components go through cooling and culture prior to tire building. From the milling and extruding operations, the rubber sheets are placed onto long conveyor belts that, through the application of cool air or water, lower their temperature.

8. The two main components of the tire-building process are the tire carcass buildup drum and the tread application drum. These drum machines assemble the cut carcass plies and belts plus the extruded tread, sidewall, and beads into tires. The process begins with the application of a thin layer of rubber compound, the inner liner, to the innermost carcass ply. The carcass plies are placed on the drum one at a time, after which the beads are set in place and the plies (reinforcing layers of cord and rubber) are turned up around them. At this stage the belts and tread rubber are added.

9. Lubricating involves preparing the uncured (green) tire for curing. The green tire may be coated with a lubricant (green tire spray). The function of the green tire spray is to ensure the cured tire does not stick to the curing mold during extraction of the tire after curing.

10. Curing involves collapsing the drum and loading the green tire into an automatic tire press to be cured (vulcanized) at high temperature and pressure. The vulcanization process converts the rubber and also bonds the various parts of the tire into a singular unit.

11. Tire finishing may involve some of the following processes: trimming, white sidewall grinding, buffing, balancing, blemish painting, whitewall/raised letter protectant painting, and quality control inspections. Some facilities also apply a puncture sealant during production.

2.4.3 Distributor:-Cooper has ten distribution centers spread throughout the US through which it fulfills the demand for its tires. These are located at the following sites:-

1. Albany2. Allentown3. Findlay4. Franklin5. Grand Prairie6. Rancho Cucamonga7. Sumner8. Texarkana9. Tupelo10. Corona

2.4.4 Retailer:-

Tires are distributed through independent dealers, regional retailers, wholesalers and national retailers. Cooper is only into the manufacturing of replacement tires and hence their major customer is the general public. These tires reach the end consumer through thousands of retailers located all over the US.

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2.5 Simflex cost analysis of current and proposed scenario of Cooper’s supply chain:

SimFlex Lite is a unique suite of value chain planning tools enabling companies to design, test and deploy robust and lean solutions supporting business decisions.

2.5.1 Assumptions:

Customs DutiesFor the analysis we have assumed that Cooper would have to pay about 20% duty in USA on raw materials received from China. For raw materials imported in Mexico, Cooper has to pay 12% import duty. Under NAFTA regulations, Cooper need not pay any custom duties on part brought into USA from Mexico.

Transportation Cost and TimesThe appropriate (indicative) transport rates, hubbing costs and times should be used. SimFlex Lite automatically updates these values based on the current market scenarios.

Inventory costsAn inventory rate of 15% which covers capital and non-capital costs (including obsolescence, mark-downs, depreciation and insurance) is considered.

Operations Two weeks of safety stock level is considered for raw materials at manufacturing plants in USA and Mexico. All distribution centers stock one week inventory.

DemandTotal Passenger car tires’ demand of 16.45 million units for Cooper tires in USA is split as per population of 50 states.Manufacturing capacities at plants are assumed to be equal.

Warehousing Costs

Activity USA MexicoDispatching Storage Unit (Pallet Out) $5.25 $2.92 Monthly Cost per Storage Unit $13.25 $9.97 Reception of Storage Unit (Pallet In) $3.33 $2.27

Value added manufacturing CostsLabor costs in USA for tire assembly are $ 18.8. Labor costs in Mexico are 35% lower than those in USA.

Bill of Material

To build the indicative supply chain, raw materials are sourced from China. Natural rubber, synthetic rubber, carbon black, steel wires, fibres etc. are converted to unitized load based on their contribution to passenger car tire. A traditional pallet can carry about 6000 lbs.

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Raw material costs in China and unitized weight data is tabulated below:

 Material Costin China ($/ton) Weight(lbs) Items per pallet

Natural rubber 5950 3.5 172Synthetic rubber 3850 6.75 89Carbon black 2500 7 86Steel wire 550 3.75 160Fabric, fillers etc 2700 4 150Tyres -- 25 24

Current State vs Alternate Scenario:

Current scenario considers supply chain network of Cooper with sourcing from China and three manufacturing facilities and ten distribution centers. Raw material is shipped from China while full truck load is used for distribution in USA.

In alternate scenario, we are proposing relocating all manufacturing facilities in Mexico to take advantage of reduced custom duties and labor costs in Mexico.

Sources of information:

For custom duties:http :// hts . usitc . gov / http :// www . transportaction . com / last _ min / REDIMPORT _ DUTIES _ CH _ MX . htm For warehousing costs:http :// www . distributiongroup . com / articles / DCM 0310 we _ boyd . pdf Supply chain strategic values are referred to in simflex group website’s knowledgebase.http :// www . simflexgroup . com /

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2.5.2 Current Scenario:

Figure 4 : Current scenario of supply chain of CRTC

2.5.3 Alternate (Proposed) Scenario:

In the alternate scenario we propose Cooper to shift its manufacturing activities to two plants in Mexico at Monterrey and Guadalajara respectively. To minimize changes in the supply chain we suggest Cooper use the same sourcing strategy while transporting its products to the distribution centers through a central distribution center located in Dallas, Texas which receives all the products from the manufacturing plants.

Figure 5: Alternate scenario of supply chain of CRTC

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2.5.4 Results of cost analysis:

Figure 6: Cost analysis results using Simflex

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Figure 7: Strategy tradeoffs

From the above results,

Cost savings in alternate scenario = Costs in current state – Costs in alternate state

= $115.2 million.

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3.1 Value addition in the supply chain:

3.1.1 Value due to Alternate raw materials:

Chemically toughened natural rubbers, vegetable-based processing oils, and fibers made of plant cellulose; when used in place of traditionally used petroleum based raw materials reduce the environmental impacts and make the tires more eco-friendly. Environmentally benign silica filler (sand micro particles) is being used to replace some of the carbon black reinforcement, with the added benefit of further reducing road friction thus reducing fuel consumption.

3.1.2 Value added by using recycled rubber in Tire manufacturing:

Recycled rubber from scrap tires can be used in the production of new tires if the particle size of the recycled rubber is extremely fine and the particles are free from impurities such as steel and fiber. On an average we can save a gallon of oil in the manufacturing process for every tire produced incorporating recycled rubber and for every pound of recycled rubber used in place of synthetic rubber, the US will prevent a pound of carbon dioxide from being released into the atmosphere.

3.1.3 Value added by Recycling Manufacturing By-Products of Tire:

Solid waste is generated from the mixing, milling, calendaring, and extruding processes. Most of this solid waste is recycled or sold to companies who use the rubber for some other type of product. Tire buffing is the major by-product which is widely used by the manufacturers themselves for various purposes as follows:-

1) Roofing-materials from tire buffing and reclaimed rubber,

2) Cryogenic grinding,

3) Rubber mats from tire buffing: Typically used in barns, arena, gyms, and playgrounds,

4) Garden Mulch from tire buffing,

5) Mud flaps from tire buffing,

6) Other molded rubber products made from tire buffing.

3.1.4 Value added by Tire Retreading:

Cooper tires could consider entering into the tire retreading industry which has significant benefits and will also help it achieve its environmental policy goals.

A retread is a previously worn tire which has gone through a remanufacturing process designed to extend its useful service life . Retreading starts with a safety inspection of the tire. The old tread is then buffed away, and a new rubber tread is applied to the bare "casing" using specialized machinery. Retreads are significantly cheaper than new tires. As a result, they are widely used in large-scale operations such as trucking, busing and commercial aviation . They are also the most environmentally friendly way of recycling used tires - in some applications; a tire can be retreaded up to 10 times. Recycled rubber from retreads can be shredded to make rubber mulch.

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3.1.5 Value added by Tire Recycling:

Fortunately tires are 100% recyclable. The high quality of steel and rubber found in tires are easily reintegrated into the manufacturing process at very minimal or no change to existing manufacturing processes. Such products using recycled tires have proved to perform better than traditional materials. The global implications of reducing waste tires are many: improved socio-economic justice, reducing landfill, reducing carbon footprint and creating a safer society.

Approximately 2 billion waste tires are reported to be stockpiled across the United States, and 250 million scrap tires are generated annually. This result in a considerable environmental problem involving hazards associated with the storage of used tires. Proposals aimed at addressing this problem include the potential use of waste tires on highway projects, in asphalt pavements, and in highway embankments. Major tire derived products (TDP) consumers range from government agencies such as transportation, parks, and schools to construction-related firms such as architects and contractors, landscapers, and individual consumers.

There are variety of recycled rubber products, which includes; Crumb Rubber, Rubber In-fill, Playground Rubber Mulch, Landscaping Rubber Mulch, Horse Arena Footing Material, Hand-to-Hand Combat Mixed Rubber Nuggets, Rubber Tiles, Rubber Mats, Rubber Chips for Civil, Engineering Projects and Tire Derived Fuel. The products obtained by recycling tires also have environmental impacts. For instance, due to heavy metals and other pollutants in tires there is a potential risk for the (leaching) of toxins into the groundwater when placed in wet soils. This impact on the environment varies according to the pH level and conditions of local water and soil. Research has shown that very little leaching occurs when shredded tires are used as light fill material; however, limitations have been put on use of this material; each site should be individually assessed determining if this product is appropriate for given conditions.

Figure 8: Sector wise tire recycling industry.

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Rubber Manufacturers association (RMA) is the association responsible for the management of all annually generated scrap tires in an environmentally and economically sound manner. This comprises of 8 US based tire manufacturers. Cooper tires is also one among them.

3.1.5.1 Tire Derived Fuel:

Tire derived fuel is main consumer of scrap tires. It uses almost 45% of scrap tires. Burning scrap tires under favorable conditions results in a fuel with the following properties,

TDF Properties:

• It’s a consistent fuel

• 14,000 - 15,000 BTU’s per pound

• Less than 1% moisture

• 88% Carbon, Hydrogen & Oxygen

• Less Nitrogen than coal

• Less than 2% Sulfur

• 1.5% Zinc

• Virtually no Chlorine nor mercury

• 6% ash

• Cost advantages

TDF Applications:

• Cement kilns: Whole or rough shreds.

• Pulp & paper mill boilers.

• Co-generation facilities (pulp and paper mills, refineries and chemical plants).

• Utility boilers.

• Dedicated tire-to-energy facilities.

• Lime kilns: rough shreds.

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Reasons for Increased TDF consumption:

• Favorable cost comparison

• Better understood by state regulators

• Plant managers more familiar w/TDF

• Higher quality TDF

• More reliable service/delivery of TDF

• Better handling/feeding systems

• Emissions are favorable

3.1.6 Value added by Warranty options:

As per the current warranty policy being followed by Cooper, only the original purchaser of tire is eligible to claim the warranty and it is not transferable, enforcing a leeway in such rules would give them a competitive advantage. Providing a range of values for the total miles warranted and tread wear measurement warranted in tread wear protection can give them a competitive advantage as the customer will get to choose from the offerings which will be proportionately priced.

3.1.7 Value added by Efficient ERP systems:

Improvement in supply chain co-ordination could increase the performance and also could lower the operating costs.

3.1.8 Value added by sourcing alternatives:

Exploring various alternatives for procuring raw materials based on the costs, quality and lead times could improve their profits.

3.1.9 Value added by expanding facilities:

Pertaining to current evolution of Asian market, expanding manufacturing facilities within Asia could improve their business. Expanding its facilities within US also could increase the international sales because of the growing market outside US.

3.1.10 Value added by new innovations:

By investing more in R&D, Cooper could come up with new innovations which could improve the tire performance with respect to fuel consumed and thereby attracts customers because of rising fuel prices.

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3.1.11Value added by long-standing premium products:

Premium tires which have good performance properties and eco-friendly are the most consumed in the market, but the wear out so soon. Hence by producing premium products which could live for long time, Cooper could have competitive edge over other producers.

3.1.12Value added by Strategic production plans.

Lean practices in the production strategies could develop a high performing culture and it also reduces the wastes like dead stock, idle time etc.

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4.1 Conclusions

● Tire industry in US is on the recovery path after the slowdown. ● The slowdown taught people a lesson in spending money judiciously which pushed

companies to think innovatively.● Cooper Tires & Rubber Co. caters to the replacement tire industry which helps it focus

better on its core competencies.● By expanding into the tire recycling industry Cooper could lower its costs while at the

same time creating value for its customers by making eco-friendly products.● Investing more into research and development of innovative raw material or ingredients

for the tires to manufacture premium tires will also add value to the entire product range offered.

● Venturing into the fast expanding tire retreading industry could add value to the product from the customer’s point of view as people are looking for cheaper options.

● Using tire derivatives like TDF, TDA and tire buffing can save Cooper Tire & Rubber Co. considerable costs.

● Implementing efficient ERP packages throughout its supply chain will improve co-ordination along the chain which will reduce its operating costs.

● Implementing lean principles to develop a high performing culture will reduce waste in its operations and hence reduce costs while improving service.

● Providing different warranty options can add considerable value to its product.● Exploring different sourcing and manufacturing options so as to reduce the lead times

and procurement, distribution costs can save costs along the supply chain.● From the results of cost analysis using Simflex, it is evident that having manufacturing

units in Mexico could benefit Cooper in terms of reduced cost of production.● Expanding facilities in Asia could prove beneficial and bring in huge revenues for the

company as the automobile market in Asia is emerging at a very fast rate and Cooper could also take advantage of the low labor and operating costs.

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5.1 References

1. http :// us . coopertire . com / 2. http :// www . ibisworld . com / industry / home . aspx 3. A handbook for value chain research prepared for the IDRC by Raphael Kaplinsky and

Mike Morris4. http :// www . simflexgroup . com / portal / 5. http :// www . alibaba . com / showroom / price - of - raw - natural - rubber . html 6. Economic Analysis of the Rubber Tire Manufacturing MACT report by Subhrendu K.

Pattanayak, Brooks M. Depro, Tayler H. Bingham (Research Triangle Institute).

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