Archive for the ‘Supply Chain Risk Management’ Category

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Ferrari’s Afire- A bit of Blog Humor

Tuesday, September 7th, 2010

As a global supply chain blogger, I’ve been commenting on numerous product recalls that have led to supply chain disruption or major hits to a product brand.  There have been numerous public incidents involving basic foods, medicines, furniture, you name it, it just continues, which is cause for serious concern.  These past days, however, it really hit home.  Now, my namesake is involved. One of the most sought after and highly expensive supercars, which was described as the ‘ultimate toy for motoring millionaires’, has been voluntarily recalled.

I’m specifically addressing the Ferrari 458 Italia, which has a top speed in the area of 200 miles per hour and will set you back a mere $253,000, direct from factory. This magnificent vehicle is apparently suffering from a series of spontaneous fires.  Consequently, the 458 is nurturing a new Google search term, ‘Flaming  Ferrari.’

Ferrari, now a division of Fiat Group,  is recalling 1,248 of these vehicles after six burst into flames. The recall is being described as one of the largest in Ferrari history, and thus far, involves specific fire incidents occurring in China, Europe and the U.S..  According to Ferrari, it seems that during manufacture, some of these cars were fitted wrongly with glue that could leak on to the exhaust. The glue will be replaced by metal fasteners, which should be little consolation to a prestigious customer who paid tons of money for a new 458.

Talk about an interesting photo, how about the following ‘Flaming Ferrari’s from across the world:

Burning Ferrari 458 in Paris

Burned Ferrari 458 in California

Burning Ferrari 458 in Switzerland

We can sometimes describe a bad day, but perhaps the privilege of watching your $250K plus sports car incinerating itself may qualify in the real bummer category.

Ferrari, of course, had an official statement which was noted in financial media.  “It happens sometimes that cars catch fire.” Read it again folks, I’m not making this up.

It seems when driving your Ferrari, you should expect an occasional problem, especially if you drive loose and fast. The Financial Times humorously noted at the end of its print edition article that “fire extinguishers are an optional extra.”

An entry penned by Marin Evans of the UK based Telegraph quotes a sports car expert as quick to note that is not unusual for new owners to exhibit a few initial crashes as they develop a feel for the new vehicle. I suppose therefore the unanswered question is whether these fires are over and above the usual ‘I need to test this monster’ period, perhaps within the normal learning curve.

This Ferrari (the author) would certainly conclude that today, supply chain risk has no boundaries, not even involving a namesake.

For the time being, please take note that Supply Chain Matters and this author, have no direct relationship with Ferrari cars, including its public releases concerning recalls.  As is sometimes said, these things happen.

I guess!

Bob Ferrari

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Yet Another Setback for the Boeing 787 Dreamliner Delivery Program

Friday, August 27th, 2010

There have been many consistent themes in our continuous commentary on Supply Chain Matters and one of the most consistent over these past months has been the supply chain setbacks that have occurred within Boeing’s infamous 787 Dreamliner manufacturing program.  All you need to do is type in ‘Boeing’ or ‘Boeing supply chain’ in this blog’sSearch box, and you get to review the full litany of commentary.  Our latest posting was at the end of July, commenting on the fact that Boeing’s CEO finally admitted the key importance that Boeing has on its supply chain capability, which was a gross understatement of the obvious.

Today there is more disappointing news.  Boeing has now announced that it has to postpone the planned first customer delivery of the Boeing 787 into the middle of the first quarter of 2011.  Mind you, for most of this year, after numerous setbacks and postponements, Boeing’s senior management had been assuring stockholders that first customer ship would occur by the end of 2010.  This latest setback was attributed to engine supplier Rolls-Royce PLC, who’s Trent 1000 engines were specified as power plants for initial customer All Nippon Airways (ANA).  A statement released by Boeing notes that this delay: “follows an assessment of the availability of an engine needed for the final phases of flight test this fall.” The Trent engine suffered a failure while being tested on a test bed in early August.

An article penned by noted aerospace blogger Jon Ostrower on the Flightglobal site notes that compounded issues with workmanship problems with the aircraft’s Alenia Aeronautica-built horizontal stabilizer and its Rolls-Royce Trent 1000 engines led-up to this latest setback. Ostrower also provides details on the subject engine issues.

The most patient of all related to this ongoing litany has been designated first customer ANA, that has had to deal with an anticipated new addition to its fleet that is now three years behind schedule.  The Wall Street Journal noted in its article that ANA called the delay regrettable but added, “However, we trust that the time will be used to deliver the best possible aircraft in the shortest possible time frame.”

We at Supply Chain Matters express praise to ANA for their eloquence, since ANA has every right to be frustrated at this point. (We refrained from using a more down-to-earth six letter term that begins with a ’p’)  The sole purpose of the supply chain , as we know, is fundamentally serving the best needs of customers.

The delay announcement came very late in the evening, Seattle time, no doubt after a very long day of discussion and deliberation among Boeing’s top management. To Boeing’s credit, it has to deliver a safe and reliable aircraft. We have to wonder, however, as to which Boeing executive (s), if any, will suffer the next fall in this latest setback. Suffice it to say, Boeing’s senior management and supply chain teams remain under a very sensitized looking glass. We all need Boeing to succeed, and soon!

Bob Ferrari

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A Barrage of Disturbing News Concerning Breakdowns in U.S. Food Quality

Tuesday, August 24th, 2010

August 2010 is quickly turning out to be quite a month for consumer safety concerns regarding the overall safety and quality of U.S. food-related supply chains. Governmental agencies are under the gun to step-up inspection and enforcement and are seeking more jurisdictional power as a litany of urgent alerts permeates news and social media sites.

A lot of attention and commentary have been directed at the massive recall of eggs that was announced on August 13, and now that incident involves over 380 million recalled eggs.  The U.S. FDA reports an ongoing four-fold increase in the occurrence of Salmonella Entertidus that led-up to this recall incident. In our commentary on Supply Chain Matters we questioned why an egg enterprise or agri-business with such a wide distribution of product and private brand volume could experience this type of occurrence without a rigorous quality and inspection program. Former U.S. secretary of labor and University of California Professor Robert Reich penned a scathing litany featured on both The Huffington Post and his own web site, concerning the history of violations involving Jack DeCoster, owner of various nationwide egg farms including the involved Iowa farms.

Adding more to consumer concerns, this week, consumers were alerted to an FDA Class 1 recall involving 380,000 pounds of deli meat products that may be contaminated with Listeria monocytogenes.  Zemco Industries of Buffalo New York is voluntarily recalling product which was distributed to nationwide Wal-Mart stores, as well as delicatessens, where they were processed into sandwiches. The products in question were produced on various dates from June 18 to July 2, 2010.  The problem was discovered in a retail sample collected by the State of Georgia that tested positive for a strain of listeria. To date, the USDA has received no reports of human illnesses.  According to a Wal-Mart press release, upon learning of the recall by Zemco, all Wal-Mart stores were instructed to remove select Marketside Grab and Go deli sandwiches from store shelves.

The FDA also issued an urgent nationwide recall of frozen mamey fruit pulp sold under the La Nuestra and Goya Foods brands because of an epidemiologic link between an ongoing outbreak of Salmonella Typhi infections and these products. The U.S. CDC reports that at least 9 people in California and Nevada are ill with typhoid fever caused by Salmonella Typhi.  Consumers who have these products in their homes are being urged to discard them immediately and further inquire as to what brand of mamey products are being used in drinks processed at juice stands and retail stores.

A select batch of pistachios and pistachio kernel products that were distributed by California Delights Inc. have been voluntarily recalled due to fears of salmonella contamination.  The products were shipped to two other distributors, Austinuts Wholesale Inc. and Glory Bee Foods, Inc. , and were re-packaged and sold to stores and bakeries within the states of Oregon, Texas and Washington.  Austinuts received two shipments of suspected product that were re-packaged as pistachio kernals, deluxe nut mix, and gourmet nut mix.  GloryBee Foods recalled its Patty brand 5 pound bags of whole raw pistachios, and 25 pound boxes of Special Commodities brand whole raw pistachio kernals.  Keep in mind that a previous nationwide recall of pistachios over a year ago impacted over 80 products and multiple brand names.

August may well turn out to be a watershed month in triggering concerns about the breakdown in quality processes involving global based food supply.  Many have noted and recognized, including the current head of the FDA, that the U.S. government has limited resources to monitor and inspect global-related flows of food products.  My belief is that the overall zeal of supply chain cost reduction efforts across many industries, including those dealing with most sensitive of products, is taking a visible toll in the breakdown of quality and conformance. I’ll be commenting more on this trend in upcoming writings.

In the meantime, the consumer goods and food industry has to self-police itself or risk more daunting regulation and control, as consumers reel from a litany of disturbing events.

Bob Ferrari

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The After Effects of the Apple Related Supplier Kickback Claims

Monday, August 23rd, 2010

The following posting can also be viewed and commented upon on the Kinaxis Supply Chain Expert Community web site.

The fallout from the indictment and arrest of Paul Devine, a global supply manager at Apple charged with wire fraud, money laundering and unlawful monetary transactions involving more than one million dollars in alleged kickbacks, has continued since we first commented on this incident.  As I pen this entry, a Google search notes over 1200 web entries directly related to various aspects of this incident. Commentaries in the blogosphere and among academics are focusing on the implications for procurement and supply planning strategies, and we all have to ponder whether this one, highly visible incident is just another sign of the state of the times or whether this is a watershed incident leading to more focused ethical standards.

Reports in various global financial publications such as the Financial Times and The Wall Street Journal are focusing on the general reactions among specific suppliers involved, as various companies respond to protect either legal interests or reputations in the market.  According to the Financial Times, Kaedar Electronics of China, a unit of Taiwan’s Pegatron Corp. and Cresyn of South Korea admitted it benefitted from the information provided by Mr. Devine. The article notes that “Cresyn and Mr. Devine signed a “consulting services agreement” spelling out what Mr. Devine was required to leak, including Apple product roadmaps and sales forecasts, in exchange for $6,000 in monthly payments.” The Times notes that Pegatron had begun its investigation and had suspended the Kaedar manager allegedly involved. Meanwhile a Wall Street Journal article notes that a Pegatron spokesperson acknowledged that Kaedar did pay a brokerage commission to an intermediate trading company for its business with Apple, but declined to disclose the amount of money paid. Others suppliers reportedly involved are indicting that such practices are not condoned.

No doubt, the coming days and weeks will provide even more opinion and commentary on the implications of this incident, and whether it sends a wake-up call on the state of ethical procurement practices when supply chain business pressures and various business cultures collide.  While some may deflect such remedies toward the moral principles or motivations of the individuals involved, or on future hiring and selection policies, in my view, hiring policy has little to do with the underlying root cause of this episode.

Individuals respond to the business culture and the goals and organizational expectations practiced within their firms.  We all know that Apple surrounds itself with a culture of extreme secrecy to protect itself from competitors.  Suppliers want an edge on their competitors, and will sometimes go to extraordinary means to secure protected information that provides that edge.  To change all of this, all members of the value-chain need to equally share in the risks and rewards of success, and further need to know where the lines are drawn. Apple has a well articulated Supplier Code of Conduct, and to its credit, is taking very decisive action in dealing with this incident.

I come back toward the needs for insuring that proper risk and reward strategies are practiced and properly monitored among all in the value-chain, and with all professionals involved. Confidentiality and the safeguarding of key information has its place and all parties need to understand that certain behavior and practices will not be tolerated.  The anticipation of lucrative business does not warrant unscrupulous behavior.

What’s your view?

Bob Ferrari

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Massive Recall of Eggs Unfolds in the U.S.

Friday, August 20th, 2010

There have been growing concerns about the eroding safety of our food supplies and Supply Chain Matters has had far too many postings noting incidents of contamination affecting the safety of food-related supply chains.  I suppose that the latest incident involving the recall of hundreds of millions of eggs in the U.S. should not be a surprise, but the scope and circumstances are again rather troubling.  In this new era of social media explosion, these types of incidents can bring tremendous amounts of negative perception and damage to brands. They also cause too many disruptions for supply professionals.

On August 13, Wright County Farms of Galt, Iowa, an entity associated with DeCoster Farms, voluntarily recalled 228 million “shell eggs” because of the potential for Salmonella Enteritidis contamination. These eggs were distributed to food wholesalers, distribution centers, supermarkets and foodservice companies across eight U.S. states, involving eggs shipped from May 16, 2010.  Thirteen different brand names were involved in this recall, and because whole eggs are the basis for an ingredient in other food products, there are probably unspecified aspects as to the total scope of this recall, and the potential for human illness.  The U.S. Food and Drug Administration (FDA) issued a recent news release outlining the details of this recall.

As I pen this commentary, the recall has now expanded to 380 million eggs involving seventeen U.S. states. All five farms owned by Wright County Farms are under suspicion as sources.  An article on Reuters notes that the amount of eggs recalled are equivalent to nearly all the eggs consumed by all Americans in two days, which is rather a significant exposure. Nearly 2000 cases of salmonella were officially reported to U.S. government agencies from May thru July, a period where 700 cases would have been considered the norm. The U.S. FDA has fifteen investigators currently working on tracking the sources or potential causes of the infection. This recall has significant supply chain implications because uncooked eggs can end up salad dressing, meringue pie or other food or restaurant items.

As was noted in recent recalls such as pistachios, potentially contaminated product has been in the supply chain, undetected until now, for at least three months.  One also has to wonder why an egg enterprise with such a wide distribution of product and private brand volume had this type of occurrence.  The FDA notes that new egg safety standards took effect on July 9 which requires producers to safeguard feed and water supplies and test poultry houses for salmonella, In the case of Wright Farms, one has to speculate if these regulations came too late.

Bob Ferrari

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Apple Supply Manager Indictment-Does lucartive supplier business warrant unscupulous business practices and behavior?

Monday, August 16th, 2010

The following posting can also be read and commented upon in the Kinaxis Expert Supply Chain Community web site.

There has been no shortage of significant supply chain related news these past months, but I would dare state that the most troubling thus far this year broke this weekend.

A global supply manager at Apple was arrested and charged with offenses that include wire fraud, money laundering and unlawful monetary transactions involving more than one million dollars in alleged kickbacks.  According to the Wall Street Journal article, (paid subscription may be required)  “this incident underscores the pressures on companies that hope to serve as suppliers to the fast-growing Silicon Valley giant.” An indictment also names an employee of one of Apple’s suppliers as a co-conspirator.

The U.S. Internal Revenue Service and the FBI conducted the investigation uncovering an elaborate scheme involving at least three suppliers where confidential information that would allow these suppliers to negotiate on more favorable terms with Apple was shared.  The suppliers in question provided mechanical parts, tooling and fixtures related to the manufacture of Apple iPads and iPhones. Information allegedly shared by those indicted include Apple’s planned sales volumes, product specifications, competitors target prices and bids, which in essence provided overall intelligence on how to best bid for Apple’s business. Correspondence with suppliers was made through Hotmail and Gmail email accounts, payments were made in traveler’s checks and as many as 14 U.S. and overseas bank accounts were utilized in depositing the monies.

To Apple’s credit, the company reacted swiftly, filing a civil suit against the alleged conspirators charging them with fraud and violations of racketeering laws.  The company also issued a statement indicating that it has “zero tolerance for dishonest behavior inside or outside of the company.”

The fact that these incidents continue to be uncovered is troubling in itself.  As many in our community are astutely aware, Apple fosters intense secrecy about its supply chain activities both among its suppliers and its internal employees. Now that an Apple supply manager allegedly violated that policy for personal gain implies that certain individuals will take extraordinary risks for personal gain, not to mention that certain suppliers themselves felt the need to take part in such unethical and criminal behavior in order to maintain or advance their supplier business interests with the company.  Further, as has been noted in past incidents of this type of behavior, the incidents themselves occurred for many months before detection.  Apple indicated that activities related this alleged incident dated back to October of 2006.

There are real questions to ponder.  Does huge supplier contracts with potential for long-term business volume foster an environment that ‘winks’ at unsavory business practices?  The suppliers alleged to be involved in this incident stemmed from China, South Korea and Singapore.  Would North America or European-based suppliers be just as susceptible to practicing these activities?  Are certain corporate security and ethical standards not being consistently enforced?  There are so many questions ….

What’s your view?

Bob Ferrari

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Recalled BlackBerry Batteries- Yet another wake-up call on counterfeit parts and product recall mitigation

Wednesday, August 11th, 2010

We have on frequent occasions penned Supply Chain Matters commentary related to the increasing occurrence of counterfeit or bogus goods across multiple industry and governmental supply chain networks. This growing issue has impacted product-related as well as refurbished product supply chains and has contributed to a more important consideration in supply chain risk identification and mitigation. In December, we noted how this problem has spread across the most sensitive of supply chains that being the defense-oriented supply chains of U.S. military agencies.  In both industry and defense sectors, unsavory operators have developed sophisticated techniques to counterfeit brand trademarks on components, taking advantage of unsuspecting buyers in their quest to find lowest-cost supply, or tap secondary distribution channels.

Another wake-up reminder to this growing problem will now catch the attention of certain BlackBerry© smartphone owners.  This week, the U.S. Consumer Product Safety Commission announced that about 470,000 BlackBerry batteries distributed by Asurion are being voluntarily recalled due to an overheating and safety problem.  According to the recall notice, the batteries in question are counterfeit, and “these batteries were used across virtually all modes of refurbished BlackBerry devices distributed by Asurion prior to November 1, 2009.” Readers should note that Asurion is a well-known provider of consumer electronics add-on protection services for many mobile phone providers.  Their marketing tag line reads: Your Technology Protection Company.

The sobering aspect to this recall is that the batteries of suspicion carry a BlackBerry brand, which implies that an  uncertain number counterfeit batteries penetrated the supply chain without apparent detection.  The Recall Alert in-fact  provides a rather revealing phrase concerning the origins of these suspect batteries: Manufactured In: Unkown The fact that the dates of shipping span as far back as March 2004 is another concerning sign.  The Notice indicates that Asurion has received two reports of these suspect batteries causing minor burns. The CPSC notes that it is still interested in in receiving incident or injury reports that may be directly related to this incident.

I strongly suspect this incident will provide interesting challenges for consumers  with refurbished BlackBerry’s, since identification of genuine vs. bogus batteries will be key to mitigating this recall in a timely and cost effective fashion.  A web site has been referenced to provide consumers with information on how to identify the counterfeit version. Yes ladies and gentlemen, you have to identify if your battery is counterfeit based on various images of batteries.  The bottom of this Battery Exchange web site also notes that consumers should not contact Asurion directly, that this exchange program is being administered by a separate administrative entity.  That is even more interesting, adding a separate entity to the exchange and mitigation process.  Does anyone recall that past incident with Dell’s defective laptop batteries?  Dell clearly communicated the location of a web site where consumers could input a serial number and get real-time feedback if that battery was subject to recall.  I visited Asurion’s web site and as of this writing, there is no mention whatsoever of this recall program, or a reference to the separate battery exchange web site.  Interesting indeed.

The ever increasing popularity in smartphones and sophisticated consumer electronics brings with it high expectations for product reliability and customer service. Consumers pay premiums for these products because of the expectation that these are premium and durable products. Buying an add-on assurance program just adds more to these expectations. Being informed that the prime power source of your device may be counterfeit, trying to locate clear information, and having to determine this on your own based on visual inspection is not what consumers want to hear.

A supply chain risk mitigation plan must include means to quickly trace and identify suspect parts, and also be able to quickly respond when a potentially harmful quality problem arises. Clear and open communication is critical.  Think of Toyota’s latest incident.  Having just heard from the U.S. government that sticky accelerator pedals may have indeed been the root-cause of the recent rash of UIA incidents will not take away the damage that was done to brand reputation.

Quality or conformity of components applies not only to individual brand owners, but their add-on service and reverse logistics providers as well.  All involved are extensions of the brand, and consumers can often be unforgiving.

Bob Ferrari

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Ship Collision Closes Mumbai Port- A Visual on Supply Chain Disruption and Risk

Tuesday, August 10th, 2010

I often use visuals in my supply chain risk management workshops, since visuals can have more impact on thinking than sometimes words. Therefore, this visual of a container ship listing at 80 degrees,(shown below)  losing its container cargo and polluting nearby waters with harmful substances certainly caught my attention. Another common tenet of major incidents is that initial reports and assessments are often conflicting, and this incident again brought this situation to light.

On Saturday, August 7th, two vessels collided about 10 kilometers outside the port of Mumbai in India.  The Panamanian-registered MSC Chitra, a container ship, and the break-bulk merchant vessel Khalija-III were involved in this accident. Thirty three crew members were reported rescued.  As is usual for these types of incidents, there were initial conflicting media and governmental reports as to the location and details of the accident and collateral damage.

The MSC Chitra was loaded with more than 2400 containers, 2600 tonnes of oil and 300 tonnes of diesel fuel, and as of yesterday, 300 loaded containers had already sunk into nearby waters.  Some of these containers were reported to include toxic materials such as sodium peroxide. A rather thick oil slick was surrounding the vessel. This ship had sailed to Mumbai from Dubai, and was outbound from JNPT port facility when the collision occurred. The Khalija-III was apparently towed into port after the incident.

The port of Mumbai remains closed as India’s Coast Guard and other governmental agencies work to salvage both the vessel and the spilled containers, some of which are floating in the main ship channel.  The port is expected to be closed for several more days.

India media reports indicate that as of Monday, there were over 80 ships waiting at sea for unloading at berths at the three JN Port terminals, and some are expected to be diverted to other ports.  Indian officials have also filed maritime charges against the two captains of the vessels.

Supply chain disruption and risk is occurring more frequently across the globe.  We recently commented on numerous occurrences in China and other areas of the globe, and it seems that accidents along with oil and chemical spills are becoming all too frequent. The need for a supply chain risk identification and mitigation strategy is ever more apparent.

Bob Ferrari

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Senate Pharma Bill May Improve Drug Supply Chain Safety for Consumers

Monday, August 9th, 2010

Last month, I wrote a guest posting on this blog about my search for the source of my generic prescriptions and commented that I learned that my American Pharma company contracted with manufacturers and drug suppliers from foreign countries, and to my chagrin it was nearly impossible to find out where my drugs were made.    In my commentary I expressed my view, as a drug consumer,  hat the same regulatory diligence and vigilance required of drugs manufactured in the U.S. also be extended to international manufacturers.

I am still apprehensive about the preponderance of foreign drug manufacturers and suppliers that are not US FDA approved or regulated.  However, I was heartened to read that Senator Michael Bennet is sponsoring a new Senate bill, The Drug Safety and Accountability Act of 2010, which gives the FDA the authority to make sure our prescription drugs are safe and pure.

One article, Act aims to fortify FDA rule of non-U.S drugs, notes that what makes this bill different from the others introduced in this legislative session is that it has a supply chain focus that “attempts to strengthen quality standards industry-wide, reaching beyond U.S. borders to such countries as India and China, home of a growing population of contractors governed by less stringent regulatory standards than the U.S.’s.” In my view, that is rather significant.

Over on IndustryWeek.com, another article, New Bill Strengthens Government Authority over Pharma Supply, quotes Senator Bennet as noting that “up to 80% of the active ingredients in U.S. drugs are made overseas, many in countries where regulatory oversight does not meet U.S. standards.” The article highlights some major bill proponents, including the Society of Chemical Manufacturers and Affiliates (SOCMA).  Senior Vice President Ken Johnson of Pharmaceutical Research and Manufacturers of America (PhRMA) states in this article that “Drug manufacturing for the U.S. market…is regulated under Good Manufacturing Practices (GMP) by the FDA…[which] assure the safety, quality and purity [of the] U.S. prescription drug supply.”

This proposed bill addresses some of my concern about relying on the assurance of any particular pharmaceutical company that all its specific drug suppliers are from U.S. FDA approved sites.  The drug supply chain has many links, and without stringent oversight, there is the likelihood that there will be undocumented breaks in the supply chain, thus leaving the pharma company and its consumers at great risk.  There are so many recent reports and examples of tainted, counterfeit, and recalled drugs that have bolstered consumer fears. The bill seems to give the FDA some teeth in terms of investigating and assessing penalties, improving manufacturing and supply chain standards, requiring accurate documentation, and implementing an accurate information tracking system. It extends the oversight to over-the-counter (OTC) drugs, as well.  This is a huge plus for consumers.

The Drug Safety and Accountability Act of 2010 has the potential of being a beneficial protection for U.S. prescription and OTC consumers.  If this bill can assist in insuring that drugs in the supply chain distributed to U.S. consumers, by any and all manufacturers, equally meet safety, purity and accurate specifications, then I am all for its passage.

Marie Ferrari

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Has Your Company Put Suppliers at Increased Risk?

Tuesday, August 3rd, 2010

The following posting can also be viewed and commented upon on the Kinaxis supply chain Expert Community web site.

Every now and then, it is important to take a step back from our everyday supply chain and procurement activities and reflect on the big-picture.  Such reflection could well uncover a brewing crisis before it becomes unwieldy, or worse, before it becomes a significant setback to business.

As I analyze various trends in cross-industry supply chain and financial performance, I have been reflecting upon why this post-recession recovery transition period has been demonstrating so many conflicting trends.  Large global manufacturing firms, for the most part, have generated rather impressive profitability results in the face of unprecedented business conditions.  Many months of cost-cutting in direct labor, overhead and supply-related costs have provided a far lower threshold to profitability, but a far leaner and vulnerable supply chain.  Some firms have taken a further step to attack any fixed cost associated with their supply chains, outsourcing the bulk of activities to contract manufacturers or key suppliers.

The end result is that many of these global manufacturing firms are amassing large amounts of cash.  The most recent analysis pegs that cumulative cash balance number in excess of $8 trillion, and Wall Street analysts are salivating on the potential for an upcoming period of increased acquisitions.  Others speculate why additional hiring has not begun.  However you view this situation, there are more fundamental stakes in play, and they directly concern supply chains.

This week, the Financial Times published an article , Industrial’s success squeezes suppliers (free preview account may be required), which perhaps gets more to the big-picture, namely that while the larger firms have been practicing financial engineering, they may well have done so at the financial risk to their smaller suppliers.

During the darkest days of the recession and continuing into this current transitionary period, smaller suppliers were forced by supply chain dominants to dramatically cut back on costs and capacity. In many cases, suppliers were mandated to absorb longer payment cycles on their accounts receivable.  Some suppliers have survived the crisis, others have not.

Now, continued uncertainty relative to the longer-term direction of the global economy has caused many of the survivors to be extra cautious before investing in added resources and/or capacity.  Those suppliers who are experiencing significant increases in demand are finding it rather difficult to borrow money to fund expansion.  The Financial Times reported last month that U.S. small businesses are having to pay more relative to the Federal Reserve’s benchmark borrowing rate then at any time in the last 25 years.

In essence, large firms have placed more strategic and tactical importance on supplier capabilities, yet still demand the same upside and downside agility as if they still owned these capabilities in-house.  In the FT article, the CFO of Caterpillar notes that this year, some Caterpillar facilities have ramped from near zero to as much as 70 percent with very little notice being provided to suppliers.  Japanese manufacturing firms who had previously built “kiretsu” partnerships with suppliers that included joint-financing assistance, are now aggressively outsourcing large portions of manufacturing to contract manufacturers.  In its article, FT concludes that “big manufacturers may well take the lesson that careful stewardship of the supply chain is important at all stages of the cycle.”

Perhaps we should not call all big manufacturing firms to task for transferring the bulk of supply chain capability to smaller suppliers without some strategic assistance.  Some firms have indeed reached out, but I suspect that the numbers are small.  What is becoming clearer, however, is that dependency on suppliers, whether large or small, is the ‘new normal’ and larger firms have higher stakes in the long-term success of these suppliers.  Perhaps some of the key parts shortages being experienced in the high tech and other industries may have root cause to the current conditions.  In any case, there is, at least in my mind, some basis for the effectiveness of “kirestsu” types of supplier partnerships.  The ‘big-picture’ is that some new form of partnership model is required, one that requires the involvement of business, financial and/or other parties.

The months of severe recession and cumulative cost cutting has shifted the supply chain risk profile.  Today’s volatile and uncertain global economy requires capabilities in supply chain agility. While technology can help with agility, strategic and partnership strategies related to suppliers may be a missing component in today’s environment.

Is your organization actively addressing this situation?

Bob Ferrari

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