There was a rather interesting article, On the rebound, featured in the August 15^th edition of The Economist Magazine of which supply chain strategic planners should take note.  This article points out that Asia’s emerging economies are recovering much more quickly that those in other parts of the world, but raises the question of longer term sustainability of this momentum.  I would argue that this momentum also implies an investment in more sophisticated supply chain planning and analytical decision-making tools.

What I found to be of most interest in the article was the Barclays Capital chart (Back on track) that indicates that emerging Asia’s  industrial production levels have jumped to an annualized rate of 36% growth in the second quarter, and output has regained levels achieved prior to the onslaught of the global economic crisis. The authors cite China as the prime influencer of this trend, where industrial production has risen 11% in the past twelve months.  The U.S. on the other hand, continues its decline in industrial production activity, which reinforces the premise that the emerging Asian economies, and Asian based supply chains are now leading in the overall recovery.

There was previous speculation among economic forecasters that emerging Asia economies that were highly dependent on export-driven markets such as the U.S or Europe would lag in the recovery, or at least front-end recovery in these countries such as the U.S.. The opposite has occurred thus far.

The authors make the observation that Asian firms, similar to other global firms, aggressively cut production to below the level of sales in order to shed excess costs. Different than the situation in other regions, these firms now need to reopen factories.  The authors point to industry observers that note that the current pick-up of activity simply reflects the rebuilding of inventories in anticipation of increased demand.  South Korea’s private consumption rose by an annualized 14% in the second quarter, and in China, consumer spending in urban areas is up by almost 11%, mostly driven by government stimulus incentives directly related to consumer spending.  The article notes: “…South Korea, Singapore, Malaysia, Taiwan and Thailand have all had a government boost this year of at least 4% of GDP.”  The argument is that stimulus has been more effective in these countries because Asian households were not burdened by huge debts, and that it was a lot easier for emerging economies to find worthwhile infrastructure projects.

While all of these trends are noteworthy, I would raise a couple of caution flags for supply chain planners.  First, similar to the current debate around government stimulus programs that motivated U.S. consumers to trade in their clunkers for new automotive purchases, the question of longer-term sustainability of demand is a very valid one, and pertains to Asia as well as other countries. Firms will need to continually sense for sustainability in product demand, or a structural shifting of demand.

Second, Asia has a particular problem related to over capacity in certain industry sectors that existed prior to the recession.  If Asian factories begin to crank-up demand too far ahead of real demand, that overcapacity problem will lead to price erosion and a need to find more outlets for goods, potentially leading to another condition of too much inventory and productive capacity.

On the subject of the threat of inflation, the article’s authors point out that growth in the overall labor supply as well as sustained productivity levels will need to combat future inflationary pressures across Asia. I would argue that implies Asian based supply chain organizations will need to step-up their investments in IT tools that can provide global-wide supply chain visibility, as well as timelier decision-making relative to overall inventory and production levels.

If Asia does lead the West in the global recovery it must do so with smarter supply chain business processes and supporting technology that can rapidly sense and respond to both domestic or export driven market changes.  This is not necessarily a call to large-scale IT investment, but rather investing in tools that provide more insights into the timely balancing of supply with actual demand.

 Bob Ferrari

I was traveling and vacationing last week, and I’m now catching-up with some supply chain news over these past few days. 

One of the more interesting and eye catching supply chain stories was that related to Southwest Airlines, which has again been cited by the FAA for a significant maintenance lapse.  On Saturday, August 22, a dispute between the FAA and Southwest over the use of potentially unauthorized parts forced the airline to temporarily ground 46 of its 737 aircraft, nearly 10% of its fleet, forcing significant delays in its service operations. The parts in question, an exhaust gate assembly, functions to protect movable panels on the rear of the wings from being damaged by hot engine exhaust, and according to both the FAA and Southwest, does not pose an immediate safety issue.  According to an article in the Wall Street Journal last Wednesday (subscription may be required), FAA inspectors and managers maintain that since the specific parts were never authorized for aviation use, the planes containing these parts were technically not fit to carry passengers. According to this WSJ article, an FAA inspector uncovered the parts discrepancy “during a routine inspection” and since then, Southwest “has told us that it plans to replace all of these parts on the affected planes.” Both the FAA and the airline have come up with a plan to replace the suspect parts in less than two weeks.

A follow-on article in today’s Wall Street Journal indicates that the unauthorized use of the subject parts has occurred for up to three years on 82 planes, and has now presented a vexing policy question for the FAA as to forcing airlines to ground planes even though the violations don’t pose an immediate danger to air safety. Southwest has indicated that swapping out all of the suspect parts could take up to three more months. The FAA in-turn is concerned that allowing Southwest to continue flying these suspect jets could set a precedent for other carriers to seek similar special treatment in the future.

In my view, there are much broader issues at stake here, those related to the operation and maintenance procedures of discount air carriers, as well as the issue of supply chain risk and control.  First, Southwest has been the benchmark for many of today’s discount carriers in obtaining maximum operational use of fleet aircraft.  We have all more than likely experienced the quick, less than 30 minute turnaround of flight landings and departures, as well as the maximum utilization of aircraft during any given 24 hours of flight schedules. The unstated question is whether the emphasis of low cost and cheap airfares that leads to maximum utilization of aircraft use is adequately supported by required and properly scheduled maintenance. There is an excellent exchange of commentary attached to the initial WSJ article that debates the pros and cons of cheap airfares and proper maintenance. One commenter reminds us that two previous FAA inspectors who were overseeing Southwest maintenance standards have since been transferred, alleging that there may have been a  “too comfortable” relationship regarding oversight.

The other issue relates to the contracting of maintenance to a third-party, that, in-turn, may sub-contract that maintenance to another firm. As the latest WSJ article points out, Southwest has had a history of outsourcing maintenance to a U.S. based contractor D-Velco Aviation Services, that in turn, subcontracted work on the affected systems to another company that was not authorized by the FAA to provide the particular parts.  Southwest has suspended D-Velco as a maintenance contractor.

Readers may further recall that there have been other maintenance incidents directly attributed to Southwest.  In March of 2008, 44 of its older jets were grounded to inspect for possible structural damage after it was revealed that the airline chose to keep flying 46 jets that had overdue safety inspections for fuselage damage. At that time, the FAA imposed a record $10.2 million fine on Southwest. An article in the Dallas Morning News in March of 2008 quoted Southwest CEO Gary Kelly on Southwest’s continued commitment to safety, and another Southwest spokesperson pointed to the airline’s ongoing internal investigation of its maintenance operations and compliance with required work.

It is time for both Southwest and the FAA to establish renewed efforts for what is acceptable maintenance and parts control standards for discount air carriers.  The notion and/or perception by the traveling public that discount air carriers can find means to “get-around” required maintenance and inspections in order to maintain schedules needs to be put to rest.  The traveling air passenger needs the assurance that aircraft, no matter how much utilized or how long in service, has had both required maintenance and is safe to continue flying.  Yes, reason should prevail relative to what may be deemed a threat to aircraft safety or air worthiness vs. other maintenance.  Airlines in turn have another reminder that outsourcing of maintenance, for the sake of cost, does not include the outsourcing of responsibility for adhering to required maintenance and parts specifications.  Airlines that choose to practice full conformance with maintenance and safety of aircraft should not be placed at a de-facto cost disadvantage.

We trust that Southwest, as well as other discount air carriers, and the FAA, will hopefully learn again that efficiency must not compromise on required maintenance and adherence to parts specifications. Surely, now is the time to adopt standards that can keep the airline industry solvent but at the same time, safe.

Bob Ferrari