No sooner had we posted our Supply Chain Matters and Supply Chain Expert Community posting on Monday, A Supply Chain In Turmoil- What’s Ahead for PC’s, than the first significant salvo announcement comes to light.

Reuters and other media are reporting that Japan’s Sony Corporation, Toshiba Corporation, and Hitachi Ltd. will together merge their money-losing small liquid-crystal display operations to form a single company to be named Japan Display. Adding more twist is that the new venture will be backed by $2.6 billion of funding from The Innovation Network Corp. of Japan, a government backed agency who will take a 70 percent ownership stake in the combined entity, while each of the merging companies will hold a 10 percent ownership stake. The goal is to complete the merger by 2012 and list the new company as an operating entity by March of 2016.

The Reuters story notes that the announcement is a response to competitors such as Japan’s Sharp Corp, Taiwan’s AU Optronics and South Korea’s Samsung Electronics which are outpacing industry competitors and garnering a good share of long-term supply contracts. The obvious supply chain dominant force is Apple who buys a lot of small LCD’s to support its smartphone, player and tablet products.  Rumors have been circulating that Apple has plans to ramp-up iPad production levels to 10 million units per quarter, while the iPhone is experiencing healthy sales volume in China, which imply a lot of displays. Sharp is rumored to receive a considerable investment from Apple while Samsung has key supply agreements with other high volume smartphone clients including its own smartphone division.

Another twist to this Reuters story is the notation that Hitachi had been in separate talks with Apple’s prime contract manufacturer Hon Hai Precision Industry (Foxconn), about a joint LCD panel venture with Hitachi.  In our recent Supply Chain Matters commentary regarding Hon Hai’s Annual Meeting, we made note of another LCD joint venture with Sharp. Apparently multiple bets are being covered.

At first take, we view two significant takeaways from this announcement.

The first is how government funding was leveraged to insure industry survival of a chosen few providers.  How do you think Sharp feels knowing that three of its Japan based competitors garnered the political influence to provide a competitor that equates to over 21 percent of the market for small and medium-sized displays?  One would suppose that Japan’s leaders viewed this in the same context as perhaps the U.S. bailout of Chrysler and General Motors, to compete against rival Ford Motor Company.  The one nix however was that more jobs and more supply chain capability was at stake in the U.S. and the timing was in the depth of the past financial crisis in 2008.  It is not likely that this action would happen in the current political environment of a government spend crisis.

The second is the most obvious for our supply chain community, the actions and buying influence  power of certain supply chain dominants such as Apple and select others, and how that cascades to volume and profitability pressures in associated supply chains. HP’s announcement and uncertainty concerning its PC and mobile computing business compounded with the business challenges for Nokia and RIM will likely precipitate other announcements in the days to come as the shift from PC to mobile products drives more strategic supply chain decisions.

Bob Ferrari

A year ago there was a massive U.S. product recall involving hundreds of millions of packaged “shell eggs” because of the potential for Salmonella Enteritidis. The eggs, packaged under 13 different brand names, originated from farms in Iowa, the largest egg producing state in the U.S. producing 14 billion eggs per year.  These eggs were distributed to food wholesalers, foodservice companies and supermarkets and because whole eggs are the basis for producing and preparing other food products, there were unspecified aspects as to the total scope of the recall along with the potential for human illness. The incident garnered widespread media coverage with calls for safety.

At the time of the outbreak, the U.S. Food and Drug Administration (FDA) and the U.S. Department of Agriculture (USDA) conducted separate investigations to determine the source of the contamination. There was suspicion pointing to the feed provided to the various hens, although no definitive conclusions were made known.  There were suspicions as to the overall sanitary conditions of the egg farms themselves, with national media outlets showing videos of large piles of manure and feces. At the time, Supply Chain Matters and other social media challenged large producers such as DeCoster Farms to do something about the problem so this incident would not repeat itself.

We happened to be alerted to a recent rather eye-popping article published in the Des Moines Register and Tribune, Egg Farms rack up violations.  We wanted to insure that our readers took the time to read this article and pass it along to others.

The article reports that government inspectors continue to find unsanitary conditions and inadequate protections against disease.  Also noted: “None of the violations have resulted in fines or penalties from state or federal agencies, and Iowa’s major egg producers still aren’t required to tell state officials when they find salmonella on their farms.”  It goes on to note that critical elements of FDA inspection reports, such as brand names or size of infestations, are blacked out and are being withheld from the public. There are quotes from food safety experts that statistically, eggs are safe, but not safe enough.  Outlined are significant gaps in the current inspectional system, including the forewarning of farms to an inspection, overlaps and gaps in federal agency inspection authority, and legislative loopholes that exempt certain farms from inspection and reporting.

If you read the article, like some of my family members, one really has to take pause as to the quality and consistency of egg related supply chains. Some of you may not be able to completely get through the article. A tip-of-the-hat to the article’s author, Clark Kauffman, for calling the current stituation to the attention of Iowa and other readers.

Last year, our commentary was that consumers should not be expected to settle for apologies but rather industry-wide actions to address quality of the egg supply.  The United Egg Producers, an industry cooperative representing 95 percent of U.S. production farmers, has outlined a series of food safety actions including a Five-Star Total Quality Assurance Program to ensure consumers get a safe product. Yet, the Register article reports that Wright County Egg and Hallandale Farms, the companies identified in the 2010 recall incident were enrolled in this program but inspectors continued to find violations. Some states are noted as developing their own voluntary inspectional programs, but Iowa seems to be missing.

One year later, the burden of quality and safety should not be on the inspectional system, but rather on the producers to provide quality and consistency. Consumers sometimes have limited options in product consumption, and eggs certainly fill that category.  Eggs exist in many other food and service-oriented supply chains such as restaurants where brands stand on their reputations.

Consumers and producers need to add their collective voices or we all run the risk of yet another outbreak.  The status quo is not going to cut-it.

Add you voice, demonstrate your concern and call-for-action.

In a recent study, The U.S. Auto Supply Chain at a Crossroads, sponsored by the Labor Market Information Offices of the states of Indiana, Michigan and Ohio, researchers from Case Western Reserve University outline two possible futures for America’s automotive industry supply chains.  One is optimistically characterized by collaborative relationships between firms at all tiers of the supply chain.  The other path speculates that fickle relationships and fear of investment will prevent progress at each tier of the supply chain. This study was conducted between July 2010 and June 2011 and came about from funding generated from the recent American Recovery and Reinvestment Act or so-termed stimulus bill.

What is most interesting about this study is its focus on the smaller “tier two” and “tier three” suppliers that comprise U.S. automotive supply chains, firms that suffered from the effects of industry upheaval and dramatic demand declines bought about from the last global recession. According to this study, these firms account for 30 percent of current employment in the supply chain, and have been previously rather difficult to target and study.

The study points to some good news, namely that there is evidence that supplier relationships are indeed becoming more collaborative. Yet, other evidence points to the continued presence of short-term cost-cutting with larger OEM’s and suppliers passing the burden of cost cutting down to lower-tier suppliers. An interesting finding of a noted interview of a representative of a tier one supplier states the following:  “At (this company), everything is short-term Today is everything. That mentality drives the behavior: Get it now, and don’t worry about the out years…  Focus on today; worry about tomorrow tomorrow.” The report goes on to cite findings related to firms that adopt “high road” practices, namely higher wage, worker training, process investing in product and production process capabilities faring much better in the wake of recession than those that did not. Noted was that two-thirds of firms surveyed chose to postpone investment in equipment and process improvements.  The reasons cited were twofold:

“Customer purchasing strategies in many cases did not allow suppliers the financial or organizational resources they would need to implement such practices, and

Public policies (that) do not do enough to pave “the high road” and block the “low road”.”

Supply Chain Matters happened to read of this Case Western Study while also reading a recent article, Dan Akerson is Not a Car Guy, appearing in the August 29 edition of Bloomberg BusinessWeek. For readers unfamiliar with Daniel Akerson, he is the recent chairman and CEO of General Motors whose background originates primarily from the telecom industry and private equity.  He follows several other CEO’s who have led GM since the beginning of the bankruptcy crisis.  The BusinessWeek article makes note that Akerson has moved GM out of survival mode and is purposefully challenging the previous management culture of GM. The article cites a particular example.  Teams presented a plan to build 45,000 of the new hybrid Chevrolet Volt in 2012, after supplier contracts were already in place to support that volume. According to the article, Akerson challenged his management team to put together a plan to support a more profitable build plan of 120,000 Volts in 2012, a significant threefold increase. GM’s engineering team was concerned not only for the radical change of ramp-up, but also the effect on quality if GM pressured suppliers to nearly triple output volumes of newer high tech parts. After four months of fact finding, Akerson had to back off his plan because suppliers would not take on the risk of building enough lithium-ion batteries unless GM guaranteed to pay their capital investment, should sales fall short of the build number. In the end, GM settled on a build number of 60,000.

That article along with the Case Western study caused us to ponder about yet another industry supply chain at the crossroads.  On the one hand, smaller suppliers continue to seek broader collaboration and support from their upper tier customers, avoiding the trickle –down “you get the burden of cost’’ or “our way or the highway” procurement behavior.  On the other hand, change agents with non-industry biases such as GM’s Akerson attack the culture, but lack sensitivity and attention to the overall cascading impacts to the overall supply chain. The jury is still out regarding Chrysler’s new infusion of Fiat’s management influence which seems grounded in operational management.

It would seem that the U.S. automotive industry needs to foster senior management that is willing to challenge the old norms of trickle-down impact among OEM’s and tier-one players, while having an operational and supply chain grounding to the cascading effects of build plan changes across the entire value-chain.

In 2009, this author, along with others, opined that the U.S. automotive industry’s greatest risk was a collapse from the bottom vs. the top.  Two years later, the U.S. government through its stimulus funding programs, brought both GM and Chrysler out of bankruptcy. However, this latest study from Case Western provides qualitative and quantitative reminders that the industry still remains at a crossroad.

We are again interested in hearing from U.S. auto industry readers.  Has supplier collaboration practices on the whole really changed?  Do you believe that the U.S. auto industry is more sensitive to supplier collaboration and investment?

Bob Ferrari

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

In a little over a week, significant announcements have precipitated large amounts of uncertainty among PC related supply chains. The speculation continues as to whether the high tech and consumer electronics industry supply chain will undergo a different equilibrium of changes in the months ahead.

The first was the bomb thrown by Hewlett Packard announcing its intent to spin-off its Personal Systems Group (PSG). The other, of course, was the announcement by Steve Jobs of Apple indicating that he was relinquishing his CEO position to Tim Cook. Perhaps unnoticed in the shadow of the other two was the announcement from Taiwan based PC manufacturer Acer that it experienced its first quarterly loss in the company’s history, and that it was highly unlikely that the company would break-even for the full year.

The HP announcement was the most significant because it raises questions as to whether the PC industry has seen its best days and will be subsumed by product demand for tablets and smartphones as the new wave of mobile computing.  HP, by its sudden announcement, in essence sent a signal that it was shedding a significant revenue source as well as well as high tech component volume buying leverage to explore more strategic options in business software and services.  It was, by our view, a statement of financial engineering vs. value or supply chain reengineering, swapping lower margin for higher margin business.

Acer, another force in the PC global markets, with its unprecedented quarterly loss, sent another message of uncertainty as to long-term industry growth.  Acer has admittedly had some senior management problems with the controversial departure of its CEO in April, which was speculated to be over business strategy disagreements. Chairman and acting CEO J.T Wang indicated at an investor conference that the recent quarter was a “correction period” and its loss was worse than expected because of a $150 million write-off of excessive inventory in Europe. Asia based financial analysts now speculate whether Acer has lost market momentum.

Last Friday, an article in the Wall Street Journal, Asian Tech Firms Brace for New Landscape (paid subscription or metered view required) speculated that some of the biggest effects of Steve Jobs resignation are likely to be felt by Asian suppliers and PC competitors. The article cites industry analysts concerned as to whether suppliers such as Wintek Corp. and Hon Hai Precision Industry Co. will experience a void in the creative product forces precipitated by Steve Jobs departure. Noted was that Steve Jobs was the catalyst for sweeping change in the smartphone and tablet segments. Not surprisingly, stock prices of multiple contract manufacturers have dropped since the announcement. Also noted in the WSJ article was that any future falloff in Apple’s marketing or product innovation prowess could spell opportunity for competitors such as HTC Corporation, Samsung Electronics and LG Electronics.

In our view, we do not anticipate any significant loss of momentum for Apple. As we noted in our Supply Chain Matters initial commentary relative to the Steve Jobs announcement, we view Apple as being in the catbird seat.  After all, which company was the primary catalyst for the current PC industry disruption with its announcement of the iPad? Most of the world now knows that Apple’s new CEO, Tim Cook is the mastermind behind Apple’s current world class and enviable supply chain capabilities. Apple remains  numero uno on anyone’s ranking of the best global supply chain for capabilities in product innovation, strategic procurement, fulfillment and B2C retailing.

However, the rest of the PC industry and its associated supply chains could see a changed landscape over the coming months.  What if one of the current value chain vertical players, one that supplies both PC and tablet components, makes a move for HP’s PC business? That would send a clear sign of longer-term vertical integration of the high tech supply chain.

Which of the existing players will benefit from consumer uncertainties over the long-term direction of HP?  Will it be Acer? Dell? Lenovo? Some other company?

What’s your view?

In the course of a week, a series of cascading announcements has turned the entire industry into turmoil.  Meanwhile, existing teams need to move forward with innovation, ship product and deal with a very uncertain global economy.

That’s why we love the high tech industry. In just a week, the equilibrium of the supply chain presents a whole different set of circumstances and outlook. Very few industries can deal with this level of change.

Bob Ferrari

This evening, news wires are active with the stunning but unexpected news regarding Apple.  Steve Jobs has tendered his resignationas CEO due to health reasons.  In his resignation letter, Mr. Jobs has recommended COO Tim Cook to be his successor.  There is no question that Steve Jobs has done a superior job for Apple, and we wish him well in whatever new paths he elects to do.  The elegance and innovation of Apple’s products under his direction will continue to be the benchmark, not to mention his abilities to bring together a very profitable company.

No doubt, this sudden news will cause Apple stockholders to be a bit on edge for the next several days.  In January of 2009, Apple Computer stock went into a tailspin as rumors about Steve Jobs’ failing health fueled speculation of an imminent leadership crisis.  Steve Jobs response was to appoint Tim Cook, Apple’s COO and able supply chain leader to the interim post of CEO while Mr. Jobs was on multiple medical leaves.

Supply Chain Matters has noted a number of previous commentaries regarding Tim Cook. Tim Cook’s background at Apple includes senior leadership positions in supply chains and operations management. The extraordinary supply chain capabilities that many in our community envy, came as a result of Tim Cook’s leadership. Mr. Cook was previously been awarded a $22m cash and stock bonus based on his achievements as Apple’s prior interim CEO.  In January of 2009 we commented that If you believe as I do that cutting your teeth in supply chain is a great proving ground for “C-level” success, than rest easy.  All will be fine. In March of 2010, we noted that Mr. Cook’s 12 years of performance speaks for itself and we should not resent the fact those years of grounded cross-functional operational experience and the existence on enviable supply chain process capabilities certainly provide credence to his performance bonuses as to his designation as probably the highest paid operations executive.

Apple’s board of directors and Apple’s stockholders would be wise to accept the recommendation of Steve Jobs.

We wish Steve Jobs all of the best, and know that his legacy and professional achievements will forever be remembered.

Bob Ferrari