For Apple, the deemed most valuable listed company for Wall Street investors, anything written about the company, especially downbeat, draws many eyeballs.
Today’s front page article published in The Wall Street Journal, Apple Cuts Orders for iPhone Parts As Demand Slips, is no exception.(paid subscription or free metered view). The article summarizes reports from insider sources (most likely Apple suppliers) that indicate that orders for iPhone 5 LCD screens have dropped to “roughly half of what the company had previously planned to order.” Apple allegedly notified of the supply cutback in December. The WSJ concludes in its report that this development indicates that sales of the latest iPhone have been not as strong as previously forecasted due to stronger market competition. As expected, the story had a downward impact for Apple’s stock.
Supply Chain Matters is of the view that one should not jump to business conclusions on the basis of a downward adjustment in Q1 product forecasts. For consumer electronics, Q4 and the associated holiday buying surge is the classic peak period for supply chain fulfillment, especially for Apple. Most all of the company’s new product launches are indeed strategically timed to build pipeline demand for the Q4 end of calendar year period when consumers are inclined to spend on lavish gifts. OEM’s can have a blowout Q4, but it can come at the cost of eroding previously forecasted Q1 demand. The report that the downward adjustment was communicated in December, we believe, is more a reflection of responsive supply chain planning.
In the particular case of LCD screens for the iPhone 5, Apple had purposely contracted with three different suppliers because of initial manufacturing yield challenges on the new layered screen design. The company shifted requirements for display technology to in-cell technology, combining the touch and panel layers in a single design. Reports from various Asia based business media outlets during the last six months have noted initial difficulties in securing high production yields with this new technology. Supplier Sharp was especially challenged to meet volume production requirements because of its severe financial difficulties, which have since been alleviated by a cash investment from Qualcomm. A downward adjustment in LCD supply may be acknowledgement of increased production yields along with the need to cut back on this contingency supply plan. For its part, Apple has again wisely elected to not comment.
Supply chain component needs expand and contract with any quarter, a reality of today’s demand-driven supply chain management practices. Thus, we tend to not draw any significant conclusions from the latest reported production cutbacks.
If on the other hand, Apple continues on a trend of subsequent quarterly contractions in supply requirements for the remainder of 2013, than that would be more newsworthy.
Supply Chain Matters provides yet another commentary related to the ongoing developments concerning the Boeing 787 Dreamliner. Our last commentary just a few days ago noted the continued frequency of component failure and other operational incidents that continue to place this new aircraft in the traditional and social media limelight. Since that time, incidents continue on a daily basis, and yesterday, the same Japan Airlines 787 that was involved in a fuel leak incident in Boston last week, again experienced a notable on the ground fuel leak, this time in Tokyo. While it is common for any new aircraft model to have some initial operational issues, the troubling aspect for the 787 is the variety and frequency of different problems, which cumulatively add more speculation as to the overall safety and reliability of this aircraft. It also sheds some additional doubts on the integrity of manufacturing and supply chain related processes.
On Friday, U.S. regulatory agencies took the unprecedented action of ordering a wide-ranging review of both the 787’s troubled electrical control system as well as overall design and manufacturing assembly methods. The U.S. Federal Aviation Administration (FAA) will oversee this probe, which is expected to take several weeks. According to published reports, this marks the first time in many years that the FAA has elected to reassess the safety of specific systems for an aircraft already certified for service. According to a report published in The Wall Street Journal, this FAA review does not ground any existing operational aircraft nor require immediate inspections or repairs. Meanwhile, The National Transportation Safety Board (NTSB) along with Boeing and JAL designees, continue on a separate investigation of the electrical system and battery explosion fire that occurred in Boston a week ago today.
We frame this follow-on commentary from two perspectives, one being that of social and business media influence strategies, the other being global supply chain related.
In our last commentary, Supply Chain Matters urged Boeing to stop the ongoing public statements indicating that the recent histories of incidents relative to the 787 are normal course of events for a newly delivered aircraft. To the credit of all, both Boeing and government agency executives have rallied too unequivocally declare that this aircraft remains safe to fly. Boeing CEO Jim McNerney got engaged by issuing a statement welcoming the FAA review and noting the Boeing believes the probe will: “underscore our confidence and the confidence of our customers and the traveling public” in the Dreamliner. Michael Huerta, head of the FAA reiterated the safety of the 787 while U.S. Transportation Secretary Ray LaHood made the statement in a news conference on Friday of last week: “I believe this aircraft is safe and I would have absolutely no reservations of boarding one of these planes and taking a flight. “ These statements are timely and needed to be declared, otherwise the flying public was already drawing different perceptions. Our new age of hyper extended social media and a 24 hour continuous news cycle require active communication and clarification of events.
The supply chain implications of the new probe center on reports that the FAA will look into the way Boeing manufactures this aircraft. It could bring back former issues related to more dependence on subcontract suppliers for major component design without adequate overall controls. Reports indicate that the FAA will take broad latitude in its investigation. It could range from recommending changes in product designs in the plane’s electrical system or changes in production processes, all of which could add further delays to an already severely delayed and unprofitable program. These ongoing issues also put a strain on the supply of components, since failed components are most likely being replaced by components or parts destined for in-process production aircraft. Global suppliers in the 787 program can financially ill afford another period of production ramp-up delays. Existing airline customers require an aircraft that will meet or exceed original operational performance objectives, which obviously are not being fulfilled by the current litany of issues.
Which each passing day, Boeing’s ongoing day-to-day challenges regarding the ramp-up of the 787 global supply chain become far more complex. A declaration in being the world’s largest global aerospace company comes with the responsibility to be the industry benchmark in supply chain capability. That test remains underway in the ongoing challenges of the 787 program.