There was significant new news that broke overnight regarding the ongoing grounding of Boeing’s 787 Dreamliner aircraft.

The New York Times last night reported (paid subscription or free metered view) that even before the grounding decision, the lithium-ion batteries used on this aircraft had experienced multiple problems, some of which were not known by current governmental investigative agencies, but known to Boeing.

All Nippon Airways (ANA), the global launch customer indicated that it replaced 10 batteries in the months before the two recent fire and in-air emergency incidents. According to the Times article, ANA informed Boeing of the replacements as they occurred, but did not report the incidents to regulators because they were not considered a safety issue. ANA further disclosed the extent of previous problems which ranged from too low a charge in five of the replacements, and failure to operate properly in three of these batteries, causing replacement of the battery and the charging system. All the events occurred from May to December of last year, which implies that Boeing had some awareness as to unexplained battery and electrical charging issues. The Times article notes that Boeing had acknowledged that the batteries were not lasting as intended.

Further disclosed was that in a little noticed test conducted in 2010, the U.S. Federal Aviation Agency (FAA) found that the lithium cobalt chemistry selected by Boeing was the most flammable of several different types considered. Boeing had elected to not revisit the design because of weight issues, and instead engineered some safeguards to protect the battery from unexpected fire or overcharging. Also noted was that in 2011, aircraft manufacturer Cessna switched its original lithium ion battery cobalt chemistry on its CJ4 business aircraft to nickel-cadmium, because of a fire incident.

Meanwhile, Japanese regulators on Monday concluded part of their investigation into the battery issues possibly originating from battery supplier GS Yuasa or controlling circuit board producer Kanto Aircraft Instruments, concluding that there were no significant discoveries. The investigation included a week long inspection into battery design and quality control processes. In its reporting of the concluded Japan investigation, The Wall Street Journal noted that privately-held Kanto Aircraft Instruments had never produced a battery monitoring unit until GA Yuasa contracted for the device for the Dreamliner.

Thus, resolution of what is exactly causing the backup electrical power issues of the Dreamliner remain a complex and unanswered, and unless something more dramatic is discovered, it is not likely that the Dreamliner will return to service anytime soon.

As we indicated in our previous commentary, for Boeing itself, every passing day of a grounded aircraft brings new operational, brand image and other monetary implications. Daily media coverage is now viral and finger pointing has now switched toward Boeing itself, and its prior knowledge of battery design concerns. The more these investigations drag on, the more that Boeing’s Dreamliner creditability suffers, along with that of any suppliers targeted in these ongoing investigations.  Any hope of ramping-up the volume delivery schedule is also in jeopardy.  There have been reports that Boeing continues to produce finished 787’s but there will be an obvious challenge as to where to store completed aircraft, and how much retrofit work will need to re-done. These are not Boeing’s sole challenges, but those shared across its global supply chain network.

Boeing’s engineering and product management teams now face some tough decisions, namely whether to allow the current wide-ranging investigations to drag on and add more grounded time to the aircraft, or whether to change the backup electrical design now. Access and synthesis of volumes of information and active business scenario planning are tools of the day.  In either case, Boeing’s senior management team is faced with yet another set of business and product decisions with many supply chain related implications in the months to come.

Bob Ferrari

Business media headlines this week are declaring that Toyota has reclaimed the title of the world’s largest auto maker in 2012, taking that title from General Motors. Toyota sold 9.75 million vehicles in 2012, compared with the 9.29 million sold by General Motors.  An impressive 27 percent sales increase in the U.S. certainly helped to regain this crown.

This achievement comes after Toyota was dealt two significant prior business challenges, some of which may have greatly impaired other global manufacturers Massive product recalls which began in 2009 were associated with problems of sudden unattended vehicle acceleration and misaligned floor mats among certain Toyota vehicles. Those incidents resulted in massive product recalls and significant threats to Toyota’s brand image among global consumers. The 2011 devastating earthquake and tsunami that hit Northern Japan added another blow that impacted global production volumes for months.

Supply Chain Matters was quick to praise Toyota’s supply chain teams for their extraordinary efforts in overcoming severe supply challenges brought about by the 2011 earthquake. It took almost a year and a half to totally recover in global output production levels. Regarding the crisis of brand image, an unprecedented formation of a corporate-wide steering committee chartered to oversee Toyota’s vehicle based quality processes and corrective programs was initiated. Chief quality officer roles were created among major geographies including Europe and North America, to insure localized autonomy on the decisions related to consistency of product quality and vehicle safety.  For the record, and in the spirit of disclosure, this author has been a long-standing customer of Toyota, dating back over 15 years. Six months ago, we changed that loyalty.

In its reporting of Toyota’s new crown, The Wall Street Journal indicated that sales increases came as a result of aggressive sales incentives in the U.S. market that included a cut of profit margins that were previously allocated to Toyota’s retail dealers. Meanwhile, manufacturers GM and Ford held back on sales incentives, resulting in single digit sales increases in 2012. This author can recall a barrage of continuous Toyota media ads throughout 2012 that urged buyers toward the latest sales incentives, to the point of “all right, already”.

Toyota’s new milestone comes with an important lingering implication, one that relates to former challenge of consistency in vehicle quality. Readers may recall that previous business media coverage and indeed, our Supply Chain Matters commentaries noted an admission by Toyota senior management as far back as three years ago that the race for number one global producer may have come at the expense of Toyota’s prior brand reputation for unmatched vehicle quality and reliability. The race for global volume outpaced that of quality and process consistency.

In 2012, Toyota had to take a $1.1 billion charge after reaching agreements with customers over liability lawsuits related to the SUA incidents. In a Financial Times interview, Toyota Motor USA CEO Jim Lentz indicated that the company had strengthened its customer care functions and had much greater ability to analyze data related to emerging quality problems. Lentz noted Toyota CEO Akio Toyoda as urging: “Make sure that we still are built on a solid foundation of quality, reliability and value because that is the hallmark of the company.” In essence, that is the declaration of the core business value of the company.

Last October, Supply Chain Matters noted the global recall of 7.43 million Toyota vehicles, the equivalent number involved in the SUA incidents over two years ago, this time related to a master power window switch defect. The Washington Post was quick to note that this flaw “raises questions about whether Toyota Motor Corp. has solved quality and safety issues that embarrassed the company in 2009 and 2010.” Also at the time, The Financial Times indicated in its reporting that Toyota was aware of the master window switch problem as far back as four years ago. It further indicated that Toyota did not respond sooner because it was unable to replicate the root cause. In our commentary at the time, ee raised the open question “as to whether Toyota would revert back to its former ways of opaque centralized corporate management, with revenue and output goals paramount to any other needs. Would the global-wide quality steering team have the corporate power, agility and dedicated resources to take proactive action on avoidance of future large-scale product quality issues and overrule sales team zeal for output?” Readers may recall that Hyundai last year made a conscious decision to throttle back current global output momentum in order to address quality and process consistency needs.

This very same week as the pronouncement of global sales leader, comes a separate announcement that Toyota is recalling more than 1 million 2003-2004 Corolla and Corolla Matrix vehicles sold in the U.S. over faulty airbags and windshield wipers. The faulty windshield wiper issue further affects 270,000 Lexis IS models sold between 2006 and 2012. This is the third product recall since October involving more than one million vehicles.

Thus, the open question remains.  Has Toyota’s new crown come at a cost to its reputation for quality and reliability?  Have the new processes for analyzing data and trends related to vehicle quality had their full impact resolving issues sooner?  Has aggressive incentives at the cost of dealer profits incurred a new dynamic for dealer loyalty toward Toyota? On a positive note, has the former announced corporate-wide steering committee addressing vehicle quality monitoring made its presence with this string of ongoing product recalls?

What continues to puzzle us is why Toyota management has not been forthcoming in addressing its progress toward chairmen Akio Toyoda’s charge for core business value.  Right now, business and social media control a narrative that the prize of global leader has again come at a price, and with certain perils. In our view, Toyota would be best served by actively managing the narrative and openly addressing progress made in its initiatives addressing supplier and production quality consistency and early-warning as to defects.

What’s you view?

Bob Ferrari

©2013 The Ferrari Consulting and Research Group and the Supply Chain Matters Blog.  All rights reserved.

It has long been the contention of Supply Chain Matters that companies whose senior management team has a solid grounding and understanding in principles of operations and supply chain management can often have their supply chain serve as a competitive differentiator for business outcomes.  There are many industry examples. We can turn to names like Apple, McCormack Foods, and global apparel retailer Zara,part of Spain’s Inditex Group.

We call reader attention to an article published in the January issue of FORTUNE and featured on CNNMoney, Amancio Ortega Gaona- the Third-Richest Man in the World.  The article traces the personal history of a man who is described as difficult to know, impossible to interview, very wealthy, and serves as the original founder and continued chairmen of Inditex Group.  It provides some context to a man we often did not know much about, one who came from the roots of poverty to surpass Warren Buffet as the third wealthiest individual on the planet. Mr. Ortega has built a fashion empire that spans more than 80 countries and consistently delivers growth and profitability in both good and challenging economic environments.  One profound article quote: “Beginning 40 years ago, Ortega ripped up the business model that had been refined over decades by Europe’s fashion houses and replaced it with one of the most brutally fast turnaround schedules the industry has ever attempted.  Decades later Zara is the world’s biggest fashion retailer.”

What is stunning is that Ortega built this business upon two fundamental and clear principles:

1. Give customers what they want.
2. Get goods to customers faster than anyone else.

The result is described as:  “ …  a global retailer that is more of an optimal supply chain than a traditional retailer.” Once more, few retailers have managed to challenge Zara’s industry success.  While Spain and other parts of Europe are suffering from severe economic stress, Zara reported a 17 percent increase in total revenues for the first three months of fiscal 2012. The retailer just opened its 6000^th store , with over 300 outlets now in China. The track record of growth consistency in revenues and profits is admirable.

What this author appreciated in reading Ortega’s background was his innate understanding of the industry and of the methods to control the supply chain. In the formative years of Zara, he organized thousands of local sewing cooperatives while providing opportunities for supplemental family incomes.  He insisted that speed and production agility be the driving force of the business model, and even today, Zara stores refresh their inventory within 48 hours. The essence of Zara remain its employees, a flat organizational structure, and its supply and logistics teams.  Chairmen Ortega prides himself and his management teams in their ability to connect with all levels of employees. Today, Ortega continues to live by modest means, living in the same Spanish community of his youth.

The legacy of Mr. Ortega and Zara will obviously remain as an important case study in agile and resilient supply chain management.  More importantly, the takeaway is having a leadership culture that understands that supply chain agility, responsive logistics and operations management and valued people do matter in successful business.

Bob Ferrari