This is a Supply Chain Matters update on our ongoing coverage of the latest crisis involving Boeing’s 787 Dreamliner program.

In Commentary Three published on January 30^th, it was noted that daily media coverage of the potential causes of electrical fire is now viral and finger pointing has now switched from suppliers toward Boeing itself. 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. Launch customer All Nippon Airways (ANA) indicated that it replaced 10 batteries in the months before the two recent fire and in-air emergency incidents.  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.

On Friday of last week, The National Transportation Safety Board issued its weekly update statement.  It indicates that the Naval Surface Warfare Center and a battery expert from the U.S. Department of Energy are conducting ongoing tests of the lithium-ion battery and its related electrical systems. The NTSB acknowledges that is has now been made aware of the prior battery replacement history of the aircraft and will use these data to determine any relevance. This week, non-invasive testing to determine if any “soft short” within battery cells may have occurred, and an investigator will travel to France to investigate the manufacturing process of the wiring bundle that connects the battery.

After formally reporting quarterly earnings last week, Boeing CEO Jim McNerney indicated confidence that a root cause will be determined and according to published reports, also played down reports that the aircraft had a succession of battery problems that led up to the grounding. He is also quoted as indicating that “we have no idea yet’ what caused the batteries to burn.

In its financial update, Boeing indicated the delivery of more than 60 Dreamliner’s this year, which reflects a commitment to the prior 5 aircraft per month delivery schedule. Planning for the newest model, the 787-8, a stretched version of the aircraft adding an additional 20 feet of length has also commenced, with a planned availability in two years. Major aerospace OEM’s require these types of lead times to prepare the global supply chain to avoid some mistakes of the past.

Much has also been published this week by business media describing the close, symbiotic relationship among Boeing with its Japan based 787 global launch customers and a network of key Japan based suppliers to the 787.  The Financial Times describes relations between Boeing and its Japanese suppliers as showing little sign of becoming strained while The Wall Street Journal has reported some strains of frustration appearing among these same suppliers as the implications of the length of grounding become pronounced. The WSJ reported that Japan based supplier value-added to the 787 consists of 35 percent, while other suppliers represent 30 percent.  Boeing itself has 35 percent of value-add.

The more these investigations drag-on, the more visible the Dreamliner supply chain partners and their design and production practices will become. That may not benefit any of the parties and once again, we at Supply Chain Matters trust that the current investigations will come to a more speedy and effective resolution.

Bob Ferrari

Today’s front page headline of the print edition of the Financial Times, Foxconn workers in landmark China vote,  (paid subscription or free metered view) is no doubt newsworthy for global supply chain audiences.

FT reports that the largest contract manufacturer in the world is paving the way for the first ever competitive level union representation elections within its China factories, in essence to step back from control of an in-house union. Labor unions within China have traditionally been influenced by state and local government, the Communist party, and employers, standing more for peaceful labor harmony among workers and their employers. Many Chinese workers do not feel an affinity toward labor unions because of a lack of perceived representation. This development is characterized as the first time where a Chinese private sector employer would support competitive union elections among its workforce while allowing a broader representation from younger workers.

Foxconn will seek the assistance of the Fair Labor Association (FLA) to begin a training process for workers on how to vote for their union representatives.  Readers will recall that Apple solicited the help of FLA in broadening its audits of supplier working conditions after the incidents of worker suicides were reported among Foxconn’s workforce in 2010. Workers will choose up to 18,000 union committees. The effort is reported as commencing after the upcoming Lunar New Year holiday.

In a supporting article, FT characterizes this Foxconn development as recognition from China’s political leaders that workers have increasingly turned to street unrest to voice their protests to working conditions, and that a more active voice on the factory floor may be needed. There is also the reality that Foxconn would not entertain the idea of open elections without party or key customer approval.  The FT is also quick to note that: “Free elections are not about empowering workers. They are about releasing pressures that might spark an explosion of discontent that authorities might find difficult to contain.”

In our view, this news is significant from two perspectives.

Foxconn by its sheer size (1.2 million workers) and association with global companies including many well-known western and Asian high tech OEM’s, has established itself as the de-facto benchmark for labor policies across China.  The first call for increased worker wages emanated from Foxconn, and has since quickly spread among other Chinese manufacturers. The call for more open union representation and younger worker participation in workplace grievances will surely spread as well.

Foxconn as we all know is synonymous with Apple’s production workplace strategies, which have been under the global looking glass for quite some time.  We have noted in previous Supply Chain Matters commentary that Apple induced pressures to increase volume output while adhering to stated supplier social responsibility practices and reduced worker unrest will lead to more automation of assembly tasks.  It has been publically reported that Foxconn has plans to invest in millions of new robots on the factory floor to accomplish these objectives.  A more open union representation and worker voice may help to ease some of the tensions that will surely come over the coming months.

Foxconn has also strived to be a more globally focused company, and has made investments in Brazil, Mexico, and Turkey, with other plans involving Indonesia, Malaysia and the United States.  The company’s significant expansion plan for Brazil, where union representation is historically strong, has already run into controversy and protest because of its perceived autocratic Chinese management style.  Having a good understanding of local culture and work practices, and now with a possible open process of union representation may indeed imply a broader voice for workers in working conditions across Foxconn, both in China and certain other countries.

Thus, this latest Foxconn development will indeed have broader implications across China and other geographies. The open question, of course, remains how much workers trust these union structures, as well as how autocratic managers respond to a potentially more expanded voice in mediating worker grievances.

Bob Ferrari

When the 2008-2009 severe economic recession impacted the automotive industry in the United States, Supply Chain Matters featured commentaries noting how various suppliers had turned to broader product innovation and industry diversification strategies to buffer severe impacts in domestic automotive related business. In many cases, these strategies insured survival as a supplier. Some automotive suppliers began to broaden their presence in other geographic markets as well as supply components to other offsetting industries such as medical devices or alternative energy. While large OEM’s may garner the attention of the government to protect a strategic industry and thousands of jobs, suppliers within other tiers of the supply base are less protected during times of severe recession. That was certainly the case in the United States.

Thus it was with interest that we once again noted an article published last Friday in the Financial Times which reports that some of Europe’s car part suppliers are embracing a flexible future through industry diversification. (paid subscription or free metered view) This article notes that in the midst of tough times for Europe’s automotive industry, suppliers based in Europe also carried learning from 2008-2009 toward broader international supply diversification and other offsetting strategies. The article cites suppliers such as Germany’s Bosch and Continental electing to move away from commoditized products to more value-added technologies such as safety, fuel efficiency and infotainment systems. Strategically, that positioned these suppliers to be able to take advantage of current automotive OEM’s global platform strategies and have access to broader geographic markets such as China and the United States.

As an example, the article draws a contrast among two French suppliers, Faurecia, the largest maker of vehicle interiors which is heavily exposed to the European market decline, and whose stock has declined 30 percent. That is contrasted to that of rival Valeo which has only a quarter of its production in Europe, and whose stock is risen about 12 percent over the past year in the midst of the European automotive market decline.

While larger suppliers may have the resources cited to exercise global diversification, smaller suppliers have limited resources, and thus the stakes are higher for those who have a business model that is dependent on a single OEM customer, domestic geographic market or commoditized product. The article cites small suppliers based in Italy or Spain who are now trying to expand business with other OEM’s with diversified international business.

This author will therefore reiterate recommendations shared in our 2009 commentary. Diversification has to be evaluated from a perspective of overall supply chain competency, current or future.  Your company may well have the design and production capabilities related to product technology, but the open question to be addressed is whether you have the supply chain business process capabilities to compete with other existing players in your new industry venture.  High volume, make-to-stock is quite different than low-volume, make-to-specification.  Packaging for high volume, just-in-time assembly lines is far different than packaging for a variety of different channels.  If your demand forecast or replenishment signals come from but a few large OEM’s, it can be far different when your demand signals are buffered by other upstream players in the value-chain, the classic “bullwhip” effect. If you about to compete with existing players who have invested in more flexible supply chain fulfillment capabilities as well as value-chain visibility, than be realistic as to what your company needs to work on in addition to new products.

Don’t get me wrong- we encourage organizations to evaluate diversification, but do take a broader view of what is required. That should be included in all of the business media articles that report on these strategies.

Bob Ferrari