The printed edition of the Wall Street Journal will report tomorrow (paid subscription required or free metered view) that the Fair Labor Association (FLA), the designated supplier social responsibility auditor for Apple, has discovered multiple instances of average work weeks exceeding 60 hours along with other safety issues at prime contract manufacturer, Foxconn.  Also reported was that the FLA found that workers weren’t being fairly compensated for overtime, an issue that Foxconn, FLA and Apple are committed to fix.

Apple requested this audit earlier in the year in an effort to put more teeth into its social responsibility practices.

The audit was based, in part, on surveys of over 35,000 workers among Foxconn Chinese facilities located in Shenzhen and Chengdu.  The WSJ reports that the FLA found at least 50 legal or code violations. The FLA found that during some periods over the past 12 months workers worked an average of more than 60 hours per week, and there were several months in the past year where the majority of Foxconn workers exceeded China’s legal maximum of 36 overtime hours per month. The WSJ further indicates that the FLA report cited an average of 80 overtime hours worked per month.

Interestingly, FLA’s report indicates that 48 percent of worker respondents thought working hours were reasonable while 64.3 percent of workers thought their salary was not sufficient for basic needs. That certainly merits further discussion and analysis.

The report indicates that Foxconn has agreed to bring its factories in China within China’s legal limits by July 2013, and further indicates that Foxconn would need to recruit tens of thousands of extra workers to comply. In the article, FLA President and CEO Auret van Heerden is quoted as indicating that the findings were “no worse than any other factory in China”.

As Supply Chain Matters posted earlier today, Apple CEO Tim Cook has been visiting China this week and as we suspected, Mr. Cook took the time to visit and tour an iPhone assembly line at Foxconn’s Zhengzhou facility.

As a final note, we would not be surprised if Foxconn now decides to accelerate its investment and installation plans for factory automation and robotics in the wake of this latest audit development.

Bob Ferrari

Supply chain risk continues to exist, especially within international food supply chains.

Last week, the Taiwan High Court sentenced the owner of a food additive manufacturing firm to a jail term of 13 years for adding toxic plasticizers to clouding agents and selling these products to food and beverage producers.  His spouse was also sentenced on the same charges.  More disturbing, the incidents were reported to occur between August of 2005 to May 2011, a period of almost six years.  This incident is being described as the largest food contamination incident in Taiwan history.

Clouding agents are typically used in the products such as fruit jelly, yogurt powder, juices and other drinks.  This incident resulted in the recall of hundreds of products and was described by the Taipei Times as “bludgeoning the confidence of Taiwanese consumers and tarnishing the country’s reputation abroad.”

Sourcing and procurement teams need to insure that proper quality measures always exist up and down the supply chain. In this Taiwan incident, the existence of non-conforming product existed far too long without detection or investigation of consumer feedback. In the case of globally extended supply, producers, distributors and retailers must further have a keen eye to specific oversight and regulatory measures.

As Supply Chain Matters has often pointed out, brands can be destroyed with a single large-scale incident.

Bob Ferrari

In June 0f last year, Supply Chain Matters provided commentary related to announcements made at the annual meeting of Hon Hai Precision Industry Co., the parent of global contract manufacturer Foxconn International Holdings Ltd.  At the time, Hon Hai Chairmen Terry Gau declared that the company would be a high-tech manufacturer, as opposed to a contract manufacturer.  He further indicated that the company’s long-term direction was to continue to develop more prowess in advanced technology, including strategic opportunities to partner with Japan based technology providers.

Today, the Wall Street Journal is reporting (paid subscription required or free metered view) that Sharp Corp. will sell nearly a 10 percent equity stake to Hon Hai in order to: “… shake up its core-but loss making –liquid crystal display panel operations.” The deal calls for Hon Hai to take a 46.5 percent  stake in Sharp’s LCD production facility in Sakai, western Japan. The Sakai plant is expected to supply displays to Hon Hai and Foxconn later this year. This deal, valued at over $800 million is being reported as the biggest investment ever involving a Taiwan based company in a Japanese technology provider.

Hon Hai already had ownership interest in own LCD unit, Chi Mei Innolux, but the is reported to be saddled with financial losses and technological weakness. As our readers are aware, Hon Hai and Foxconn are the primary contract manufacturing providers to Apple.  Chi Mei is not involved as an LCD supplier to Apple but the WSJ speculates that this equity deal may position Sharp as more of a volume supplier to Apple’s small LCD display needs.  Sharp competes with LCD industry leader Samsung Electronics for LCD displays.

This move can also be viewed a counter to recent LCD supplier agreements involving Japanese producers. In August of 2011, Supply Chain Matters made mention of the formation of Japan Display, a merging of the LCD operations of Sony, Toshiba and Hitachi. That venture was reported to be backed by a $2.6 billion funding from a government backed agency, The Innovation Network Corp. of Japan.  The August announcement was noted to be a response to competitors Sharp, Au Optronics and Samsung who were garnering a healthy share of longer-term supply contracts.

It now appears that Hon Hai and Sharp are positioning for a more strategic supply relationship with Apple and other customers.  In the view of Supply Chain Matters, this deal may also represent another attempt by Hon Hai to vertically integrate high tech and consumer electronics production, including more influence over long-term supply contracts. We also view this deal as another sign of a changing contract manufacturing model as providers move to garner more value-added margin opportunities.

The open question is how Apple and other high volume consumer electronics providers will respond to this latest announcement from Hon Hai and Sharp.

Bob Ferrari

Readers of this blog may note that like other supply chain industry analysts and consultants, there are some supply chain trends that tend to trigger our ire.  One specific area has been the ocean container carrier industry, whose arrogance toward customers and management missteps just keep on coming. Ocean container carriers still do not seem to have a clue on how to balance internal profitability objectives with delivering required customer service. Instead, decisions motivated by internal objectives are eroding customer and overall service levels.

In previous Supply Chain Matters commentaries we called attention to the dynamics of consolidation and industry restructuring and noted that just when we presumed that international ocean container carriers were finally paying more attention to customer cost and service needs they again disappointed.  Our latest commentary observed the industry again turning to price increases and targeting U.S. bound shipments for carrier profitability targets.

In mid-February, after fighting a market-share battle with its competitors, industry leader Maersk Line announced that it would cut Asia to Europe vessel capacity by 9 percent. In a Financial Times article, Maersk’s finance director indicated that the carrier will use all of its tools to return to profitability, including further pricing charges and capacity cuts beyond those already announced.  Maersk raised rates on the Asia – North Europe route by $100 per 20 foot container on February 1, and another $50 on March 1.

In late-February, AP Moeller Maersk, the parent company, announced that its profits had dropped 33 percent to $3.38 billion. Profits for Maersk Line, the ocean container group, came in at a net loss of $537 million.  Ocean container losses were fortunately offset by a 24 percent increase in oil and gas activities.  The carrier’s CEO, Soren Skou, who assumed leadership in mid-January, arrogantly declared that Maersk Line had captured enough market share to fill excess capacity. In a separate FT article, Mr. Skou declared that industry margins have come in at 2 per cent over the last seven years while 12 percent was a more acceptable range.  Later he declared that unless industry returns do not reach 8 or 9 percent, the industry is destroying shareholder value.  During this same period, container lines collectively decided to order way too much excess new capacity with over 250 vessels currently being idled.  While the industry might have viewed bigger and more efficient ships as the answer to increased profitability, too many of these ships have exceeded any conceivable notion of container shipment growth.

As a contrast for our readers, UPS currently has a pre-tax operating margin of 10.86 percent, and a net margin of 7.15 percent.  FedEx has a pre-tax margin of 5.7 percent, and a net margin of 3.7 percent. Both FedEx and UPS have proactively idled excess capacity since the global recession of 2008 without incurring significant service level erosion for customers, while continuing to exceed profitability expectations. Each has balanced investment in new, more efficient capacity with corresponding investments in process control and productivity tools directed at servicing shippers.

Today, ocean container carriers continue to run at the slowest speeds, Maersk is quoting transit times from Shanghai to Northern Europe at 34 days, up from the mid-twenty days in prior months.  That has an impact on customer needs for faster transit times and less safety stock. Last week Maersk had to declare that it was suspending bookings on the North Europe to Asia reverse route because a current backlog of shipment containers has caused European ports to be at full physical capacity. European shippers have obviously stepped-up some export volumes while empty containers needing to be sent back to origins compound the problem. The carrier indicates that it may take until May to clear port backlogs.

A failure to view an operating problem from both the internal profit and external customer service lens compounds even further.  Ocean container carriers have withdrawn capacity, and continue to slow transit speeds in order to raise profitability. Slower transit times are causing ports to become ever more congested as empty containers cannot be cycled to other ports. Shippers continue to plan for far more excess inventory to compensate for slower transit times from the key manufacturing regions in Asia. Now, as choke points continue to compound themselves, carriers decide to suspend services rather than recall an idled ship and operating crew.

I’m sure we need not continue this commentary since the bulk of our readers get the picture. While the industry may boast that it serves as the lifeblood of global commerce, management missteps and a general arrogance to shipper and customer needs have resulted in a mess. Where is the balance?

In the view of Supply Chain Matters, what this industry really needs is either a healthy dose of oversight, or a general thinning of the carrier herd with the survivors being those who demonstrate a clear focus on investing in customer and shipper needs.

Bob Ferrari

Many past accolades have been written and cited regarding Apple’s supply chain capabilities including recognition in most any industry analyst’s top supply chain ranking, including our own at Supply Chain Matters.

If you have not been keeping-up of late, Apple has entered, perhaps not to its liking, a fairly new phase of global-wide visibility to its supply chain capabilities. The current phase can best be described as a phase driven by public relations and perception, one that will once again challenge Apple’s internal supply chain management teams.

The watershed events leading to this current phase were triggered by two media events.  One was Apple’s January announcement of a more aggressive stance in supplier social responsibility standards, and the other was a rather revealing and candid article published in the New York Times revealing Apple’s certain production and supply chain practices which was not complimentary.

Since that time, Apple’s senior executive and public relations team have been hard at work depicting two sides of Apple’s corporate culture.  The first is one that protects the Apple brand for innovation and corporate responsibility.  The second is the ability to exercise corporate name and power to influence whom in traditional and social media Apple deems to grant access and visibility.

A recent blog posting penned by Wall Street mogul Henry Blodget on the Business Insider blog speculates that instead of thanking the Times for focusing attention on why so many high tech and consumer electronics companies have no choice but to deal with the implications of supply chain sourced in Asia, Apple has been  retaliating by offering competing traditional media outlets like the Wall Street Journal, or blogger friendly outlets like John Gruber’s blog, increased access to Apple senior executives for interviews. The takeaway conclusion is noted as access journalism.

The newest chapter comes tonight in the U.S., when an ABC News’s Nightline broadcast will air what is hyped as an unprecedented glimpse inside the contract manufacturing facilities of Foxconn.  Reporter Bill Weir has penned a fairly revealing perspective of what will be aired on tonight’s program. Weir provides the context for the invite to ABC News as a direct invitation by Apple to actually observe Foxconn final assembly lines as the Fair Labor Association (FLA) conducts its first ever audit of Apple’s supplier responsibility practices. Weir questions the fact that ABC News is owned by Disney Corporation and Disney CEO Bob Iger serves as a member of Apple’s board of directors.

Readers will note Weir’s statement that Apple promised complete access to factories, but denied repeated requests for interviews with either Apple CEO Tim Cook or senior vice president of industrial design, Jony Ive.  The remaining commentary provides eye-popping admissions that reveal how past events have led to Apple having no choice but to increase its oversight of supply chain working conditions.

Sound bites that are sure to resonate from tonight’s airing include the statement that Foxconn’s production campus “employs 235,000 people, roughly the population of Orlando Florida. “  That should hit a sour chord with current U.S. unemployed high tech workers. He notes that during the recent wave of worker suicides that occurred on Foxconn’s campuses, Tim Cook rallied a team of psychiatric experts for advice for dealing with this situation.  Readers may recall that recently the Times expose noted that Tim Cook secretly traveled to Foxconn for first-hand meetings.  There are many more revelations, but , in our view, probably the most revealing are stated quotes from FLA audit inspector Ines Kaempfer.  In the context of Apple’s decision to join and engage FLA in what is reported to be a six figure cost, Kaempfer states: “We call it the ‘Nike moment’ in the industry.  There was a moment for Nike in the ‘90s, when they got a lot of publicity, negative publicity.  And they weren’t the worst.  It’s probably like Apple. They’re not necessarily the worst, it’s just that the publicity is starting to build up. And there was just this moment when they just started to do something about it. And I think that’s what happened for Apple.”

Weir concludes his preview by replaying the  video interview with a production worker as he pulls out his personal iPad and shows photos of his children in America. He asks that worker: “For all the people in America who buy one of these, what do you want them to know about you?”  The reply is impactful: “I want them to know we put a lot of effort in this product so when they use this please use it with care.”

Thus by this airing tonight and the observations and impressions made by viewers, Apple is indeed orchestrating a new and far more visible perspective on its global supply chain.  This is a perspective not as Supply Chain Matters has previously penned as managed by extraordinary supply chain business process, procurement strategy or advanced technology.  It is one that will come from global consumer perceptions of the labor and supplier social responsibility practices within Apple’s supply chain.

The open question for Apple’s supply chain management community is how to manage in a public relations vs. overall improvement framework context.  Tune in tonight and share your own perspectives and observations.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

Once more, Apple has rocked Wall Street and financial media with spectacular fiscal Q1 financial results, again fueled by the company’s supply chain capabilities.  However, with each passing quarter, that supply chain becomes subject to more visibility, not all of which will remain complimentary.

The numbers are staggering even in context to the fact that the quarter included the holiday selling period. They included a 118 percent year-to-year increase in profits amounting to $13.1 billion on sales of $46.3 billion.  There is commentary that Apple could once again overtake Exxon Mobil as the world’s most valuable company in terms of market value. Internationally based sales accounted for 58 percent of the quarter’s revenue indicating the increased tapping of emerging markets as consumers around the world succumb to the Apple experience.

In terms of output volumes, Apple delivered 37 million iPhones and 15.4 million iPads during the quarter, sustaining an average fulfillment volume of over 402 thousand iPhones and over 165 thousand iPads per day. These are volumes that can challenge any global based supply chain. The iPhone 4S is now available in 90 countries across multiple channels. Company executives also admitted that the company struggled to meet demand and could have done better if it could have ramped production. The iPhone was noted as on ‘significant’ backlog at the end of the quarter, and the unavailability of supply has been cited as a cause of rioting at Apple’s new Beijing outlet as consumers and black market profiteers sought new iPhones.

Gross margin was equally impressive growing to 44.7 percent compared with 38.5 percent one year ago. Wall Street has been taken back with the fact that the company generated $16 billion in free cash flow during the quarter, along with a near $100 billion cash balance. In its reporting, the Wall Street Journal made note that Apple not only benefitted from strong demand but also lower component costs, highlighting how the company’s supply chain remains a distinct advantage. Keep in mind that the consumer electronics industry has been dealing with certain supply shortages brought about by the compounding effects of the Japan tsunami and Thailand floods. Apple’s influence over suppliers made its mark and volume remains a considerable influence.

The lens on Apple naturally turns to what comes next and how can it sustain these spectacular results.

For its supply chain, the lens is of course maintaining a steady stream of supply while supporting a new edition of the iPad later this year. As the company’s distribution turns more toward international channels, the risks will increase. Company officials see China as a huge untapped opportunity but the reality of being the most expensive smartphone implies either more prepaid plans and distribution channels or a scaled-down version. The lens on supplier social responsibility policies has also widened considerably.

Supply Chain Matters provided previous commentary related to Apple’s recent release of its 2012 Supplier Social Responsibility Report.  This weekend, New York Times columnists Charles Duhigg and Keith Bradsher penned one of the most revealing articles in our memory concerning the supply chain capabilities of Apple.  The article, How the U.S. Lost Out on IPhone Work, (paid digital subscription or free metered view) extracts observations from former employees and others as to why Apple elects to source all of its major manufacturing operations in China. It describes one incident where 8000 workers at one of Apple’s contract manufacturers were awakened after midnight and started a 12 hour shift fitting last minute re-designed glass screens into frames to support iPhone volume production.

Bottom line, Apple believes that China provides far more speed, flexibilities and far more skills than can be garnered elsewhere, including the U.S. Corning’s CFO is quoted: “The consumer electronics business has become an Asian business. As an American, I worry about that, but there is nothing I can do to stop it.   Asia has become what the U.S. was for the last 40 years.”

The Times article raises some profound conclusions as to the definition of supply chain flexibilities, and we urge our readers to absorb all that is within the article.  Apple employees and management appear to demand total flexibility without regard to the worker ramifications associated with such directives. At the same time, they enjoy the healthy financial benefits in corporate profits, bonuses, and over $2 billion in stock awards. Apple CEO Tim Cook, the architect of the current supply chain received a 2010 compensation package valued at $59 million, while the average Chinese factory worker garners $17 per day. Not many of these Chinese factory workers could afford to buy a new Apple product.

From our perspective, the most profound cited quote came from an unnamed current Apple executive who states that the company does not have an obligation to solve America’s problems, but rather making the best product possible. Having its pile of cash grow even more each quarter only leads to more perceptions of greed and lack of national or social responsibility as U.S. job growth continues to falter.

Readers no doubt are aware of the technology vendor hype concerning the need for supply chain flexibility.  The looking glass into Apple’s supply chain is perhaps revealing a real-world definition.

The Times columnists began their article by citing an event last February and the question that President Barrack Obama posed to Steve Jobs: What would it take to make iPhones in the United States?  We believe that Apple, and all of us in the supply chain community need to think long and hard on that question.

What’s your view? Have countries such as the U.S. any realistic opportunities in closing the supply chain capabilities gaps in consumer electronics and high tech?

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and Supply Chain Matters.  All rights reserved.