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McDonalds Sticking with Supplier Under Fire

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Over these past days, business and general media has produced high visibility reports of expired meat products being served among global restaurant chains operating within China. The news of the expired meat originated on China’s Dragon TV Network. By now, many of our readers, particularly within consumer products and food service environments have read of these ongoing developments, along with consumer, regulatory and industry reactions.

Well-known brands such as McDonald’s, Yum Brands (operators of Kentucky Fried Chicken, Pizza Hut) and Burger King were named by both media and Chinese food regulatory agencies for offering such expired meat products to customers. The expired chicken and beef meat products were traced by restaurant operators to food supplier Shanghai Husi Food Company, which is affiliated with U.S. based OSI Group, a $6 billion producer of food products. OSI itself has garnered what is reported to be a solid reputation as a quality focused food supplier.

According to published reports, the Chinese based distributor Shanghai Husiallegedly re-labeled the meat products with new expiration dates after the original date had passed. Chinese authorities quickly detained five people as a result of these incidents. The Shanghai Food and Drug Administration later concluded that the violations were not the result of an individual but rather the result of an organized effort by the Chinese distributor, which is a serious charge. However, reports seem to indicate that the practice may have been limited to a single Shanghai Husi processing facility.

The CEO of OSI Group was quick to issue a public apology for the actions of its China based subsidiary. That statement begins: “What happened at Husi Shanghai is completely unacceptable. I will not try and defend it or explain it. It was terribly wrong, and I am appalled that it ever happened in the company that I own.” The distributor further pointed out that Chinese authorities inspected other facilities across China and found no issues. The supplier further dispatched a team of its own global experts to ensure that the problem is addressed and corrected.

Yum Brands took quick action by terminating OSI as its supplier in China Australia and the U.S… Burger King suspended all orders from the Chinese distributor. But something different is occurring with McDonalds.

Initially, McDonalds CEO issued a statement indicating that the chain was misled by its Chinese supplier and cut its ties with that supplier. But on Friday, the Wall Street Journal published an article (paid subscription or free metered view) indicating that the chain would stand by OSI Group, its loyal supplier for over 59 years. According to the WSJ, the supply agreement dates back to 1955 when founder Ray Kroc was looking to expand across the United States and now supplies up to 85 percent of McDonald’s global locations. OSI has been instrumental in supporting McDonald’s global expansion and reportedly helping the chain to maintain consistent quality standards. As noted, OSI is not just a supplier to McDonalds but to many other global customers. In 2011, this supplier was cited in a quality award by McDonalds for supply activities both in the U.S. and Asia. According to the WSJ, in 2013 food distributor Sysco cited the supplier with its “Gold Supplier” award.

By Thursday of last week, McDonalds decided to retain OSI as its global supplier, utilizing other OSI owned factories within China.  A statement issued to the WSJ stated: “We will not walk away from the issue but we are committed to resolving it.

Supply Chain Matters has a two-fold reaction to these events.  First and foremost, any food supplier that resorts to illegal product classification practices deserves the consequences of such actions.  On the other hand, a supplier that has garnered years of experience as a quality focused and rock solid supplier deserves the opportunity for the facts to come out and to take action to totally correct any deficiencies. 

In this era of instantaneous response and 7 by 24 news cycles, it becomes all too convenient to throw a supplier “under the bus” of negative publicity. Loyalty to a long-standing business relationship seems to be a fleeting principle.  Of course, a global restaurant services provider with such a dependency on a single supplier will often find it difficult to quickly source alternative suppliers.  One could argue that that might have led to the McDonald’s response.

However, kudos to McDonald’s management for taking a step back and giving its long-time supplier the benefit of the doubt with the opportunity to get to the facts and resolve the issue (s). A long history as trusted supplier deserves some consideration.

Bob Ferrari

 


Potential West Coast Port Disruption Raises Questions on Impacts to Upcoming Peak Shipping Period

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A commentary posted on Logistics Management makes the observation that the threat U.S. West Coast port disruptions as a result of current ongoing labor union contract negotiations raises an open question as to “peak shipping season” this year. News Editor Jeff Berman makes note that inbound container shipments destined for the ports of Los Angeles and Long Beach, which together account for upwards of 40 percent of incoming U.S. container traffic,  increased 16.5 percent and 8.8 percent respectively during June.  The premise presented is that buyers scrambled to move cargoes earlier to avoid the potential of goods being caught-up in a port stoppage.

Logistics Management further conducted a reader poll of 103 buyers of freight transportation and logistics services. That survey indicated 68.1 percent of respondents expecting a more active peak shipping season this year. Some respondents are reported to be concerned about potential transportation lane disruptions in the fall.

Meanwhile, as we approach the end of one month since contract expiration, no real news has come forward regarding the ongoing labor talks between the Pacific Maritime Association and the International Longshore Warehouse Union. That provides continued uncertainty and concern among industry supply chains.

Supply Chain Matters proposes to conduct its own reader poll. For those readers managing inventory, procurement, transportation and logistics services, here’s the question:

What are your organization’s current plans or strategies regarding a potential disruption or work stoppage among U.S. West Coast plants? 

Provide your responses in our interactive poll at the bottom of our right-hand panel. We will open this poll for two weeks and will announce the final results.

Bob Ferrari


Once Again Another Apple New Product Ramp-up of the iPhone Supply Chain

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On the eve of Apple’s report of quarterly earnings, its supply chain is leaking all sorts of information regarding the upcoming new production ramp-up of Apple’s new iPhone models in preparation for all important the holiday buying surge period that comes later this year.

Our Supply Chain Matters information alerts regarding Apple have been active for the past five weeks but the trigger point arrived today when the Wall Street Journal featured a front-page article regarding ongoing production plans.

According to the WSJ, Apple’s supply chain planners have placed orders for between 70 million and 80 million iPhones in both 4.7 inch and 5.5 inch screen configurations to be completed by the end of this calendar year. That compares to production orders of between 50-60 million phones for the same period last year as Apple ramped-up for the introduction of the iPhone5 model series. That is an obvious indication that Apple is making big-bets on the expected popularity of the new iPhone models. Apple also does not want to encounter a situation of being short on inventory for the most popular iPhone 5s model, as was the case during last year’s holiday season.

The WSJ report generally correlates with reports from Taiwan media several weeks ago. Where the reports differ is when volume production is scheduled to start.  Media outlets in Taiwan reported that the 4.7 inch model would begin volume production this month, while the 5.5 inch would begin production in mid-August.  Today’s WSJ report indicates the larger screen version production would begin in September. Previous Taiwan and Chinese reports indicated that contract manufacturer Foxconn was in the process of hiring an additional 100,000 workers to accommodate the cyclical production increase while secondary contract manufacturer Pegatron was in the process of hiring an incremental 10,000 workers. All of this data provides a sense of the sheer scale and flexibility that Apple requires from its supply chain partners.

What is remarkable is that a reading of today’s report gives a true sense of the complexity and variability challenges that Apple’s supply chain planners must manage.  The new larger screen is again, as in prior years, presenting production ramp-up and yield challenges due to more advanced in-call technology and a rumored sapphire based screen. The WSJ report indicates that orders for upwards of 120 million displays have been placed to compensate for yield challenges. If that number is accurate, it would imply that planners are factoring a 60 percent yield factor. The report further validates that Apple planners will make production adjustments based on early demand history, which was again demonstrated last year when production volumes for the iPhone 5c were scaled-back based on initial demand from consumers. Last month, China Times reported that global semiconductor chip producer TSMC was expected to produce 120 million touch ID fingerprint sensors for Apple, which is three times the volume produced last year, and a further indication of production yield factors and ramp-up scale.

Then there is the celebration of the Lunar New Year, which next year, arrives in February, when most production grinds to a halt as workers take time to return to their families. Apple planners must insure that adequate inventories remain to compensate for a lull in production, or that contract manufacturers make assurances that some production will continue during the period of the Lunar New Year celebration. Multi-tiered inventory visibility is an obvious necessity.

As was the case last year, Apple’s upcoming new product launches will place its supply chain with even more challenges. The competitive stakes for Apple are far higher this year as market dynamics and overall competition in emerging markets intensifies. Rival Samsung has already felt the effects of intensified competition from lower-price producers Lenovo and Xiaomi in China and Micromax and Karbonn in India. 

Pricing strategy will be critical and some reports indicate that Apple is seeking higher list prices from carriers for its upcoming new models.  The government of China recently raised media-wide concerns regarding the overall security of Apple smartphones in the midst of ongoing global spying scandals, which could place additional pressures on China Mobile to feature other brands. Android powered phones continue to gain more overall market share while Microsoft and other tech players are providing more incentives for lower-cost providers to adopt Windows based phones.

These are all variables that will drive Apple’s supply chain planning in the coming weeks, one that will again have to demonstrate responsiveness to increased market dynamics, synchronization of NPI and ramp-up plans and resiliency to unplanned disruptions or material shortages.

Then again, Apple continues to be rated by Gartner as the number one supply chain.

Bob Ferrari


Supply Chain Matters News Capsule for July 17; UPS, Foxconn, Mondelez, Typhoon Rammasun

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It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news.

In this capsule commentary, we include the following topics:

  • UPS Memphis Facility Expansion
  • Foxconn Plans for New Plant in China’s Guizhou Province
  • Mondelez Continued Re-Structuring,
  • A New SCRM Standard,
  • Typhoon Impacts the Philippines

 

UPS Kicks Off Expansion of Memphis Facility

Global transportation and parcel giant UPS indicated this week that the services provider has kicked off construction related to the expansion of its Memphis Tennessee package distribution facility. According to the announcement, the expansion will add an additional 140,000 square-feet of building space with an estimated cost of $70 million. The UPS Memphis facility controls processing of air and ground gateway hub operations processing and reports further indicate that UPS is leasing upwards of 27 acres from the Memphis Airport Authority to support an 80 percent expansion in package processing. Early improvements are expected to be operational by November, to accommodate expected holiday peak shipment volumes.

Readers will recall that on the day before last year’s Christmas holiday, UPS was thrown under the bus for its admission that its network was overwhelmed and unable to deliver all of parcels in time for the holiday.  While the Worldport facility was the prime focus at the time, the announced expansion in Memphis is an obvious response to have more capacity in place for the upcoming peak holiday shipping period.

 

Foxconn to Build New Environmentally Friendly Production Facility in Interior China

Global contract manufacturer Foxconn Technology has disclosed plans to build a new environmentally friendly production complex in one of China’s most rural and pristine provinces. According to a published Bloomberg BusinessWeek report, a 500 acre park will be built in the province of Guizhou, on the outskirts of the provincial capital, Guiyang.

Plans call for an environmentally focused facility to produce smartphones, large-screen televisions and other products that will employ upwards of 12,000 workers. Production processes within this new plant will include new methods for mold based painting, carbon nanotube film for touchscreens and other innovations. The facility will also include a 2160 square-meter state-of-the-art data center that will be cooled by prevailing natural winds. Bloomberg makes no mention of advanced robotics for assembly but we suspect that may also be included.

This facility will also be constructed from 100 percent recycled steel and include patent protected heat-reflective glass that was designed by Foxconn. The plant is scheduled to be operational by March of 2015.

 

Mondelez to Separate European Cheese and Grocery Unit

In late January, we noted in a commentary that an activist investor was granted a board seat a global snacks and foods provider Mondelez.  The Wall Street Journal reported at that time that Mondelez management agreed to this move to quell public criticism of the company as well as avoid a public proxy fight. Having a board seat, activist investor Nelson Peltz could escalate his calls for added profit margins.

Last Friday, the company announced that it would separate its European cheese and grocery products groups into separate business units as it prepares to jettison its coffee business into a new company. Rumors among the Wall Street community reflected on eventual sale of the European grocery and cheese businesses as well. According to reports, both European groups represented 3.9 percent of total sales.

 

ASIS Releases New Supply Chain Risk Management Standard

ASIS International, a society of global security professionals released a new supply chain risk management standard to assist organizations to address operational risks within their supply chains. This standard was developed by a global cross-disciplinary team in partnership with the Supply Chain Security Council. An Executive Summary of this new standard can be viewed at this web link.

 

Typhoon Strikes the Philippines

Typhoon Rammasun barreled across the Philippines this week, killing at least 38 people and leaving the capital city of Manila without power most of Thursday.  The eye of the storm passed just south of Manila after impacting the island of Luzon.  The storm was reported to have destroyed about 7,000 houses and damaged 19,000, with more than 530,000 being evacuated. Offices and commerce were expected to reopen by late week.

Meanwhile, southern China and Northern Vietnam are bracing for the arrival of the Typhoon on Friday, with wind gusts expected to surpass 140 kilometres per hour.


A Lesson in Emerging Market Dynamics Within Consumer Electronics Supply Chains

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A new dynamic is occurring within the global E-tablet market, one that is being orchestrated by some key suppliers. This dynamic provides a reminder to the crucial importance of supplier intelligence strategies.

The Wall Street Journal recently observed that global microprocessor chip maker Intel, in response to being shut out as a key supplier for the Apple iPad and iPhone as well as Samsung models, is wooing smaller electronic tablet providers within China. The strategic objective is sub $250 tablet markets that are attractive to consumers within emerging market economies.

Intel has been calling on the likes of Shenzhen Hampoo Science & Technology Co., Shenzhen Ramos Digital Technology and select other China based mid-sized consumer electronics providers. These companies were previously learning towards existing ARM-based chip producers as well as Google’s Android operating system. According to the WSJ: “Among other tactics, Intel has taken a cue from Chinese chip makers and last year began offering “reference designs”- essentially ready-made tablet designs that allow manufacturers to create a product in as little as one month.” Intel has further sped-up its chip product development cycles in China.

This week provides another related development.  Microsoft announced that it would expand its subsidies to vendors for Windows-based tablets and sub 9 inch models priced below $250, in essence receiving free Windows licenses. Microsoft is betting that tablets featuring full Windows functionality, in combination with lower-cost processors, have a good chance of capturing added market-share from Android devices. A posting by Digitimes reports that with this new strategy, China white-box, private brand manufacturers have quickly raised their proportion of Windows based tablets.

Two major, influential suppliers are thus in the process of altering existing market dynamics and the stakes are high.  The sub-$250 electronic tablet market could lead to larger production volumes and subsequently, leverage existing electronic content distribution strategies.

As Supply Chain Matters has noted in previous commentaries, within today’s highly dynamic high tech and consumer electronics supply chains, key component suppliers can serve as either a strategic partner or a potential market disruptor by shifting product and market development strategies. The takeaway is that supply chain and procurement sourcing leaders need to fully understand the markets they serve and the key strategic suppliers within that market.  Supplier intelligence has never been as crucial as it is today. A key sourcing decision made for certain business outcome purposes can have ramifications when deep pocket suppliers elect to counter that strategy.

Bob Ferrari


Foxconn Continues to Hint at Building its own Branded Products and Services

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Global contract manufacturer Foxconn (Hon Hai Precision Corp) conducted its annual meeting of shareholders last week and continued to reinforce a business transformation strategy. The company’s chairmen indicated to shareholders that revenues and profits will grow 10 percent this year.

According to the Wall Street Journal, Foxconn’s $130 billion in revenues for 2013 were but a one percent increase over 2012 levels, while operating margins have flattened to 2.76 percent. The contract manufacturer’s direct labor costs have more than doubled since 2009, compelling the company to accelerate initiatives directed at robotics and factory automation.

Founder and CEO Terry Gou indicated to the company’s shareholders: “Business transformation is crucial for Foxconn’s sustainable growth in the next ten years.” That is the similar message delivered at last year’s stockholder event. Mr. Gou indicated that the contract manufacturer will continue to test new business models that integrate hardware, software and services initially in Taiwan, and then in global markets. According to a published report by China Post, the current investment plan reflects the company’s determination to go beyond its status as the world’s biggest contract electronics manufacturer and move into new generation businesses. Gou indicated a strategic focus on development in four key areas — smart grid networks, smart broadband networks, smart Information networks and cloud computing-based artificial intelligence networks.

Initiatives underway include the offering of mobile accessories under the Coverbank brand name, a Bluetooth headset branded under the name of Candyard along with smartphone related distribution and inventory management services including local distribution of Blackberry smartphones.

A recent posting by PC World indicates that earlier this month, Japanese tech company Softbank unveiled Pepper, a personal robot that Foxconn helped develop. Pepper is designed to interact with humans, and can talk and even read people’s emotions: “I believe it will become a huge platform for human companionship” Gou indicated, noting that additional software services could be bundled with the robot. According to PC World, Foxconn is already a partner with U.S.-based Tesla Motors, having built the touchscreen found inside the company’s vehicles. But last week, Foxconn’s CEO revealed that his company is developing its own electric cars, with a target price of less than $15,000.

However, the company continues to indicate that it has no plans to enter the smartphone market as a branded competitor since over half of current revenues come from being a key contract manufacturer for Apple. In a recent Supply Chain Matters commentary, we noted rumors that Foxconn is being tapped as the lead manufacturer for Apple’s next release of the iPhone.

As Foxconn , the most dominant global contract manufacturer continues at its efforts towards business diversification, the implications for other contract manufacturers are also evident.  Contract manufacturing is a low margin business without product diversification or increased investments in factory automation.  The China advantage for direct labor savings is fast evaporating.

The world of contract manufacturing is rapidly changing and so will the manufacturing outsourcing dynamic.  Supply Chain Matters has noted in prior commentaries, a new model of manufacturing will evolve over the next five years, one with different regional manufacturing capabilities and perhaps different global players. The inter-relationships will be dynamic and so will the notion of brands, products and services.  OEM’s will have increased pressures for opening up more customer value-chain opportunities to key suppliers, or else, suffer the consequences.

High tech and consumer OEM’s can no longer lean on past assumptions related to outsourced manufacturing business models.

Bob Ferrari


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