It’s the end of the calendar work week and the prelude to the Labor Day Holiday weekend in the U.S… This commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.
In this capsule commentary, we include the following updates:
Report that McDonalds is Reevaluating its China Supplier
Boeing and a Major Supply Chain Partner Land a Big Order
Oracle Announces Release of E-Business Suite 12.2.4
Report that McDonalds is Reevaluating its China Supplier
A few weeks ago, Supply Chain Matters highlighted a Wall Street Journal report that indicated that in the light of China’s food regulators finding the existence of certain expired meat products within the McDonalds supply chain in China that the restaurant chain was going to give the benefit of doubt to its long-time supply chain supplier of 59 years, OSI Group, who’s China based subsidiary, Shanghai Husi Food Company was allegedly implicated in the expired meat mis-labeling investigation.
This week, the WSJ published a follow-up report that now indicates that McDonalds is reconsidering its prior relationship with OSI Group. The report quotes a corporate spokesperson as indicating that in the past six weeks, the OSI partnership for supply of China outlets has been suspended. After due-diligence investigation by McDonalds, the chain suspended all cooperation with Shanghai Husi as of July 20th, which precipitated a near three week shortage of meat products for outlets in China and Hong Kong. The chain is instead positioning alternative suppliers Cargill and Keystone Foods to increase supply capacity within China.
Considering both WSJ reports spanning a month, its somewhat confusing to ascertain if McDonald’s has indeed been standing by a loyal supplier. We can only speculate that due diligence either uncovered troubling labeling practices or the restaurant chain feels an entirely new supplier slate is needed for China and other Asia outlets.
Boeing and a Major Supply Chain Partner Land a Big Order
In our ongoing Supply Chain Matters commentaries directed at commercial aerospace supply chains, we have echoed the new buying influence of airlines and leasing operators supporting emerging market regions such as China and greater Asia.
This week, Boeing and Singapore based BOC Aviation, a leading aircraft lessor in Asia, announced a near $9 billion order, at list prices, for a total of 82 new aircraft. The order includes 50 of Boeing’s 737 MAX 8s, 30 Next-Generation 737-800’s and two 777-300 Extended Range aircraft. These new aircraft are destined for expansion or replacement needs for a number of unnamed airline operators across Asia with deliveries spanning the time period from 2016 to 2021. According to a published report by Bloomberg and The Seattle Times, the estimated order is more likely to be $4.2 billion when discounting is factored. That is obviously a reflection of buyer power.
The Boeing order follows a mid-July announcement from BOC Aviation of an order from Airbus consisting of an additional 43 A320 and A321 series aircraft with deliveries extending through 2019. Airbus had additionally landed a sale of $11.8 billion of new aircraft from Japan based lessor SMBC Aviation. The Bloomberg report quotes a spokesperson as indicating that BOC Aviation projects receiving an average 27 planes a year starting in 2015, while also disposing of 20 to 30 annually.
In the adage that a rising tide raises all supply chain boats, another major beneficiary of the bulk BOC Aviation order involves the aircraft engine consortium of CFM International, the joint venture between General Electric and Safran. CFM was the recipient for orders involving 100 LEAP-1B and 60 CFM56-7BE engines that is valued at $2 billion at list prices. The engine orders additionally include longer-term, multi-year service and maintenance considerations.
Oracle Announces Release of E-Business Suite 12.2.4
Oracle recently announced the release of Oracle E-Business Suite 12.2.4. According to the announcement, this latest release provides an updated user experience, significant customer-driven enhancements across the applications suite, with added integrations to Oracle Cloud Solutions.
This particular release has many enhancements related to the support of various supply chain procurement and customer fulfillment technology enhancements. Highlights include:
Oracle Procurement: Web ADI–enabled spreadsheet creation and modification of purchase order lines, schedules, and distributions to improve buyer productivity when dealing with large orders.
Oracle iProcurement: A streamlined single-step checkout flow allowing employees to quickly complete shopping activities and initiate the requisition approval process.
Oracle Procurement Contracts: Improved buyer efficiency from auditing of contract documents by reviewing details of policy deviations and net clause additions.
Oracle Services Procurement: Enhanced capabilities provide buyers with greater flexibility to support a broad range of complex order scenarios.
Oracle Channel Revenue Management: Improved volume offer capabilities and a streamlined user interface enable users to quickly adapt to changing business conditions.
Oracle Order Management: A long overdue new HTML user interface addressing improved usability, greater flexibility, and a more modern user experience.
Oracle Yard Management: A new solution enables manufacturing, distribution, and asset-intensive organizations to manage and track the flow of trailers and their contents into, within, and out of the yards of distribution centers, production campuses, transportation terminals, and other facilities.
Oracle Manufacturing: Significant usability improvements in the Oracle Manufacturing Execution System (MES) help improve operator productivity by simplifying time entry and quality collection. New capabilities to manage the auto-de-kit (disassembly) of serialized products supports customer returns and internal reuse of component parts.
Oracle Enterprise Asset Management: Enhancements to support linear assets in industries, such as oil and gas, utilities, and public sector, help improve productivity and retire costly integrations and custom code.
Oracle Service: Enhanced spare parts planner’s dashboard provides rich user interaction to improve planner productivity.
Oracle Value Chain Planning: Numerous enhancements across multiple products include deeper industry functionality, such as minimum remaining shelf-life enhancements for the pharmaceutical and consumer goods industries, multistage production synchronization for process industries, and integration between Oracle Service Parts Planning and Oracle Enterprise Asset Management for asset-intensive industries. New promotions planning analytics in Oracle Advanced Planning Command Center improve business insight.
The bulk of Apple’s component supplier and contract manufacturing partners reside in China and Asia where many high tech electronics products are produced. Unfortunately, this is an area that continues to deal with high levels of industrial pollution, worker safety and industrial accidents.
Apple is now taking meaningful steps to initiate substance regulations across its supplier network.
According to a recent posting appearing on Apple Insider, the company is banning the use of cleaning agents’ benzene and n-hexane within supplier factories. This moves is part of Apple published Regulated Substances Specification which has recently been made available for open viewing. The purpose of this specification reads in-part:
“We require our suppliers to adhere to this Regulated Substances Specification, which describes Apple’s global restrictions on the use of certain chemical substances or materials in our products, accessories, manufacturing processes, and packaging used for shipping products to Apple’s customers.”
Apple’s vice-president of Environmental Initiatives has additionally published a letter regarding the company’s stance on safe working environments. Apple further intends to establish a new advisory board made up of chemical and pollution prevention experts who are tasked with finding additional ways to minimize or eliminate the use of toxins across Apple’s supplier network.
These moves come after activist groups submitted petitions calling for the company to place a ban on dangerous substances.
The fact that one of the top rated global supply chains has taken this proactive stance regarding supply chain safety and environmental responsibility is quite meaningful. Hopefully it will be an impetus for more high tech and consumer electronics brand owners to join in citing higher standards for safe chemical use.
Many supply chain industry publications, forums, industry analysts and indeed Supply Chain Matters have made note of the discernable shift in production outsourcing strategies in favor of near-shoring strategies where production is located in proximity to large geographic markets.
Changing economics, the intent to protect valued intellectual property and the discovery of cheap and abundant forms of oil and natural gas have further fueled the continuing resurgence in U.S. and North American based manufacturing among many industry sectors. This trend is especially prevalent for small and medium-sized manufacturers who cannot afford to have elongated supply chains. The Wall Street Journal recently cited a statistic indicating that more than 80 percent of companies bringing work back to the U.S. have $200 million or less in revenue volumes.
If you have been reading reports reflecting companies within industries such as apparel, footwear or consumer electronics moving production operations from China back to the U.S., a challenge often cited is the lack of a reliable and industry competitive network of component or value-chain suppliers. That was understandable given the mass exodus of such suppliers when industries flocked to China to secure direct labor savings. Rebuilding industry focused world-class component suppliers will take additional time as well as other economic and business related factors.
However, our news alerts came across quantification of a significant new data point and trend that could hasten the maturity of lower-tier supply chain networks within the U.S.
The South China Morning Post published a report that indicates that China’s low-end manufacturers have also identified advantages for moving production operations from China to the United States and are moving operations at a quiet but aggressive pace. The report quotes a consultancy as indicating that in the two year span from 2011 to 2013, investment by Chinese manufacturers in operations within the U.S. grew from $400 million to $2 billion, while the number of U.S. based jobs provided by Chinese manufacturers nearly quadrupled. Obviously, if these numbers are accurate, they reflect a significant and noteworthy trend.
While China’s manufacturers will remain dominant in their home country, the fact that value-chain and component suppliers are practicing nearshoring of certain operations is an obvious reflection that U.S. component supply chain capability will indeed improve. OEM and brand manufacturers are obviously influencing their China based suppliers to assist in the effort.
Once more, U.S. based manufacturers or all sizes , if they have not done so already, will discover that Chinese competitors can, and are more than willing to implement their own near-shoring strategies to support specific global markets.
If readers can provide additional quantification of this trend within their specific industry sectors, please share them in Comments area or send them directly via email.
A Different Investment Environment Concerning China- Differentiating Market and Supply Chain Sourcing Strategies
If you have been keeping-up with business headlines over the past several months, you may have noticed an emerging trend involving doing business within China that is impacting both large and small manufacturers and services providers. Chinese regulators continue to intensify scrutiny of foreign-based technology, product and service providers and there is no reluctance to take on the highest profile companies. China’s business environment continues to change.
Supply Chain Matters has called attention to previous incidents. Restaurant services providers McDonalds, Burger King and Yum Brands were cited by Chinese regulators for serving expired chicken and beef meat products in restaurants. Within the ocean container shipping industry, the proposed P3 Network alliance was scuttled by Chinese maritime regulators in June after both European Union and U.S. Maritime agencies had given a green light. Previous developments have involved large pharmaceutical producers along with Apple and other consumer electronics companies.
Today’s Wall Street Journal reports that China continues to step-up its antitrust efforts targeted at Western firms. Surprise inspections were made in the offices of Microsoft and Accenture regarding suspected monopolistic practices. The WSJ notes that Windows XP has a nearly 55 percent market share within the country and consumers are angered over Microsoft’s prior decision to suspend support. Another agency is investigating Audi and Fiat Chrysler for alleged monopolistic practices. Previous reported investigations involved Daimler in its pricing of service and repair parts. In the wake of the recent NSA information spying incidents, Apple’s iPhone was recently cited by Chinese regulators for not having proper information security, raising added concerns for China’s telecom and cellular network providers in offering other buyer choices besides the iPhone.
On a previous earnings briefing involving a mid-sized technology company we heard the CEO openly declare that the company’s efforts to actively sell technology within China was being temporarily shelved because of market feedback that China based firms were uncomfortable with evaluating any foreign-based technology options.
It is no secret that many foreign based firms made significant direct and indirect investments in China to gain access to a huge market. Ten years ago, this author can recall hearing companies talk about the vast potential of China’s market, a more open, less regulatory intensive environment that made investments in facilities and infrastructure happen rather quickly. Much lower direct labor costs added the impetus for investing in production, supply chain and distribution facilities. While protection of intellectual and proprietary capital was always the most prominently identified risk factor, many companies made conscious decisions to invest anyway, given the huge potential of China’ markets.
Obviously the situation has significantly changed. China’s leaders continue efforts to moderate overall growth to avoid an economic bubble. Supply chain teams are well aware of the double-digit explosion in direct labor rates that continues to occur. A plundering of resources and energy has led to increased environmental concerns given high levels of pollution and dirty air. And now, China’s regulatory agencies have been given the power to crackdown on abuses.
Recall that after the global financial crisis, manufacturers declared that added investments in U.S. manufacturing and supply chain capability were not attractive because of higher corporate tax rates, overly restrictive regulations and higher labor costs. Similar arguments pursued regarding European Union investments. The discovery of new and cheaper energy sources in North America and global currency shifts have now altered the above noted concerns.
A lot has changed in the global environment, and will continue to change. The realities of doing business internationally have many facets and challenges. Efforts to seek lower costs and less regulation compelled industry supply chains to flock to China. This has now caused China to initiate protections of its economy, labor force and environment.
The takeaway for supply chain leaders is that business decisions reflecting global market penetration and for supply and production sourcing are two different strategies. Obviously there are important dependencies on each strategy but both remain distinct. New market opportunities must always be evaluated and leveraged.
Global sourcing of supply and production is predicated on a number of important and related factors, and cannot be one-dimensional. Ultimately, singularly chasing the next lower-cost production opportunity is a short-term strategy that could end up costing more. Sourcing strategy is far more strategic, that must include balancing of factors that include product innovation, labor, transportation, risk management and other landed cost aspects.
Sourcing and procurement efforts can no longer be made in isolation, nor can they be static. They require continuous cross-functional and cross-business involvement.
© The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
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.
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.