This week, The Wall Street Journal reported (paid subscription) that global contract manufacturer Foxconn is in preliminary talks to build a high-end $5.7 billion LCD display screen factory in Northern China. According to this report, the CMS is in discussion with the government of Zhengzhou regarding potential investment arrangements. According to WSJ unnamed sources, Foxconn and Hon Hai Precision Chairmen Terry Gou visited Zhengzhou in August and met with government officials to discuss an investment proposal. The Zhengzhou region is also the home of an Apple iPhone assembly facility.
This news is significant in that it would represent Foxconn’s largest investment in component manufacturing and would be an additional sign of further diversification within key downstream strategic components of high tech and consumer electronics supply chains. LCD production requires rather expensive capital investments and the business has had its ups and downs in profitability.
In its reporting, the WSJ stated that it remains unclear as to whether Apple or other investors are being approached to invest in the proposed display plant. Apple already sources LCD display from three major suppliers. Apple declined any comment to the WSJ report.
Further reported was that Foxconn has been floating ideas for building a component and handset gain manufacturing facility in Indonesia, but is apparently driving a hard bargain for local authorities.
In a published Supply Chain Matters commentary in June, Service Supply Chains Put to the Ultimate Stress Test in the Automotive Industry, we focused on General Motors, which after intense scrutiny from U.S. regulators and legislators regarding faulty ignition switches among multiple models, had recalled thousands of vehicles. At that time, GM had announced a cumulative 44 product recalls involving nearly 18 million previously sold vehicles not only for faulty ignition switches but for various other lingering quality problems.
Other Automotive OEM’s have also found themselves under intense regulatory scrutiny, and many elected to err on the side of caution and declare product recalls if there were any concerns regarding vehicle or occupant safety. The result led to a Washington Post headline indicating that one out of every ten vehicles on the road had been subject to a recall notice. That amounts to a lot of motor vehicles.
Beyond the challenge of potential damage to brands and subsequent consumer brand loyalty, our primary concern in June was that automotive service and aftermarket supply chains were about to face their biggest stress test ever. The sheer numbers implied that required replacement part inventories were not going to be able to match expected demand and that inventory would have to be re-allocated or alternate suppliers would have to be sourced. Dealers and authorized repair facilities had to be very careful in scheduling service appointments and setting customer expectations regarding replacement part availability and concerns for vehicle safety.
Also included in our June commentary, was reference to reports that product recalls related to defective airbag inflators produced by supplier Takata Corp. were expected to increase after a series of investigations.
Flash forward to today, and now the sheer scope and impact of the unfolding product recalls involving defective Takata airbag inflators is approaching millions of additional vehicles and multiple other brands. U.S. regulatory agencies have raised alarms for the safety of occupants with calls for immediate attention. Web sites are swapped with consumers seeking the status of their vehicles. Business and general media have not taken the time to get the facts sorted out regarding the largest concern being potential defective airbag inflators operating in warm and humid climates. Instead, consumers from across the U.S. are forced to seek answers and demand attention as to whether their vehicle is safe to operate.
By our lens, automotive aftermarket service and parts networks have now been literally thrown under the proverbial bus.
It wasn’t their fault.
The events did not allow the planning for adequate replacement parts or analysis to the required capacity of service repair and replacement resources. The problem was thrown over the wall because quality monitoring mechanisms stalled and time had run out for planned response. Organizational interplays and CYA were probably at-play as well.
Already, OEM’s such as Toyota are trying to proactively respond to this defective air bag inflator crisis in the most realistic manner. Reports indicate that Toyota dealers are being requested to disable the potential defective airbag mechanisms of recalled vehicles and instruct vehicle owners to return when replacement parts are made available. They are doing so because of the reality of backlogged replacement parts which are substantial. In the meantime, temporary labels affixed on vehicles warn occupants of a safety hazard of not having operating airbags.
How comforting is that?
But, without adequate replacement part inventories, there are little options right now.
Service supply networks will invariably come-up with means to prioritize the most important and time sensitive parts requirements and then move on to the various other replacement part requirements to get through this crisis.
The takeaway from these ongoing unprecedented set of automotive industry product recall events is that if the business situation requires much more responsive, supply-chain wide quality monitoring mechanisms and more informed service and aftermarket spare parts networks, than provide the necessary tools and resources required to get the job done.
No doubt, there will be considerable repercussions and learning that come from these events. There will invariable be far more attention paid toward vehicle safety, regulatory safety and reporting and supply chain wide quality adherence.
In the meantime, as automotive consumers, we need to allow the time and patience for the dedicated professionals who plan and fulfill aftermarket parts and service event requirements to adequately respond to the crisis at-hand while more attention is directed toward more responsive quality management.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
There are many ways to remediate a perceived supply risk management problem and Constellation Brands has just exercised its bold and approach.
The beer and spirits producer recently reported fiscal 2015 second-quarter results. While total revenues increased 10 percent, the company had to reverse approximately $37 million of net sales in the quarter as a result of a product recall at the height of the seasonal beer consumption period in August. This recall was prompted by the discovery that some glass beer bottles contained tiny bits of glass. In what the company describes as an abundance of caution regarding these glass bottles, two million case shipments of Corona Extra branded beer were recalled from wholesalers and retailers during several weeks in August. Perhaps some of our readers experienced the effects of this recall, not being able to drink their favorite beer brand. According to Constellation, there have been no reported injuries due to the defective bottles.
The supplier of the subject beer bottles was Anheuser-Busch In-Bev, specifically a bottle producing plant located at its Mexican based subsidiary. Beer drinkers may recall that the Corona brand was sold to Constellation in order for In-Bev to conform to regulatory restrictions for one of its product acquisitions.
To alleviate this type of problem in the future, Constellation additionally announced its intent to acquire from Anheuser-Bush InBev’s glass plant and associated warehouse facility that was associated with the prior recall. This bottle producing facility sits adjacent to the Corona brewery in Nava Mexico.. The company is investing the sum of $300 million in a vertical supply strategy to gain more control of quality conformance processes and to boost production. The deal further calls for a 50-50 joint venture ownership with Owens-Illinois to own and operate both the Mexican bottling facility and to source Owens-Illinois as a secondary glass bottle supplier.
According to the announcement, the glass plant currently has one operational glass furnace and plans are in-place to scale to four furnaces over the next four years at an additional cost of $300-$400 million, costs that are expected to be equally shared by Constellation and Owens-Illinois. When fully operational, the Nava Mexico bottle facility, operating under the leadership of Owens-Illinois is expected to supply more than 50 percent of the glass needs for Constellation’s U.S. beer business. Constellation also has a long-term bottle supply agreement with bottle supplier Vitro.
While we can all speculate that some of these plans were in the works leading up to the bottle recall, Constellation has indeed taken a bold step in assuring long-term bottle sourcing supply along with added assurance of quality conformance.
In a June 2014 Supply Chain Matters commentary, Automotive Component Supply Strategy Meets Sensitized Regulatory Environment, we called attention to a published Reuters report indicating that product recalls involving airbags supplied by Japan based Takata Corp. would expand and involve millions of affected motor vehicles and ensnarl many global brands.
That situation has become ever more visible in a multitude of cascading product recalls and urgent consumer advisories involving many auto brands from entry-level to upscale luxury.
Today, the National Highway Traffic Safety Administration (NHTSA) issued a high visibility consumer advisory, urging owners of over 4.7 million recalled vehicles to act immediately on recall notices and replace defective Takata airbags due to suspected defective air bag inflators. Brands involve BMW, General Motors, Honda, Mazda and Nissan and the vehicle models date back as far as 2000-2001. While this advisory notes specific urgency for certain U.S. states and regions featuring warm, humid climates that fact seems to be blurred by the blast of Monday news from general media. The other reality is that many vehicle owners may have ignored previous recall notices which could jeopardize the safety of occupants.
Aftermarket service and spare part networks are already stressed by a surge of product recalls issued from an abundance of caution to avoid punitive financial fines. This latest high profile consumer warning related to certain airbag deflator defects will add more stress to overly stressed networks that lack the tools to handle such volumes.
Automotive OEM’s have fostered component product innovation strategies among a key set of lower-tiered component system suppliers, and OEM’s leverage such innovation across multiple vehicle and brand platforms. These strategies were put in place to foster both faster product innovation cycles as well as to be able to leverage volume supply costs across multiple global platforms. The objective of leveraging lower component costs has never gone away, at least for certain OEM’s.
Earlier this month, The Wall Street Journal featured a report (paid subscription or free metered view) indicating that Honda, after a long supplier relationship, is re-evaluating that arrangement with Takada in light of a series of airbag inflator product defects. Reports indicate that defective air bags, some dating back to the early 2000’s, could send metal shrapnel flying upon air bag inflation, posing serious injury risk to drivers and/or passengers. According to reports, Takada utilizes a different propellant than other suppliers, one that is cheaper but more volatile. Rival air bag suppliers that could benefit from the current crisis include Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which is being acquired by German based ZF. The WSJ further reported that Toyota and Nissan are also concerned about Takata air bag systems in the light of the current circumstances. But, switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.
The WSJ report provides some in-depth perspective on how Takada has expanded its global just-in-time supplier footprint to accommodate individual OEM platform demand. The report alludes that the product quality problems may have stemmed from a period of rapid growth, testing communication and process discipline among far-flung regional plants. After two years of investigation, Honda and Takata joint quality teams discovered certain machine defects in a plant in Washington state and in process parameters in a Mexican plant. At times, poor record keeping hindered the ability to figure out which cars had defective inflators installed.
Whether Takada can recover from this ongoing and compounding product recall and branding crisis is certainly open to skepticism and speculation. However, Supply Chain Matters feels that automotive OEM’s face their-own realities related to product development and global product platform cycles. A global platform strategy supported by component supply agreements has to be balanced with supplier risk. Requiring suppliers to locate just-in-time production across far-flung global regions requires an assessment of rigid process control discipline and conformance. When such controls indicate cause for concern, two-way communication must be forthright and honest and procurement teams need to be proactive in assessing and communicating risk implications.
Today’s overly sensitized regulatory environment requires timely feedback and responsive risk mitigation.
The passenger safety, financial, and brand risks are far higher.
In a May 2014 Supply Chain Matters commentary, Recruiting the New Era of Retail and Online Fulfillment Leaders, this Editor made the following statement:
“In this era of online retailing and Omni-commerce, there are two leadership competencies that will differentiate tomorrow’s executive leaders in retail. They are a deep understanding of social-media fueled marketing and Internet focused retailing, and a deep awareness, understanding and appreciation of end-to-end supply chain inventory deployment and fulfillment capabilities. From our lens, recruiting for retail C-level executives has been too focused on classic merchandising, finance or traditional brand marketing.”
Our commentary at that time reflected on business media reports indicating that major retailers such as JC Penny, Target and others were finding it difficult to recruit a qualified CEO.
Now, more than seven months later, it is important to reflect on what is occurring, namely that some retail industry CEO selection teams now weigh operations leadership experience over that of pure merchandizing.
In late- July, Target, for the first-time in its history, brought in former PepsiCo executive Brian Cornell as its CEO. Before accepting the Penny CEO role, Cornell had prior experience in leading PepsiCo’s Americas Food business unit and the Sam’s Club warehouse business for Wal-Mart stores. Cornell is now in the process of re-evaluating all of Target’s operations and supporting processes.
Also in late July, Tesco recruited Dave Lewis, a 28 year executive veteran of Unilever as its new CEO after first-half profit trailed the grocer’s expectations. Lewis previously led the expansion of one of Unilever’s fastest-growing businesses, and was the first outsider CEO hired by the UK retailer. Lewis’s leadership experience included the chairmanship of U.K. and Ireland business and president of the Americas operating units at Unilever. When the Chairmen of Tesco was asked why that retailer sought with Lewis, he stated:
“If you look at what Dave Lewis brings, David is absolutely the leader in brand management and brand identity, communication, customer development, customer management. Tesco is not short of retail skills.”
Last week, JC Penny finally selected its new CEO designate. In its reporting, The Wall Street Journal lead-in to the announcement noted that Penny elected to go with strength in nuts and bolts retailing rather than flashy merchandising. Former Home Depot and Target operations executive Marvin Ellison will ramp into the CEO position by August of 2015 after a several month transitional period as President. After the disastrous episode when former Apple retail executive Ron Johnson brought the retailer to near financial disaster with a $4 billion hit in revenues, Penny’s directors are opting for a longer ramp-in for its new CEO designee. Ellison will serve under the stewardship of Myron Ullman, who was brought back to save Penny in April of 2013.
Ellison’s accomplishments include 15 years at Target before joining Home Depot, where he held roles in global logistics and vice president of U.S. stores. Ellison was reported to have helped to integrate Home Depot’s e-commerce operations with brick-and-mortar stores, namely implementing the buy online and pick-up in store initiative.
Regarding the JC Penny CEO selection, the WSJ provided the following commentary:
“The appointment also reflects a broader shift in retail in which some big companies have favored detail-oriented operators over executives mainly lauded for brilliance in merchandising, as the industry faces giant new challenges in managing its supply chains and keeping customers from defecting to the web.”
Certainly, each retailer requires different leadership skills at a point in time, and operations experience may or may not be favored. However, the evidence from above indicates that for those retailers who have especially struggled with the impacts and ramifications of today’s Omni-channel retail environment and permanent structural shifts in retailing are opting for proven operations leadership.
Sales and operations, supply chain and customer fulfillment professionals in retail industry environments should take note that this now building evidence of value in operations leadership will hopefully continue for selecting next generation retail leaders.
Keep that in-mind as the next several weeks bring the usual doses of operational realities.
Earlier this month, Supply Chain Matters featured a commentary focused on predictions of upcoming holiday sales. Our commentary referenced the latest forecast from the National Retail Federation (NRF) indicating that holiday sales in the coming quarter are expected to increase 4.1 percent, which in monetary terms, represents the largest rise in holiday sales in the past three years. We further noted an interview on business network CNBC featuring the NRF chief economist indicating that the 4.1 percent may be on the low-end, considering the current trend toward lower gasoline prices and increased employment in the U.S…
A new data point is a recent joint release from both the NRF and Hackett Associates that forecasts ocean container shipments will rise 6.4 percent in October, compared to last year’s monthly volume. The report does caution that August and September port volumes saw modest increases. A report published by The Wall Street Journal interpreted this latest container data prediction as an indicator of more confidence on the part of retailers to bring-in additional holiday sales inventory.
For curiosity, we re-visited the port container volumes for the Port of Los Angeles for the periods of July through September, which is traditional high volume inbound period, contrasting TEU volumes in 2013, vs those this year. Indeed, for the three months, 2014 TEU inbound load volumes this year are trending up roughly 6 percent from 2013 levels. That is in the backdrop of the continued uncertainty of a potential port labor stoppage as union labor talks have continued since labor contract suspension earlier in summer. Therefore, if October inbound container volume trends even higher, as indicated by NRF’s forecast, than perhaps retailers have indeed become more optimistic.
We would appreciate hearing from Sales and Operations planners and procurement professionals residing within retail and wholesale supply chains.
We have added a Supply Chain Matters interactive polling question: (Located on the lower portion of our right-hand panel) Is your organization planning increased inventory levels, relative to 2013, to support expected 2014 holiday sales? The poll is anonymous and will provide trending results. Let’s all see what those closest to the action indicate. We will run this poll for the next three weeks.
Like many of you, we will also closely monitor inbound container stats for October.
In the meantime, let’s all observe and best wishes in the upcoming 10 weeks of craziness.