Supply Chain Matters and other supply chain focused media has called specific attention to the current wave of mergers and acquisitions impacting the global logistics sector. Yet, it is quite important that supply chain leaders pay close attention to the motivations of such actions, as well as the implications related to providing more one-stop services. Incorporating a logistics provider as an extension of complex and often changing supply chain business processes comes with an expectation that such a provider has the asset, process and technology enabled capabilities that can accomplish the job and meet operational milestones and performance measures.
The Wall Street Journal recently noted that there have been 10 major acquisition deals totaling $18 billion since early 2014. The most notable have been the recent XPO Logistics acquisition of Conway Way, FedEx’s acquisition of GENCO and Bongo International as well as TNT Express, and UPS’s acquisition of Coyote Logistics. Once more, there are strong indications that this trend will continue.
The primary reasons are that globalization, increased process complexity and impacts of online and Omni-channel fulfillment are motivating more and more firms to seek one-stop services or to outsource various value-added logistics processes. In essence, the third-party logistics (3PL) logistics business model is fundamentally moving toward the termed fourth-party logistics (4PL) model. Many supply chain and logistics professionals recognize the 4PL model as one that provides an extension of the customer’s current business process needs, including the integration of information and technology systems. However, the misnomer is that many 3PL’s who have shied from significant investments in technology and processes now look to acquisitions to quickly gain such capabilities.
But alas, the ability to be an extension of a customer’s business processes presents its own challenges, even for the largest and most savvy logistics providers.
The Wall Street Journal published a report indicating how aircraft jet-engine producer Pratt & Whitney’s production was stalled nearly a month because of issues at a UPS logistics center. (Paid subscription). Pratt had contracted with UPS to streamline its manufacturing processes and ramp-up production levels of its newly designed aircraft engine. Readers will recall that that Pratt’s new and more fuel efficient engine will power new aircraft models including the Airbus A320 neo. Pratt’s current customer booking stands at 7000 orders.
A UPS logistics center would receive parts from various Pratt engine suppliers and package them into kits holding 8000 parts and ship them to various final assembly production facilities. According to the report, the logistics center was beset with problems when it first opened in July that slowed Pratt assembly operations to a crawl. Kits were received with what was described as dirty, damaged or missing parts, prompting Pratt production workers scrounge among multiple kits to find a full complement.
Pratt and UPS quickly assembled dedicated teams to address these process start-up issues that included additional training as well glitches in inventory tracking software. The problems are now reported as resolved but Pratt’s production levels in August nearly came to a crawl.
Pratt’s parent is United Technologies and its CEO indicated to the WSJ: “It’s the ramp. The technology, I’m very confident we’ve got that right. But you’re only as good as your worst supplier. When you’ve got 8,000 parts in an engine, one of those parts aren’t there, you’re not building an engine.”
Pratt had turned to UPS to eliminate low-value work and avoid holding extensive inventory on its own books. The engine producer has a unionized work force and the WSJ report indicates that union members were not all that pleased with this new arrangement. Pratt transferred management of parts and inventory to an automated UPS warehouse system.
The Pratt story is somewhat of a typical example of what is currently driving the logistics industry today, along with the challenges for becoming the extension of an existing manufacturing, supply chain or customer fulfillment business process. The fact that a provider the size, scope and resources of UPS initially stumbled is indeed an indicator that beyond business growth through acquisition, the logistics industry has to concentrate on added technology and information integration capabilities.
When it comes to certain cases related to food safety, the wheels of justice turn mighty slow. But recently, the judicial system has sent a powerful and far-reaching message to the food and other consumer products focused industry and to their respective supply chain partners.
In early 2009, there was an incident involving a salmonella outbreak linked to peanuts and peanut butter products distributed by Peanut Corporation of America (PCA). That salmonella outbreak sickened over 700 people and led to the liquidation of PCA.
Four former executives of PCA and a related company faced criminal charges for covering up information that peanut butter produced was contaminated with salmonella bacteria. The 76 count indictment included charges of conspiracy, mail and wire fraud, obstruction of justice, among others related to distributing adulterated or misbranded food. Federal officials alleged that certain executives at PCA were aware of salmonella testing results, failed to alert consumers, and lied about test results to inspectors from the U.S. Food and Drug Administration (FDA).
This week, a U.S. District Court judge sentenced two former plant managers at the PCA Georgia peanut processing plant identified in the 2009 incident to six year and three year prison sentences. Both would have probably faced higher sentences if they had faced trial and not pleaded guilty. Both made deals with prosecutors to testify against Stewart Parnell, the owner of PCA. The Georgia plant’s quality control manager received a five year prison sentence.
Last week, Parnell was sentenced to 28 years in prison after being found guilty on 67 criminal counts. Some noted that the Parnell sentence was too harsh, especially in the light of convictions in similar salmonella related cases.
According to a published AP report syndicated on Manufacturing.net:
“Investigators discovered the Georgia plant had a leaky roof, roaches and evidence of rodents, all ingredients for brewing salmonella. They also uncovered emails and records showing food confirmed by lab tests to contain salmonella was shipped to customers anyway. Other batches were never tested at all, but got shipped with fake lab records stating that salmonella screenings turned out negative.”
Once more, tainted peanut products were shipped up the supply chain to other producers who used them to make snack crackers and other products.
Parnell’s attorneys blamed the scheming on the two former plant mangers. They argued Parnell, who ran the business from his home, was a poor manager who failed to keep up with his employees’ actions.
It may indeed seem that the wheels of justice do turn slow, six years in this case. But a strong and powerful message has been administered, one that will reverberate across food and consumer goods supply chains. Food safety is paramount and knowingly and willingly supporting or advocating the shipment of tainted food or improper quality monitoring processes will have a consequence, one that has taken on even more meaning.
Both The Wall Street Journal (paid subscription) and Reuters are today reporting that global retailer Wal-Mart is planning a round of layoffs involving hundreds of workers at its Arkansas corporate headquarters later this week. According to both reports, fewer than 500 employees may be involved.
According to the WSJ, HR employees have reserved many meeting rooms at headquarters and some department directors were told to cancel travel this week to make sure that they were in the office.
Speculation of pending layoffs has reportedly been percolating for several weeks, fueled by local recruiters receiving resumes and others who live in the region.
This latest development adds more evidence that Wal-Mart needs to preserve its profit margins in the midst of longer-term initiatives directed at increased investments in online commerce and fulfillment capabilities, long awaited wage hikes for in-store employees and other strategic initiatives.
Supply Chain Matters has highlighted other recent efforts to reduce costs and maintain margins including added cost reduction pressures placed on suppliers and some push-back from larger, more influential suppliers.
With this reported action of internal layoffs, the retailer is demonstrating a seriousness of its profitability commitments.
In the backdrop our previous Supply Chain Matters commentary related to Boeing and its decision to shortly assemble new 737 commercial jets in China, we provide another related development.
In November of 2014, we called initial attention to the announcement that Boeing had initiated a multi-billion long-term supply agreement with Japan based Toray Industries for the supply of carbon fiber composite material. This ten year strategic supply agreement was initiated to provide continuity of supply of carbon fiber material needed for the production of Boeing’s 787 Dreamliner and new 777X aircraft. Apparently Boeing is now considering a supply risk strategy regarding this strategic material.
Last week, The Seattle Times reported that Toray Composites America (TCA) celebrated the completion of a fifth production line at its plant near Tacoma Washington, but further warned that additional expansion will center on other U.S. east coast and overseas investments.
Noted in this Seattle Times report is that each pre-preg carbon fiber assembly line requires a $100 million investment and 14 months of rigorous testing before such line is qualified to produce high specification material. With the addition of this fifth assembly line, executives at parent Toray in Japan now indicate that any further investments will be directed at the existing TCA facility located in Spartanburg South Carolina.
Toray has purchased an additional 400 acres of land with plans to build a $1 billion fully integrated composites production facility that will span precursor chemical to finished carbon fiber tape. According to the article, Toray has signed additional supply contracts with Bell Helicopters and Brazilian jet producer Embraer.
A Toray executive is reported as indicating that diversifying supply in South Carolina is a desire by both Toray and Boeing to insure supply continuity, in the event of a shutdown at the Tacoma based facility. More revealing are statements by this same executive indicating that Boeing’s longer-term thinking centers on the labor cost intensity associated with manufacturing this material in the U.S. , with an eagerness to transfer some composite supply sourcing to perhaps India, which has a growing demand for new commercial aircraft, and could provide more attractive labor costs.
In the lens of Supply Chain Matters, this may be an additional indication that growing demand for new commercial aircraft within specific Asian countries may include additional provisions for more supply chain presence and value-add activity.
As a follow-up to our prior Supply Chain Matters posting reflecting on high tech executives meeting with the leaders of China and India last week, came the announcement from Boeing of a significant order for new commercial aircraft along with the pending opening of a Boeing manufacturing facility within China itself.
Boeing indicated that it would sell 300 of its new model 737 jets to China. Of far more concern, this deal includes a plan calling for Boeing to team-up with state-controlled Commercial Aircraft Corp. (Comac) in building and operating a single aisle aircraft completion center in China. This announcement came as President Xi Jinping of China visited Boeing’s facilities near Seattle.
While Boeing indicates that the timing of the completion center has not been finalized, Boeing’s labor unions and certain politicians were quick to weigh-in on this announcement. While Boeing stresses that it will not reduce employment on the 737 program in the state of Washington, the current global hub of 737 manufacturing, the announcement did not garner favor with the likes of U.S. Presidential candidate Donald Trump, State Representative June Robinson and the head of Boeing’s labor union representing aerospace workers.
Readers might recall that in 2011, Boeing reached a labor contract settlement with the labor union representing the company’s production workers at production facilities in the state of Washington. Among other tenets in the ratified agreement, Boeing agreed to source the production of its new 737 MAX aircraft, the newest version, within the union facilities in Renton Washington. The union pressed for such a tenet because Boeing had already had plans to ramp-up model 787 aircraft production at the Charleston South Carolina final assembly facility.
In its reporting, The Wall Street Journal indicates that last month, Boeing increased its forecast for commercial aircraft demand emanating from China to 6330 new aircraft over the next 20 years, 70 percent of which are noted as market growth vs, replacement of older aircraft. That figure represents an average annual volume of upwards of 300 aircraft on an annual basis and that is the friction associated with the announcement of Boeing’s first foreign-based final assembly manufacturing site.
Added to these concerns is that state-owned Comac has been developing the C919 to compete with the 737 and the Airbus A320. That aircraft has thus far garnered orders for 500 jets. Airbus operates an assembly plant in Tianjin to produce aircraft destined for China and Asia based carriers.
Boeing indicates that the new facility will paint the fuselage and install seats and in-flight entertainment systems, but yet one wonders whether China’s leaders will accept such lighter areas of manufacturing as a legitimate presence. One might speculate that value-added composition will be an area for ongoing negotiations related to the China based facility. While in-country value-add is often a tenet of large aircraft deals, coexistence with a declared competitor along with general concerns for intellectual property protection and information security compound a decision related to China in the current environment.
Similar to the themes of the high tech sector, Boeing needs access to China’s growing commercial aircraft market, and in order to gain such access, the company must add a China based production presence to its global supply chain flows, regardless of the expected fallout.
Supply Chain Matters provides a follow-up to our prior commentary: high tech supply chains- increased risks associated with global access. In that commentary, we posed the question of balancing the need of high tech firms for increased market access to China’s market with the added risks of intellectual property protection. Leading up to the visit by Chinese President Xi Jinping to the United States last week, prominent high tech firms elected to seek favor and seek new deals with Chinese partners.
The U.S.-China summit managed to yield some significant deals. On Friday, both countries agreed not to direct or support cyber-attacks that steal corporate information for economic benefit. The countries further agreed to cooperate more closely on the investigation of cybercrimes along with the creation of a high-level working group to combat such attacks. However, beyond the agreement are the actions and will of enforcement. President Obama declared: “We (United States) will be watching carefully as to make an assessment as to whether progress has been made in this area.” President Xi declared that the proper approach was to strengthen cooperation to avoid confrontation and politicization of the issue.
Prior to his summit meeting with President Obama, President Xi Jinping hosted an Internet Industry Forum meeting of prominent corporate high tech executives at the Seattle campus of Microsoft. In its reporting, The Seattle Times features a photo of the prominent high tech CEO’s invited to attend. The optics are stark. The CEO of Alibaba, Amazon, Apple, Cisco, Facebook, IBM, Lenovo, among others are shown as participants. U.S. and China based alike. The Times notes: “Based on the attendance for what was essentially a photo-op in Redmond, that tech industry is betting that their future relies on China.”
In conjunction with the Seattle and Washington meetings, Cisco Systems announced a partnership with China based Inspur Group Co. In June, Cisco indicated that it was prepared to invest more than $10 billion in China over the next several years. The irony of the current announcement was that Cisco was the key supplier to help build China’s internal Internet and was later accused of spying on Chinese citizens. Now its CEO declares: “There are certain geopolitical dynamics that we have to navigate.”
As we along with business media has noted, Chinese authorities have informed state-owned companies and agencies to buy more locally owned and produced high tech equipment and that has accelerated the strategic importance of domestic technology. Foreign based high tech companies now have to pick their partners in order to continue to expand revenues in China.
Surely not as a coincidence, India’s Prime Minister Narendra Modi visited Silicon Valley last week and made time to speak with prominent high tech and consumer electronics executives about investments in the country.
Market and technology access along with job-growth needs are all interwoven in moving parts with implications to global product innovation and value-chain strategies. There are no easy answers and thus are the risks, perils and strategy implications that continue to unwind within today’s globally based and far more competitive supply chains.