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Product and Quality Management Take on More Difficult Dimensions

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Our ongoing Supply Chain Matters commentaries regarding certain product design flaws, quality conformance shortfalls and subsequent efforts at covering-up such flaws have drawn similar takeaways, but it now appears that the stakes are growing far higher.

In the case of the diesel engine emissions manipulation scandal involving Volkswagen, the financial, legal and brand impact implications remain ongoing. A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers is learning some tough lessons because of this scandal. Financially, the global tally is now exceeding $20 billion in product recall, legal settlement, and other costs with potentially more remaining.

Last week, in response to U.S. Justice Department investigative efforts, VW admitted guilt in the manipulation of auto emissions standards along with efforts to cover-up such activities. Six individual VW executives were criminally indicted because of the emissions cheating case. One was once responsible for ensuring that vehicles complied with U.S. emissions standards. Five others had senior leadership roles in the product development organization in Germany.

In its plea agreement, VW admitted that its supervisors and employees agreed to deceive regulators and customers regarding the actual emissions performance of engines. According to published reports, the indictment states that some of the supervisors encouraged employees to create software to evade emissions standards.

A published report by both the New York Times, Reuters, and global business network CNBC, cites content taken directly from the U.S. Justice Department indictment. Noted is man identified as “Supervisor B,” who overruled nervous subordinates and allegedly instructed them to develop the overriding software program to defeat emissions readings. According to the court documents, this supervisor instructed the subordinates to not get caught.

Further noted in this report is a statement from the federal indictment indicating: “In 2012, for example, senior executives rebuffed a group of Volkswagen engineers who had discovered the illegal software. The engineers were told to destroy the documents they had prepared showing how the software worked.”

The whole affair represents the first time that the U.S. Justice Department has elected to pursue responsible individual employees as well as companies themselves in such criminal investigation cases and the admission of guilt.

Also last week, a U.S federal grand jury indicted three former Takata Corp. executives, charging them with conspiring to provide auto makers with misleading test reports on rupture-prone air bag inflators at the center of unprecedented products recalls involving upwards of 42 million vehicles involving multiple brands. These executives held senior positions overseeing air bag product management and engineering at the Japan based supplier. Takata itself separately pleaded guilty to criminal wire fraud and agreed to pay $1 billion to resolve a two-year long U.S. Justice Department probe of the supplier’s handling of air bags that risk rupturing and spraying shrapnel in vehicle cabins. The safety problem is linked to 11 deaths and 184 injuries in the U.S. alone. According to court documents, a senior Takata executive at one point directed a junior engineer to remove data showing ruptures during testing from a report later given to an auto maker

Product and quality management professionals with on-the-job experience in regulated industry environments have likely encountered certain situations of organizational tendencies to cover-up potential product, process, or software design flaws. Such tendencies can sometimes come from verbal directives from above to “make the problem go-away.” Often, pressures to make operational and financial performance milestones can motivate such actions.

Yet, with each passing year, the scope and implications of such actions have grown to unprecedented dimensions. And now, these latest actions point to executives and individuals collectively being held criminally accountable for their specific actions.

We need to be clear, we are not at-all dismissing any of these actions and behavior.

Instead, we observe that product and quality management professionals have now been placed in a more precarious role.

Accommodate pressures to make problems go away so that business goals and performance bonuses are met, or stand on principled legal grounds to do the right thing for customers, corporate and individual legal protections. The challenge becomes ever more magnified as increasingly specifications, process performance activities and management actions are stored in digital files and available for internal or external review.

Such actions represent a slippery slope, one that probably does not get adequate attention in employee and management leadership training, but surely will in the coming months.

The notions of “make the problem go-away’ needs to be supplanted by “we all need to do the right thing” for customers and employees. It starts with corporate leadership, culture, ethics and resolve.

Unfortunately, in today’s global business climate of intense pressures for results, the challenge appears to be more elusive, and individual careers and reputations may well suffer the consequences.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


A New Round of Reported Job Cuts at Wal-Mart- Part of a Singular Leadership Model Directed at Integrated Online and Store Customer Fulfillment

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Last week, word began to leak out that global retailer Wal-Mart was planning to cut nearly 1,000 corporate jobs before the end of this month, the close of the retailer’s fiscal year. These cuts are in addition to previous job cuts announced in 2016. Part of this effort is to continue to streamline and centralize leadership and goal-setting across Wal-Mart’s online and physical store strategies. The latest move is being headlined as the largest round of corporate level headcount cutbacks in some time.  Wal_Mart Store

Several published reports by The Wall Street Journal citing Wal-Mart internal communications indicate many believed executive changes underway. They include existing CIO Karenann Terrell departing the retailer in mid-February. SAP technology focused readers might recall that SAP’s 2015 Sapphire customer conference featured Ms. Terrell in an on-stage keynote delivered by SAP’s CTO and senior board executive Bernd Leukert. Ms. Terrell provided a humorous moment as she quipped to Leukert that she hoped that Wal-Mart could complete its SAP S4 HANA implementation sometime in her lifetime at the retailer.

Other reported executive moves include existing Chief Marketing Officer Tony Rogers assuming leadership of both online and digital marketing initiatives to include Jet.com marketing. Existing head of Wal-Mart Labs engineering Jeremy King, will reportedly be promoted to U.S. Chief Technology Officer, directly reporting to both the chief of U.S. stores and the chief of U.S. online. Scott Hilton, existing Chief Revenue Officer for Jet.com will reportedly assume the role of Chief Revenue Officer for all E-commerce operations.

The WSJ further indicates that Michael Bender, existing COO for E-Commerce will likely leave the company. A separate Wal-Mart securities filing indicates that Rosalind Brewer, current Executive Vice President, and CEO of the Sam’s Club business segment plans to retire effective February 1st. John Furner, current Chief Merchandising Officer for Sam’s Club will assume Ms. Brewer’s leadership role. Other reported headcount reductions include human resource staff and other support staff.

These latest organizational and headcount reduction moves follow a pattern for providing singular leadership in Wal-Mart’s effort to take on Amazon by initiating an online capability supported and complimented by physical store presence. In September, 7000 store focused back office jobs were eliminated and in November, because of the prior announced acquisition of Jet.com, founder Marc Lore was appointed to lead all U.S. online operations, causing several existing online executives to depart the retailer. In January of 2016, existing corporate IT and @WalMart Labs Silicon Valley development groups were merged together into one singular group to focus on singular technology deployment strategies.

Wal-Mart has invested a reported $10.5 billion in new information technology to enhance its online web presence and fulfillment capabilities.  The retailer is planning to invest an additional $2 billion over the next two years to further springboard its online fulfillment channel, not to mention the $3 billion acquisition of the Jet.com online platform. That implies a commitment and an accountability to get it right.

These latest moves come in the shadow of the latest restructuring and headcount reduction announcements from multiple other retailers, all a result of the more apparent implications of online Omni-channel forces continuing to impact the retail industry.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Deep Dive on 2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Provide Added Global Sourcing Challenges

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The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.

At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.

The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.

In an earlier Supply Chain Matters blog postings, we provided deep dives related to:

Prediction One- Subdued World Economic Outlook and Heighted Uncertainty to Test Industry Supply Chain Agility.

Prediction Two- A Challenging Year in Procurement

Prediction Three- A Supply Chain Talent Perfect Storm

In this deep-dive series posting, we drill down on Prediction Four.

 

2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Will Provide Added Sourcing Challenges for Industry Supply Chains

In our predictions concerning 2016, we stated that major developments surrounding global trade policies would occupy the attention of many industry supply chain organizations during the year. Our context was the potential adoption of major global trade agreement such as the Trans Pacific Partnership (TPP), China’s competing One Belt, One Road (OBOR) initiative, and the Transatlantic Trade Investment Partnership (T-TIP).  Geopolitical events turned quite negative in terms of expanded global trade and thus the attention of industry supply chains never materialized.

For 2017, our prediction remains that major developments surrounding global trade policies will occupy the attention of many industry supply chain organizations during the year, but now from a far different and perhaps opposite perspective.

Across the globe, growing gaps in income inequality and rising political discontent against elements of domestic and international status quo are fueling a growing backlash towards global trade and unfettered open markets. With heightened global tensions now turning toward more anti-trade and possibly more protectionist rhetoric among developed nations, industry supply chains must now be prepared to deal with potential near and longer term implications that such policies will bring about.

A global environment that begins to turn hostile toward open global trade policies could result in increased import tariffs and added protectionist measures among trading nations, particularly China and the United States. According to the IMF’s October 2016 World Economic Outlook: “In short, turning back the clock on trade can only deepen and prolong the world economy’s doldrums.”

As we pen this prediction in early January, the World Bank declared that political and policy uncertainty in China, Europe, and the United States and in other major global economies are at unprecedented levels. There are fears that the Administration of Donald Trump could trigger a trade war with China and Mexico with threats to impose higher import tariffs for components and products entering the United States. The bank cautions that such a trade war may offset any gains from corporate tax cuts for U.S. businesses.

Further as we pen this prediction, proposals being floated by the Republican Party dominated U.S. Congress that are being directed at corporate tax reform feature border adjustment concepts. Essentially, the concept is applying taxes based on where a product is sold rather than where it is made or where the producer’s operations or executives are based. Imports would not be deducted as a cost of doing business, while exports would be exempted from taxes. The Wall Street Journal and other business media have already raised awareness as to the potential impact on industries that sell most their products domestically while sourcing most production externally in lower cost manufacturing regions. Examples are toys, consumer electronics, apparel and footwear and other products. Such concepts, if enacted, will place a far different financial perspective related to lower-cost production sourcing.

We anticipate that industry supply chain network models will undergo continuous analysis and scrutiny in the coming year as respective supply chain teams assess various changing landed cost and tax factors among product management models. That will likely require a lot of analytical modeling to ascertain impacts to product margins and line-of-business financial metrics.  They could further impact today’s contract manufacturing services model in the notions of where bill-of-material components originate from and where final products are shipped to.

Global trade issues indeed percolate in the coming year and they will likely be complex and confusing to sort out in terms of which will ultimately come to fruition. We concur with the IMF and the World Bank assessments that the Trump Administration could well be part of the epicenter of anti-trade disruption rhetoric to fulfill the political promise of Make America Great Again, and that may well include heightened trade tensions involving China or other lower-cost manufacturing nations.

Global trade advisory firms and consultants will be quite busy in 2017 in advising clients of potential implications of more protectionist trade policies or the heightened risk factors for certain global markets.

As noted in Prediction One, the ability to analyze and share important information, and to educate the business and C-Suite executives on supply chain impacts and/or risk tradeoffs of changed trade policies that potentially impact existing global and product innovation sourcing will be an important differentiator and competency throughout 2017. Collaboration among product sourcing, product development and supply chain strategy teams is essential. Organizations should further consider the value of organizing centralized, dedicated sourcing strategy and impact teams responsible for ad-hoc analysis while fostering a common foundation of analysis data and information. In essence, the task may be more of multiple scenario based analysis predicated on different input and output factors.

Our takeaway is that an assumed static global sourcing strategy could prove to be rather risky in 2017.  Technology supporting more analytically focused analysis and decision-making will likely play a very important role in the coming year.

This concludes our Prediction Four drill-down. In our next posting of this series, we will dive into Prediction Five that predicts continued turbulence across global transportation networks.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Airbus and Boeing Report 2016 Year-End Operational Performance Amid an Industry Inflection Point

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Once again, both Airbus and Boeing declared that they each exceeded operational performance targets in 2016 but the numbers would indicate an industry inflection point is at-hand, one that has implications for the collective industry supply chain ecosystem for the next several years.  Boeing 737 Max Production Line

Airbus

Airbus announced the delivery of 688 completed commercial airliners among 82 customers in 2016 representing an 8 percent increase over 2015 delivery performance. Of the total, upwards of 79 percent of total deliveries originated in the A320 aircraft line-up, including 68 of the new, more fuel-efficient model A320neo (new engine option).

During 2016, Supply Chain Matters highlighted some significant challenges related to delayed deliveries of the innovative new Pratt & Whitney geared turbofan engine featured on the neo model. Pratt had to cut back its original delivery commitment of 200 to 150 because of several supply and production challenges. With announcement of the final delivery number, we can now estimate that customer deliveries of 71 percent of the A320 family aircraft came in the second-half of the year. In the month of December alone, 66 A320 model aircraft were delivered, 45 in the new engine option. That would seem to imply that Pratt made the bulk of its revised engine delivery commitments promised for the end of the year. In its year-end announcement, Airbus indicated that it has now commenced deliveries on both engine variants of A320neo, to include the CFM International LEAP 1A as well as the Pratt PW1100G model engines.

Another noteworthy data point related to deliveries was the 49 A350 XWB aircraft delivered in the year.  This model was dogged with component supply shortages related to interior seating, lavatory, and other interior components throughout the year. The fact that Airbus actually delivered just short of its 2016 goal of 50 A350’s in 2016 is a testament to detailed planning and collaboration with key suppliers.

The European aircraft producer further achieved a total of 731 net orders from 51 customers, eight of which were new. That included a mix of 604 single-aisle and 124 wide-body aircraft.

At the close of 2016, Airbus’s overall order backlog stood at 6874 aircraft valued at $1,018 billion at list prices.

Boeing

U.S. based Boeing announced the delivery of 748 completed commercial aircraft among 100 customers, taking the industry title of highest delivery number. Of that total, 65 percent of deliveries (490) originated in the 737 single-aisle model. The 2016 delivery performance of 748 represented a decrease of 762 aircraft delivered in 2015. Boeing made a management decision earlier in the year to throttle-back the production delivery rate for 2016 to control costs and boost profitability.

A continued challenged program remains that of the 787 Dreamliner, which recorded a total of 137 completed aircraft in 2016, two more than the 135 total delivered aircraft in 2015, despite achieving break-even profitability of this program. Keep in-mind that airline customers pay the bulk of an aircraft’s negotiated price at time of delivery.  The leading-edge designed 787 Dreamliner was first unveiled in 2007 representing the most fuel-efficient aircraft at the time, and a planned more innovative replacement for aging 777 operational aircraft. The aircraft was originally planned to enter service in 2008, but first flight did not occur until late 2009. After a series of highly visible snafu’s related to explosions with its lithium-ion batteries resulting in a several month FAA grounding, the Dreamliner did not enter full operational service until 2011, and today, two separate production facilities produce finished aircraft. Boeing has now elected to shelve plans to increase monthly delivery rates from 12 to 14 monthly.

Chicago based Boeing reported a total of 668 net orders in 2016 worth $94.1 billion at list prices, well below the 768 net orders booked in 2015. This represented the company’s weakest year for new order growth, a sign taken by Wall Street that the prolonged boom in aircraft sales may be waning. Boeing actually secured gross orders for 848 new jetliners but experienced cancellations of 180, the majority of which were from customers switching from wide to narrow aisle aircraft. The company’s new order rate considerably lagged in the second-half of the year, and ultimately led to sudden senior management leadership change for the Commercial Aircraft business arm.

 

Our stream of Supply Chain Matters commentaries related to commercial aircraft supply chains have painted a picture of an industry that is designing and manufacturing new generations of more technology laden, far more fuel efficient new aircraft. This led to the enviable position of having order backlogs of upwards of $1.5 trillion that extend outwards of ten years. At the same time, an industry with a track record of prior challenges in its ability to more rapidly scale-up overall aircraft production levels is clashing with the industry dynamics of both Airbus and Boeing in their desire to deliver higher margins, profitability and more timely shareholder returns.  Smack in the middle of these dynamics are relationships among suppliers, who need to continue to invest in higher capacity and capability, but of-late have had to respond to key customer requirements for larger cost and productivity savings.

All of this is about to change and a declared industry inflection point is at-hand. We will dive deeper into this inflection point when we drill down on 2017 Prediction TenIndustry-Specific Predictions coming at the end of this month.

For the industry’s respective multi-tier supply chain, the implications of this inflection point are sobering in terms of planning windows through the year 2020. The decline of new order flows for higher margin wide aisle aircraft place the major emphasis on narrower margin single-aisle aircraft that must produce higher volumes to meet financial business objectives.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Phoenix Rising from the Ashes- Samsung Suddenly Moves from Damaging Product Recall to Profit Milestone in a Single Quarter

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In May of 2012, in our commentaries related to high-tech and consumer electronics industry, Supply Chain Matters coined the analogy of the shiny apple and the complex orange. It related to that of Apple and Samsung and their competitive battles in the smartphone market.

The analogy drawn was that the shiny apple, which distinctively sits in the fruit basket and can easily be identified in its familiar image and taste. This apple is very delicious, somewhat tart, but consistently delivers on taste. Sometimes the apple can develop blemishes, but consumers can overlook the blemish and still relish the taste. The apple has an iconic brand image and a warm memory.

The orange does not garner all the attention of the shiny apple, but the reality is that it is slightly bigger, and can serve multiple purposes.  The orange serves as a multi-purpose fruit, not only for direct eating but as an ingredient or compliment to other foods. The taste of the orange is often tart or bristle to the palette, its skin is difficult to remove and its pulp is complex layering. That orange analogy referred to Samsung.

For years, Samsung itself has exercised a supply chain vertical integration model that has served that company well in its ability to continuously refresh innovation in products, support faster time-to-market and quickly ramp products to enormous global wide volumes. In February 2012, Fortune magazine featured a profile of Samsung noting that the secret sauce of the company is that it controls the supply chain of many of the building blocks of its phones, tablets, electronic watches, and other electronic devices. The not so secret sauce is that major consumer electronics value-chain components such as leading-edge semiconductor chips, high-resolution LCD displays and memory components often come from Samsung’s electronics business units and supply many other branded providers.

Last week, business media reported that the South Korea based technology giant expects its recent December-ending fourth-quarter operating profit to rise upwards of 49 percent from the year earlier period. In its reporting, The Wall Street Journal’s opening paragraph in a January 5th report exclaimed:

For a quarter in which Samsung Electronics Co. suffered its most embarrassing product recall in its history, the world’s biggest smartphone maker has also forecast its strongest profit in more than three years.”

In a separate article the next day, the WSJ wrote:

Even with the early-October recall of its premium Galaxy Note 7 smartphone that cost it at least $5 billion, Samsung projected fourth-quarter earnings would be the highest in more than three years. The reason: competitor’s growing demand for Samsung components.”

This article (Paid subscription required) observes that global smartphone shipments have slowed sharply, registering less than one percent global growth in 2016.  Our analogy of the orange comes embedded in this WSJ observation:

Even as smartphones were selling strong, Samsung continued to pour tens of billions of dollars into semiconductors and display panels to enable phones to run faster, hold more storage and offer crisper images. Recent advances have made its components more powerful than those of competitors—positioning Samsung as an essential parts supplier for many of its rivals.

The profit forecast has pushed Samsung stock to record highs, and investors have obviously turned from gloom to elation.

We suggest a couple of takeaways can place this new development in perspective.

First, there should be no question that the Samsung brand image took a major hit with the exploding Galaxy Note 7 product recall debacle, followed by the exploding laundry machines. The memory of media accounts of exploding phones and announcements banning Samsung Galaxy Note 7 phones from air travel remains ingrained on the minds of consumers. That will take time to overcome. However, the company will learn from this incident, and that learning will be transferred to new product and component designs.

Samsung’s broader vertical supply chain focused strategy for high-tech electronics component innovation and value-chain penetration has proven thus far to be a far more insightful strategy, particularly as increasingly electronics and information-laden intelligence continues to be embedded in other products such as autos, trucks, and machines. It remains a manifestation that supply chains do matter in the context of supplier-driven product innovation and industry scale. As the WSJ observed, even if the Galaxy Note 7 was a somewhat successful product, limited global market growth of the market itself would have limited is profit contribution.

The reward is benefiting from the broader advances in high-tech electronics among numerous brands.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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