If our readers have had the occasion to travel to Boston, you might have experienced the public transit subway system which is referred to as the “T”. Typical to the historic nature of the city, its subway system dates back to the late 1800’s. Today, its subway lines are denoted by colors, namely the Red, Green, Orange and Silver lines.
Last week, another very important milestone took place.
The Massachusetts Department of Transportation awarded a contract to China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars. The important headline for this development was the awarded contract cost, namely $567 million, is a rather compelling sum for this amount of modern equipment.
It its reporting, Bloomberg News echoed that this was the first deal of this kind for a Chinese company in the U.S.: “The deal breaks new ground for Chinese train makers whose overseas push, backed by Premier Li Keqiang, has been mostly limited to developing markets.” According to CNR officials, this deal eventually places CNR equipment in all of the world’s six continents.
The contract calls for CNR to replace 152 Orange Line subway cars, that line’s entire fleet, which has an average of 1.5 million miles of service per car. Additionally, 132 Red Line subway cars which date back 27 years and have racked up to 2.3 million average miles will also be replaced. CNR will construct a new $60 million final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. The new production facility is expected to employ upwards of 150 factory workers.
Since the contract stipulates that 60 percent of the work to take place in the U.S., Supply Chain Matters speculates that the subway car components will be imported directly from China, most likely by ship via and expanded Panama Canal routing to an east coast port.
The timetable calls for a three to four year design phase, with initial pilot cars delivered in 2018, and production car output spanning the years 2019-2021. The deal has an additional option for the delivery of 58 additional Red Line cars.
The specifications for these new subway calls call for adding an additional 15 additional passengers per car, wider accessibility doors, LED lighting, regenerative braking systems, environmentally friendly HVAC and advanced customer information systems.
The Massachusetts Bay Transit Authority (MBTA), operator of Boston’s transit system has struggled with its finances for many years, falling behind in any efforts to invest in new operating equipment. Thus, the opportunity to replace this amount of equipment at the stated cost had to be a very attractive proposition for taxpayers. However, it has to a rather concerning development and omen for existing train equipment manufacturers.
A reported six companies bid on this replacement contract. Bidders were reported to have been evaluated on criteria ranging from technical and manufacturing experience, quality assurance, reliability as well as price. In its reporting, Bloomberg noted that the CNR price was a little more than half that of Bombardier and other bidders included Hyundai Rotem Co. of South Korea and Kawasaki Rail Car of Japan. An MBTA spokesperson later added that that agency found no human rights violations with CNR.
Rival state-owned CSR Corp. is reportedly keen to supply high-speed trains to the State of California. A published Reuters report indicates U.S.-based SunGroup USA indicated to Reuters earlier last week that it had teamed up with CNR and its unit Tangshan Railway in a pitch to supply California’s $68 billion project with up to 95 trains that can travel as fast as 354 kilometers per hour (221 miles per hour). That news is significant in that CSR could possibly team up with rival CNR, the recipient of the recent Massachusetts subway car contract, for the California contract. About a dozen firms are expected to compete for the California project.
And then there is one more development. An additional Bloomberg report published yesterday indicates that both CNR and CSR will make “a major announcement” in about a week. The report cites speculation that China’s State-Owned Assets Supervision and Administration Commission (SASAC) is seeking the merger of the two companies to boost exports of high-speed railway technologies.
Obviously, China has indeed set aggressive targets for exporting train equipment and supply chains to global markets and developments are moving rather quickly.
Throughout the summer months, Supply Chain Matters as well as other supply chain management focused media have been monitoring the ongoing threat of potential west coast port disruptions. The primary threat resulted from the expiration of the labor contract among the Pacific Maritime Association, representing 29 U.S. west coast ports, and the International Longshore and Warehouse Union (ILWU).
During July, a Supply Chain Matters commentary cited a published report in Logistics Management made the observation that the threat of U.S. West Coast port disruptions raised an open question as to “peak shipping season” this year. 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 were reported to be concerned about potential transportation lane disruptions in the fall. Perhaps, in retrospect, that was insightful thinking by some.
In September, there were reports of significant progress in labor talks with a tentative deal reached on the critical knotty issue of healthcare benefits. The other remaining issues involving compensation, job security and workplace safety implied that contract negotiations would continue for several additional weeks.
As we pen this latest Supply Chain Matters, reports indicate that congestion within the critical Ports ofLos Angeles and Long Beach has reached levels not seen since 2004. A report published on Friday by the Los Angeles Times (paid online subscription or free metered view) describe a logistical nightmare that could undermine the best laid plans for supporting the all-important holiday fulfillment surge. As on Friday afternoon, there were a reported seven container ships anchored and queued off the coast awaiting to be unloaded at both ports.
In a situation which one trucking firm executive describes as “a meltdown on the harbor”, and what LA’s Port Director describes as “a perfect storm”, the unloading and throughput of goods from both ports is now taking 7 to 10 days, and perhaps longer. Four of the seven container terminals in Los Angeles are reported to be currently operating above 90 percent capacity.
Concerns are raising that apparel, toys, electronics and other holiday merchandise may not arrive in time to meet holiday promotional windows. While retailers are initially optimistic that consumers will open their wallets in the coming weeks, this threat for inbound supply delays adds more challenges for retail focused sales and operations planning teams. Already, manufacturers and retailers are being forced to ship critically needed goods via alternative but far more expensive air cargo methods.
The current severe port bottlenecks are being attributed to a combination of factors. They include the increased use of mega-container ships which take longer to unload, a shortage or misbalancing of trailer chassis required for unloading and transporting loaded containers to destinations. Shipping lines have for the most part excited the ownership of trailer chassis to third-party leasing companies. While the operators of the two ports have offered the use of extended free storage time and overflow storage yards, there are little takers due to confusing work rules. Accusations of work slowdowns as a result of a lack of a signed labor contract have reportedly added to the current congestion and calls for acceleration towards a final labor agreement. It is indeed the “perfect storm” scenario that is unfolding.
Supply Chain Matters recently re-visited the port container volumes for the Port of Los Angeles for the periods of July through September, which is the traditional high volume inbound period, contrasting TEU volumes in 2013, vs those this year. For the three months, 2014 TEU inbound load volumes this year were trending up roughly 6 percent from 2013 levels, thus, some retail S&OP teams were planning for a potential disruption scenario. However, it seems now that there were other bottlenecks and choke points beyond the threat of a work stoppage or slowdown.
Retail supply chains are deep into the holiday execution window and there is now little tolerance for finger-pointing or posturing. Even if labor contract talks were to come to a hasty final agreement, the ratification and sign-off process will do little to salvage the current port condition. This is a time for creative action.
The optimistic holiday retail sales forecast scenario can well be in jeopardy or compromised by late arrival of needed holiday inventories. Need we further mention the other doomsday scenario- that retailers now delay their most aggressive promotions under the very last days before the Christmas holiday when inventory is in-place.
We will all have to wait and observe as one disruption cascades through the remainder of retail fulfillment channels.
Revenues for the aerospace provider’s commercial aircraft division rose 15 percent as a result of stepped-up production deliveries. However, operating margins dropped to 11.2 percent from 11.6 percent a year earlier.
In the earnings report, Boeing’s CFO again indicated that Boeing sells each Dreamliner for less than it costs to manufacture this aircraft, and that the program spending broke through the $25 billon milestone barrier this past quarter. Boeing utilizes accounting measures that allow it to spread program costs and revenues for the 787 program over a longer multi-year horizon.
In its reporting, The Wall Street Journal characterized that development as suggesting that reducing costs on the program is taking longer than expected. This news calibrates with reports in June indicating that Boeing has re-negotiated certain long-term component supply agreements with major suppliers of the 787 and other aircraft.
Also noted by the WSJ in its reporting is that turning cash positive on the 787 program is central to Boeing’s efforts to boost shareholder returns through stock buybacks and higher dividends. In the earnings briefing, Wall Street financial analysts peppered questions regarding concerns that planned production increases across various aircraft programs would delay ramp-up in shareholder’s payments.
That is not a good omen for those participants in Boeing’s supply chain ecosystem who can anticipate further pressures for cost reduction and efficiency gains.
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.