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Airbus Evaluating a Further A320 Supply Chain Ramp-Up

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Commercial aircraft producer Airbus is reportedly evaluating a dramatic ramp-up of the monthly production of new A320 aircraft. The European aerospace provider currently supports a monthly production cadence of 42 A320 aircraft per month. In February, the company indicated that it had plans to increase the monthly production rate to 50 aircraft by early 2017, but is now actively evaluating an even larger cadence.  Airbus A320neo

With a current order backlog of over 5100 A320 aircraft, current indications are that Airbus is now considering upping the cadence to 60 per month, which would represent a near 43 percent increase from current production volume. The company is now in the process of assessing the impact among its global based suppliers and expects to make a final decision regarding timing by the end of this year.

Rival Boeing’s single-aisle monthly production volumes averaged 40 737 and 10 787 Dreamliner aircraft during the recently completed first quarter, with plans to increase the monthly production rate of 737 aircraft to 52 by 2018.  Boeing continues with efforts to ramp-up monthly delivery volumes of its multi-year backlogged 787 aircraft.

Since key suppliers for Airbus also support production requirement needs of Boeing, this planned ramp-up has significantly broader implications for the entire commercial aerospace supplier ecosystem. The most significant suppliers involved in these ramp-up decisions are often aircraft engine suppliers, fuselage and airframe components suppliers as well as the myriad of avionics and electronic component suppliers.

Airbus is likely matching and/or upping the competitive pressure on Boeing’s competing single-aisle aircraft families in assuring its airline and leasing customers more timely and flexible delivery options relative to orders. Supply Chain Matters has recently called attention to a recent trend of airline customers exercising changed order preferences as the economics and business strategies of the airline industry become more dynamic due to the current dramatic reductions in the cost of fuel and in the rapidly changing competitive dynamics of the global airline industry. Global airlines themselves are much more savvy customers who constantly monitor industry dynamics and are not shy to exercise customer influence among the two major aircraft OEM’s.

The recent occurrence of high-profile aircraft tragedies involving discount airlines is further raising concerns as to whether the supply of experienced pilots, air controllers and air safety systems can support the addition of so many new aircraft over the coming decade.

As Supply Chain Matters has noted in a number of our previous aerospace supply chain focused commentaries, the realities of multi-year order backlogs are now reaching the point of all-in commitment. These are record-breaking production volumes and massive scale that this industry has never experienced at a regional or global-wide perspective. Technology will play a critical role along with people, since the aerospace industry is facing the same reality of highly experienced older employees about to retire. Processes, systems, risk mitigation, talent and supplier management practices are sure to be tested in the journey that is unfolding.

As a supply chain community, those directly involved, and those of us as outside observers, get the opportunity to observe the lessons, process innovations and accomplishments that lie ahead for the commercial aerospace supply chain industry.

Bob Ferrari


Fire Incident at Apple Facility in Arizona

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Yesterday, a fire broke out at an Apple facility located in Mesa Arizona, just outside of Phoenix,  which initially made lots of news. According to a video report from a local news channel, the fire spread rather fast and was believed to have been ignited by solar panels on the roof of this facility. Various news reports indicate that a dozen people were evacuated from the facility, and it took 35 minutes for the fire department to put out the flames. The Deputy Chief of the  Mesa Fire Department is quoted as indicating that the fire spread rather rapidly at the 1.3 million-square-foot plant but was confined to a section of the roof over a loading dock.

What is somewhat significant is that this facility was previously designated by former supplier GT Advanced Technologies to be a high volume plant for the production of sapphire glass. That plan was abandoned with the sudden bankruptcy of GT Advanced and Apple has since taken possession of the facility. In February, Apple announced that it would instead convert the Mesa facility into a world class, sustainable data center. At the time, Supply Chain Matters voiced its disappointment that Apple did not consider sourcing more manufacturing at this facility.

Such an incident involving an Apple facility was assured to garner both traditional and social media coverage.  As we pen this posting, Google had indexed nearly 100 different reports related to yesterday’s fire.  Apple stock also took a hit yesterday on the news.

It is not likely that this incident will be of any major concern to Apple’s supply chain teams but perhaps Apple’s facility teams will seek an in-depth investigation as to whether the solar panels contributed to the cause of the blaze.  Investing in the most modern, state-of-art energy and sustainably efficient mega data center probably needs assurances that solar panels will not erupt into flames.

Bob Ferrari

 


Added Concerns to the Longer-Term Effect of the Activist Investor Trend- A Supply Chain Perspective

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Supply Chain Matters has on multiple occasions, in our blog commentaries and in our annual industry predictions, provided our readers perspectives on activist investors’ efforts in driving manufacturers, retailers and technology providers toward more short-term results.  We have done so because of our belief that such growing activities influencing firms toward investing more in stock buybacks, shorter-term shareholder dividends and accelerated cost control efforts have a negative effect on longer-term global competitiveness and supply chain capabilities.  The effects literally cascade horizontally and vertically among industry supply chains and the effects are showing.

Review some of our past commentaries reflecting on consumer product goods supply chains and you will hopefully sense such long-term impacts. Once more, activist investors have now spread their influence across many different industry sectors as well as among multiple supply tiers of industry supply chains.  It seems as though senior management’s sole concern of late has been either fending-off such efforts or positioning their firms to avoid an activist thrust.

The growing concerns related to this topic were brought forward today by The Wall Street Journal in two separate articles, a front page article, As Activism Rises, U.S. Firms Spend More on Buybacks Than Factories and a Business & Tech section article, Tech Firms Seek Ways to Fend Off Activist Investors. (both require either paid subscription or free metered view)

The WSJ describes the ongoing trend as a fundamental shift in the way firms are deploying capital and raises similar concerns to the effect of longer-term competitiveness. Billions of dollars that were once invested in product R&D, innovation or new plant & equipment are instead channeled into strategies directed at shorter-term shareholder value. Boosting a firm’s stock price trumps needed investments in longer-term innovation, talent and capability. Once more, even Silicon Valley companies, known as the hotbed of technology innovation, are increasingly under attack. Moody’s Investors Services is cited by the WSJ as indicating that tech companies accounted for 20 percent of firms that activists targeted, while retailers accounted for 13 percent. There is literally no industry not consumed by this trend.

Once more, there is quantification of the scope of such change. The WSJ commissioned an analysis conducted by S&P Capital IQ indicating:

that companies in the S&P 500 index sharply increased their spending on dividends and buybacks to a median 36% of operating cash flow in 2013, from 18% in 2003. Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003.”

At S&P 500 companies targeted by activists, the spending cuts were more dramatic. Targeted companies reduced capital expenditures in the five years after activist bought their shares to 29% of operating cash flow, from 42% the year before, the Capital IQ analysis shows.  Those companies boosted spending on dividends and buybacks to 37% of operating cash flow in the first year after being approached, from 22% in the year before.

The WSJ provides other profound statistics pointing to the broad extent of the current trend.

Of course, statistics and trends are subject to debate and interpretation, and such debate rages on.  The continued availability of cheap money adds to the debate since in the past, a dramatically lower cost of capital would have motivated longer-term investments in products, processes and productivity needs. We are sure our global Supply Chain Matters audience will have mixed views as well.

The bottom line for product development, procurement, cross-functional supply chain and their associated supplier teams is the added pressures for accomplishing more with less, while demonstrating abilities to respond or take advantage of constant market change.  Product innovation has become the key ingredient to sustained competitiveness yet suppliers more often experience continued demands from their customers for reduced costs as well as leading-edge innovation. We believe both goals are becoming more difficult to jointly attain.

The activist investor trend is multi-faceted and industry supply chain teams continue to be caught in the middle or held hostage to events that they cannot influence. Operations, supply chain and S&OP leaders must now, more than ever, provide the leadership to navigate these troubled waters while providing existing teams the motivations and incentives to continue to make a difference in delivering expected business outcomes.

Now let’s hear from our community of readers- do you believe that the activist investor trend is helping or hurting your supply chain organization’s efforts in supporting expected business outcomes? Share your perspectives in the Comments section associated with this posting.

Bob Ferrari


The Implications of the ConAgra Food Safety Case

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This week brought significant and perhaps troubling news to food and consumer product goods producers and their respective suppliers distributing products throughout the U.S.. Business headlines noted that a ConAgra Foods business unit agreed to plead guilty to a federal misdemeanor charge and pay an $11.2 million fine in conjunction with 2006-2007 salmonella outbreak involving the firm’s Peter Pan and Great Value branded peanut butter products.

At the time, the salmonella outbreak occurred across 47 states and sickened a reported 700 people. The outbreak was eventually traced to a manufacturing facility in the state of Georgia. As part of this week’s plea agreement, ConAgra admitted it had been aware of some risk of contamination prior to its voluntary recall. After this outbreak, ConAgra subsequently made was is reported to be significant upgrades to its manufacturing facility along with instituting advanced safety protocols.

This news is significant for this industry in a couple of rather important dimensions.  This week’s fine, although meager by today’s liability standards, is noted as the largest fine levied to-date in a food safety case. Once more, over these past months, federal authorities are now demonstrating intent to hold both companies and their individual executives accountable for food safety. According to The Wall Street Journal, since 2013 the Justice Department has won convictions or guilty pleas involving four criminal cases against food companies or the executives that run them.  The WSJ notes that in most of the recent cases, successful prosecution occurred even without proof that officials acted with criminal intent, which was a difficult hurdle for investigators to previously overcome. The significant nuance of holding executives accountable without proofing criminal intent has reportedly jolted the food industry, given its broad implications. That implies that executives are now legally accountable for food safety, and that might be interpreted to include senior supply chain executives. Certainly, we are not lawyers, and industry supply chain leaders are advised to seek out specific opinion from in-house legal counsel.

Food companies are now stepping-up efforts to improve food safety including investments in new technologies to monitor any signs of contamination or erosion in quality and to speed-up data analysis. That, in reality, may be good. However, it opens the doors to added sensitivities as to when manufacturers should recall food products, and the types or levels of internal documentation required as proof of proactive response to suspected contamination and/or disease.  The industry may well experience an increased rate of recall actions out of abundance of caution, as these new nuances are more fully understood.

The takeaway for consumers is hopefully safer food products in the coming months.  For supply chain management teams, the implication is added cautions and increased scrutiny of individual production, storage and distribution practices related to food production. Any notion that assuring proactive food safety practices is not my job is now null and void.  Food safety is every executive’s and every employee’s concern.

Bob Ferrari


A Significant New Milestone Involving the Quality Perception Crisis Among Automotive Supply Chains

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Throughout 2014, Supply Chain Matters called attention to the automotive sector and the unprecedented levels of product recalls that continued to stress auto aftermarket service supply chains and supplier relationships to their limits. From a tactical lens, we observed that the colliding forces of regulatory, political, supplier management and capacity-restrained automotive replacement spare parts networks may well continue for many more months, and that appears to be exactly what continues to unfold. Once more, Supply Chain Matters predicted that when the dust settles, the automotive industry and its supply chain ecosystem partners need to take a hard look at lessons learned.

While automotive OEM’s and their associated brands have taken the bulk of the consumer and regulatory heat around product recalls, quality defects have more often resided within either OEM product designs or parts suppliers and their associated product design or manufacturing processes.

The most significant culprits for the continuous litany of product recalls has been the ignition switch defects involving multiple General Motors vehicles and the alleged defective airbag inflators produced by Japan based supplier Takata Corp for multiple OEM producers. After undergoing continuous ongoing scrutiny from U.S. regulators these past months, Takata refused to broaden the scope of the defective inflators recall beyond a select number of U.S. States with high humidity concerns because the supplier supposedly could not determine the exact cause of defects. That is up to now.

This week provides yet another, but far-reaching significant milestone, namely what is being described as the largest automotive recall in U.S. history, and involving the same potentially defective air bag inflators originating from Takata. Bowing to intense pressure and scrutiny from regulators, Takata has now, for the first time acknowledged that there are defects in its air bag inflators, yet root causes remain unanswered. This week’s announced product recall will be conducted by 11 different automakers and now doubles the number of vehicles subject to recall. Business media now reports the overall vehicle recall as involving nearly 34 million existing automobiles in the United States. Six deaths and upwards of 100 injuries have been linked to the defective airbag inflator problem thus far.

In announcing the current expanded recall, U.S. Transportation Secretary Anthony Foxx indicated: “It’s fair to say that this is probably the most complex consumer safety recall in U.S. history.” Depending on which math is being referenced, the scope of the overall recall amounts to roughly 14 percent of the total vehicles now operating on U.S. roads. Add to that the scope of the 2 million plus vehicles included in the GM product recalls, along with other product related recalls and the picture of a large number of existing vehicles awaiting repair attention becomes a dominant picture. Needless to state, the implications of the continued litany of product recalls involving the industry are far reaching, for both OEM’s, their suppliers, and their service networks.

Logistically, as we and others have noted in our prior commentaries, it will take months and perhaps years for dealer and service parts networks to complete repairs on all recalled vehicles. That will cause additional safety concerns and added frustration among consumers. There are concerns that previous air bag deflator repairs to vehicles may have been completed with defective parts requiring the need for yet another repair.  As noted, the root-causes of the air bag deflator’s defects have yet to be determined by either Takata or a consortium of 10 automotive OEM’s. The shear volumes of cumulative open recalls are testing existing processes and supporting systems, perhaps to their breaking point. As we have pointed out, alternative suppliers have been recruited to augment supplies for both existing new production as well as repair parts needs.

From a political perspective, legislators and regulatory agencies continue to react to the concerns and frustrations of automotive consumers who wonder aloud if automakers really care about the quality of the vehicles they are producing as well as their attentiveness and timely response to vehicle safety. That leads to a continued sensitized regulatory and judicial perspective.

From a financial perspective, the bulk of the costs related to a litany of past product recalls have been on the shoulders of the OEM’s.  However, some automakers such as GM, have managed to shield themselves from expensive lawsuits from prior legislative actions dating back to a previous bankruptcy filing. That will change with the current scope and visibility brought to bear of the latest Takata related recalls. In its reporting, The Wall Street Journal cites one estimate indicating that Takata alone could face recall-related charges in the range of $4-$5 billion, far outpacing an original estimate of $1.6 billion. Yesterday, Takata’s stock fell 10 percent on the Tokyo Exchange as its investors adsorbed the implications. On a broader perspective, the issue of which party bears the bulk of the financial liability for component quality will again be up for discussion.

To be candid and blunt, product quality perceptions have become an overall mess, and it could not come at a worse time.  There was a feeling that automakers had come a long way in overall vehicle reliability but that perception belies the current picture of numerous vehicles now with open recalls.  Once more, consumers clamor for the latest technology advances in vehicle safety, comfort and convenience including all notions of the connected car. Many of these innovations stem from component and sub-system suppliers within an industry that has a track record of mostly marginal supplier relationship building. In its recent annual supplier poll conducted by Planning Perspectives, for the 14th straight year, suppliers continued to rank Toyota and Honda as best customers. Noted is the diametrically opposite goals of an adversarial relationship where OEM’s often seek a supplier’s best technology at the lowest possible price. Compounding the problem are activist investors and private equity firms investing in various tiers of automotive supply chains clamoring for more short-term returns for shareholders.

From our lens, the global automotive industry, and in-particular U.S. based OEM’s need to have rock solid quality focused product design and more responsive early warning quality mechanisms as a top industry priority. Industry executives need to seriously look beyond any perceptions of the panacea of a current super sensitive regulatory environment that will run its course. The notions of an industry solely being driven by lower product margin goals and placing the bulk of that burden on suppliers has to change.  Component, systems and overall vehicle reliability is not the purview of a marketing campaign but rather a systemic process that spans end-to-end product and aftermarket service centered supply chains. Component and systems quality must be a living fabric of supplier relationship management and suppliers need to be fairly compensated for assuring high standards in product design and process innovation, especially considering current product strategies leveraging common brand and/or vehicle model platforms. The stakes are even higher when considering that the electronic and software content of vehicles continues to rise implying more sophisticated reliability and systems focused hardware and software related engineering. In the analogy of carrot and stick agreements, the carrot is longer-term, more collaborative based product design and supply chain focused relationships and the stick is the shared responsibility and liability for warranty and/or product recall costs attributed to vehicle sub-systems such as vehicle safety.

Finally, you may have noticed that lately, not a day goes by without a barrage of targeted online or traditional media ads urging we as consumers to buy or lease that new car with latest technological features.  From our lens, the industry will be better served by re-allocating existing marketing and sales budgets towards investments in more robust early-warning mechanisms related to component quality and to current overburdened and perhaps collapsing aftermarket service networks that are the first line of intelligence for quality and vehicle safety.

Bob Ferrari

© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Another Example of the Importance of Strong and Loyal Supplier Relationships- Bourbon

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Across our supply chain management community, we are often keenly aware of how the dynamics of product demand and component supply interrelate. While teams always strive to balance and align product demand and supply needs, forces in a market or across an industry have a way of adding different or unforeseen challenges. They drive home the importance of nurturing strong supplier relationships and creativity along with the notions that the supply chain and suppliers, do matter.

A timely reminder was brought forward last week within The Wall Street Journal’s published article, Bourbon Feels the Burn of a Barrel Shortage (paid subscription required or free metered view) Amidst souring consumer demand for bourbon and craft-distilling beverages, this industry is facing the blunt reality of a three year long shortage of the barrels required for storing and aging bourbon. More specifically is a shortage of required supplies of white oak which the barrels are constructed.

Various cooperages (barrel makers) are actually turning down orders, along with offers to pay upwards of twice standard barrel pricing from those distillers seeking availability of prepared white oak barrels. Existing barrel suppliers apparently have only the capacity and wood to supply existing loyal customers and are either wait listing or turning down new industry entrants. According to the article, the white oak supply problem was compounded by a massive contraction impacting the lumber industry during the 2007-2008 housing crash across the United States. Sawmills shut down and loggers abandoned the market. While the lumber industry is now rebounding, the article points out that white oak supply still lags the current demand among barrel makers, while a shortage of lumber mills and experienced people continues to limit supplies.

In response to the demand crisis, barrel makers themselves reportedly have become more creative. Examples brought forward included Independent Stave Company, a large private barrel maker and supplier to Evan Williams and Jim Beam, which is now buying logs sourced from five different U.S. states in addition to its traditional supplies within the state of Missouri. To avoid high transportation costs for logs, this supplier invested in a new lumber mill in Kentucky.

Brown Forman, producer of its iconic Jack Daniels branded whiskey invested in a new barrel making facility near Huntsville Alabama because it opened “a whole new territory of logs”. It reportedly halved the time required to ship new barrels to Jack Daniel’s production site.

Craft distillers have reportedly turned to seasoned consultants for help in finding and/or brokering any and all supply of new barrels while some fear that they will not be able lay away whiskey.

Here is the takeaway message. As you, I and thousands of other new consumers partake and enjoy their very favorite branded bourbon, standard or craft whiskey, consider the fact that active supplier loyalty, strong relationships and joint creativity helped to insure that said bourbon and whiskey was aged and nurtured in the proper white oak barrels.

Supply Chain Matters offers a timely new toast:

Here’s to good times, good people, and great bourbon, along with creative and resourceful suppliers.”

Bob Ferrari


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