Over these past days, business and general media has produced high visibility reports of expired meat products being served among global restaurant chains operating within China. The news of the expired meat originated on China’s Dragon TV Network. By now, many of our readers, particularly within consumer products and food service environments have read of these ongoing developments, along with consumer, regulatory and industry reactions.
Well-known brands such as McDonald’s, Yum Brands (operators of Kentucky Fried Chicken, Pizza Hut) and Burger King were named by both media and Chinese food regulatory agencies for offering such expired meat products to customers. The expired chicken and beef meat products were traced by restaurant operators to food supplier Shanghai Husi Food Company, which is affiliated with U.S. based OSI Group, a $6 billion producer of food products. OSI itself has garnered what is reported to be a solid reputation as a quality focused food supplier.
According to published reports, the Chinese based distributor Shanghai Husiallegedly re-labeled the meat products with new expiration dates after the original date had passed. Chinese authorities quickly detained five people as a result of these incidents. The Shanghai Food and Drug Administration later concluded that the violations were not the result of an individual but rather the result of an organized effort by the Chinese distributor, which is a serious charge. However, reports seem to indicate that the practice may have been limited to a single Shanghai Husi processing facility.
The CEO of OSI Group was quick to issue a public apology for the actions of its China based subsidiary. That statement begins: “What happened at Husi Shanghai is completely unacceptable. I will not try and defend it or explain it. It was terribly wrong, and I am appalled that it ever happened in the company that I own.” The distributor further pointed out that Chinese authorities inspected other facilities across China and found no issues. The supplier further dispatched a team of its own global experts to ensure that the problem is addressed and corrected.
Yum Brands took quick action by terminating OSI as its supplier in China Australia and the U.S… Burger King suspended all orders from the Chinese distributor. But something different is occurring with McDonalds.
Initially, McDonalds CEO issued a statement indicating that the chain was misled by its Chinese supplier and cut its ties with that supplier. But on Friday, the Wall Street Journal published an article (paid subscription or free metered view) indicating that the chain would stand by OSI Group, its loyal supplier for over 59 years. According to the WSJ, the supply agreement dates back to 1955 when founder Ray Kroc was looking to expand across the United States and now supplies up to 85 percent of McDonald’s global locations. OSI has been instrumental in supporting McDonald’s global expansion and reportedly helping the chain to maintain consistent quality standards. As noted, OSI is not just a supplier to McDonalds but to many other global customers. In 2011, this supplier was cited in a quality award by McDonalds for supply activities both in the U.S. and Asia. According to the WSJ, in 2013 food distributor Sysco cited the supplier with its “Gold Supplier” award.
By Thursday of last week, McDonalds decided to retain OSI as its global supplier, utilizing other OSI owned factories within China. A statement issued to the WSJ stated: “We will not walk away from the issue but we are committed to resolving it.”
Supply Chain Matters has a two-fold reaction to these events. First and foremost, any food supplier that resorts to illegal product classification practices deserves the consequences of such actions. On the other hand, a supplier that has garnered years of experience as a quality focused and rock solid supplier deserves the opportunity for the facts to come out and to take action to totally correct any deficiencies.
In this era of instantaneous response and 7 by 24 news cycles, it becomes all too convenient to throw a supplier “under the bus” of negative publicity. Loyalty to a long-standing business relationship seems to be a fleeting principle. Of course, a global restaurant services provider with such a dependency on a single supplier will often find it difficult to quickly source alternative suppliers. One could argue that that might have led to the McDonald’s response.
However, kudos to McDonald’s management for taking a step back and giving its long-time supplier the benefit of the doubt with the opportunity to get to the facts and resolve the issue (s). A long history as trusted supplier deserves some consideration.
It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.
In this capsule commentary, we include the following topics: Zara Implementing RFID Tagging System; Hershey and Other Candy Providers Raise Prices to Compensate for Higher Commodity and Production Costs; Pratt and Whitney and IBM Embark on Predictive Analytics Initiative; U.S. Government Announces New Rules Pertaining to Rail Shipments of Crude Oil
Zara Implementing RFID Tagging System
Reports indicate that Zara, a known icon in world class logistics and supply chain management, is implementing a microprocessor-based RFID tagging system to facilitate item-level tracking from factory to point-of-sale. This initiative was revealed at Zara’s parent company, Inditex SA, annual stockholder meeting earlier this month.
The tracking system embeds chips inside of the plastic alarms attached to various garments and supports real-time inventory tracking. The retailer indicated that the system is already installed in 700 of its retail stores with a further rollout expected to be 500 stores per year. That would imply that a full rollout to all 6300 Inditex controlled stores would entail a ten year rollout plan. No financial figures have been shared regarding the cost aspects of this plan.
Hershey and Other Candy Providers Raise Prices to Compensate for Higher Commodity and Production Costs
One of our predictions for 2014 (available for complimentary download from Research Center above) called for stable commodity and supplier prices with certain exceptions. One of those exceptions is turning out to be both the cost of cocoa and transportation.
Citing current and expected higher commodity, packaging, utility and transportation costs, Hershey announced last week an increase in wholesale prices by a weighted average of 8 percent, which is rather significant. That was followed by an announcement from Mars Chocolate North America this week that it will institute price hikes amounting to seven percent. A Mars statement issued to the Wall Street Journal indicated that it has been three years since the last announced price hike and that Mars have experienced a dramatic increase in the costs of doing business.
According to the WSJ, cocoa grindings, a key gauge for chocolate product demand, has surged over 5 percent across Asia and 4.5 percent in North America.
By our lens, the next move will more than likely come from Mondalez International.
For consumers, indulging in Hershey Kisses, M&M’s and Snickers will be more expensive.
Pratt and Whitney and IBM Embark on Predictive Analytics Initiative
Another of our 2014 predictions called for increased technology investments in predictive analytics. One indication of that trend was an announcement indicating that aircraft engine provider Pratt & Whitney is partnering with IBM to compile and analyze data from upwards of 4000 commercial aircraft engines currently in service. This effort is directed at developing more predictive indications of potential engine maintenance needs. According to the announcement, each aircraft engine can generate up to a half terabyte of operational performance data per flight. According to an IBM statement: “By applying real time analytics to structured and unstructured data streams generated by aircraft engines, we can find insights and enable proactive communication and guidance to Pratt & Whitney’s services network and customers.”
Previously, Accenture announced a partner effort with General Electric’s Aviation business to apply predictive analytics in areas of fuel-efficient flight paths.
U.S. Government Announces New Rules Pertaining to Rail Shipments of Crude Oil
As a response to heightened calls for increased safety of trains carrying crude oil across the United States, the U.S. Department of Transportation announced this week a set of comprehensive new rules for the transportation of crude oil and other flammable materials such as ethanol. The move follows similar efforts announced by a Canadian transportation regulatory agency.
The new rules call for enhanced tank car standards along with new operational requirements for defined high hazard flammable trains that include braking controls and speed restrictions. The new rule proposes the phase-out of the thousands of older and deemed unsafe DOT 111 tank cars within two years. Rail carriers would be required to conduct a rail routing risk assessment that considers 27 safety and security factors and trains containing one million gallons of Bakken crude oil must notify individual U.S. state entities about the operation of such trains. Trains that haul tank cars not meeting enhanced tank car standards are restricted to 40 miles-per-hour while trains carrying enhanced tank cars would be limited to a 50 miles-per-hour speed restriction. Further under the proposed new rules, the ethanol industry will have up to 2018 to improve or replace tank cars that carry that fuel.
The proposed new rules are now open for industry and public comment over the next 60 days and are expected to go into effect early in 2015. According to various business media reports, there are upwards of 80,000 DOT-111 rail cars currently transporting crude and ethanol shipments. When the new U.S. and Canadian rules take effect, there is likely to be a boon period for railcar producers and retro-fitters.
Our previous Supply Chain Matters commentary noted that Apple is in the process of marshalling its vast supply chain scale in ramping-up for the pending introduction of new iPhone and other products while stoking consumer demand for the upcoming holiday buying surge. Upwards of 110,000 or considerably more additional workers are being marshalled to support production ramp-up while suppliers themselves reap the benefits of orders exceeding 100 million units.
In December 2012, Apple CEO Tim Cook conducted a series of orchestrated media interviews that included an announcement that Apple planned to invest upwards of $100 million to build Mac computers in the U.S. Our Supply Chain matters commentary at that time reflected on one interview conducted by NBC News anchor Brain Williams. Below is an excerpt of that commentary:
“There were statements by Cook that, in our view, were somewhat on the mark and deserve amplification. Brian Williams asked in the Rock Center interview- What would be the financial impact to the product if, for example, the production of iPhones were shifted to the U.S.? Cook’s response was that rather than a price impact, the real issues reflect a skills challenge. Skills were identified as the existence of talented manufacturing process engineers, as well as experienced manufacturing workers. Cook pointed to deficiencies in the U.S. educational system, as well as the ongoing challenge of recruiting skilled manufacturing workers in the U.S. Great answer! But perhaps, there is much more unstated. High tech and consumer electronics firms long ago shifted the core of consumer electronics supply chains to Asia. Foxconn alone represents a production workforce of over a million people, not to mention many more of that number spread across Apple’s Asian based suppliers. Add many other consumer electronics companies and the arguments of existing capabilities in people, process, component product innovation and supply chain across Asia remain compelling.”
We recall that commentary in light of yet another major ramp-up of Asia based consumer electronics supply chain providers. Yet, the open question remains, where or what is the status of Apple’s planned $100 million investment in the U.S. let alone a more far reaching commitment toward renewing a U.S. based consumer electronics component supply chain ?
A posting in All Things Digital in May of 2013 indicated that according to testimony from CEO Tim Cook before a Congressional Subcommittee the Mac facility would be located in Austin Texas and rely on components made in Florida and Illinois and equipment produced in Kentucky and Michigan. Soon after, Apple contract manufacturing partner Foxconn announced that it was looking to source more manufacturing in the U.S.
In June of this year, PC World made note that Cook tweeted a photo of his visit to the Austin Texas facility where Macs are being produced. The snafu was the iMac in the background was running Microsoft Windows.
The problem however is that a Google search to find updated information related to Apple’s investment in U.S. supply chain capability yields scant information. We certainly urge our readers with knowledge of Apple’s U.S. production and supply chain investment efforts to chime in, if they are allowed.
Compare that with the efforts being generated by Wal-Mart in its Made in the U.S.A. initiative, committing upwards of $250 over the next ten years on U.S. produced goods. During the Winter Olympics, Wal-Mart produced a super slick video, I am A Factory, that garnered over a million You Tube views. That has been followed by summit meetings held with would-be suppliers in multiple product categories to encourage U.S. investment and provide assistance in sourcing or skills development training. Wal-Mart is even willing to make multiple year buying commitments to prospective manufacturers to help them invest in U.S. based supply chain resources. Last week, the Wall Street Journal profiled Element Electronics which is currently assembling televisions in a production facility in South Carolina under the Wal-Mart program. Noted is that the Element production line is an exact duplicate of one that exists in China, installed by Chinese engineers. While Element management admits that there are challenges in the sourcing of a U.S. component supply chain, and in required worker skills, it is making efforts to correct that situation over time under the support of Wal-Mart’s longer term buying commitment.
The point is this. There is no question that Apple has the financial resources and the public relations savvy to make a U.S. production and supply chain sourcing effort far more meaningful, impactful and visible. Yet one has to dig real deep to find information let alone acquire any sense of active commitment. Instead, business headlines note massive scale-up and flexibility of Asia based resources as being far more important to Apple’s business goals. Yet Apple has no problem in demanding a premium price for its products from U.S. consumers. We will avoid diving into the debate regarding Apple’s offshore cash strategy.
Supply Chain Matters therefore challenges the top rated supply chain to join Wal-Mart and others in a far more active and impactful multi-year commitment to U.S. manufacturing which includes higher volume products and education of required worker skills.
On the eve of Apple’s report of quarterly earnings, its supply chain is leaking all sorts of information regarding the upcoming new production ramp-up of Apple’s new iPhone models in preparation for all important the holiday buying surge period that comes later this year.
Our Supply Chain Matters information alerts regarding Apple have been active for the past five weeks but the trigger point arrived today when the Wall Street Journal featured a front-page article regarding ongoing production plans.
According to the WSJ, Apple’s supply chain planners have placed orders for between 70 million and 80 million iPhones in both 4.7 inch and 5.5 inch screen configurations to be completed by the end of this calendar year. That compares to production orders of between 50-60 million phones for the same period last year as Apple ramped-up for the introduction of the iPhone5 model series. That is an obvious indication that Apple is making big-bets on the expected popularity of the new iPhone models. Apple also does not want to encounter a situation of being short on inventory for the most popular iPhone 5s model, as was the case during last year’s holiday season.
The WSJ report generally correlates with reports from Taiwan media several weeks ago. Where the reports differ is when volume production is scheduled to start. Media outlets in Taiwan reported that the 4.7 inch model would begin volume production this month, while the 5.5 inch would begin production in mid-August. Today’s WSJ report indicates the larger screen version production would begin in September. Previous Taiwan and Chinese reports indicated that contract manufacturer Foxconn was in the process of hiring an additional 100,000 workers to accommodate the cyclical production increase while secondary contract manufacturer Pegatron was in the process of hiring an incremental 10,000 workers. All of this data provides a sense of the sheer scale and flexibility that Apple requires from its supply chain partners.
What is remarkable is that a reading of today’s report gives a true sense of the complexity and variability challenges that Apple’s supply chain planners must manage. The new larger screen is again, as in prior years, presenting production ramp-up and yield challenges due to more advanced in-call technology and a rumored sapphire based screen. The WSJ report indicates that orders for upwards of 120 million displays have been placed to compensate for yield challenges. If that number is accurate, it would imply that planners are factoring a 60 percent yield factor. The report further validates that Apple planners will make production adjustments based on early demand history, which was again demonstrated last year when production volumes for the iPhone 5c were scaled-back based on initial demand from consumers. Last month, China Times reported that global semiconductor chip producer TSMC was expected to produce 120 million touch ID fingerprint sensors for Apple, which is three times the volume produced last year, and a further indication of production yield factors and ramp-up scale.
Then there is the celebration of the Lunar New Year, which next year, arrives in February, when most production grinds to a halt as workers take time to return to their families. Apple planners must insure that adequate inventories remain to compensate for a lull in production, or that contract manufacturers make assurances that some production will continue during the period of the Lunar New Year celebration. Multi-tiered inventory visibility is an obvious necessity.
As was the case last year, Apple’s upcoming new product launches will place its supply chain with even more challenges. The competitive stakes for Apple are far higher this year as market dynamics and overall competition in emerging markets intensifies. Rival Samsung has already felt the effects of intensified competition from lower-price producers Lenovo and Xiaomi in China and Micromax and Karbonn in India.
Pricing strategy will be critical and some reports indicate that Apple is seeking higher list prices from carriers for its upcoming new models. The government of China recently raised media-wide concerns regarding the overall security of Apple smartphones in the midst of ongoing global spying scandals, which could place additional pressures on China Mobile to feature other brands. Android powered phones continue to gain more overall market share while Microsoft and other tech players are providing more incentives for lower-cost providers to adopt Windows based phones.
These are all variables that will drive Apple’s supply chain planning in the coming weeks, one that will again have to demonstrate responsiveness to increased market dynamics, synchronization of NPI and ramp-up plans and resiliency to unplanned disruptions or material shortages.
Then again, Apple continues to be rated by Gartner as the number one supply chain.
In our previous published commentary, we reflected on the recently held Farnborough Air Show and the new order activity generated for aerospace industry supply chains by this trade show.
One other report from this trade show caught our attention. Boeing indicated that the reliability to-date of the more than 160 787 Dreamliners that are operating among global carriers is averaging about 98 percent. The OEM’s chief 787 test pilot flatly indicated: “that number is not where we would like it to be, we were expecting it to increase.” The industry sets reliability benchmarks for aircraft, particularly newly introduce models that must meet higher customer expectations. According to reporting from the Wall Street Journal, Boeing pegs reliability of new aircraft to that of the previous generation 777 fleet at comparable times of product rollout and fleet operating time. The “triple seven” has been widely recognized as one of the most reliable.
Thus far, 787’s have logged more than 490,000 hours of service, but a series of various ongoing snafu’s or malfunctions have caused some setbacks with both production volumes of new aircraft as well as operation of existing aircraft. However, Boeing officials report that the situation is improving. With its latest new “dash nine” variant of the 787, Boeing has further taken on more design management to insure overall reliability of system components.
The report itself provides yet another reminder of the very high overall reliability standards that today’s more advanced and technology laden aircraft must meet. It is also a reinforcement to the overall criticality of integration of product design with physical and software performance. Not many industries with such a complex hardware, software and bill-of-materials complexity can meet the standards of 98 percent reliability let alone even higher levels.
As we have noted in prior Supply Chain Matters commentaries related to aerospace industry supply chains, air shows have customarily become the preferred trade show venue for the announcement of customer orders. Last week, the biennial Farnborough Air Show wrapped-up with its flurry of customer order activity not only for aircraft OEM’s but for engine providers as well.
Various business media reports indicate that Airbus landed the bulk of order activity booking a reported $75 billion of orders at list prices, involving 496 aircraft. Boeing snagged a little over $40 billion worth of orders involving over 200 aircraft orders. In its reporting, the Wall Street Journal crowned Airbus as beating rival Boeing for air show bragging rights but the more important headline is the growing backlog of orders that industry supply chains must respond to. Neither of the dominant OEM’s came to this air show featuring brand-new aircraft, instead they showcased newer versions of previous new model aircraft including Airbus’s A330 and Boeing’s Dreamliner787 series.
Aircraft engine providers were further big winners at last week’s event. The consortium of General Electric and CFM International booked over $36 billion in new aircraft orders that involved over 1100 engines along with contracts for maintenance, overhaul and repair. Rolls Royce had its share of new order announcements including being the exclusive engine power plant for the newly announced Airbus A330neo, along with new engine orders related to various other Airbus and Boeing wide-body aircraft.
Another important development related to Farnborough related to the aircraft models that were unable to make a presence because of program difficulties. Bombardier elected not to feature its C-Series after test flights were suspended following a major engine incident. That incident occurred at the end of May when a newly designed geared fan engine produced by Pratt & Whitney incurred an uncontained engine failure during a ground test.
The highlight of the military aircraft aspects of the air show was supposed to be the F-35Joint Fighter being developed by Lockheed Martin for the U.S. Air Force. That aircraft was restricted from flying to the United Kingdom after it suffered an engine failure in late June. The aircraft was also powered by a Pratt engine.
The other interesting theme within commercial aviation from last week’s air show was increased nervousness about current backlogs as well as more evidence towards the emergence of a preferred supplier strategy.
There are fears for an industry downturn or cancellations as global airlines adjust to a changing global and industry economics. Current multi-year backlogs for new aircraft delivery are not meeting the business challenges for airlines to have more fuel efficient aircraft operating on a more-timely basis, especially when competing with lower-cost budget airlines. These lower-cost rivals are now taking delivery of the newer aircraft and extending their route coverage, flying longer distances and charging lower fares than existing long distance carriers. Intense competition has raised concerns for overcapacity, especially if marginal airlines start to succumb to faster growing operators. Carriers operating across Asia are responding to pressures to sustain 30 to 40 percent growth rates while having to deploy new aircraft on newer routes. Terminals, runways and air traffic control systems are reportedly not keeping pace with current demands for airline expansion across Asia. Euphoria is making way to the realities of hyper-growth.
Airlines and leasing operators also want to have negotiating flexibility in the all-important selection of engine providers. Increasingly, as OEM’s continue to tune product designs among airframe and engine, such options are beginning to whittle. They are no longer inclined to spend development dollars across multiple engine power plant options.
As we continually point-out, aerospace industry supply chains are dealing with an extraordinary unique set of challenges. There are the blessings of multiple years of order backlogs with the challenges among OEM’s for ramped-up production and delivery of new aircraft under a shared risk and revenue arrangement. Rather, dynamic and responsive capacity management, end-to-end value chain intelligence, enhanced supplier collaboration and goal-sharing will all come into play as aerospace supply chains continue to adjust to extraordinary and constantly changing industry dynamics.
While other industry supply chains will envy such circumstances, the ongoing situation in aerospace continues to provide a rather interesting set of circumstances that will no doubt, provide business case content for many years to come.
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