Airbus Announces Corporate Restructuring and Headcount Reductions with Some Supply Chain Management Implications
Airbus announced plans to trim its overall workforce by as many as 1164 positions in a new iteration of a corporate-wide restructuring initiative. These positions were described as support and office roles and the company hopes to make such cuts relying on voluntary departures, early retirements and relocations. Airbus currently employs upwards of 136,000 people globally.
According to a report by the Financial Times, duplicate functions will be eliminated in research, communications, human resources and other group services. The multi-nation firm further indicated that it would transfer 325 positions to complete the relocation of headquarters staff from former centers in Paris and Munich to Toulouse. The Associated Press quotes an Airbus spokesperson as indicating that 640 of the job cuts will be in France, 429 in Germany and the remainder in Britain and Spain.
Also announced is that 230 new positions would be created to help this aerospace manufacturer embrace digital technologies. As Supply Chain Matters highlighted in previous commentaries, Airbus is aggressively moving toward broader visibility and quicker decision-making related to its overall supply chain. Initiatives such as the Airbus Digital Control Room now serve as the heartbeat of its supply chain, providing a singular information and resolution control hub to manage issues occurring across the multitude of multi-tier suppliers that support Airbus’s production volumes. Other efforts related to digital supply chain and Internet-of-Things (IoT) enabled active devices are also underway.
Airbus CEO Tom Enders indicated that the restructuring would quicken overall decision-making, provide additional cost savings and narrow the profitability gap with rival Boeing. Airbus must develop a final plan with respective labor unions which is expected to occur by the middle of next year.
The current restructuring is part of a multi-year, shareholder backed initiative to reduce French, German and Spanish government involvement in company decision-making. Fabrice Bregier, who heads the commercial jetliner unit now serves in the role of chief operating officer that includes leadership responsibilities for overall supply chain efforts supporting both aircraft and other group activities.
Principal rival Boeing had previously announced headcount reductions in February and March amounting to 4500 positions, also involving a corporate-wide restructuring.
A World Trade Organization (WTO) panel has ruled that upwards of nearly $6 billion of prior tax incentives provided to Boeing improperly excluded foreign competition. According to a report by the Associated Press, these incentives that were set to be awarded between 2024 and 2040 apply to the production of the wings to be part of Boeing’s new 777x wide-body aircraft.
In late 2013, Boeing issued RFP’s among multiple U.S. states seeking proposals to source final production and assembly of the new 777x aircraft, which is being designed to carry upwards of 400 passengers on long-haul flights. At the time, Boeing’s threat to source design engineering and production outside of Seattle was part of an effort to seek supplemental longer-term concessionary agreements from various labor unions on longer-term wage and benefit costs. Lobbying efforts were also initiated with the State of Washington which resulted in a package of tax and other incentives valued at $9 billion through 2040 to keep the bulk of the 777x program activities in the state.
This development represents the latest round of commercial aircraft related trade disputes among the United States and the European Union with Boeing and Airbus being the major accusers. The EU voiced its concerns to the WTO over the State of Washington’s tax incentive benefits to Boeing shortly after they were announced, claiming that a total of $8 billion in incentives were prohibited subsidies and needed to be rescinded by the WTO.
In its most recent ruling, a WTO panel opted to deny the overall EU claims, but did focus on the specific incentives related to the aircraft’s wing production. The Financial Times reported that this is only the fifth time in the WTO’s history that it has defined a subsidy as “prohibited.” Two months ago, the WTO found that the EU had failed to unwind billions of dollars in unlawful subsidies to Airbus. That ruling could allow the U.S. to impose tariffs on European goods.
A statement from the EU Trade Commissioner indicated: “We expect the U.S. to respect the rules, uphold fair competition and withdraw these subsidies without any delay.” Boeing on the other hand indicates it will appeal the ruling and again characterized Airbus as being non-existing without “$22 billion in illegal subsidies from the EU.”
This ruling comes on the immediate heels of the unexpected election of Donald Trump as President–Elect of the United States, with a platform for the U.S. to become more hard lined on global trade policies. That will likely amplify the rhetoric and subsequent actions related to this recent WTO ruling.
The battle among both aircraft manufacturers on opposite sides of the ocean has been long noted as the most contentious rivalries involving global trade and the overall sales of commercial aircraft among multiple foreign countries. All came to a head in 2011 when the WTO ruled that both companies had collected billions in unlawful assistance and incentives. In the wake of a rising threat from China’s heavily subsidized aircraft sector, Airbus CEO Enders has since called on his U.S. rival to initiate talks on a new global settlement for government support which would benefit both sides of the Atlantic.
The announcement further comes on the heels of the sudden departure of Boeing’s overall head of the Commercial Aircraft business unit to be replaced by a General Electric Aerospace executive. Business media reports regarding this sudden senior executive move point to deep animosity among Boeing’s labor unions over the process of 777x production sourcing and ultimate plant selection.
Boeing made a senior management change this week, recruiting a General Electric Aviation Services executive to be the new head of the Commercial Aircraft division. This executive move, which is effective immediately, likely has manufacturing, supply chain and services management implications from two perspectives.
Kevin McAllister previously served as the head of GE’s Aviation Services business unit which is the customer support arm of the aircraft engine unit. Thus, McAllister brings an aftermarket services perspective. His background is one of design engineering, having served in roles of engine component development and services sales.
According to statements from Boeing CEO Dennis Muilenberg, the aerospace manufacturer sought an executive with “fresh ideas” to lead in efforts to triple services related revenue over the next decade. In conjunction with this executive change, Boeing further indicated that it plans to centralize management of the service businesses related to defense and space operations as well as commercial aircraft.
Supply Chain Matters believes that the above moves signify intent by Boeing to expand revenue and profitability growth across managed services and such efforts will likely include leveraging of Internet of Things (IoT) and connected devices as technology underpinnings of such efforts. Boeing had previously announced its intent to leverage more revenues from service parts which decreases revenue opportunities from certain suppliers.
As the new head of Commercial Aircraft, McAllister will oversee all of Boeing’s manufacturing and internal supply chain resources. He represents the first outsider hired for a senior management position since 2005 when former GE executive Jim McNerney was recruited to be CEO. We believe that his prior background in product engineering, services and manufacturing will surely help in the continuing challenge to ramp-up Boeing’s existing aircraft production cadence to meet backlogged product demand. Boeing previously
According to a report published by the Seattle Times, during his tenure, former Commercial Aircraft CEO Ray Connor had precipitated a sharply negative turn in Boeing’s relationships with its various labor unions. Much of this animosity came during plans to source manufacturing and supply chain related strategies for Boeing’s next generation 777X aircraft. In a January 2014 blog commentary, we had highlighted the effects of Boeing’s strong-willed collaboration efforts with the State of Washington, with prospective suppliers, and with Boeing’s labor unions. Other sour relations remain in the shared manufacturing responsibilities for the 787 Dreamliner aircraft among Seattle based, unionized manufacturing workers and predominate non-unionized workforce at its Charleston South Carolina production facility. Mr. McAllister must now direct some of his leadership efforts at addressing these sore areas.
The announcement of this new external executive hire comes after a corporate supply chain management announcement in March. Pat Shanahan, the former head of Commercial Airplane Programs was appointed as Senior Vice President for Supply Chain Management and Operations companywide. According to that announcement, Shanahan was provided direct responsibility for oversight of manufacturing operations and supplier management functions, including implementation of advanced manufacturing technologies and global supply chain strategies. At the time of his appointment, Shanahan reported directly to Boeing CEO Dennis Muilenburg. There will obviously be some shared collaboration and leadership with both McAllister and Shanahan moving forward.
© The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
While industry supply chain teams continue to work on achieving 2016 year-end strategic, tactical, operational line-of-business business and supply chain focused performance objectives, this is the opportunity for Supply Chain Matters to reflect on our prior 2016 Predictions for Industry and Global Supply Chains that we published just before the start of the year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Not only do we research and publish our annualized predictions, but every year in November, we look-back and score our predictions for the year.
As has been our custom, our scoring process is based on a four-point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
In our prior Part One posting, we looked backed on our prediction for overall economic climate and business planning and the outlook for sourcing and procurement.
In our Part Two posting, we revisited our prediction for continued turbulence and change surrounding global transportation, along with our prediction related to the widening of supply chain talent and skill gaps.
In this Part Three commentary, we will revisit each of our industry-specific supply chain predictions.
For reader awareness: this posting is much longer than our typical blog postings but we felt it would not be appropriate to break-up the various industry sectors. You can scan the industry sub-headings if an industry update captures your interest.
2016 Prediction Five: Noted Supply Chain Industry-Specific Challenges
Each year when we publish our annual predictions, we often include a specific prediction addressing what we feel will be industry-specific challenges that are likely to dominate business and media headlines in the year. For 2016, we predicted challenges remaining in B2C Online Retail, Commercial Aerospace, Consumer Product Goods (CPG) and Automotive industry sectors. We added a further 2016 industry challenge, that being current efforts to deploy more sustainable and health conscious agriculture and food based supply chains.
B2C Online Retail
Self-Rating: 3.8 (Max Score 4.0)
We once again included the prediction of continued challenges in the B2C online fulfillment sector for several reasons. First, industry CEO’s were openly admitting that online trends provided one of the most challenging eras for the retail industry, with impacts ranging from merchandising, organizational and supply chain process and technology dimensions. Second, the byproduct of the late 2014 U.S. West Coast port disruption significantly impacted retailer bottom lines, that has obviously carried over as a challenge for better planning of inventories and expected volumes. Finally, there was the ongoing threat of Amazon, and what actions Amazon would take to impact online retail even more. The Amazon Effect continues to fuel online consumer expectations for faster delivery and instant gratification with little patience for shipment delays or lack of up-to-date information.
As the 2015 holiday fulfillment season, winded down, one important trend became crystal clear for 2016, more and more additional consumers have opted for online shopping. That reality was evident after the Black Friday– Cyber Monday weekend, and it continued right up until the 2015 Christmas holiday. Forecasting firm ChannelAdvisor indicated that online sales in the period of November 26 thru December 20 rose nearly 12 percent over 2014. Another takeaway for retailers as a result of the 2015 holiday period was the reality of the higher costs for inventory, distribution and order fulfillment to support online channels.
By mid-December 2015, reports began to reinforce that online orders were far more than originally anticipated with major parcel transportation provider FedEx and UPS networks falling behind in delivery commitments. Despite the best efforts, technology and forecasting tools, both parcel carrier networks were strained at various points, the former being impacted just before the Christmas holiday by supposedly severe winter storms. Some FedEx employees volunteered to work the holiday to get packages to their holiday destinations, as last-minute shoppers swamped its network. Our Supply Chain Matters assessment commentaries echoed whether the 2015 holiday surge brought forward the question of whether hub and spoke designed delivery networks can accommodate increasing holiday-surge volumes. While UPS managed to make all its required deliveries by 6pm Christmas eve, its network experienced visible slowdowns in the middle of December. Once again-finger-pointing among carriers and online retailers broke out as to which party exhibited accuracy of forecasting.
Two apparent stars of 2015 were Amazon and the U.S. Postal Service (USPS). Amazon took more control of its shipping network, chartering its own air freighters and implementing its larger network of customer fulfillment and package pre-sorting centers. The online retailer literally exposed the weaknesses of hub and spoke logistics and distribution and could promote holiday sales up until Monday of Christmas week. Package volumes handled by the USPS matched that of UPS. Profitability of the agency was however, a whole different story.
In early January, Wal-Mart announced plans to close 269 stores and re-align its brick and mortar retailing strategy. We viewed that announcement as the initial shockwave of the new industry realities, acknowledging the structural impacts that Omni-channel and online customer fulfillment were having on physical stores. In essence all retailers would have to rationalize their dual physical and supply chain presence in the light of consumers’ emphatically moving to online. Other announcements of physical store closings came from other large scale retailers including Macys. That was followed by Wal-Mart’s announced acquisition of Jet.com coupled with a declaration of a strategy more committed to online vs. physical store expansion.
There were added financial casualties from the movement to online including the declared bankruptcy and asset selloff of the Sports Authority retail chain. Athletic goods retailer Finish Line initiated efforts to close upwards of 600 retail stores after its new warehouse management system failed to process orders fast enough, costing the retailer an estimated $32 million in lost sales. This motivated us to declare in a research advisory: The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains, (Currently available for complimentary download in our Research Center) that this new phase will include physical stores being evaluated by either Return on Investment Capital (ROIC) or profitability growth, much more sophisticated supply chain and inventory management systems tied to advanced forms of predictive and prescriptive analytics, and the ongoing battle of Alibaba and Amazon for global online platform dominance.
We believe our prediction to anticipate more challenges for the retail industry in 2016 was on the mark and we likely continue into the coming year based on the results and final outcomes of this year’s holiday period.
Self-Rating: 3.8 (Max Score 4.0)
Industry dominants Airbus and Boeing continue to manage an unprecedented phase of ramping-up each of their individual global-based supply chains and ecosystems to make a dent in multi-year order backlogs over the next 3-4 years among new aircraft programs. We predicted a rather fragile commercial aerospace supply chain in 2016-17 with many increased risks and concerns. We expected the smaller industry OEM’s to be the primary victims of any supply disruptions.
Throughout 2016, delays in securing certain supply needs such as seats and aircraft interior components hampered production, especially for higher margin wide body aircraft. In May, The Wall Street Journal reported that that Airbus executives were trying to end what has become an annual rite, the end-of-year hockey-stick effort to fulfill the annual target for customer airplane deliveries. The company’s COO of commercial aircraft acknowledged to the WSJ the ongoing frustration and that: “we need to do better.” The report further indicated that the company was exploring further means to change the way airplanes are manufactured in a more predictable manner, language that often translate to additional manufacturing automation. Similarly, Boeing’s efforts to invest in more manufacturing automation became visible with the prototype build of the new 737 Max single aisle aircraft. In February, Boeing made a stunning announcement that it would deliver fewer completed aircraft in 2016 than the manufacturer delivered in 2015.
Another critical shortage turned out to be the new Pratt and Whitney geared turbo fan (GTF) engine that ran into a series of software snafus and key component delays during Q2 and Q3, causing Pratt to declare that it would miss its original 2016 delivery commitments. That event alone impacted the planned shipping schedules for the Airbus A320 neo, and eventually caused Bombardier to announce significant headcount reductions as a result of unplanned delays in deliveries of that manufacturer’s CSeries jets.
On the aerospace strategic supply and product value-chain front, merger, acquisition and business split-out strategies became even more evident in 2016. This was compounded by a general cyclical buying patterns and pressures for added cost reduction among aerospace OEM’s. Metals and forgings supplier Alcoa, the holder of multi-billion supply agreements with both Airbus and Boeing announced plans in March 2015 to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. In January of this year, Alcoa announced the split-out of Arconic, a new value-added aluminum and nonaluminum specialty forging manufacturing company. This split new company was formed to take advantage of the growth of supply needs for high-tech alloy fasteners, forged metal parts within the commercial aerospace and automotive industries. In early November, Arconic became listed for trading and was immediately greeted with 12 percent stock decline due to the concerns of the constant delivery adjustments to delivery schedules of aerospace and automotive supply chains.
Just a few weeks ago, Rockwell Collins and B/E Aerospace announced that they have entered a definitive agreement under which Rockwell Collins will acquire B/E Aerospace for approximately $6.4 billion in cash and stock, plus the assumption of $1.9 billion in net debt. Other such moves occurred, each with the promise of long-term supply agreements and enhanced supply negotiating power with major commercial aircraft manufacturers.
By October, it was becoming rather evident that Airbus and Boeing were pursuing a different set of strategies. The Wall Street Journal reported this dichotomy by observing that while Airbus seemed to be pursuing efforts to increase its aircraft delivery cadence, Boeing was observed as pursuing a strategy of added wide-body sales to expand margins and fund needed production increases.
While the final 2016 production output numbers remain to be completed and announced, there was little doubt of the continued and ongoing supply chain challenges among various aerospace supply chains.
Self-Rating: 3.0 (Max Score 4.0)
Despite an improved economy and more optimistic consumers, the automotive industry continued to have its own unique set of challenges. An unprecedented level of industry-wide product recalls has taxed service management and repair parts supply chains and indeed continued to overflow into 2016. In 2015, the ongoing series of recalls related to defective airbag inflators produced by supplier Takata that involved a multitude of global brands continued to permeate in 2016. Multiple manufacturers were forced to add additional product recalls related to a whole series of automotive components with the result being that most brands had vehicle nameplates under product recall notices.
We predicted that the headline would shift to Volkswagen in 2016 and its needs to address thousands of diesel-powered vehicles with illegal air pollution monitoring devices and software, which continues to impact the reputation of its brand. By October, the financial implications for VW in the U.S. alone amounted to $15 billion in compensation agreements to vehicle owners, dealers and to government regulatory agencies. Other financial settlements involving European and other global owners will add to that number. The brand erosion impacts and remediation efforts are likely to likely extend for multiple years, along with the implications among the broader industry for attempts to alter emissions or other government monitored data.
Another concern indicated for 2016 was that of China’s automotive sector where significant overcapacity existed. We predicted that declining domestic demand would likely force more global exports. Our China sector prediction did not occur, primarily because China’s government provided a much-needed tax break incentive for would-be automotive buyers. Currently, more than 70 percent of autos sold in China qualify for an average $1470 incentive for buying a new vehicle. As of October, new car sales were a cumulative 19 million vehicles, reflecting a 15 percent increase from the same period a year earlier. By year-end, total output in China may exceed that of the United States.
In December, we concurred with Fortune Magazine’s published prediction that Apple will likely buy Tesla to springboard entry into the industry as well as acquisition of a fully operating, vertically integrated supply chain. We thought that Google (Alphabet) was likely another potential player. Obviously, none of these occurred and we blew that prediction. However, the most interesting development was Apple’s subsequent changed strategy in developing its own automobile design, causing the layoff of design team members and a possible different strategy.
We predicted that the bottom-line for the automobile industry in 2016 would be stepped-up efforts in quality assurance, combined software and hardware innovation, alternative energy and Internet-of Things technologies. We feared that automakers would again run the risk of complacency in the current environment of unprecedented low prices of gasoline, opting to promote higher margin trucks and luxury vehicles over those of more increased fuel efficiency and range. The latter is turning out to be the prevalent strategy and it has come at the cost of added innovation. According to JD Power, more than 62 percent of all motor vehicles sold in the U.S. during the month of October were either pick-up trucks or sports utility vehicles.
Global automakers now suddenly find themselves in late 2016 scrambling to stay in front of quickly evolving autonomous vehicle technologies that are prevalent with the likes of Google, Tesla, Uber and others. Both GM and Ford are now plowing investment monies in software development or in new start-ups to avoid opportunity lost.
Consumer Packaged Food and Beverage Goods
Self-Rating: 3.0 (Max Score 4.0)
Since 2014, we have included CPG in our industry-specific challenges for the coming year amid permanent changes in consumer tastes. The year 2016 provided little exception and the stakes indeed were far higher. Consumers continue to shift their food shopping preferences away from traditional processed foods in favor of food providers that offer more perceived healthy foods containing natural and sustainable ingredients. That in-turn has led to continuing low single-digit organic sales growth and laggard profitability levels among the largest CPG companies.
Declining profits and meager sales growth continues to spawn activist equity investors to influence certain CPG, food and beverage firms to consolidate. We predicted further M&A announcements in 2016, possibly involving blockbuster global brands, other than AB In-Bev’s acquisition of SAB Miller, but that by our lens, was a global market-share acquisition effort. There were attempts, such as Mondalez’s overtures to acquire Hershey that later fizzled. Thus, our prediction of wide-scale M&A was off the mark.
The industry remains consumed by zero-based budgeting and significant supply chain focused cost-cutting techniques. Industry leaders and past veterans point to experiencing one of the most dynamic, challenging and disruptive periods ever seen in the industry. As an example, Kraft Heinz Company, formed in 2015 when AB In-Bev’s HJ Heinz acquired Kraft Foods indicated in October that efforts to decrease annual spending by $1.5 billion by the end of 2017 has already met three-fourths of that goal. However, this large food producer reported a sales decline of 1.5 percent for the October-ending quarter, an indication of possibly trading product innovation and sales growth for higher margins and profitability. Executives of the merged company now indicate they will likely raise the cost-cutting goal for 2017.
We predicted that in 2016, the industry winners or survivors will be those who can lead in product and process innovation and gut-wrenching transformation to satisfy consumer preferences more healthy foods, while dealing with the significant distractions and de-moralization brought about by ZBB or other wide-ranging cost cutting initiatives. Generally, we sensed a noticeable uptick in industry product innovation with new product innovation cycles accelerating overall.
We further predicted that lean and mean cost controls would cause food quality monitoring levels to suffer and there will be yet another uptick in highly visible food related product recalls. Our review of the United States Department of Agriculture, Food Safety and Inspection Service listing of food related product recalls through the end of October indicted a near doubling of recall action in 2016, but many of these recalls were related to either undeclared allergens, mislabeling or misbranding of products. That would be an indicator of lax controls related to product management vs. food borne disease. Thus, our prediction of highly visible product recalls was off the mark but likely reduced staffing levels have an effect on assuring that accurate and up-to-date product quality and safety information is being maintained.
The True Organic, Green and Sustainable Food Supply Chain
Self-Rating: 3.8 (Max Score 4.0)
We added this specific 2016 industry related prediction because of the obvious reasons noted in our CPG industry prediction and the shear multi-year scope and effort implied in this effort. Consumers of food now demand to know more about the origins of the food they consume, and how it was produced. They are clearly holding well-known iconic food and restaurant brands accountable for increased commitment to this effort and companies in-turn, are rushing to satisfy these requirements. However, for large, global based companies with complex and established food supply chain practices, the challenge comes down to long-term planning and managing expectations of supply and demand.
Brands such as Costco, Hershey, Kellogg, McDonalds, Nestle, Tyson Foods, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers. Yet, do consumers and providers realistically understand the significant challenges and timetables for these efforts? In other words, the entire food industry and respective shareholders needed to come together in concerted efforts in 2016 and beyond to address realistic timetables and consumer expectations as to when true organic, green, sustainable and socially responsible foods will be available in adequate supply and at more affordable prices.
We noted that providers and originators of meat, grocery and produce products will require financial incentives and economic resources to make such transitions over reasonable time periods. The other obvious concern is food safety. When massive scale methods are removed that focus on the use of harmful drugs, genetically modified methods of farming or raising animals in quicker time periods, what will be the near-term impact on food safety? The widespread food safety incidents that impacted Chipotle Mexican Grill since 2015 are a wake-up call reminder to consumers that a fully sustainable food supply chain is a big and complex challenge that is beyond individual companies and food suppliers.
In 2016, food companies indeed stepped-up initiatives and efforts in providing more visibility to the individual product supply chain. Many of these efforts were in enhanced information included in food labeling, or in specific web links that provide even more origin related information. New software can now report on inspection checks among each step in the supply chain while other software can provide very detailed ingredient information of all the possible allergens and health reactions. However, that was just an initial marketing and informational step that merely scratched the surface. The fact remains that consumers generally do not trust brand manufacturers and more industry-wide efforts in long-term supply planning are required.
There is an adage that when the industry big dog makes significant change, others quickly follow, especially those suppliers who also view opportunity for first mover or preferred supplier advantage. One of the more influential sustainable focused food companies in 2016 was McDonalds. This well-known chain was not the only big dog, for example, Nestle indicated it would make the transition to cage-free in five years’ time. Responding to its own challenges relates to sustaining revenue growth, this big dog restaurant chain has ended the use of certain antibiotics in chicken supplies and has embarked on a 10-year effort to provide cage-free egg supplies, which currently are part of upwards of 50 percent of current menu items. As Fortune Magazine noted in a published September report, the firm’s efforts in committing to changed efforts in poultry and egg sourcing are transformative for the entire U.S. food industry. This is because McDonalds represents a huge demand source with large-scale buying influence. It is currently buying over 2 billion eggs per year, and only an average of 13 million eggs currently can meet the cage-free standard. As Fortune noted: “McDonald’s cage-free commitment set off a stampede throughout the food industry. Nearly 200 companies have followed suit.” It further stated: “Now McDonalds isn’t waiting for the supply- it’s creating it.”
Agricultural commodities firm Cargill manages the egg supply for the restaurant chain and is now a founding member of the Coalition for Sustainable Egg Supply which is collaborating with farmers on new henhouse systems, revised farming practices, animal genetics as well as dealing with mitigating the impacts of cage-free in higher mortality rates and potentially higher bacteria levels. The commodities firm is further responding to the demand for non-genetically modified food by modifying practices for how it sources materials in the supply chain and meat-packing facilities.
On the producer side, some specialty egg providers see the opportunity for preferred supplier and our well on the way towards that object. The most prominent is the Happy Egg Company that controls 11 farms scattered across the Ozark Woodlands of Arkansas and Missouri. Other noted producers are Handsome Brook Farm and Vital Farms. In the case of Happy Egg, this producer now has upwards of 400,000 birds in totally cage free settings and plans to double production by the end of 2016. Distribution of product includes more than 7000 grocery stores nationwide with partnerships with Costco, Safeway and Wal-Mart.
There is indeed an acknowledgement that such changes require major multi-year shifts in farming. The U.S. Department of Agriculture estimates that the transition to cage-free could cost upwards of $7 billion for the industry, a considerable burden for producers alone. McDonalds remains committed to financially assist in some of this transition but other egg buyers have provided little interest to subsidize an industry transition.
Fortune notes that consumers are agitating McDonalds to implement pig and cattle antibiotic practices as well as more organic and sustainable meat sourcing practices globally. That challenge is currently characterized as far more challenging because it involves many more suppliers and intermediaries. This undoubtedly is a far more complex multi-year effort.
Therefore, we self-score this prediction on the mid-high side because we sense that the industry influencers are beginning to take on the long-term supply strategy view and have been willing to help producers in the multi-year transition. That stated, there’s a long way to go and it will include further food supply chain challenges. Therefore, do not be surprised if we carryover this prediction into 2017.
This concludes Part Three of our scoring of this year’s predictions. In Part Four, we revisit our predictions related to S&OP processes, the realities of Internet of Things initiatives.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved
For highly engineered performance products, product design along with sourcing and procurement teams are always attuned to component quality and performance trending or abnormal incidents.
Late last week, General Electric Aircraft and the National Transportation Safety Board (NTSB) issued a joint investigative update regarding an uncontrolled fiery and explosive failure of a GE CF6-80 engine that occurred on October 28 involving an American Airlines 767-300 aircraft at O’Hare International Airport in Chicago. According to an NTSB release, the aircraft right-hand engine’s stage 2 high pressure engine disk fractured into at least four pieces with the metal fractures being consistent with an “internal inclusion.” The subject disk fractured into at least four pieces, two which landed upwards of a half-mile from the aircraft.
Published reports over the weekend point to the possibility of foreign debris somehow being embedded within the special alloy that made up the specific engine disk. It is now being described as a manufacturing flaw. According to a published Bloomberg report, GE believes it has identified a “limited number” of disks manufactured at the same time that may have had the same flaw and further indicates its determination that only one other remains in operation. A letter obtained by Bloomberg notes: “We are currently working with the operator to accomplish removal of the remaining part in service.” GE indicated in a statement that the company and an unnamed supplier of the Inconel 718 alloy are now reviewing production records for NTSB investigators. GE further indicated that the engine manufacturer has not experienced such a failure for parts made with this same alloy in more than 30 years. More than 4000 of various CF6 engines are in current operating service.
While this remains an ongoing investigation, some observations clearly come to mind. First, the speed in which GE could trace the production lot origins of the alleged defective disk is a testament to the maturity of existing quality management and control processes. That will surely help in ongoing investigation and determination if other operating engine disks need to be further examined or remediated. Second, the notion that a component alloy has not demonstrated a tendency for failure in over 30 years is a reminder that for highly engineered or high performance components, manufacturers should likely continue to assume that never is never a given.
Detailed component records are mandated among aerospace and commercial aircraft supply chains because of the possibility of incidents that occurred with the Chicago incident. It serves a reminder to all other precision manufacturing supply chains that process control and traceability are necessary investments.