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.
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.
© 2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
Both Airbus and Boeing announced their commercial aircraft deliveries for the first-half of 2014, which are indicators of each OEM’s current supply chain support activity. These announcements come as a prelude to this month’s Farnborough International Airshow in Great Britain, a premiere event for announcing newly booked orders.
Airbus indicated that it delivered 303 aircraft through the end of June, an increase of 2.7 percent from the year earlier period. The aerospace OEM indicated that its plans call for total 2014 aircraft deliveries to match the 2013 number of 626 aircraft. On the inbound order front, Airbus booked 290 net commercial aircraft orders in the first-half although cancellations surged after global carrier Emirates cancelled its outstanding order for 70 A350 aircraft.
Boeing indicated that it delivered 342 aircraft in the first six months including 48 of the 787 Dreamliner’s. That 787 number is slightly below Boeing’s initial estimates for monthly 787 production volumes in 2014. The numbers include the delivery of 239 new 737 Next Generation aircraft which equate to an average production run-rate of 40 per month which is a considerable production pace. The current pace of commercial aircraft deliveries would position Boeing’s supply chain in a position to exceed the total 648 total commercial aircraft delivered in 2013.
While both Airbus and Boeing supply chain teams should be applauded for first-half performance, the fact remains that multi-year order backlogs remain rather large that the jet buying frenzy among Asian based carriers may give way to a more sober approach that reflects the current global airline challenges of intense competition, pilot shortages and inadequate infrastructure. As Supply Chain Matters and now traditional business media has opined in previous commentaries, multi-year backlogs can give way to more changing market dynamics. The recent Emirates announced cancellation of its hefty A350 order could be considered another indicator of changing industry dynamics.
We again echo our prior advisory, namely that an enviable industry position awash with order backlog does not condone a business-as-usual focus on product lifecycle and supply chain management. 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.
It’s the end of the work week and we continue with our news update series related to previous Supply Chain Matters posted commentaries or news developments.
Another Bombardier C-Series Program Delay
Supply Chain Matters has featured past commentaries concerning Bombardier and its efforts to make its presence as an aircraft provider in the single-aisle market and compete with the likes of an Airbus or Boeing. The company’s C-Series of aircraft were designed to offer prospective air carriers an technologically advanced single aisle aircraft at perhaps a more cost competitive option for airlines. However, like many other commercial aircraft programs, the C-Series has suffered a series of milestone setbacks. The first maiden flight of the C-Series was in September 2013, nine months behind its original schedule. In December, the aircraft and diversified transportation equipment provider replaced its head of aviation sales due to lagging booked orders.
There are reports of continued setbacks regarding the C-Series program. This month, Bombardier re-started ground tests following a test failure of the aircraft’s innovative geared turbofan engines designed and produced by Pratt & Whitney. The company further announced that it will not feature the C-Series at the Farnborough International Airshow that occurs in July, forgoing a major sales opportunity. The revised plan is to introduce the smaller CS100 version of the C-Series in the second-half of 2015, with the larger version six months later. Thus far, about 15 percent of test activity has been completed.
The company has scaled-down its expectations of orders to a number of 300 expected orders by the time the aircraft enters operational service. Air Canada had been evaluating the C-Series as a potential replacement for 25 existing Embraer aircraft has now indicated it will not order any of the aircraft.
Airbus Loses Huge A350 Order
An update to our ongoing Supply Chain Matters commentaries regarding Airbus’s A350 supply chain which completed its maiden flight in June of 2013. A major new program development includes some disappointing news.
Business media reported last week that Airbus suffered one of the industry’s largest plane cancellations. Emirates Airlines elected to walk away from a previous deal to acquire 50 A350-900 and 20 A350-1000 aircraft after the airline reevaluated its long-term capacity needs. Emirates is apparently concerned that capacity at its Dubai hub could be an impediment to long-term growth, and that larger capacity aircraft should be part of its fleet strategy.
According to a published report by the Wall Street Journal, the A350 order was placed in 2007 and had a list price value of $16 billion. The cancellation represents a 9 percent hit to the A350 current order backlog. That will add some sting to the A350 supply chain ecosystem.
According to the WSJ, Emirates is the most influential buyer of Boeing’s 777 and Airbus’s A380 super jumbo aircraft. In November, Emirates boosted its A380 order commitment to 140 aircraft.
The order cancellation also effects engine provider Rolls Royce who indicated that its order book would fall by about 3.5 percent or $4.4 billion as a result of the Emirates decision.
UPS Appoints New CEO and Other Senior Management Changes
Earlier this month, UPS announced that David Abney, currently the company’s Chief Operating Officer, will be the transportation provider’s new Chief Executive Officer. Scott Davis, who has served as the company’s Chairman of the Board and CEO since 2008, will retire from UPS and will assume the role of non-executive Chairman. Both appointments are effective September 1, 2014.
In conjunction with the appointment of a new CEO from the ranks, UPS announced further senior management appointments. Alan Gershenhorn was appointed Executive Vice President and the company’s first Chief Commercial Officer, effective immediately. Gershenhorn will lead development and implementation of broad strategic growth and innovation initiatives focused on creating distinctive customer value. These include new market development, innovative future products and solutions, increased speed-to-market and stronger customer engagement across the entire UPS portfolio. Gershenhorn, a 35-year UPS veteran, previously served as chief sales, marketing and strategy officer.
UPS also announced the addition of Kate Gutmann to lead the provider’s global sales solutions and customer engagement strategy. Her new role as Senior Vice President of Worldwide Sales and Solutions was created to further market penetration through broader customer relationships. Gutmann is a 24 year UPS veteran.
Mitch Nichols, a 27-year UPS veteran and current president of UPS Airlines, was promoted to a newly created position on the Management Committee as Senior Vice President of Transportation and Engineering. His responsibilities will include UPS Airlines, transportation, engineering and sustainability.
Brendan Canavan, currently president of UPS Asia Pacific, will replace Nichols as president of UPS Airlines. Nando Cesarone, a 24-year UPS veteran, was promoted to President of UPS Asia Pacific.
Rhonda Clark will become the company’s Chief Sustainability Officer (CSO). Amy Whitley was named as the company’s first Chief Diversity & Inclusion Officer. Whitley will oversee global strategies to ensure that UPS leverages the talents and unique perspectives of a diverse workforce. She will also serve as vice president overseeing strategic human resources programs.
Tesla Motors Releases its Patents to Industry Rivals
Tesla Motors announced that it is offering open access to its patents related to its electric car technology to other automotive providers. CEO Elon Musk indicated that the offer is intended to spur wider development of electric powered vehicles that currently only make-up less than one percent of the new car and truck market. BMW is already interested, confirming that it has met with Tesla to discuss the success of electro-mobility on the international level.
Musk hinted at another reason for this announcement. Readers will recall tesla’s bold announcement to build a “gigafactory” in the U.S. to produce the company’s smaller battery packs for the industry. A sharing of Tesla developed IP can insure that the planned U.S. battery factory can be a potential supplier for other manufacturers.
Kinaxis Completes its IPO
Supply chain planning technology provider Kinaxis announced that it has completed its public offering of the company’s stock in Canada. Kinaxis issued 5,000,000 common shares and an aggregate of 2,739,715 common shares were sold by certain selling shareholders at a price of Cdn$13.00 per share. Canadian business media reports identified the selling shareholders as Boston based HarbourVest Partners and Alberta Trust of Montreal, both of which retain a 30 percent ownership stake.
The initial public offering and secondary offering resulted in aggregate gross proceeds of Cdn$65.0 million to Kinaxis and Cdn$35.6 million to the selling shareholders, for total aggregate gross proceeds of Cdn$100.6 million. Kinaxis’ common shares will be traded on the Toronto Stock Exchange under the symbol “KXS”.
Kinaxis CEO Doug Colbeth indicated to media that proceeds from the IPO will be utilized to pay down $30 million in debt and strengthen the company’s balance sheet. He did not rule out acquisition of other companies if that makes sense for Kinaxis’s business. Kinaxis reported a net loss of Cdn $9.7 million in 2013. In the first quarter of 2014, the company reported revenues of Cdn $15.6 million and a net income of Cdn $2 million.
There is recent news related to Boeing’s supply chain ecosystem. The aerospace and commercial aircraft manufacturer has announced that it has reached a preliminary agreement to extend partnership with a group of key Japan based suppliers to provide major structural components of the newly planned 777x aircraft. These suppliers provide major structural components such as fuselage sections, wings, and other components. They include:
- Mitsubishi Heavy Industries Ltd.
- Kawasaki Heavy Industries Ltd.
- Fuji Heavy Industries Ltd.
- Shinmaywa Industries Ltd.
- Nippi Corp.
Many of these same suppliers also support Boeing’s 787 Dreamliner program, thus outsourced component innovation and global supply chain sub-assembly is also being planned for the new 777x scheduled for delivery in 2020. As noted in a previous Supply Chain Matters commentary, Boeing has been pressuring suppliers on cost in setting up its supplier partnerships for the 777x program. The fact that Boeing is continuing with its core group of Japan based structural component providers provides evidence that these suppliers with monetize their cost and innovation activities over Boeing’s two largest commercial aircraft programs.
There is also news regarding the ongoing 787 program. U.S. and European regulators have now approved for commercial service, the largest 787-9 (Dash Nine) model version of the aircraft, those powered by Rolls Royce engines. This announcement paves the way for initial customer delivery to launch customer Air New Zealand and to satisfy a current backlog of 413 Dash Nines among 26 customers, accounting for 40 percent of all 787 orders. Approval for the Dash Nine version powered by General Electric engines is still pending.
The Dash Nine is designed to be 20 feet longer than the previous 787 models and can accommodate up to 290 passengers. It is designed for a cruising range of 8300 nautical miles on routes as long as 15 hours.
According to the Wall Street Journal, the Dash Nine was originally due to be delivered in 2010 but its development has been dramatically pushed back due to changes in design. The aircraft’s list price has risen more than 40 percent since it was first discussed in 2006.