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 updates:
Google and Barnes and Noble Partner to Take on Amazon
Earlier in the week, the New York Times reported (tiered subscription) that Google and Barnes and Noble are joining forces on for fast, cheap delivery of books. According to the report, buyers in Manhattan, West Los Angeles and San Francisco Bay locales will be able to get same-day delivery of books from local Barnes and Noble retail stores via Google Shopping Express, beginning this week. The effort is billed as a competitive response to Amazon’s same-day delivery services.
Google Shopping Express already allows online shoppers to order products from 19 retailers including Costco, Walgreens, Staples and Target and secure same-day delivery. As noted in a previous Supply Chain Matters News Capsule, the Google Shopping Express strategy is to become an ally and complement a retailer’s local brick and mortar presence, relying on inventory from local retail outlets rather than the deployment of a larger network of fulfillment centers.
Airbus Completes Test Trials of the A350
Airbus completed the route-proving certification phase for operational testing of its new A350-900 model commercial; aircraft, approximately two months after completing the maiden flight of this aircraft. During this completed phase, engineers had to demonstrate to safety and regulatory agencies that the aircraft is ready for commercial service. A Vice president in charge of flight testing for Airbus declared; “The airplane is perfectly fit to go into service tomorrow.” The A350 was designed to compete against the current operational 787 Dreamliner and the 777 aircraft. Bookings for the A350 have surpassed more than 700 aircraft.
It has been noted that 7000 engineers worked on the development of the A350, with roughly half of these engineers stemming from key suppliers. Important learnings have included the need for a singular Product Lifecycle Management (PLM) software system, creating a single electronic rendering of an aircraft that every program engineer can reference or modify when needed.
Administrative reporting to various agencies remains a milestone before this aircraft can be officially certified for commercial use. Meanwhile, the Airbus supply chain ecosystem continues preparations and scaling to support planned production levels of 10 A350’s per month by 2018.
Boeing to Make Additional Cost Cuts from Defense Focused Supply Chain
Supply Chain Matters has posted numerous commentaries related to Boeing’s commercial aircraft focused supply chain ecosystem, faced with a dual challenge of having upwards of 8-10 years of customer order backlogs while continually being challenged to reduce costs.
Boeing’s defense businesses have a far different problem. Cutbacks in military and government spending programs have led to declining business, and a supply chain oriented to engineer-to-order specialized aircraft and spare parts. Early this week the head of Boeing’s defense, space and security business unit called for an additional $2 billion in cost cutting, two-thirds of which is being targeted among suppliers. Boeing has already cut $4 billion in spending related to its defense businesses. The unit chief called on suppliers to note efficiencies that have been gained in Boeing’s commercial aircraft programs.
Hewlett Packard Announces Smaller, Less Costly Cloud Platform
Hewlett Packard announced what it is communicating as a less costly cloud based IT platform under the Helion brand name.
Helion Managed Virtual Private Cloud Lean is being targeted for use by small and medium sized businesses looking to move applications development, software testing and workplace collaboration onto a Infrastructure as a Service platform. According to HP’s announcement, the new service offering can further provide services around SAP’s HANA in-memory systems.
With the new service offering, HP’s goal is to provide the same level of large enterprise services but at a lower-priced alternative. Pricing for this announced service is noted as $168 per month for a small virtual service configuration. A pilot trial service also is available for customers who want to certify an application to run in the cloud with the full support of the HP team.
U.S. Job Openings at a Thirteen Year High
Talent management, retention and skills development has been a constant theme among supply chain management forums and indeed many Supply Chain Matters commentaries. Executives and team leaders constantly lament on how difficult it is to find people with the right level of skills. Current forces of supply and demand in the U.S. labor market are not going to help in overcoming this challenge.
The number of job openings across the U.S. reached a 13-year high in June with U.S. employers announcing 4.7 million job openings. Reports indicate that employers additionally hired 4.8 million workers in June; an indication that the U.S. labor market is showing new momentum. With this increased level of hiring activity, existing workers have showed increasing willingness to seek other opportunities, given the level of new opportunities. A reported 2.53 million U.S. workers quit their jobs in June, up from 2.49 million in May.
Commercial aerospace and aircraft producer Boeing has recently initiated some supply chain risk mitigation and strategic sourcing moves which demonstrate responses to important business needs.
Many headlines of late report on the continuing tensions among Russia and the United States concerning ongoing events in the Ukraine. Today’s Wall Street Journal reports (paid subscription or metered view) that certain aerospace manufacturers, namely Boeing and United Technologies, have been augmenting safety stock supplies of titanium, a critical material utilized in the fabrication of critical aircraft components. One of the world’s largest producers of this material is VSMPO-Avisma, which has a parent company with direct ties to the government of Russia. VSMPO is reported as supplying upwards of 30 percent of the total volume requirements used in the aerospace industry each year. Ukraine, currently involved in political and social unrest, provides almost all of the concentrates used by VSMPO. The combination of severe economic sanctions being placed on the Russian economy and the unrest in Ukraine has logically prompted concerns about the continuity of titanium supply.
In its reporting, the WSJ cites sources as indicating that Boeing and UA have been stockpiling as much as six months of safety stock supply of highly customized titanium forgings, which are supplied by a single provider such as VSMPO. Boeing confirmed to the WSJ the existence of the strategic reserves from its Russian supplier, with the material accounting for 15 percent of the airframe weight of the Boeing 787 Dreamliner. UA utilizes the subject titanium forgings to produce landing gears for Boeing and other producers, as well aircraft engine components for its Pratt & Whitney division. VSMPO further confirmed that customers had placed buffers in place as part of their risk management planning and that customers would go back to buying as needed for standard production. The WSJ further reports that Airbus has not acknowledged a safety stock strategy for titanium forgings.
Inventory management strategies are often a flash point among discussions involving supply chain planners and finance. However, insuring continuity of strategic supply components can be a far different dialogue. Supply Chain Matters has made note of other previous decisions made within industry supply chains to insure strategic continuity of supply when significant risk conditions are present.
South Carolina Facility Tapped
Electing to further dual source production, Boeing announced that the largest to date Dreamliner model, the 787-10 aircraft, scheduled for market delivery in 2018, will be built solely within the company’s non-union production assembly facility in North Charleston South Carolina. Statements to business and general media indicate that the sourcing decision was prompted by the stretched length of the aircraft’s fuselage. The suppliers of this 114 foot long stretch fuselage are within Italy and Japan, and normally the fuselage components are flown in on a special fitted Boeing-owned 747 Dreamlifter cargo plane. Boeing indicates that the elongated fuselage components required for the 787-10 will not fit the existing cargo aircraft.
Regarding the South Carolina sourcing decision, a published report by the Seattle Times reports: “It makes clearer the profound impact of Boeing’s 2009 decision to bypass its unionized stronghold in Washington in favor of building a second 787 assembly line in nonunion South Carolina. In six years, Dreamliner final assembly will be equally divided between the East and West Coast sites.” The Times report further notes: “So by the end of the decade, the prospect for Boeing widebody-jet production is that North Charleston and Everett will each be rolling out seven Dreamliners per month, while Everett will in addition be producing up to eight 777s per month, plus two 767 tankers for the Air Force.”
Meanwhile, a labor union among Boeing’s Everett Washington production facilities were naturally not pleased with the sourcing decision, indicating that while not surprised, they were certainly disappointed in the final decision.
Reports indicate that the Everett facility will continue to sustain a production level of seven Dreamliners per month while the North Charleston facility will ramp-up from three aircraft per-month today, to five in 2016 and seven by the end of the decade. According to Boeing, both production facilities will have similar production practices and standards.
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.