While industry supply chain teams continue efforts in achieving their various 2015 strategic, tactical, and operational line-of-business business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.
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. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year. After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.
As has been our custom, our scoring process will be 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 the initial posting of this Predictions Score Card series, we looked back at both Prediction One- global supply chain activity during the year, and Prediction Two- trends in overall commodity and supply chain inbound costs. In our Part Two posting, we revisited Prediction Three- the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four- wide multi-industry interest in Internet of Things.
We focus this commentary on our prediction for industry specific supply chain challenges.
2015 Predictive Five: Noted Industry Supply Chain Challenges
Self-Rating: 3.5 (Max Score 4.0)
Our prediction called for specific supply chain challenges in B2C-Retail, Aerospace and Consumer Product Goods (CPG) sectors. Additionally, we felt that Automotive manufacturers would have to address continued shifting trends in global market demand and a renewed imperative for corporate-wide product and vehicle platform quality conformance measures while Pharmaceutical and Drug supply chains needed to respond to added regulatory challenges in 2015.
B2C and Retail
In 2015, global retailers indeed were challenged in emerging and traditional markets and in permanent shifts in consumer shopping behaviors. Consumers remained merciless in their online shopping patterns seeking value and convenience. The price tag of the U.S. West Coast Port disruption was pegged at upwards of $5 billion for the industry and the inventory overhang effects remain as we enter this year’s holiday surge period. In August, we contrasted the financial results of both Wal-Mart and Target that presented different perspectives on the importance of integrated brick and mortar and online merchandising strategies and strong, collaborative supplier relationships. Both of these retailer’s performance numbers pointed to an industry that continues to struggle with balancing investments in both online and in-store operations and a realization that significant change has impacted retail supply chains.
A stunning announcement during the year was the October announcement from Yum Brands that after a retail presence since 1987, the firm will split-off all of its China based Kentucky Fried Chicken, Taco Bell and Pizza Hut restaurant outlets into a separate publicly traded franchisee based company. The move came to insulate the company from the turbulence that has beset its China operations from food-safety scares, stronger competition and Yum’s own operating missteps, which provide important learning for other retailers. Other general merchandise retailers continue to struggle with the inherent challenges of China’ retail sector, especially in the light of a possible contraction in China’s economic climate. Global current shifts have further dampened global retailer attempts to gain additional growth from emerging market regions.
Amazon, Google and Alibaba continued their efforts as industry disruptors with Alibaba setting a new benchmark in one-day online sales volume, processing and fulfilling upwards of $14.3 billion in online sales during the 2015 Singles Day shopping event across China. Last year, online retailers acquired important learning on the higher costs associated with fulfillment of online orders, which will be crucial in managing profitability during this year’s holiday surge period.
Consumer Product Goods
Consumer’s distrust of “Big Food” continued front and center this year. We predicted that the heightened influence and actions of short-term focused activist equity investors, applying dimensions of financial engineering or consolidation pressures among one or more CPG companies would continue to have special impacts on consumer goods industry supply chains with added, more troublesome cost reduction and consolidation efforts dominating organizational energy and performance objectives. The year has featured quite a lot of consolidation and M&A activity as larger CPG producers attempted to buy into smaller, health oriented growth segments. One of the biggest announcements that rocked the industry was the March announcement that H.J Heinz would merge with Kraft Foods, orchestrated by 3G capital and financed in-part by Berkshire Hathaway. In a article, The War on Big Food, published by Fortune in June, a former Con Agra executive who now runs a natural foods company is quoted: “I’ve been doing this for 37 years and this is the most dynamic disruptive and transformational time that I’ve seen in my career.”
Indeed, the winners or survivors in CPG will be those more nimble producers who can lead in product innovation, satisfying consumer needs for healthier, more sustainably based foods, while fostering continuous supply chain business process and technology innovation. This industry will remain challenged in 2016.
Our prediction was that Industry dominants Airbus and Boeing and their respective supply ecosystems will continue to be challenged with the needs for dramatically stepping-up to make a dent in multi-year order backlogs and in increasing the delivery pace for completed aircraft. Dramatically lower costs of jet fuel that were expected in 2015 would likely present the unique challenges of airline customers easing off on delivery scheduling, but at the same time insuring their competitors do not garner strategic cost advantages in deployment of newer, more fuel efficient and technology laden aircraft. These predictions indeed transpired and both aerospace dominants have now announced aggressive plans to ramp-up supply chain delivery cadence programs over the next 3-4 years for major new commercial aircraft programs. The lower cost of jet fuel indeed motivated some airlines to adjust or postpone certain aircraft delivery agreements but not in significant numbers. The other significant industry development was the continued struggles of Bombardier in its efforts to deliver its C-Series single aisle aircraft to the market, which could have provided an alternative for certain airlines. This aircraft producer recently sought a $1 billion loan from Canadian governmental agencies in order to sustain its development and market delivery efforts and complete C-Series global certification sometime in 2016.
We predicted that Middle East and Asian based airlines and leasing operators will continue to influence market dynamics and aircraft design needs and that indeed occurred. Emirates, Ethiad and Qatar clashed with American, Delta and United over the future of international air travel, competing aggressively with large fleets of new, lavishly appointed jets and award-winning service. But the US legacy carriers believe that competition with the Middle Eastern carriers has become inherently unbalanced with large government subsidies to fund such investments. Emirates is now the world’s largest operator of both the Airbus A380 superjumbo and the Boeing 777-300ER and continues to pit both Airbus and Boeing on developing newer long-haul, technological advanced aircraft, while other carriers seek faster delivery of more efficient single-aisle aircraft to service growing air travel needs among emerging markets.
Supply issues did manifest themselves in 2015 with reports of under-performance in the delivery of upscale airline seating, the continuous supply of titanium metals, and the effects of the massive warehouse explosions near Tianjin China. However, most were overcome.
At the time of prediction in December of 2014, an unprecedented and overwhelming level of product recall activity was occurring across the U.S. This was spurred by heightened regulatory compliance pressures, driving product quality and compliance as the overarching corporate-wide imperative. At the time, a New York Times article cited that about 700 individual recall announcements involving more than 60 million motor vehicles had occurred in the U.S. alone in 2014. Indeed General Motors and other global brands remained under the regulatory looking glass throughout 2015 and the one dominant issue remained defective air bag inflators. We predicted that supplier Takata would continue to deal with its ongoing quality creditability crisis and indeed in November, long-standing partner Honda announced that it would sever its relationship with the Japan based air bag inflator supplier.
While we predicted that GM would especially be under the regulatory looking glass in 2015, the big surprise turned out to be Volkswagen and the ongoing crisis involving the installation of software to circumvent air pollution standards in its automotive diesel engines. This crisis is still unfolding with implications that could amount to potentially billions of dollars, not to mention a severe credibility jolt to the Volkswagen name in the U.S. and globally. We may have erred on this particular prediction, but who would know that such a development would have such far-reaching global implications for product design and regulatory compliance for the entire industry.
Finally, China’s auto market was expected to grow by 6 percent or 20 million vehicles in 2015. However, economic events over the past few months and a far more concerned Chinese consumer may well mute such growth and market expectations. In November, GM announced that it would import a Chinese manufactured SUV sometime in 2016, the first to enter the U.S. market.
In our next posting in our look back on 2015, we will review Predictions Six through Eight
In the meantime, feel free to add to our dialogue by sharing your own impressions and insights regarding these specific industry challenges in 2015.
This is a follow-up to an August Supply Chain Matters commentary highlighting a published report indicating that a key component part production scalability problem had been identified on the Boeing 737 MAX development program. At the time, The Wall Street Journal had reported that that a key supplier within Boeing’s 737 MAX program, United Kingdom based GKN PLC, was challenged with production ramp-up supply issues related to an engine thrust reverser on this new aircraft. Difficulties in use of an advanced titanium based material and consistency in manufacturing output volume were reportedly flagged by Boeing as a significant development challenge for its commercial aircraft business. However, at the time, Boeing indicated every confidence that GKN would be up to the task of volume production.
This week, the WSJ reported that nearly three months later, Boeing has now canceled its engine thrust reverser supply contract with GKN. Further reported was that a change in the component part design that would more readily support high ramp-up volumes of production was underway. A Boeing spokesperson indicated: “We made this decision to ensure we have a product that is not only maintainable and reliable but is producible at the high production rates of the 737 program.”
With a current order backlog approaching 3000 aircraft, Boeing must meet its time-to-market output objectives. It further appears that Boeing has translated learning from the 787 Dreamliner program where advanced technology, such as the lithium ion batteries led to aircraft groundings and production delays, and volume production of composite carbon fiber airframe components led to overall program delays. Instead, it would appear that Boeing is taking precise actions to readily identify design for supply chain challenges as quickly as possible.
As we noted in August, the fact that the design of the new thrust reverser was flagged for production volume capability assessment, two years before planned first customer ship, is indeed a good sign of proactive and decisive program management.
Last week provided an important milestone for China’s commercial aircraft sector. China’s first single-aisle commercial jetliner, the C919 rolled-off its prototype production line at an unveiling ceremony that included a reported 4000 government officials, aviation executives and other invited guests held at Pudong International Airport near Shanghai.
The C919 was developed by state-owned Commercial Aircraft Corp. of China (Comac) and was originally unveiled in 2006. Supply Chain Matters initially called reader attention to this program in 2010. The C919 program is very significant since it represents China’s efforts to be recognized as a competitive global manufacturer of commercial single-aisle aircraft. A short video of the unveiling ceremony can be viewed at the UK’s The Telegraph reporting web site.
China represents one of the biggest global aviation markets but has seen Boeing and Airbus aircraft models compete and deploy among various China based airlines. The multibillion-dollar effort to create a homegrown jetliner is aimed at clawing back some of the commercial benefits that flow to foreign providers. However, with its maiden flight scheduled for next year and at least another three years of test flights, it will take some time before the single-aisle jet can fly commercial air routes across China and globally.
Versions of C919 can seat 158 to 174 passengers with a standard range of upwards of 4,075 kilometers. Its current supply chain consists of more than 30 foreign firms including CFM International, Honeywell and Rockwell Collins who have supplied key components. Thus the program must rely on key foreign-based technology, including composite materials, in its current value-chain. According to China’s Xinhua News Agency, upwards of 12 percent of the C919 airframe include advanced composite materials.The significance of the reliance on the existing global supply chain is even more significant given that when this aircraft reaches full certification and production release, aerospace supply chain will have reached unprecedented and untested levels of monthly production output.
Comac indicates that it has booked 517 orders from 21 foreign and domestic customers for the C919.
According to business media reports, both Airbus and Boeing extended congratulations to Comac and welcomed new competition in their markets. When the C919 does enter commercial service, it will likely be competing with the newest versions of the Airbus A320 neo and Boeing 737 Max aircraft models possibly placing the aircraft at a competitive disadvantage. But, as a state-owned company, Comac will surely garner purchasing influence among China’s domestic air carriers.
The C919 truly represents China’s efforts to be recognized as a viable player in commercial aircraft design and manufacturing, and as such, this is an important program to watch in the coming years.
In late May, Supply Chain Matters noted that commercial aircraft producer Airbus, in response to increased orders, was actively evaluating a further ramping-up of its A320 family production volume cadence. In February, the stated plan called for increasing monthly production from the current 42 to 50 aircraft per month by early 2017. However, evaluation was underway to assess if the global supply chain could support a ramp to 60 aircraft per month.
Late last week, the company formally announced that it would indeed increase the A320 production rate to 60 aircraft per month by the middle of 2019. To further enable this ramp-up, Airbus will extend an additional production line at its Hamburg Germany manufacturing facility, as well as harmonize some production processes at its Toulouse France facility. As of September, Airbus reported backlog orders for the single-aisle A320 aircraft family amounting to 5502 aircraft.
While Airbus scrutinized suppliers for ability to support such a plan, there are still concerns regarding CFM International, the joint venture among General Electric and Safran SA, which is a major supplier for its new LEAP family of advanced aircraft engines for both Airbus and rival Boeing. As of September, nearly 4300 of Airbus backlogged orders were designated for the A320neo (new-engine option) model, powered by the new CFM LEAP engines.
During the summer, company management publically expressed concern about each OEM’s aggressive ramp-up schedules. Through September, CFM had booked orders for 9550 LEAP engines. If one were to conservatively assume that this backlog was spread out over the next eight years, CFM would have to sustain an average production rate of nearly 100 engines per month. The reality of order and delivery timing skew would likely make that monthly volume number higher. That is quite a challenge, one that obviously requires a significant investment in resources, capacity and consistent quality focused processes.
As Supply Chain Matters has previously noted, the realities of multi-year order backlogs are now reaching the point of all-in commitment. These are record-breaking production volumes and massive scale that this industry has never experienced at a regional or global-wide perspective. Technology will play a critical role along with people, since the aerospace industry is facing the same reality of highly experienced older employees about to retire. Processes, systems, risk mitigation, talent and supplier management practices are sure to be tested in the continuing journey that is unfolding.
In previous Supply Chain Matters postings, we have called attention to metals and components supplier Alcoa. In September of 2014 we highlighted the announcement of Alcoa’s long-term strategic agreement with Boeing’s commercial aircraft unit. Our March 2015 commentary further highlighted this supplier’s strategic positioning within commercial aircraft and aerospace supply chains, and our September commentary noted how product innovation efforts have begun to pay off.
This week features the news that Alcoa has signed a $1 billion deal to supply aircraft components such as bolts, rivets and other specialty fasteners with Airbus. Alcoa classifies this deal as its largest deal for aerospace fastening systems with Airbus.
According to published reports, the parts are to be fabricated from titanium, steel and nickel-based alloys utilized in newer Airbus aircraft models such as the A350, the A320 neo, and the A330. The components were designed to withstand extreme operating conditions and be more resistant to wear.
Once again, Alcoa has characterized these new fastener components as having “breakthrough technology for some of the most advanced aircraft in the world.” Of further significance, these specialty parts that Alcoa has developed are normally provided by niche specialty metal suppliers catering to the aerospace sector.
According to a report from The Wall Street Journal, most of the work related to this new Airbus supply contract would be completed in California and a more than a dozen Alcoa world-wide sites.
Supply Chain Matters and other supply chain focused media has called specific attention to the current wave of mergers and acquisitions impacting the global logistics sector. Yet, it is quite important that supply chain leaders pay close attention to the motivations of such actions, as well as the implications related to providing more one-stop services. Incorporating a logistics provider as an extension of complex and often changing supply chain business processes comes with an expectation that such a provider has the asset, process and technology enabled capabilities that can accomplish the job and meet operational milestones and performance measures.
The Wall Street Journal recently noted that there have been 10 major acquisition deals totaling $18 billion since early 2014. The most notable have been the recent XPO Logistics acquisition of Conway Way, FedEx’s acquisition of GENCO and Bongo International as well as TNT Express, and UPS’s acquisition of Coyote Logistics. Once more, there are strong indications that this trend will continue.
The primary reasons are that globalization, increased process complexity and impacts of online and Omni-channel fulfillment are motivating more and more firms to seek one-stop services or to outsource various value-added logistics processes. In essence, the third-party logistics (3PL) logistics business model is fundamentally moving toward the termed fourth-party logistics (4PL) model. Many supply chain and logistics professionals recognize the 4PL model as one that provides an extension of the customer’s current business process needs, including the integration of information and technology systems. However, the misnomer is that many 3PL’s who have shied from significant investments in technology and processes now look to acquisitions to quickly gain such capabilities.
But alas, the ability to be an extension of a customer’s business processes presents its own challenges, even for the largest and most savvy logistics providers.
The Wall Street Journal published a report indicating how aircraft jet-engine producer Pratt & Whitney’s production was stalled nearly a month because of issues at a UPS logistics center. (Paid subscription). Pratt had contracted with UPS to streamline its manufacturing processes and ramp-up production levels of its newly designed aircraft engine. Readers will recall that that Pratt’s new and more fuel efficient engine will power new aircraft models including the Airbus A320 neo. Pratt’s current customer booking stands at 7000 orders.
A UPS logistics center would receive parts from various Pratt engine suppliers and package them into kits holding 8000 parts and ship them to various final assembly production facilities. According to the report, the logistics center was beset with problems when it first opened in July that slowed Pratt assembly operations to a crawl. Kits were received with what was described as dirty, damaged or missing parts, prompting Pratt production workers scrounge among multiple kits to find a full complement.
Pratt and UPS quickly assembled dedicated teams to address these process start-up issues that included additional training as well glitches in inventory tracking software. The problems are now reported as resolved but Pratt’s production levels in August nearly came to a crawl.
Pratt’s parent is United Technologies and its CEO indicated to the WSJ: “It’s the ramp. The technology, I’m very confident we’ve got that right. But you’re only as good as your worst supplier. When you’ve got 8,000 parts in an engine, one of those parts aren’t there, you’re not building an engine.”
Pratt had turned to UPS to eliminate low-value work and avoid holding extensive inventory on its own books. The engine producer has a unionized work force and the WSJ report indicates that union members were not all that pleased with this new arrangement. Pratt transferred management of parts and inventory to an automated UPS warehouse system.
The Pratt story is somewhat of a typical example of what is currently driving the logistics industry today, along with the challenges for becoming the extension of an existing manufacturing, supply chain or customer fulfillment business process. The fact that a provider the size, scope and resources of UPS initially stumbled is indeed an indicator that beyond business growth through acquisition, the logistics industry has to concentrate on added technology and information integration capabilities.