There has been much reporting within social and business media regarding the potential industry supply chain disruptive effects of the recent massive warehouse explosions that affected the facilities adjacent to the Port of Tianjin.
It is rather important and crucial that industry supply chain and sales and operations team obtain meaningful and insightful information regarding what is happening on the ground as well as the potential short or long-term supply chain impacts, if any.
We at Supply Chain Matters are disappointed to observe that certain technology and service providers are attempting to utilize this tragic incident as a backdrop to product marketing outreach campaigns. Neither should technology providers suddenly become news outlets.
Not good ideas by our lens.
Supply chain technology providers should instead continue to educate on the benefits of the technology they provide and allow industry supply chain teams to receive clear, unfiltered and unbiased insights and information from informed and educated sources.
One of the better Tianjin perspectives Supply Chain Matters has reviewed to-date ia a published white paper: The Aftermath of the Tianjin Explosions: A Global Supply Chain Impact Analysis, authored by supply chain risk management provider Resilinc.
While this 24 page white paper does include some product marketing, along with requiring registration, the bulk of the report provides meaningful and insightful information related to potential immediate, near-term, medium and longer term supply chain impacts.
The paper concludes that the less apparent ripple effects of the warehouse explosions will be felt weeks, months and even years to come.
The paper provides meaningful background information regarding this vital logistics and manufacturing hub, which services industry needs of automotive, commercial aerospace, high-tech, petrochemical and general industrial manufacturing supply chains, among others. It further outlines important mapping of industrial manufacturing and supplier concentrations within close proximity of the explosions, based on a mapping of over 30 sites in a 2-10 mile radius of the blast. Four large industrial zone districts are adjacent to the port, with the port serving as what is described as the largest free trade zone in northern China, and the second largest Vehicle Processing Center for importing and exporting of automobiles.
On the topic of near-term ripple effects, the Resilinc analysis predicts that extensive delays can be expected for most companies and sites moving products through Chinese ports as government agencies deal with the after-effects of a regulatory environment needing extra attention.
There are predictions that Tianjin port operations will only begin to resume normal operations by approximately mid-September, and that any containers now at the port will be inaccessible for the next two months, even if they are intact. Resilinc indicates that for any suppliers located within 2-15 miles of the explosions, companies may presume 12-16 weeks of delays.
Long-term impacts outlined related to the ripple effects of increased regulatory actions impacting certain industry sectors including the location and storage of goods near large population centers.
Regarding potential long-term impacts, the paper cites Chinese media as indicating the economic cost of Tianjin crisis could be as high as $8 billion.
If your organization is dependent on operations, logistics partners, suppliers or service providers in the Tianjin area, we recommend you review this report which can be accessed at the following Resilinc web link. (Some personal registration information required)
Many observers of commercial aerospace supply chains including Supply Chain Matters were anticipating forms of supply disruption and now we have a visible indication.
The Wall Street Journal reported today (paid subscription required) that a key supplier within Boeing’s 737 MAX program is wrestling with production ramp-up supply issues related to an engine thrust reverser. Difficulties in consistently manufacturing this part are apparently been flagged by Boeing as a significant development challenge for its commercial aircraft business.
According to the report, supplier GKN PLC will not be able to produce quantities of the new engine thrust reverser to support the ramp-up production needs of the newest version 737 MAX.
The problem is associated with the inner wall of the thrust reverser which is composed of a honeycomb titanium design to fit both size restrictions and withstand rather high engine temperatures. Key supplier Spirit AeroSystems transferred responsibility for working with component supplier GKN back to Boeing, because of the technical challenges.
The fact that volume production of the new thrust reverser is being flagged two years before planned first customer ship scheduled for 2017 is a good sign. However, as the article points out, initial prototype production is already underway including the wings, fuselage and new dedicated assembly line.
Boeing currently has firm orders for over 2800 of the new 737 MAX with plans to raise all models of 737 production volumes to 47 per month in 2017 and 52 per month in 2018. The 737 serves as the prime profitability engine for Boeing’s commercial business, hence it garners lots of attention.
The report indicates that Boeing executives have acknowledged the supplier and design challenge but indicate confidence that adequate resources and attention are being applied. A GKN spokeswoman declined comment to the WSJ and referred the question back to Boeing.
More than likely, there will be more supply challenges flagged for both Boeing and Airbus as each manufacturer strives to ramp-up production to unprecedented levels over the coming months and years. As always, the question will remain how each manufacturer responds to these challenges and proactively works with suppliers and design teams to resolve challenges on a timely basis.
While Supply Chain Matters continues on its last week of summer break, news developments impacting various industry and global supply chains obviously continue. These past few days, we have noted three significant news items worthy of brief mention.
The first is a major acquisition involving a precision parts manufacturer. The second is China’s sudden de-valuation of its currency. Finally and perhaps with more news forthcoming, are the severe floods and storm damage caused by the typhoon that struck Taiwan and coastal China. A follow-on commentary will delve into the latter two developments.
Berkshire Hathaway’s announced acquisition of Precision Castparts, a prominent manufacturer supporting both aerospace and energy generation supply chains has implications for aerospace supply chains. The approximate $37.2 billion acquisition places Warren Buffet’s investment firm again center stage in investing in a well-respected manufacturer with strategic implications. In the case of Precision Castparts, nearly two-thirds of current revenues are derived from supply arrangements within the aerospace industry. These include precision components supplied to both Airbus and Boeing as well as turbine fans supplied to major aircraft engine producers.
Berkshire has had a track record of strategic investments involving broader supply chain implications. In 2010, the firm acquired the BNSF railroad in the United States amid initial speculation as to why. We all later discovered the why was the subsequent boom in share-oil discoveries across the Western United States which led to an explosive need for rail tank car transportation requirements to move crude oil to oil refineries located among the U,S. Gulf and East Coast ports. In this latest investment, speculation is ripe that Berkshire is now looking to leverage the multi-year order backlogs and production boom involving new commercial aircraft orders. Supply Chain Matters has featured multiple commentaries related to the industry’s opportunities as well as potential threats.
There is already Wall Street speculation involving further bolt-on acquisitions involving additional aerospace component suppliers.
Supply Chain Matters will provide more in-depth analysis of this development later this month. Suffice to note that we believe this news is noteworthy and bears additional observation.
Thirteen months ago, Supply Chain Matters called reader attention to the news that Boeing had reached a preliminary agreement to extend partnerships 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, and they involve parent companies Japan Aircraft Industries (JAI) and Japan Aircraft Development Corporation (JADC). Individual suppliers include:
Mitsubishi Heavy Industries Ltd.
Kawasaki Heavy Industries Ltd.
Fuji Heavy Industries Ltd.
ShinMaywa Industries Ltd.
Boeing has now announced that it has signed a formal agreement with these key strategic suppliers , which in aggregate will supply upwards of 21 percent of the major aircraft structure components for the planned new 777x model. The contract includes fuselage sections; center wing sections; pressure bulkhead; main landing gear wells; passenger, cargo and main landing gear doors; wing components and wing-body fairings.
In the Boeing press release, Boeing’s Vice President and GM of Supplier Management praises these Japanese partners for their commitment for working on the affordability goals associated to the 777X program. Judging on the interval of an entire year being required to finalize the supply agreement, we can all speculate on the back and forth negotiations. The JADC Chairmen and KHI President indicates in the release that the agreement involves investing in new facilities and introducing robotic and other automated systems. That may be the source of the negotiations and evolving production strategy.
Boeing notes that it has partnered with Japan based aerospace providers for nearly five decades, and that in 2014 alone, the company purchased more than $5 billion in goods and services. With the new supply agreement in-place, Boeing indicates it expects to purchase $36 billion of goods and services from Japan between 2014 and the end of the decade. From our lens, such a relationship is a testament to joint product design, component and production process innovation.
Teams have different definitions and context as to what may be termed strategic supplier. An overall spend of $5-$6 billion per year certainly qualifies for such a context.
Our newsletter is a more insightful look at global supply chain and B2B/B2C business process, technology and other important trends and is offered to both readers of this blog and clients of our consulting and industry analyst advisory services. Please check your inbox to insure you received a copy.
The Q2-2015 Newsletter includes the following updates and industry supply chain event implications:
- Q2 quantitative and qualitative highlight summaries of global PMI supply chain indices indicating more moderation and slowdown within emerging regions.
- Commercial Aerospace industry assesses supply chain ramp-up realities.
- Confirmed turbulence in global transportation.
- Continued crisis for Consumer Products and Food based supply chains.
If you would like a copy of our latest Q2 newsletter, please send an email with the title Newsletter Request to: newsletter <at> supply-chain-matters <dot> com. Please remember to include your Name, Role and/or company with your email address and we will have a copy sent directly as well as automatically add your email to future distribution.
Bob Ferrari, Founder and Executive Editor
In 2012, The Economist described the dawn of the Third Industrial Revolution, an era that would feature the digitization of manufacturing and the use of new, stronger and more innovative composite materials. And indeed, that trend continues at a rapid pace. Competing in this new era requires manufacturers to invest in new technologies that can provide both product as well as process innovation. General Electric, through its GE Reports series, recently highlighted its billion dollar bet on ceramic super material as a basis of product innovation.
Ceramics has been utilized for many years for certain power and electrical based applications mostly used in kitchen appliances. A visionary GE engineer however, believed that ceramics, which can withstand higher heat than even the most advanced alloys, could be the perfect material for jet engines and other machines that burn fuel and must handle enormous temperatures. Nearly 30 years later, along with nearly $1billion in research investment, components made from ceramic matrix composites (CMC’s) are being incorporated in the next generation of aircraft engines such as CFM International’s LEAP model that will power the upcoming Airbus A320 neo (new engine option) aircraft. The concept of a new and highly more fuel efficient upgrade of the A320, with a shorter new product development time, was prompted by these newer innovations in aircraft engine technologies.
According to the GE report, unlike other alloys, CMC components weigh one-third the weight of metal and do not need to be air-cooled. A GE Research leader indicates: “CMC’s allow for revolutionary change in jet engine design.” This was a tremendous bet on innovation. Now, aerospace, military and industrial customers may soon experience aircraft, helicopters and industrial turbines made from more CMC material based components providing lighter weight higher performance and operational savings.
However, not all suppliers have the deep pockets of global-based manufacturer such as GE. Suppliers that currently exist in commercial aerospace supply chains experience constant cost-control pressures from respective aerospace producers seeking to improve product margins or overcome prior expensive aircraft program delays. Even now, as both Airbus and Boeing are planning for significant production volume ramp-up, there still remains the perspective of who pays for innovation, and who reaps the overall benefit.
So what is the key difference for GE and its joint partners, Italian based Turbocoating, France based Snecma. That difference is that airlines negotiate and contract for aircraft engines directly with engine manufacturers. These manufacturers can translate investments in innovation to bottom line financial outcomes. CFM International has thus far booked orders for 9550 LEAP engines valued at $134 billion at list prices. The margins achieved from this amount of orders are under the direct control of the aircraft engine manufacturers themselves, a benefit that the majority of other aerospace suppliers do not have.
From our lens, the takeaway is twofold. Manufacturers ultimately own the responsibility for overall product design innovation. It is not a task delegated to key suppliers without joint compensation. Several years ago, the industry embarked on a strategy of de-centralized innovation and cost-sharing, one that required key component suppliers to innovate in product and process dimensions but not necessarily harvest the benefits from longer-term production volumes. Principle aircraft manufacturers are investing heavily in final assembly process and test automation, yet seek to offset program costs within other areas of the supply chain.
Much continues to be written on the lessons learned by that strategy, particularly those related to design and cost implications. Now, as the industry faces its toughest test in terms of supply chain ramp-up, suppliers seek due compensation for their innovation efforts. Suppliers must also answer to investors who have a shorter-term horizon.
The Third Industrial Revolution will continue to lead to breakthroughs in many dimensions, and to a new breed of more agile, market responsive manufacturers. The notions of who owns and who is rewarded for innovation will be front and center in this race to the top and will lead to a return to vertical integration supply based strategies.
The manufacturing leaders of tomorrow will be those that master the risk and reward dimensions of product and process innovation.