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The Newest Phase for Elongated Supplier Payments- More Aggressive Supplier Push-Back

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Of late, the trend of extending payment terms to suppliers should not be any new news to many of our Supply Chain Matters readers since such practices continue to gain multi-industry momentum. Such momentum continues because private equity firms and high powered consultants in finance now advocate and practice this tactic as a means to boost earnings and operating cash flow.  However, what we view as an even more disturbing trend is current more aggressive efforts by suppliers to now push back by exercising whatever options they have, up to and including significant supply disruptions.

To ascertain the scope of the trend towards extending payments to suppliers, we exercised a Google search this morning on the term: News- suppliers not being paid. That search yielded and eye-popping 9.7 million item results, an obvious indication of industry-wide trending.

Just about a year ago, Bloomberg published an article: Big Companies Don’t Pay Their Bills on Time. The author, Justin Fox attributed the increased trend among large global companies to extend payments to suppliers to two principle influences. The first was Amazon, that being yet another aspect what we often describe as “the Amazon effect.”  In essence, the online retailer had a cash conversion cycle of negative 24 days in 2014, meaning the online retailer received cash from customers 24 days before it was paid out to suppliers. The other major influence was noted as Brazilian private-equity firm 3G Capital which has acquired well known consumer brands and operates primarily today as Anheuser-Busch InBev. A chart in the Bloomberg report indicates that since the acquisition of Anheuser in 2008, supplier payments stretched to near 260 days by 2014 with InBev on-average paying suppliers 176 days after the company was paid by customers. That is nearly six months of cash float.

Similarly, after previously attending this year’s Institute of Supply Management (ISM) annual conference, this author penned a blog commentary on a session where private equity firm representatives leveraged their stated tactic of operational intervention and improvement, namely concentration in procurement policies to harvest cash flow and margin savings.

The Bloomberg article further charts well-known names Procter and Gamble, Mondelez and Kimberly-Clark, who collectively have to now respond to 3G’s industry presence with the acquisition of both Heinz and Kraft. in the consumer-goods sector. By 2014, days payable outstanding for all three had grown to between 70 and 85 days.

And so the ripple effect of this trend continues offering the brand owner opportunities to leverage cash flows, product margins and profitability, while the ripple effects cascade down the to the remainder of the supply chain.

The open question now remains as to what are various industry norms for paying suppliers, and invariably, the principles of supplier survival and stakeholder interest come into play when such practices become more wide-spread. More and more, such incidents seem to be on the increase.

In early July, General Motors encountered a brief supply disruption over a contract dispute and bankruptcy filing from Clark-Cutler-McDermott Co. a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America. The supplier stopped producing parts for GM after work shifts on a Friday and laid off its workforce. Subsequently the supplier refused to grant GM access to any remaining inventory or production tools forcing GM layers to enter a legal process proceeding in bankruptcy court to gain rights to tooling and any leftover inventory.

In late July, avionics producer Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments and noted as a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. In its reporting, The Wall Street Journal observed that the industry relationship among Rockwell and Boeing was previously noted for positive collaboration in ongoing cost-control efforts resulting in Rockwell gaining additional supply contracts involving other produced commercial and military aircraft.

Similarly, British based GKN, a supplier of cabin windows, ice protection systems and winglets, openly called Boeing to task for extending supplier payments. Both Reuters and The Wall Street Journal had earlier reported that to boost its cash flows, Boeing was extending supplier payments from 30 days, too upwards of 120 days while at the same time continuing efforts to scale-up the supply chain to address upwards of ten years in booked orders.

Other noteworthy news related to supplier push have involved UK retailer Tesco as well as global  iron and steel producer Rio Tinto.

The most recent public incident of outright supply disruption is now Volkswagen dealing with the possibility of reduced working hours involving multiple German based final assembly plants resulting from a supplier dispute with two suppliers, Car Trim and ES Automobilguss. Car Trim reportedly supplies parts for seating and ES Automobilguss produces gearbox components for a variety of different VW car models. As of today, business media is reporting that negotiations are ongoing to resolve the matter after the suppliers cut component supply deliveries feeding four final assembly plants. The suppliers have denied responsibility for the situation, indicating that VW cancelled contracts without explanation or compensation and the decision to halt delivery was taken to protect their own workforces. As we pen this posting, upwards of 10,000 workers at VW’s main plant in Wolfsburg, Germany are close to being idled due to parts shortages. Both suppliers, which are part of holding company Prevent, have denied any responsibility in the pending supply disruption claiming that VW is responsible for creating its own supply crisis because of the lack of timely payments to suppliers and that the suppliers’ decisions were taken to protect their own workforces and financial health.

Thus we observe a common theme beginning to manifest across different industry supply chain settings, more aggressive supplier push-back to existing payment terms and the transfer of the burden of cash-flow.

In prior Supply Chain Matters postings, this Editor has not been very keen on such strategies namely because of the short and longer-term havoc imposed on supply chain capabilities and ongoing relationships. But, with the realities of the current business environment being what they are, and with so many firms now under the short-term professional looking glass, the elongated payment strategies extend, testing such relationships. This is obviously not healthy, and many other voices are beginning or have already concluded as-such.

Our prior advice to procurement professionals was essentially to be forewarned and prepared since those possessing or prepared with termed financial engineering skills can reap some short-term financial and other bonus rewards.

We now extend advice to the broader supply chain management leadership and operations management communities. If you have little choice but to exercise such strategies, best be prepared for the new consequences of supplier push back and potentially harmful supply disruptions and eroded supplier relationships.

The age old adage remains that long-term success is built on two-way, win-win relationships. An I win-you lose relationships helps lawyers to stay gainfully engaged and your supply chain to be in constant jeopardy. When times are good, such strategies can yield some benefits. When times are challenged, such as the 2008-2009 global recession, they often lead to massive supply disruptions or calls for mutual sacrifice from suppliers.  They further lead to missed opportunities for joint-collaboration on product and process innovation since suppliers are indeed savvy to stick with customers to consistently try to adhere to win-win relationship building.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.

 


Boeing Considers Commercial Aircraft Production Cutbacks

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Reuters reports that at an investor conference held last week, the aerospace manufacturer’s CFO indicated that will not increase 787 output and could further cut 777 product output levels unless sales of both jets improve.  Boeing 787 production line

Last November, a report indicated that Boeing was planning to deliver a total of 140 new 787’s to customers in 2016. That averages out to roughly 12 aircraft per month among the two designated final assembly facilities in Seattle and Charlestown South Carolina. Boeing’s plans were to increase the monthly production rate of completed 787’s from the current 2016 level of 12 to 14 per month in 2017. Last week’s statement would indicate that Boeing is now re-evaluating that decision in the light of softening customer demands to take delivery of 787 orders as well as general resource cutbacks to boost the manufacturer’s near-term profitability.

An earlier posting appearing on the ALL Things 787 blog indicates that: “near term deliveries of the 787 look to slow down due to unspecified issues with the thrust reversers affecting both GE and Rolls Royce powered aircraft.” The issue affects certain models or variants of the aircraft. The posting further indicates that just when followers of the 787 program thought that the program starting to emerge from the financial black hole that was created, it was sucked right back in with Boeing’s announcement of an incredibly high charge of $847 million against second-quarter 2016 earnings.

The blog indicates that with the 14 deliveries accomplished in July, Boeing has delivered 82 787’s this year through the end of July.   That would imply that 58 remain to be delivered to meet the prior 2016 production goal. A subsequent blog posting noted that Boeing’s South Carolina facility will shut down for about 11 days (between August 22 and September 2nd) to allow suppliers to retool for 787-10 production that will start later this year., which could reduce August total output numbers.

Regarding the 777, Reuters re-iterates the 777 is slated to be replaced with the new 777X.  As we have noted in our prior Supply Chain Matters commentaries, Boeing has been offering sales incentives for the 777 model to certain airlines in order to maintain production and capacity levels prior to ramp-up of the newest model. The fact that Boeing is re-visiting a production cutback may well be an indication that airline customers are differing any buying decisions until the newer model is released.

Finally, Boeing also indicated that it will soon entirely phase-out the iconic four engine 747 model because of slumping demand. Apparently orders for new replacements of U.S. Presidential jet Air Force One have been the only real highlight of that program.

 


Bombardier CS100 Enters Operational Service Three Years From Original Milestone

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This blog commentary is a side note to our prior Supply Chain Matters published commentary related to first-half delivery performance for both Airbus and Boeing reflecting continued supply chain challenges.

A secondary competing competitor in the single aisle commercial aircraft program category has been Bombardier’s C-Series aircraft which has been challenged by extended financial, program and Swiss Maiden CS100supply chain setbacks. A major milestone has finally occurred with the recent announcement that the first CS100 entered operational service at Swiss International Airlines.

The maiden commercial flight of the CS100 was a Zurich to Paris flight. During the first-half of 2016, Bombardier secured firm orders for 127 C Series aircraft. Transport Canada has further awarded type certification to the larger CS300 model aircraft and the delivery of this model to airBaltic is currently scheduled for Q4.

What caught our attention was a Business Insider blog posting titled: Airbus and Boeing’s greatest threat just arrived.  That posting observes:

Over the next few years, several manufacturers from around the world will launch aircraft aimed to compete with Airbus and Boeing. But Bombardier is the first to enter service and the only one that will compete head-to-head within one of their most important market segments.. Not since the demise of McDonnell Douglas and its MD-80 and MD-90 in the late ’90s has there been a third major player to challenge the Airbus-Boeing duopoly.”

What Bombardier has going for it is the fact that the C-Series is widely viewed as a great plane — receiving critical acclaim for its fuel efficiency, range, and advanced technology.”

If readers have been following our stream of Supply Chain Matters commentaries related to the C-Series program for the past few years, you would have discerned another important advantage from a supply chain perspective.  To provide readers just two examples, you can view our original commentary published in 2010 and a subsequent 2013 commentary posing the question: can a disruptor compete with giants. If the program had not encountered such setbacks from its original goal to enter the market in 2013, it would have entered operational service much earlier and provided evidence to major airline carriers that it could be a viable alternative to current extended delivery schedules for single aisle aircraft. Now, Bombardier will likely have to deal with the industry-wide supply chain constraints that exist, including availability of the newly designed Pratt & Whitney PurePower® PW1500G engine.

One could classify this as opportunity lost, but then again, only time will tell the ultimate determinant.

For airline and leasing customers, it is indeed good to have choices and options for new commercial aircraft. Both Airbus and Boeing sales teams have been rather aggressive in insuring that airline customers would not consider such an alternative option. But now, when the industry as a whole is constrained, than the most innovative program and supply chain management processes and consequent decision-making can well become the ultimate differentiator as to what airline customer  elect to do in their buying choices.

We welcome additional reader viewpoints as well.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved

 


First-Half 2016 Delivery Performance for Airbus and Boeing Reflect Continued Supply Chain Challenges

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As the commercial aircraft industry moves into the second-half of 2016, it is time for our usual Supply Chain Matters six month industry review of performance. Reflecting on delivery performance thus far, there are continued signs of industry supply chain supply challenges.  Airbus Mobile Alabama Manufacturing Facility

Let’s begin with Airbus which reported the booking of a total of 227 confirmed orders in the first six months of the year. That number may be somewhat understated since at the industry’s recently completed Farnborough Air Show, Airbus achieved bragging rights for announcing orders and commitments for 279 commercial aircraft, more than half originating from a single airline customer, that being AirAsia who ordered 100 A320neos.

 

Airbus recorded the delivery of a total of 298 aircraft in the first-half, which consisted of the following:

  • 160- Single aisle aircraft (Variants of A319, A320, A321)
  • 38- A330’s
  • 27- A350’s
  • 2- A380’s

 

In the above, tell –tale signs of supply disruption are reflected in two key aircraft. There were only 8 completed deliveries of the brand new A320neo, no doubt reflecting the ongoing catch-up in delivery of the brand new Pratt & Whitney geared turbofan engines.  Airbus had delivered just 5 A320neos in Q1 meaning that just 3 were delivered in Q2. As noted in our prior commentary, nearly a dozen of completed A320neos have been reported as lined-up on factory adjacent runways and parking areas awaiting Pratt to deliver completed engines. The exiting delay is associated with fixing the engine’s cooling design through a combination of software and component modifications.  Pratt engine deliveries were not expected to catch-up until after June and there are continued reports that Pratt’s supply chain remains strained.  The other new engine offering, the new LEAP model from CFM International is expected to be available in the second-half of this year as-well. With a stated target to have a production level of 50 A320neo’s per month by 2017, there is a lot more planning and execution remaining.

A further problematic area acknowledged by Airbus has been supply and bottleneck challenges associated with newest model A350 production, and first-half completion of 27 reflects that ongoing challenge. Supply challenges have been noted as interior seating and structures and Airbus senior management has expressed public frustration regarding ongoing supply glitches.

Turning to Boeing, the aircraft producer reported the booking of a total of 321 orders in the first-half. At the completion of the Farnborough event in July, Boeing was able to announce orders and commitments for 182 aircraft but just 20 actual new firm orders.

Boeing further recorded the delivery of a total of 298 aircraft reflecting its previously announced scaled-down expectations for delivery cadence this year. The breakdown was:

  • 248-737’s
  • 3-    747’s
  • 5- 767’s
  • 51- 777’s
  • 68- 787 Dreamliners

 

In the above, a challenged area remains completed deliveries of Dreamliners although the cadence has improved slightly beyond 10 per month. There is still a long way to go in ramp-up and lots of internal pressures remain since the program remains cash negative until delivery performance dramatically improves.  Both Boeing’s Seattle and South Carolina assembly facilities are now producing completed Dreamliners.

With current order backlogs of nearly ten years for Airbus and over seven years for Boeing at current production cadence levels, both manufacturers have been concentrating on increased production automation and longer-term strategic supplier agreements. In June, key suppliers urged both manufacturers to move cautiously on demand noting that there are definitive restrictions on the ability to ramp-up the industry supply chain to expected volume output cadence.  Another growing concern is the ability of aircraft engine producers to be able to support higher output volumes given the increased technical sophistication of the new generation engines.  Pratt alone is in the midst of managing five different new engine models and with both commercial aircraft dominant manufacturers continuing to book further orders and explore newer model introduction, the pressure builds.

Again, only time will prescribe the course of events in an industry that is clearly reflecting supply chain distress.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved

 


Report that Boeing is Moving Toward Development of New Midsized Commercial Aircraft

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The Wall Street Journal reports (Paid subscription required) that Boeing is advancing toward development of an all new midsized jetliner that would seat upwards of 270 passengers and offer a flight range of up to ten hours. This new aircraft would supposedly be delivered with more attractive market pricing.

The report indicates that the aircraft producer has held talks with as many as 36 airlines and lessors regarding their interest in what have been termed as “New Middle Market Airplane” a new twin-aisle aircraft accommodating between 200-270 passengers that would fit between the existing 737 and 787 aircraft models. It further would represent an alternative to replace rather aging existing Boeing 757 aircraft which have been a workhorse for airline customers. The company estimates that there is global demand for as many as 5000 midsized, midrange jets. The report further stresses that no final decision has been made as yet since Boeing executives must secure board approval regarding development and revenue goals.

Market entry is estimated to be between 2024 and 2025. From our lens, that seems to be a lifetime by today’s much faster pace of business change. By that time period, if current industry commercial aircraft production goals hold true, there will be a whole lot of new airplanes flying the global skies. Further, as the WSJ notes, Airbus may well have 1000 new mid-range aircraft in service by the time Boeing jet is ready.

There are two further aspects from a product development and supply chain strategy perspective.

The news of this proposed new aircraft reportedly reflects an ongoing change in Boeing’s prior product strategy that was predicated on airlines moving away from very large jets to connect global hubs in favor of flying fewer people directly to smaller cities with far more efficient aircraft.  The building realities of global pilot shortages and more crowded skies now reflect needs for super-efficient mid-ranged aircraft that can maximize passenger load and avoid the need to fly through crowded global hubs.

From the supply and value-chain lens, to meet the rather aggressive price and margin targets, it appears that Boeing will continue to leverage composite and carbon-fiber materials as well as more heavily automated production processes. Process learnings from the existing 787 Dreamliner and the ongoing 777X development program are expected to be applied to the proposed new model.


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