Reports indicated that that an explosion has occurred at the massive BASF chemical production complex in Ludwigshafen Germany.
Initial indications are that two employees have unfortunately lost their lives and two others are currently missing. Six people are reported as seriously injured as a result of the explosion which reportedly occurred on a supply line connecting a harbor and a tank depot on the Ludwigshafen site at around 1120 local time (0920 GMT).
As many our readers may be aware, BASF is one of the largest global manufacturers of chemicals utilized across multi-industry supply chains.The Ludwigshafen site, which is 50 miles south of Frankfurt, is recognized as world’s largest chemical complex, covering an area of 10 square kilometers (four square miles) and employing 39,000 workers.
Reports we are monitoring indicate that production operations have been suspended at the BASF steamcrackers utilized to convert hydrocarbons into other chemicals. According to a published report from The Wall Street Journal, it is believed that the current suspension will initially suspend the supply of raw material chemicals supporting 20 other plants which are either in the process of shutdown or only partially operating.
According to a published report by Reuters, news of the explosion came less than two hours after BASF ad indicated that four people were injured in a gas explosion at its Lampertheim facility, a plant near Ludwigshafen that makes additives for plastics.
Obviously this is troubling news for many industry supply chains, particularly those residing in the Eurozone, and bears continual monitoring for any ongoing disruption of product supply chains.
General Electric broke ground today for its brand new Welland, Ontario, Brilliant Factory located just across the Canadian border from Buffalo New York. The diversified manufacturing conglomerate indicates that this plant, when operational in approximately 20 months: “will strengthen the base of North American manufacturing and equalize the region’s ability to compete where direct labor costs are cheaper.” The decision to move the plant to Canada from a previous U.S. location was politically charged.
According to a GE Reports commentary, the new factory will produce massive Waukesha branded natural gas powered reciprocating engines that are primarily utilized in petroleum and oil and gas exploration. The plant will further produce other components for GE’s Transportation, Oil & Gas and Power business units. What makes the facility different is that production equipment machines will have embedded sensors with the plant connected to GE’s Industrial Internet via use of GE’s Predix software platform. Near real-time streaming data from production processes will then be available to manufacturing and product engineers allowing quicker needed changes to production and faster prototyping and commercialization of parts. GE’s $165 million investment in Weiland follows plans to build similar “brilliant factories” in the U.S. including Greenville, South Carolina.
GE’s chief manufacturing scientist is quoted in the commentary as noting that with the application of these combined technologies, factories no longer need to be sourced where labor is cheaper. Instead, they can compete where educated workers can make the most of advanced technology, and where opportunities can be leveraged to shorten supply chains and reduce inventories.
However, there are obvious realities to smarter plants that will leverage streaming data, constant feedback loops and advanced analytics. According to the GE commentary, the new plant will employ 220 highly skilled employees.
The Waukesha branded engines were previously produced at a factory located in Waukesha Wisconsin that employed a reported 350 employees. That plant began operations in 1910. In September 2015, GE indicated plans to move the facility to Canada citing concerns over the U.S. Congress’s failure to re-authorize the U.S. Export–Import Bank. At the time, a senior GE executive indicated: “We believe in American manufacturing, but our customers in many cases require Export Credit Agencies financing for us to bid on projects. Without it, we cannot compete, and our customers may be forced to select other providers.” Since that time, the U.S. Congress has yet to re-authorize the bank.
The news came as an unexpected shock to both factory employees and local community residents. President Barack Obama toured the Waukesha Wisconsin plant in January 2014, praising its worker apprentice training and re-education programs, calling them a model for the U.S.
GE has made an obvious bold move from two dimensions. One is an effort at self-demonstrating the benefits of GE’s termed Industrial Internet powered by the Predix operating platform in its owned production operations. The other is straddling the political waters of demonstrating an ongoing commitment to both U.S. and North America based production and the realities of a global economy that must deal with international financial and labor markets.
How both turn out is a matter of time.
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.
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.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
Supply Chain Matters has on several occasions praised Andrew Liveris, Chairmen and CEO of Dow Chemical Company for his understanding and appreciation for the value and contribution of manufacturing and supply chain capability to business outcomes. His pearls of wisdom shared with other CEO’s of manufacturing companies note that in manufacturing, you have to constantly innovate faster than being commoditized, and that the biggest manufacturing and supply chain challenge stems from the ability to train a new skilled workforce.
We were therefore rather disappointed to read recent news that Liveris has indicated that he will leave Dow Chemical by mid-2017 as a result of the announced $120 billion merger with DuPont brought about from the influence of activist investors. The merged companies, if approved, expect to split into three separate specialty chemical businesses. But before that occurs, there is an anticipated $3 billion in cost cuts.
Earlier this month. Dow indicated that Vice-Chairman and COO James Fitterling will oversee the merger with DuPont which was reported by business media as an indication that that a certain activist investor did not favor Mr. Liveris in a senior leadership role in the new to be companies.
Besides his nearly ten year leadership of Dow, Mr. Liveris has been an author and U.S. presidential advisor on manufacturing competitiveness. In a September 2013 commentary, we praised his keynote delivered to the MIT Production in the Innovation Economy (PIE) conference which unveiled results of MIT’s study on U.S. manufacturing competiveness. In the first quarter of 2015, in a posting appearing in the online version of Chief Executive Magazine, Mr. Liveris shared what he termed as his winning formula for manufacturing success. His prime messages was for manufacturers to rethink the role in evolving global supply chains and actively address workforce training and development needs for today and the future.
We certainly hope and trust that Mr. Liveris will consider continuing to be an educator and mentor for advocating U.S. manufacturing and supply chain competitiveness. His articulation of why manufacturing and supply chain capability matter and his leadership presence are one that needs to sustain.
The biggest news last week and perhaps for all of 2015 was the announcement that long-time rivals Dow Chemical and DuPont‘s intend to merge into a specialty chemicals giant of more than $120 billion. There are stated plans to split both enterprises into three separate companies providing different specialty chemical based product offerings.
This proposed deal has obvious massive implications.
Saturday’s edition of The Wall Street Journal carried the headline that this deal cements activists’ rise. A profound quote of that article stated:
“While they (activists) have become increasingly powerful in recent years, forcing companies to do everything from buying stock to selling assets, their ability to help bring about such a monumental deal represents a new high.”
Today, the WSJ further described long-simmering hostilities between Dow CEO Andrew Liveris and activist investor Daniel Loeb which reached a boiling point this weekend after the announcement on Friday. Loeb apparently declared that this deal was too rushed, and called for Liveris’s resignation.
In October, former Dupont CEO Ellen Kullman suddenly resigned after fending off one of the most prominent wave of activist investor assault on a corporate board. Kullman was succeeded on an interim basis by board member Edward Breen while the company searched for a permanent replacement. Breen, whose resume includes being Chairmen and CEO of Tyco International worked with Dow CEO Andrew Liveris to orchestrate this deal.
Our Supply Chain Matters initial perception is that the announced deal provides a significant new and scary watershed as to the degree of influence that activists portend to have on corporate CEO’s. That is qualified, however, as to whether government regulators would allow this deal to go through given the significant implications. Analysts at Piper Jaffrey were quoted as indicating: “The global natures of the antitrust hurdles are likely to be significant.”
The National Farmers Union (NFU) has already expressed its frustration for yet another enormous merger. NFU President Roger Johnson declared: “Having just five major players remaining in the marketplace would almost certainly increase the pressure for remaining companies to merge, resulting in even less competition, reduced innovation and likely higher costs for farmers. This announcement, combined with the on-again-off-again Monsanto/Syngenta merger, is creating a marketplace where farmers will have very few alternatives for purchasing inputs.” The National Corn Growers Association declared it will do all it can to protect farmer interests and preserve an open and competitive marketplace.
Do not be surprised to read of other such declarations.
Since both of these global companies supply materials at the lowest echelons of many different industry supply chains, this proposed merger has significant internal and external implications from many industry value-chain supply dimensions. These will unfold over the coming days and weeks and will likely take on market, technology and human resource dimensions, since the cost and the scale of this merger is momentous and far-reaching. How long the regulatory approval process actually occurs is likely anyone’s guess.
One thing is certain however, the specialty chemicals industry has reached a watershed moment, one that will likely redefine industry players and their associated supply chains for many years to come.