In a June 2014 Supply Chain Matters commentary, Automotive Component Supply Strategy Meets Sensitized Regulatory Environment, we called attention to a published Reuters report indicating that product recalls involving airbags supplied by Japan based Takata Corp. would expand and involve millions of affected motor vehicles and ensnarl many global brands.
That situation has become ever more visible in a multitude of cascading product recalls and urgent consumer advisories involving many auto brands from entry-level to upscale luxury.
Today, the National Highway Traffic Safety Administration (NHTSA) issued a high visibility consumer advisory, urging owners of over 4.7 million recalled vehicles to act immediately on recall notices and replace defective Takata airbags due to suspected defective air bag inflators. Brands involve BMW, General Motors, Honda, Mazda and Nissan and the vehicle models date back as far as 2000-2001. While this advisory notes specific urgency for certain U.S. states and regions featuring warm, humid climates that fact seems to be blurred by the blast of Monday news from general media. The other reality is that many vehicle owners may have ignored previous recall notices which could jeopardize the safety of occupants.
Aftermarket service and spare part networks are already stressed by a surge of product recalls issued from an abundance of caution to avoid punitive financial fines. This latest high profile consumer warning related to certain airbag deflator defects will add more stress to overly stressed networks that lack the tools to handle such volumes.
Automotive OEM’s have fostered component product innovation strategies among a key set of lower-tiered component system suppliers, and OEM’s leverage such innovation across multiple vehicle and brand platforms. These strategies were put in place to foster both faster product innovation cycles as well as to be able to leverage volume supply costs across multiple global platforms. The objective of leveraging lower component costs has never gone away, at least for certain OEM’s.
Earlier this month, The Wall Street Journal featured a report (paid subscription or free metered view) indicating that Honda, after a long supplier relationship, is re-evaluating that arrangement with Takada in light of a series of airbag inflator product defects. Reports indicate that defective air bags, some dating back to the early 2000’s, could send metal shrapnel flying upon air bag inflation, posing serious injury risk to drivers and/or passengers. According to reports, Takada utilizes a different propellant than other suppliers, one that is cheaper but more volatile. Rival air bag suppliers that could benefit from the current crisis include Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which is being acquired by German based ZF. The WSJ further reported that Toyota and Nissan are also concerned about Takata air bag systems in the light of the current circumstances. But, switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.
The WSJ report provides some in-depth perspective on how Takada has expanded its global just-in-time supplier footprint to accommodate individual OEM platform demand. The report alludes that the product quality problems may have stemmed from a period of rapid growth, testing communication and process discipline among far-flung regional plants. After two years of investigation, Honda and Takata joint quality teams discovered certain machine defects in a plant in Washington state and in process parameters in a Mexican plant. At times, poor record keeping hindered the ability to figure out which cars had defective inflators installed.
Whether Takada can recover from this ongoing and compounding product recall and branding crisis is certainly open to skepticism and speculation. However, Supply Chain Matters feels that automotive OEM’s face their-own realities related to product development and global product platform cycles. A global platform strategy supported by component supply agreements has to be balanced with supplier risk. Requiring suppliers to locate just-in-time production across far-flung global regions requires an assessment of rigid process control discipline and conformance. When such controls indicate cause for concern, two-way communication must be forthright and honest and procurement teams need to be proactive in assessing and communicating risk implications.
Today’s overly sensitized regulatory environment requires timely feedback and responsive risk mitigation.
The passenger safety, financial, and brand risks are far higher.
General Motors Attempts to Turn to a New Chapter of Growth, Customer Loyalty and Supply Chain Practices
The public relations teams supporting General Motors have been in high gear these past weeks for obvious reasons. Lapses in product design and quality management practices, and what has been billed by business and general mediaas the worst U.S. product safety crisis in recent memory has led to a series of product recalls among multiple GM brands involving upwards of 2.6 million vehicles.
GM desperately needs to move beyond its current state and restore confidence in its brands and in its business management model. Suppliers and partners associated with supporting this U.S. based OEM need to also move on to more collaborative and win-win relationships, but that requires a different GM perspective.
When Mary Barra was appointed CEO of General Motors, this author communicated our Supply Chain Matters elation for this announcement. Our enthusiasm came from the dual fact that not only was Barra the first senior female executive ever to lead a global automobile manufacturer, but more importantly, because her 35 year background included plant management, manufacturing, product design and development leadership experience. She is also an engineer by training. Barra likely understands the elements of producing high quality cars and trucks and the important contribution of the GM supply chain ecosystem in achieving that goal.
If readers want to gain a candid perspective on Mary Barra’s current challenges in transforming GM, we recommend the recently published Time article, Mary Barra’s Bumpy Ride at the Wheel of GM. Author Rana Foroohar pens an insightful perspective on Barra’s management style and her efforts to change a rather in-bred corporate culture built around functional fiefdoms and little accountability. She describes Barra as the consummate “outsider-insider” with a far different style from most of her CEO predecessors. She has been put in charge to become the change agent and apparently has the support of many of GM’s employees in that task. In our previous commentary in December 2013, we called attention to the Wall Street Journal characterizing Barra as “having a reputation for speaking her mind, a trait that hasn’t always been appreciated in GM’s executive suite.”
This week, business and general media are featuring reports of GM’s latest earnings announcement. The WSJ reported that after nine months, Barra wants to switch gears towards a multi-year strategy to deliver increased revenues and profits while restoring consumer trust. She explained to a group of GM’s top 300 executives that the company must do what it takes to be the “world’s most valued automotive company”. The going forward strategy leans heavily on reliance on planned new models expected to come to market, many of which were shepherded under the leadership of Barra when she previously led new product development. A goal is to have 47 percent of global sales to be fueled by these new models by 2019. It further includes market expansion and growth within China through investing in five additional auto assembly plants and he introduction of nine new Cadillac models in that country.
GM will further focus on the broader supply chain’s contribution to its renewed business goals.
According to a recent WSJ report, there is an internal belief that GM pays more than its competitors for materials and technology because the company bases parts purchases on unrealistically high forecasts that burden suppliers with high fixed costs when ultimate demand falls short. Our community is more blunt in such an explanation: it is lousy forecasting predicated on achieving functional stovepiped goals. The WSJ quotes some analysts as indicating that the automaker could save upwards of $1 billion a year with smarter purchasing practices, which as we know, is a typical Wall Street short-term perspective these days. Squeeze those suppliers!
GM’s existing product development chief, Mark Reuss, actually met with executives representing 700 suppliers indicating that the company is ready to share more financial risks if sales projections are high. At that same meeting, GM’s purchasing boss, Grace Lieblein indicated that the supplier base will likely need to add capacity to support growth plans. In a Detroit Free Press published report, she is quoted as stating: “we just have to be cautious and strategic about how we add that capacity and not move too fast.” Lieblein further communicated that an important strategy is convincing suppliers to locate closer to GM assembly plants to reduce transportation costs.
Obviously that’s a tall order for suppliers since transportation cost savings do not necessarily weight themselves to the benefit of the supplier. Adding production capacity to support additional volume and spreading that capacity further across the globe requires a significant financial investment. Add some history of throwing suppliers “under the bus” when quality plans go south because of component design flaws, well, you get the picture of legacy trust.
The new era of GM obviously requires what Barra has described as bold thinking and leadership. What this author was hoping to read is that goal of GM’s supply chain going forward is to support continued product innovation while controlling costs and accelerating productivity. Perhaps that will be articulated in the coming months.
It is this author’s view that such thinking can benefit by a broader and deeper perspective by GM’s executive leaders on how more modernized supply chain business practices, new product introduction (NPI) practices incorporated to supply chain impacts, more collaborative based inventory and supply chain planning practices have led to benefits among other industries as well as other automotive OEM’s. Today’s supply chain and B2B business network technology capabilities can further link the global end-to-end supply chain with more granular levels of planning and supply chain execution synchronization.
The business practices and enabling technology are available but it requires a good dose of change management infusion before real benefits can flow. We trust GM will hence forth nurture the leadership to set such perspectives.
© 2014 The Ferrari Consulting and Research Group LLC and Supply Chain Matters. All rights reserved.
The current waves of industry acquisition frenzy continue as cheap money remains available, and as usual, industry supply chains are impacted.
Today’s business headlines include a massive deal involving two global automobile systems, components and parts suppliers. ZF Friedrichshafen AG announced its intent to acquire TRW Automotive Holdings in a reported all-cash deal that is estimated to be in excess of $11 billion. According to reports, this deal would form an industry supplier with combined annual revenues near $41 billion, rivaling the size of other major global industry suppliers Robert Bosch and Denso. Under the deal, TRW would become an integrated but separate operating unit of ZF. The combined research and development investment portfolio exceeds $2 billion. This transaction requires several closing conditions and the approval of TRW stockholders, and is expected to close in the first-half of 2015.
According to the press release and statements from ZF’s CEO, the prime motivation for this combination is combining of product innovation resources applied to markets in electro-mobility and autonomous driving. TRW Automotive is a supplier of automotive integrated safety electronics, sensors, steering, suspension and integrated braking systems. TRW’s production and supply chain resources are global in scope and include support for major automotive production regions of United States, Europe, Asia and Latin America. ZF is a closely-held global supplier in transmission driveline, axle and chassis technology with 122 facilities in 26 countries and is a major supplier to German based mainline and premium model OEMS’s including Volkswagen. Combined, both suppliers will more than double revenues in support of major regions of China and the United States, and be able to support a fairly broad area of automotive and truck component system supply needs. With its combination with TRW, ZF has the opportunity to significantly increase its revenues and presence in the U.S. market.
The talks between these two automotive industry suppliers have been percolating for some time, and according to a published report from The Wall Street Journal, other suppliers such as Delphi Automotive, BorgWarner and AutoLiv have each expressed interest in “bulking up through acquisitions” in order to have sufficient scale to further stay ahead of product innovation needs to support various global automotive OEM’s. OEM’s have a desire to move forward in electric drivetrains and autonomous driving systems but prefer that system component innovation come from Tier One and other suppliers.
This wave of acquisitions involves other industry as well. Business headlines today include reports of a percolating massive mega-deal between Anheuser-Busch InBev and SAB Miller that could involve upwards of $122 billion. That would involve the combination of two of the world’s largest brewers and according to the WSJ, put control of nearly one-third of global beer supply under one company, and a wide range of brands.
The beat goes on and industry supply chains will have to continue to deal with the opportunities and/or consequences.
This week, Gartner unveiled its annual regional listing of what the analyst firm considers to be fifteen of the best supply chains in the European region. Gartner conducts this ranking as a supplement to its Top 25 Global Supply Chain rankings that are traditionally announced in the fall. According to Gartner, the top three European supply chains, Unilever,Inditex and H&M, remain unchanged and continue to lead in supply chain excellence while Seagate Technology made its debut in the number four ranking. Three new company supply chains also made a presence in the Gartner Europe ranking.
The published ranking for Europe Top 15 supply chains were noted as:
- Unilever (ranked 4th in 2014 Top 25 global ranking)
- Inditex (ranked 11th in 2014 Top 25 global ranking)
- H&M (ranked 13th in 2014 Top 25 global ranking)
- Seagate Technology (ranked 20th in 2014 Top 25 ranking)
- Nestle (ranked 25th in 2014 Top 25 ranking)
- Delphi Automotive
- Reckitt Benckiser
Similar to our view of this week’s Gartner’s Asia-Pacific rankings, Supply Chain Matters believes that this ranking reflects how we would have voted if we were part of the external or peer voting panel. Unilever is indeed a great supply chain competing in a very challenging CPG industry group. As we noted in our commentary associated with Gartner’s Top 25 ranking, Unilever has made steady progress over the past three years and deserves special recognition. Inditex has long been an icon when describing a top retail focused supply chain that is extraordinary in sensing and responding to fashion and customer demand. Seagate Technology as well, has bounced back from the near disaster of disruption and supply shortages caused by the 2011 floods in Thailand. L’Oreal has made great strides in integrating supply chain planning and execution across its supply chain business network. Nestle deserves its recognition especially in leading with industry-leading supply chain sustainability initiatives.
Three of the Gartner European Top 15 reside in the automotive industry sector which has been an industry segment not previously noted for consistent supply chain excellence. Both BMW and Volkswagen have been deploying a global based product platform strategy and have weathered the European economic crisis through a focus on international markets.
Also noteworthy is the appearance of two pharmaceutical supply chains, Glaxo and Reckitt in Gartner’s Europe ranking.
We believe that a ranking of the top Europe supply chains has even more significance given the ongoing challenges related to the severe economic conditions that have impacted Europe. These are supply chains that had to demonstrate various aspects of resiliency to insure required business and product outcomes.
Supply Chain Matters again extends its congratulations and recognition to each of the named supply chain organizations for achieving such recognition. There is obviously hard work that goes into achieving such recognition and citation and it should be acknowledged.
Today, Gartner published its annual regional listing of what the analyst firm considers to be ten of the best supply chains in the Asia-Pacific region. Gartner conducts this ranking as a supplement to its Top 25 Global Supply Chain Rankings that are traditionally announced in the fall. According to Gartner, while most of these regionally-based supply chains still need to elevate their supply chain capabilities to compete on a global level, many have dramatically improved their position.
The published ranking for Asia-Pacific Top Ten supply chains were noted as:
- Samsung Electronics (ranked 6th in 2014 Top 25 global ranking)
- Lenovo Group (ranked 16th in 2014 Top 25 global ranking)
- Toyota (reported to have moved up three places in the top ten Asia-Pacific and up 22 places in global ranking but not in current 2014 Top 25 global ranking)
- LG Electronics
Overall, Supply Chain Matters believes that this ranking reflects how we would have voted if we were part of the external or peer voting panel. Samsung is especially noteworthy since by many accounts its supply chain is supporting more product and perhaps process innovation than that of its arch competitor, Apple. It is quite interesting to note the appearance of three automotive OEM’s in the Asia Pacific ranking while there are no automotive OEM’s ranked in the global Top 25 rankings. We have been especially impressed with Honda’s global manufacturing sourcing strategies that have helped the company overcome currency challenges and better service global product demand.
At least three of the Gartner Asia-Pacific top ten, namely Samsung, Lenovo and Hyundai practice some form of supply chain vertical integration strategies.
However we were somewhat quite taken-back by the appearance of Sony’s in this top ten ranking, given its profitability challenges in the past few years. Sony has also been aggressively outsourcing parts of its television and certain parts of its consumer electronics supply chain to contract manufacturers in order to aggressively reduce costs. Gartner’s own admission is that Sony is lagging behind some of major competitors.
Again, we are shocked with the lack of recognition toward Foxconn Technology (Hon- Hai Precision), the world’s largest contract manufacturer by revenue and output volume. Foxconn is a major supplier and serves as the lead contract manufacturer for Gartner’s consistently ranked number one global supply chain of Apple. This CMS’s ability to respond to Apple’s intense product innovation requirements as well as rapidly scale volume production is highly noteworthy. We remain highly curious as to why Flextronics does not appear in this top ten regional ranking, let alone the global ranking, but then again, social responsibility strategies concerning workers may be a weighting factor. Another supply chain worthy of consideration is that of TSMC, the world’s largest semiconductor manufacturer.
Supply Chain Matters has featured commentaries on many of Gartner’s ranked top ten Asia Pacific supply chains. They can be accessed by utilizing our Search box: i.e. Samsung supply chain.
Supply Chain Matters has featured many ongoing commentaries regarding electric powered automotive manufacturer Tesla Motors and its bold “gigafactory” strategic supply strategy. Our last commentary published in mid-August on this topic reflected on the high frenzy of lobbying and proposed incentives among various U.S. states to be designated as the designated site for this massive factory, but the betting for the final site was leaning heavily towards a particular site, that being Nevada.
This afternoon, the formal announcement regarding the chosen site for this massive $5 billion supply facility will be made but business and general media has already running stories concerning disclosed the site, which is an industrial complex near Reno Nevada.
Let’s re-visit the four strategic objectives outlined in our mid-August commentary in light of today’s expected announcement:
Bold supply chain vertical integration
As more information comes to light, there is no doubt in the lens of Supply Chain Matters that Tesla has elected a bold vertical integration strategy. The massive scale of this facility is targeted at reducing the unit costs of lithium-ion batteries by 30 percent. Current reports now cite the statistic that at total capacity, capable of supplying up to 500,000 electric vehicles per year, the plant capacity exceeds than all of the entire automotive industry’s current lithium-ion battery supply needs. However, other information now coming to light indicates that Tesla’s supply strategy extends beyond current automotive industry needs, and could include electric storage needs for public utility, alternative energy or other industry needs.
There are new reports that the Nevada site selection has considerations for being powered by solar, wind and/or geothermal energy methods. as well as being a potential supplier of electrical storage to Las Vegas casinos and entertainment complexes.
Proximity to key commodity supply and transport networks
The site itself is rather close to supplies of the all-important raw material of lithium supply. A report posted on SiliconValley.com observes that Rockwood Lithium, the only operating bulk lithium supplier in the United States could easily supply needed raw material. The sire itself, to be located within the Tahoe Reno Industrial Center is approximately a four hour drive from Tesla’s primary Fremont assembly facility, and does provide for rail services.
A well trained and technically savvy workforce
Currently, Nevada has one of the highest unemployment rates in the United States. No doubt, the State of Nevada probably included workforce training incentives to staff the new facility. This facility is expected to be highly automated, but previous estimates pegged overall employment at 6500 at full capacity.
Subsidies that may well defray the overall cost burden.
In its reporting of the Tesla Nevada site selection, the Wall Street Journal noted: “Nevada likely offered Tesla one of the largest incentive packages in the history of the U.S. automotive industry.” Reports reinforce Tesla’s prior statements indicating expectations that the designated states would defray upwards of $500 million of this facility’s total $5 billion costs. The Governor of Nevada is expected to convene a special session of that state’s legislature to finalize details of the overall incentives package. We’ll know in the coming days the details of such subsidies, but as noted above, early indicators point to a substantial package.
Tesla is a company whose boldness extends across its entire value-chain. Today’s announcement of Reno Nevada as the site as one of the largest single factories ever constructed in the United States is a testament to such boldness and initiative. The race to a 2017 volume production now begins.