Late last night, while monitoring Twitter, we picked-up on breaking news “tweets” reporting that a major 6.1 magnitude earthquake had occurred in the vicinity of central Taiwan.  While earthquakes often occur in this region, a strong tremor that occurs at a shallow depth can be a cause for considerable concern. Knowing that this area in the epicenter for high tech and consumer electronics supply chains, we immediately re-tweeted this news with hopes that our readers would be on-alert to both the event and the potential for disruption.

Fortunately, for those residing in the impacted area, damage was reported as minimal.  Tragically, one fatality occurred along with some injuries. As we pen this commentary, there is a report that a number of large production facilities had to be quickly evacuated.  They include two separate facilities operated by the world’s largest semiconductor fab producer, Taiwan Semiconductor Manufacturing Company (TSMC), but according to the company, no interruption in production schedules is expected.  Three other companies with operations in Taiwan–chipmaker United Microelectronics, flat-panel maker Innolux, and liquid crystal display manufacturer AU Optronics each indicated in public statements to Bloomberg that they expected no impact from the quake.

These names, along with others, should be very familiar to our readers since they are each key strategic partners to large and smaller global high tech OEM’s. Any disruption involving any of these suppliers would probably have a significant supply chain impact without a supply chain risk mitigation plan.

Earlier this month, we were alerted to a startling report from Japanese media. A Japanese government panel predicts that if a magnitude 9.1 earthquake, similar to the size of the quake that struck the northern coastal region in 2011, were to hit off the southern coast of Japan, it could cause upwards of $2.3 trillion in economic damages, ten times the economic impact of the 2011 Great East Japan Earthquake.  That would equate to 40 percent of Japan’s current GDP. This estimate regarding a worst-case scenario is sensitive because of a long-expected quake potentially occurring along the Nanki Trough, a roughly 4 kilometer deep depression on the seabed that extends from Suruga Bay to areas off eastern Kyushu.

Think for a moment about what occurred in 2011, and the impacts incurred on aerospace, automotive, high tech, industrial and other supply chains. The impact to supply and brands was enormous and far-reaching.

These are all timely reminders of the realities of supply chain related risk, and the critical importance for having active supply chain risk mitigation and business continuity processes.

What’s the status in your organization?

Bob Ferrari

Added Note: This author will be speaking on this timely topic at an upcoming monthly meeting of the Central Pennsylvania APICS organization in Harrisburg Pennsylvania on Wednesday, April 17. The meeting will be held at the Holiday Inn Harrisburg East beginning at 5:30pm.  For further information and registration, please email registration <at> apics-cp <dot> org.

From time to time, Supply Chain Matters will call attention to reports or articles which we feel should definitely be included in your reading list, especially when it concerns small to mid-sized supplier businesses.  This commentary references an article worthy of both a good read and reflection on how component suppliers can demonstrate industry diversification in supply chain support strategies.

Today’s edition of The Wall Street Journal features the article: Meet the Smartphone Arms Dealers. (paid subscription or free metered view) This article describes the efforts of two Japan based suppliers, Murata and TDK, both of which have managed to successfully leverage continuous product innovation and industry targeted support toward business excellence. While Japan’s major electronics OEM’s have fallen on difficult business times, these two suppliers are performing very well. In terms of overall business and financial performance, the WSJ reports that both of these suppliers posted profits for the first nine months of their fiscal year’s, fueled by healthy demand for products.

Murata is one of the largest providers of ceramic capacitors and wireless communications modules. TDK is a leading global supplier of electronic inductors.  The WSJ points out that both suppliers have been able to maintain dominance in the electronic circuits’ area by keeping R&D and leading-edge production in-house. Each further designs and builds the manufacturing equipment used at their factories, maintaining a manufacturing process edge. A Murata senior executive is quoted as indicating that one always needs to be one or two steps ahead of the competition.

In the 80’s and 90’s when Japanese electronics OEM’s dominated the global market, the customers of Murata and TDK were domestic. According to the WSJ, today Japanese customers amount to little more than 20 percent. Both suppliers have reached out to supply components to major smartphone and electronic tablet OEM’s including the lucrative supply chains of both Apple and Samsung. Both suppliers are working on longer-term efforts towards expanding their diversified industry presence. TDK is focusing on components utilized in electric and hybrid automobiles along with energy distribution systems for buildings. With a trend for more and more electronic circuits used within cars and trucks, Murata is building a presence in that industry.

Upon reading this article, we thought of the past history of U.S. automotive supply chains in terms of Tier 1 and other component suppliers.  At one time, the big three OEM’s owned their own Tier 1 component suppliers, and later under severe financial stress, were forced to spin them off as independent companies owned by various outside investors. During the severe recession of 2008-2009, when the market tanked, the ripple effect impacted U.S. automotive suppliers quite heavily.  Some diversified in supplying adjacent industries or non U.S. OEM brands such as Toyota or Honda. Others were unfortunately forced to be acquired, some by non-U.S. interests also seeking product innovation or market diversification.  That was the initial entry of China based suppliers into U.S. automotive supply chains. Some smaller suppliers unfortunately perished, running out of options.

In 2008-2009 we were publishing commentaries highlighting successful product innovation and diversification strategies as a means to share learning. We therefore remain much attuned toward highlighting successful efforts of component suppliers in practicing sound business and diversification in supply chain support strategies.

Understand and learn from others.

Bob Ferrari

Many industry supply chain management teams have a keen recollection of the aftereffects of the Tsunami that struck northern Japan and the severe floods that impacted Thailand in 2011, especially their implications on automotive supply chains.

In a May 2012 commentary published on both Supply Chain Matters and the Supply Chain Expert Community, we pointed out that while Toyota and Honda supply chains were both severely impacted by the floods, the implied winner turned out to be Nissan, who bounced back the quickest of Japan’s big three auto makers.  This same resilience was also reflected in the earlier northern Japan tsunami, where the Nissan supply chain team demonstrated stronger resiliency to supply disruptions.  Two weeks after the tsunami disaster, Nissan was able to assess all of its suppliers and was able to be the first to resume volume production.

But, as we all know, in today’s dynamic world of business, no company and no organization can rest on its previous achievements, benchmarks or track record.  As the lyrics of that popular Eagles tune laments: “in a New York minute, everything can change.”

Thus, late last week, Nissan reported a 35 percent drop in net profit because of sluggish sales in two of its largest markets, China and the United States.  Unlike its Japanese rivals, Toyota and Honda, the automaker was not able to seize on the momentum of increased sales in the U.S. market. Production snafus involving core models in the U.S. and the ongoing political tensions between Beijing and Tokyo effected sales in both countries which underpin Nissan’s operating profits. Profit in Nissan’s North America segment dropped nearly 40 percent in the latest quarter.

The Wall Street Journal reported that miscommunication with suppliers caused snafus in the ramp-up of the newly remodeled Altima sedan, Sentra compact and Pathfinder SUV. A production handoff of the Frontier pickup truck among the Smyrna Tennessee and Canton Mississippi plants also experienced snafus. Supply Chain Matters previously noted a product recall involving nearly 14,000 newly designed Altima sedans caused by four transverse link bolts and two power steering rack bolts that were apparently not torqued to the required specification.

In the WSJ reporting, Nissan Vice President Joji Tagawa was quoted as indicating the following: “In an effort to do a lot of things at the same time, there was a bit of disarray that affected production through the end of the year, not only in the U.S. but also for some models in China.”

Perhaps some of readers can relate.  Success brings a culture of boldness and aggressiveness, which can be lead to further success, provided feedback mechanisms are allowed to input given realities. A supply chain that performed admirably in the past, now stumbles because events and internal initiatives perhaps got ahead of control mechanisms.

The takeaway is fundamental.  No organization can rest on its past laurels, and every organization needs to have vibrant and open feedback to management. As noted in our commentary last May, we as a supply chain community need to continue to have a more risk-aware perspective, along with the ability to effectively communicate which areas need to be shored-up for mitigating operational risk in the future.

Bob Ferrari

When the 2008-2009 severe economic recession impacted the automotive industry in the United States, Supply Chain Matters featured commentaries noting how various suppliers had turned to broader product innovation and industry diversification strategies to buffer severe impacts in domestic automotive related business. In many cases, these strategies insured survival as a supplier. Some automotive suppliers began to broaden their presence in other geographic markets as well as supply components to other offsetting industries such as medical devices or alternative energy. While large OEM’s may garner the attention of the government to protect a strategic industry and thousands of jobs, suppliers within other tiers of the supply base are less protected during times of severe recession. That was certainly the case in the United States.

Thus it was with interest that we once again noted an article published last Friday in the Financial Times which reports that some of Europe’s car part suppliers are embracing a flexible future through industry diversification. (paid subscription or free metered view) This article notes that in the midst of tough times for Europe’s automotive industry, suppliers based in Europe also carried learning from 2008-2009 toward broader international supply diversification and other offsetting strategies. The article cites suppliers such as Germany’s Bosch and Continental electing to move away from commoditized products to more value-added technologies such as safety, fuel efficiency and infotainment systems. Strategically, that positioned these suppliers to be able to take advantage of current automotive OEM’s global platform strategies and have access to broader geographic markets such as China and the United States.

As an example, the article draws a contrast among two French suppliers, Faurecia, the largest maker of vehicle interiors which is heavily exposed to the European market decline, and whose stock has declined 30 percent. That is contrasted to that of rival Valeo which has only a quarter of its production in Europe, and whose stock is risen about 12 percent over the past year in the midst of the European automotive market decline.

While larger suppliers may have the resources cited to exercise global diversification, smaller suppliers have limited resources, and thus the stakes are higher for those who have a business model that is dependent on a single OEM customer, domestic geographic market or commoditized product. The article cites small suppliers based in Italy or Spain who are now trying to expand business with other OEM’s with diversified international business.

This author will therefore reiterate recommendations shared in our 2009 commentary. Diversification has to be evaluated from a perspective of overall supply chain competency, current or future.  Your company may well have the design and production capabilities related to product technology, but the open question to be addressed is whether you have the supply chain business process capabilities to compete with other existing players in your new industry venture.  High volume, make-to-stock is quite different than low-volume, make-to-specification.  Packaging for high volume, just-in-time assembly lines is far different than packaging for a variety of different channels.  If your demand forecast or replenishment signals come from but a few large OEM’s, it can be far different when your demand signals are buffered by other upstream players in the value-chain, the classic “bullwhip” effect. If you about to compete with existing players who have invested in more flexible supply chain fulfillment capabilities as well as value-chain visibility, than be realistic as to what your company needs to work on in addition to new products.

Don’t get me wrong- we encourage organizations to evaluate diversification, but do take a broader view of what is required. That should be included in all of the business media articles that report on these strategies.

Bob Ferrari

Business media headlines this week are declaring that Toyota has reclaimed the title of the world’s largest auto maker in 2012, taking that title from General Motors. Toyota sold 9.75 million vehicles in 2012, compared with the 9.29 million sold by General Motors.  An impressive 27 percent sales increase in the U.S. certainly helped to regain this crown.

This achievement comes after Toyota was dealt two significant prior business challenges, some of which may have greatly impaired other global manufacturers Massive product recalls which began in 2009 were associated with problems of sudden unattended vehicle acceleration and misaligned floor mats among certain Toyota vehicles. Those incidents resulted in massive product recalls and significant threats to Toyota’s brand image among global consumers. The 2011 devastating earthquake and tsunami that hit Northern Japan added another blow that impacted global production volumes for months.

Supply Chain Matters was quick to praise Toyota’s supply chain teams for their extraordinary efforts in overcoming severe supply challenges brought about by the 2011 earthquake. It took almost a year and a half to totally recover in global output production levels. Regarding the crisis of brand image, an unprecedented formation of a corporate-wide steering committee chartered to oversee Toyota’s vehicle based quality processes and corrective programs was initiated. Chief quality officer roles were created among major geographies including Europe and North America, to insure localized autonomy on the decisions related to consistency of product quality and vehicle safety.  For the record, and in the spirit of disclosure, this author has been a long-standing customer of Toyota, dating back over 15 years. Six months ago, we changed that loyalty.

In its reporting of Toyota’s new crown, The Wall Street Journal indicated that sales increases came as a result of aggressive sales incentives in the U.S. market that included a cut of profit margins that were previously allocated to Toyota’s retail dealers. Meanwhile, manufacturers GM and Ford held back on sales incentives, resulting in single digit sales increases in 2012. This author can recall a barrage of continuous Toyota media ads throughout 2012 that urged buyers toward the latest sales incentives, to the point of “all right, already”.

Toyota’s new milestone comes with an important lingering implication, one that relates to former challenge of consistency in vehicle quality. Readers may recall that previous business media coverage and indeed, our Supply Chain Matters commentaries noted an admission by Toyota senior management as far back as three years ago that the race for number one global producer may have come at the expense of Toyota’s prior brand reputation for unmatched vehicle quality and reliability. The race for global volume outpaced that of quality and process consistency.

In 2012, Toyota had to take a $1.1 billion charge after reaching agreements with customers over liability lawsuits related to the SUA incidents. In a Financial Times interview, Toyota Motor USA CEO Jim Lentz indicated that the company had strengthened its customer care functions and had much greater ability to analyze data related to emerging quality problems. Lentz noted Toyota CEO Akio Toyoda as urging: “Make sure that we still are built on a solid foundation of quality, reliability and value because that is the hallmark of the company.” In essence, that is the declaration of the core business value of the company.

Last October, Supply Chain Matters noted the global recall of 7.43 million Toyota vehicles, the equivalent number involved in the SUA incidents over two years ago, this time related to a master power window switch defect. The Washington Post was quick to note that this flaw “raises questions about whether Toyota Motor Corp. has solved quality and safety issues that embarrassed the company in 2009 and 2010.” Also at the time, The Financial Times indicated in its reporting that Toyota was aware of the master window switch problem as far back as four years ago. It further indicated that Toyota did not respond sooner because it was unable to replicate the root cause. In our commentary at the time, ee raised the open question “as to whether Toyota would revert back to its former ways of opaque centralized corporate management, with revenue and output goals paramount to any other needs. Would the global-wide quality steering team have the corporate power, agility and dedicated resources to take proactive action on avoidance of future large-scale product quality issues and overrule sales team zeal for output?” Readers may recall that Hyundai last year made a conscious decision to throttle back current global output momentum in order to address quality and process consistency needs.

This very same week as the pronouncement of global sales leader, comes a separate announcement that Toyota is recalling more than 1 million 2003-2004 Corolla and Corolla Matrix vehicles sold in the U.S. over faulty airbags and windshield wipers. The faulty windshield wiper issue further affects 270,000 Lexis IS models sold between 2006 and 2012. This is the third product recall since October involving more than one million vehicles.

Thus, the open question remains.  Has Toyota’s new crown come at a cost to its reputation for quality and reliability?  Have the new processes for analyzing data and trends related to vehicle quality had their full impact resolving issues sooner?  Has aggressive incentives at the cost of dealer profits incurred a new dynamic for dealer loyalty toward Toyota? On a positive note, has the former announced corporate-wide steering committee addressing vehicle quality monitoring made its presence with this string of ongoing product recalls?

What continues to puzzle us is why Toyota management has not been forthcoming in addressing its progress toward chairmen Akio Toyoda’s charge for core business value.  Right now, business and social media control a narrative that the prize of global leader has again come at a price, and with certain perils. In our view, Toyota would be best served by actively managing the narrative and openly addressing progress made in its initiatives addressing supplier and production quality consistency and early-warning as to defects.

What’s you view?

Bob Ferrari

©2013 The Ferrari Consulting and Research Group and the Supply Chain Matters Blog.  All rights reserved.

Supply Chain Matters will at times focus on senior business or industry executives whom we believe really understand the essence of supply chain strategies and how the supply chain plays an important role in enabling desired corporate outcomes. In that vein, we continue to be impressed with Sergio Marchionne, Chairmen of Fiat and CEO of Chrysler Group. We have held this opinion since 2009. Not much has been written about this visionary, probably because of his no-nonsense style to shun away from the sometimes superstar status that some CEO’s savor.

A little over a year ago we posted a commentary, Chrysler-Fiat Continues its Journey Towards Synergistic Supply Chain and Manufacturing Strategy Execution. In that commentary, we summarized the positive aspects of Chrysler’s comeback from the depths of bankruptcy, and how the marriage of Fiat and Chrysler turned out to be positive in many respects. The unique leadership style of Mr. Marchionne, specifically his no-nonsense approach to management, his deep analytical abilities, and attention to the details of all aspects of the business, including manufacturing and value-chain continue to be recognized as being instrumental in this turnaround. Chrysler has performed well in 2012, both in sales and in execution.

At breakfast this morning, this author was listening to National Public Radio in the U.S., who in conjunction with this week’s Detroit Auto Show conducted an interview with the Chrysler CEO.  I was especially impressed with Mr. Marchionne’s description of his initial assessment of the company at the time of the takeover.  He describes an insular top level management structure that did not have sensitivity to conditions within manufacturing and the supply chain.  In spite of the financial crisis circling the company, it was essential to invest in the manufacturing processes and working environment to restore a quality oriented culture. He admits to ripping off major elements of the Toyota Production System which was renamed World Class Manufacturing System for Fiat, and instilling that philosophy in all production facilities.

We felt that our readers would enjoy listening to this NPR interview. (you will have to select the specific interview from the menu choices) Pay particular attention to Marchionne’s communication style, and picture yourself as a member of his management team.  He speaks to never falling into a state of complacency, in spite of the business successes at Chrysler, and instilling a commitment to quality and excellence.

Listeners should have little doubt, after listening to just this short snippet, about where the business priorities reside with this business leader. That is so very important in any organization.

Bob Ferrari