Throughout 2014, Supply Chain Matters called attention to the automotive sector and the unprecedented levels of product recalls that continued to stress auto aftermarket service supply chains and supplier relationships to their limits. From a tactical lens, we observed that the colliding forces of regulatory, political, supplier management and capacity-restrained automotive replacement spare parts networks may well continue for many more months, and that appears to be exactly what continues to unfold. Once more, Supply Chain Matters predicted that when the dust settles, the automotive industry and its supply chain ecosystem partners need to take a hard look at lessons learned.
While automotive OEM’s and their associated brands have taken the bulk of the consumer and regulatory heat around product recalls, quality defects have more often resided within either OEM product designs or parts suppliers and their associated product design or manufacturing processes.
The most significant culprits for the continuous litany of product recalls has been the ignition switch defects involving multiple General Motors vehicles and the alleged defective airbag inflators produced by Japan based supplier Takata Corp for multiple OEM producers. After undergoing continuous ongoing scrutiny from U.S. regulators these past months, Takata refused to broaden the scope of the defective inflators recall beyond a select number of U.S. States with high humidity concerns because the supplier supposedly could not determine the exact cause of defects. That is up to now.
This week provides yet another, but far-reaching significant milestone, namely what is being described as the largest automotive recall in U.S. history, and involving the same potentially defective air bag inflators originating from Takata. Bowing to intense pressure and scrutiny from regulators, Takata has now, for the first time acknowledged that there are defects in its air bag inflators, yet root causes remain unanswered. This week’s announced product recall will be conducted by 11 different automakers and now doubles the number of vehicles subject to recall. Business media now reports the overall vehicle recall as involving nearly 34 million existing automobiles in the United States. Six deaths and upwards of 100 injuries have been linked to the defective airbag inflator problem thus far.
In announcing the current expanded recall, U.S. Transportation Secretary Anthony Foxx indicated: “It’s fair to say that this is probably the most complex consumer safety recall in U.S. history.” Depending on which math is being referenced, the scope of the overall recall amounts to roughly 14 percent of the total vehicles now operating on U.S. roads. Add to that the scope of the 2 million plus vehicles included in the GM product recalls, along with other product related recalls and the picture of a large number of existing vehicles awaiting repair attention becomes a dominant picture. Needless to state, the implications of the continued litany of product recalls involving the industry are far reaching, for both OEM’s, their suppliers, and their service networks.
Logistically, as we and others have noted in our prior commentaries, it will take months and perhaps years for dealer and service parts networks to complete repairs on all recalled vehicles. That will cause additional safety concerns and added frustration among consumers. There are concerns that previous air bag deflator repairs to vehicles may have been completed with defective parts requiring the need for yet another repair. As noted, the root-causes of the air bag deflator’s defects have yet to be determined by either Takata or a consortium of 10 automotive OEM’s. The shear volumes of cumulative open recalls are testing existing processes and supporting systems, perhaps to their breaking point. As we have pointed out, alternative suppliers have been recruited to augment supplies for both existing new production as well as repair parts needs.
From a political perspective, legislators and regulatory agencies continue to react to the concerns and frustrations of automotive consumers who wonder aloud if automakers really care about the quality of the vehicles they are producing as well as their attentiveness and timely response to vehicle safety. That leads to a continued sensitized regulatory and judicial perspective.
From a financial perspective, the bulk of the costs related to a litany of past product recalls have been on the shoulders of the OEM’s. However, some automakers such as GM, have managed to shield themselves from expensive lawsuits from prior legislative actions dating back to a previous bankruptcy filing. That will change with the current scope and visibility brought to bear of the latest Takata related recalls. In its reporting, The Wall Street Journal cites one estimate indicating that Takata alone could face recall-related charges in the range of $4-$5 billion, far outpacing an original estimate of $1.6 billion. Yesterday, Takata’s stock fell 10 percent on the Tokyo Exchange as its investors adsorbed the implications. On a broader perspective, the issue of which party bears the bulk of the financial liability for component quality will again be up for discussion.
To be candid and blunt, product quality perceptions have become an overall mess, and it could not come at a worse time. There was a feeling that automakers had come a long way in overall vehicle reliability but that perception belies the current picture of numerous vehicles now with open recalls. Once more, consumers clamor for the latest technology advances in vehicle safety, comfort and convenience including all notions of the connected car. Many of these innovations stem from component and sub-system suppliers within an industry that has a track record of mostly marginal supplier relationship building. In its recent annual supplier poll conducted by Planning Perspectives, for the 14th straight year, suppliers continued to rank Toyota and Honda as best customers. Noted is the diametrically opposite goals of an adversarial relationship where OEM’s often seek a supplier’s best technology at the lowest possible price. Compounding the problem are activist investors and private equity firms investing in various tiers of automotive supply chains clamoring for more short-term returns for shareholders.
From our lens, the global automotive industry, and in-particular U.S. based OEM’s need to have rock solid quality focused product design and more responsive early warning quality mechanisms as a top industry priority. Industry executives need to seriously look beyond any perceptions of the panacea of a current super sensitive regulatory environment that will run its course. The notions of an industry solely being driven by lower product margin goals and placing the bulk of that burden on suppliers has to change. Component, systems and overall vehicle reliability is not the purview of a marketing campaign but rather a systemic process that spans end-to-end product and aftermarket service centered supply chains. Component and systems quality must be a living fabric of supplier relationship management and suppliers need to be fairly compensated for assuring high standards in product design and process innovation, especially considering current product strategies leveraging common brand and/or vehicle model platforms. The stakes are even higher when considering that the electronic and software content of vehicles continues to rise implying more sophisticated reliability and systems focused hardware and software related engineering. In the analogy of carrot and stick agreements, the carrot is longer-term, more collaborative based product design and supply chain focused relationships and the stick is the shared responsibility and liability for warranty and/or product recall costs attributed to vehicle sub-systems such as vehicle safety.
Finally, you may have noticed that lately, not a day goes by without a barrage of targeted online or traditional media ads urging we as consumers to buy or lease that new car with latest technological features. From our lens, the industry will be better served by re-allocating existing marketing and sales budgets towards investments in more robust early-warning mechanisms related to component quality and to current overburdened and perhaps collapsing aftermarket service networks that are the first line of intelligence for quality and vehicle safety.
© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Supply Chain Matters has provided a series of ongoing commentaries involving fairly recent multiple industry aspects involving escalating pressures being placed on suppliers. Our commentaries have reflected on reports regarding global retailer Wal-Mart ‘s latest efforts of cost cutting and certain Consumer Product Goods producers being driven to bullying or extreme cost-cutting measures. Today, The Wall Street Journal provides a report indicating how one global automotive manufacturer is now trying to reverse course of previous supplier squeeze actions to foster needed collaboration.
This report, GM Wants Long-Term Parts Contracts (paid subscription or complimentary metered view) describes efforts by General Motor’s newest Chief Procurement Officer Steve Keifer to influence extended component parts supplier contracts that extend as much as a decade, in order to support two new vehicle product development programs and subsequent market volume output requirements. According to the WSJ report: “locking suppliers into longer-term contracts and looping into vehicle designs earlier in the process, the auto maker can expect suppliers to share more innovations and better processes that help save money.”
For some of our readers, that statement would appear to be forward-thinking but keep in-mind that the U.S. automotive industry has had a long history of supplier bullying that has been difficult to change for some manufacturers. While Keifer is described as a GM veteran, he only recently assumed the CPO role at the end of 2014, after serving an executive role at Tier one supplier Delphi Automotive. The report thus hints that this new CPO has brought more of a supplier sensitivity to his role.
That approach is apparently being influenced and supported by GM’s new CEO, Mary Barra, who herself has a manufacturing and product development leadership background. According to the WSJ, Barra has recently implemented a strategy “aimed at improving relationships with suppliers that believed the automaker was overly optimistic in its planning assumptions or too forceful in cost-cutting mandates.”
The report points to the ongoing technology-driven revolution occurring across the automotive industry, and the need to bring even more technology to market at a quicker competitive pace. However, the new CPO has the challenge of undoing decades of poor supplier relationships that curtailed deeper collaboration on areas of innovation. The spur such innovation, GM is reportedly open to consideration of new suppliers from regions such as the U.S. Silicon Valley or Israel.
On this blog we have pointed out the drawbacks of how a short-term business outcomes perspective driven to cost reduction mandates can permeate across the many levels of the value-chain. While such efforts may lead to short-term accolades and performance bonuses, they undermine efforts directed at longer-term needs for product, process and customer fulfillment innovation. Suppliers themselves need to have heightened sensitivities to the business pressures of key customers, and try to provide a helping hand perspective on short and longer term supplier relationship alternatives.
In the case of this week’s WSJ report concerning General Motors, a changed senior management perspective, driven by both the realities of long-term industry competitiveness through innovation, and a leadership grounding in the importance of suppliers for contributing to such innovation has helped to initiate a changing perspective. That will help in overall change management.
We trust there will be more of the above positive actions rather than the others we have highlighted of-late.
Today, The Wall Street Journal reported that Volvo Car Corporation, owned by China based Geely Holding Group plans to invest $500 million in the construction of a new vehicle production and assembly facility in the United States.
According to this report, Volvo is making this investment to become closer to its prime North American market, take advantage of attractive labor rates and protect against currency fluctuations. Volvo has had a presence in the U.S. market since 1957 but has struggled in recent years to establish market-share growth. The plant will reportedly build vehicles utilizing a new “SPA” platform that serves the basis of several new models including the Volvo XC90 SUV.
The report further indicates that the auto maker is considering sourcing its new facility in a handful of U.S. states and will make a final site decision in about a month. Volvo had considered a new plant investment in Mexico but opted instead for a U.S. site.
What is even more interesting is that Volvo’s CEO indicates that the new factory could eventually serve as an avenue for its parent, Geely to distribute cars in the United States.
We are often reminded that one of the most common traits of industry disruptors is that they think differently. They challenge the notions of industry norms, current practices and business processes or the leveraged use of technology in product and service delivery.
Over the coming weeks, Supply Chain Matters will feature a series commentaries focused on industry disruptors and their implications to existing customer fulfillment.
Fast becoming one of the icons of disruptive thinking approaches is Elon Musk with his current ventures in the automotive and space exploration and aerospace sectors. The two companies he leads, Tesla Motors and Space Exploration Technologies have each challenged legacy industry practices.
Supply Chain Matters has featured a number of prior commentaries specifically focused on Tesla and how this automotive producer has challenged existing norms in is driving re- thinking in supply chain vertical integration, advanced manufacturing practices, service and distribution strategy. Tesla’s fundamental approach is that an automobile serves as a transportation device that is primarily powered by computer intelligence and the user experience. There is little need for intermediaries or after-market providers.
This week, Tesla has invigorated both social and business media on the news of its latest series of software upgrades planned for the Tesla Model S. At a recent automotive industry conference, Musk declared that it will soon become illegal for humans to take the wheel once the technology of self-driving cars have proven themselves. If you sit in a Tesla vehicle, it’s visually striking that the huge 17 inch LCD screen takes-up more driver attention than a traditional automobile dashboard. It was designed as such.
Last October, IHS reported on its initial analysis of a teardown of the components of the Tesla Model S with the headline: Is it a Car or an iPad? The article is impressive and worth a read.
What is extraordinarily impressive is that Tesla’s software upgrades are delivered wirelessly to individual owned consumer vehicles in the truest form of cloud delivery. There is no need for the traditional automotive industry dealer visit. Musk views such upgrades in the same context as updating a laptop computer or a smartphone. He further categories autonomous driving as a “solved-problem”. Last year, Tesla began equipping its Model S with on-board cameras and sensors to be powered by a sophisticated system termed “autopilot”.
Over the coming weeks and months planned upgrades will include functionality that completely puts the driver at-ease regarding the existing range of the car’s battery power. The software analyzes the current driving route, road conditions, topography and location of available battery charging stations. If the car is going to exceed the range and distance to the nearest charging station, a real-time warning is issued along with GPS coordinates to the charging facility. According to Musk, “it makes it almost impossible to run out unless you do it intentionally.”
In an upcoming release 7.0, a new user interface will provide the ability of the car to operate with complete autonomy on highways when the driver lets go of the steering wheel.
In the context of the consumer experience, like Apple, Tesla delivers on design elegance and the interactive user experience. The car you may have purchased one or two years ago, has newer functionality and user experience features delivered by the cloud than when you purchased that vehicle.
For the remainder of automotive related industry, a disruptor such as Tesla will elicit more accelerated innovation in applied technology and the driver experience. Suppliers are already working on more sophisticated processors, sensors, embedded systems and driving aides.
Is it any wonder that when news broke that Apple was working on its own secret development of an electric vehicle, that social media lit-up like fireworks and the automotive industry shuttered.
In today’s industries, change is constant and the termed clock speeds of product innovation are indeed accelerating. Supply chain teams will invariably be either on-board facilitators or unfortunate obstacles to these changes.
Note: This author is not a current owner of a Tesla automobile nor a stockholder, rather an observer and enthusiast of automobiles.
There has been a new development regarding the ongoing large number of product recall activities involving suspected automobile defective airbag inflators produced by supplier Takata Corporation.
The Associated Press is reporting that rival Japan based airbag inflator supplier Daicel Corporation announced last week that it will accelerate the building of a second U.S. factory in Arizona to meet the growing demand for alternative capacity for these components. This supplier, responding to specific requests from Honda Motor for an alternative supplier, and expects to start operating the Arizona facility by March of 2016. According to this report, Daicel has further plans to increase production of inflators at its existing factory in Western Japan to supply additional replacement parts later this year.
This is an obvious sign that alternative component supply arrangements are being initiated as Takata continues to struggle in resolution of current component needs.
A Sudden CEO Leadership Change at Honda and Another Reinforcement of the New Product and Operations Grounded CEO
In the wake of continued challenges involving quality glitches and mass product recalls, Honda Motor Company announced today that is current CEO will step-down in June to make way for a new breed of leadership.
Takahiro Hachigo, a trained engineer and currently a managing officer within China, will replace Takanobu Ito as president and CEO in late June. Mr. Ito has led Honda since 2009, at the height of the global recession.
According to reporting from The Wall Street Journal, this executive leadership change comes at a critical juncture for Honda, which is being challenged by Nissan Motor for the number three brand leadership for the U.S. market, and amid continued product recall actions involving airbag inflators produced by supplier Takata Corporation. Honda has been one of the brands most affected by the defective airbag inflator quality crisis, and in October, top executives took on salary cuts to demonstrate responsibility for quality problems.
Reportedly, company insiders were taken by surprise by the timing of this announcement, and the choice of a younger executive promoted over those executives expected to be considered as the next Honda CEO. The global auto company further indicated that several directors who ranked higher than Mr. Hachingo would retire. In a released statement, Mr. Ito stated: “Honda is ready to make a new leap forward. To do this, Honda needs to be led by a new, younger team.”
Mr. Hachigo’s experience includes stints in product design, production operations, and procurement, which provides yet another example of a trend for new senior management appointments involving executives with product and supply chain management prowess. According to Honda’s announcement, Mr. Hachigo’s previous experience includes roles as a vice-president of Honda Motor Technology- China, representative of development, purchasing and production- China, president and director of R&D in Europe, general manager of the Suzuka manufacturing facility production operations , general manager of purchasing and vice-president of R&D in the Americas.
This resume adds further evidence of the new importance of global-based experience, including operational experience within China.
In December of 2014, BMW appointed new replacement CEO Harold Kruger, with a background in operations, engineering and manufacturing. A year earlier, General Motors rocked the global automotive industry by appointing the first ever female CEO, Mary Barra, who had risen through the GM ranks in roles in manufacturing, engineering, product design and other leadership positions. Mrs. Barra has since experienced a baptism of fire involved in GM’s massive product recall incidents.
This trend extends beyond the automotive industry, with product management and supply chain experience in the current CEO’s of Apple, Home Depot, McCormack Foods and other firms large and small.
There is an adage that one data point is interesting, two consistent data points are more interesting and three or more consistent data points is obviously a sign of a trend. For the global automotive industry, the new trend for senior management is showing a common denominator for sensitivity and grounding in product design, operations and global supply chain management leadership.
The year 2015 may well be a watershed year as this new generation of product design and operations background CEO’s continue to take the leadership helm. For global supply chain ecosystems across the automotive industry, these are, by our Supply Chain Matters lens, encouraging signs.
© 2015, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.