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Can Automotive Industry Supply Chain Strategy Undergo Disruption- Perhaps Yes?

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To state the obvious, this has been a week of significant industry developments mostly all pointing to implications for industry supply chain structural change. Having just published our initial commentary on the thunderbolt developments in traditional grocery retailing, we now add more evidence of building disruption, in this case, for automotive supply chains.

Tim Cook has finally publicly acknowledged that Apple has a formal development effort underway focused on Autonomous Driving Systems. In a published interview on Bloomberg Television, Cook indicated: “It’s a core technology that we view as very important.He likened the effort to “the mother of all AI projects,” saying it’s “probably one of the most difficult AI projects to work on.” Tesla Mod3 Sized 450 Can Automotive Industry Supply Chain Strategy Undergo Disruption  Perhaps Yes?

As Supply Chain Matters and other business focused social media outlets have all previously noted months ago, Apple’s efforts in either autonomous driving or electric vehicle manufacturing, under the umbrella of Project Titan, were an open secret. While the effort itself has had its share of fits, starts and scope changes, Cook’s public acknowledgement is an obvious indication of a purposeful and meaningful business initiative that could soon lead to further announcements. With all things related to Apple, timing of announcements is always a prelude to an evolving marketing or pre-planned corporate communications plan to boost brand and investor interest.

In its summary of the interview, Bloomberg notes that Apple has had upwards of a half-dozen vehicles testing autonomous technology on public roads in and around the San Francisco Bay area for at least a year, citing a source familiar with Project Titan. Of course, Apple itself declined to comment on how long the company has been conducting road tests.

Always having a focus on industry supply chain implications, this Editor searched for other opinion and commentary, and found just that.  In fact, we found an opinion commentary that provides powerful arguments for a pending disruption of automotive industry supply chain, and in notions of automotive and electronics contract manufacturing.

An opinion commentary penned by EnerTuition, and hosted on the Seeking Alpha financial investor platform addressed the question: Can Apple Disrupt Automotive Manufacturing?  Without fringing on content rights, the arguments presented for the affirmative are by our view, powerful and dead-on.

The content makes a strong case that there is little doubt that Apple will enter autonomous car manufacturing, with the primary reason being that Apple never considers itself as just an IP or software components company. There is always the full branding strategy of products and related services.

Further challenged is the conventional industry thinking that “the auto industry cannot be disrupted” because of the capital-intensive nature of this industry. While the statement has meaning for traditional automotive manufacturing that is hardware, metal and sheet metal intensive, the counter argument presented is that autonomous electric vehicles provide a far different product value supply chain profile. That includes batteries as the highest cost-of-goods sold (CAGS) component, followed by vehicle sensors and software systems. The assumption presented, although somewhat future focused by our view, is that there will be no need for human factors such as steering wheel placements and instruments, which opens consideration for a singular global product design and manufacturing process.

The most interesting and profound opportunity for disruption is within the core area of manufacturing.

The argument made is that with most of the value-added of electric powered cars consisting of electronics vs. sheet-metal, and with the change coming so rapidly, manufacturers or industry disruptors will have little choice but to adopt a contract manufacturing strategy. With such a strategy, EnerTuition argues that the supply chain dominants will become emerging automotive component sub-systems and electronics providers, augmented with existing high-tech electronics contract manufacturers. Names such as Foxconn, Flextronics and Jabil are argued to grow more share of contract automotive manufacturing.

The above, ladies and gents, is a rather strong argument to support how Apple can indeed move directly into automotive manufacturing, because of its intimate knowledge and proven capabilities to understand the tenets of supply chain strategy and utilization of contract manufacturing. And, if you tend to dismiss any parts of the above arguments, consider that Apple, with its obscene cash balance, could acquire an electric automobile manufacturer itself. Guess which one- it starts with a “T”.

The reason we are highlighting this Seeking Alpha commentary for our readers is because this Editor and independent supply chain management industry analyst has been observing new and emerging positioning and capability among contract manufacturers and the industry that points toward such technology-driven changes.  Recall that just recently, Ford Motor elected to undergo a CEO change because of the stated need to move faster in technology innovation and in development efforts in autonomous vehicles.

There is ample evidence that disruption is indeed on the horizon soon, and traditional auto manufacturers and their key suppliers may be the deer in headlights if they do not move fast enough with an integrated product development and supply chain support strategy

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Technology’s Impact on Industries Recognized as More Profound- Is the Supply Chain Prepared?

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A change is underway across many industry sectors, one that was profound implications for businesses and their associated supply chains. Investors are now realizing the threat of new digital based business models, and CEO’s are some of the recent casualties for businesses deemed to be laggard.  Supply Chain Matters submits that the added question is whether the supply chain is prepared. SCM 250 76 Technologys Impact on Industries Recognized as More Profound  Is the Supply Chain Prepared?

Over the past several days, The Wall Street Journal has published two opinion commentaries that reinforce a message that CEO’s must grasp the implications of technology on their businesses and on their industries like never before. The casualty list is growing.

The first profiles J. Crew CEO Mickey Drexler, (Paid subscription required) a fashion genius noted for building brands such as Banana Republic, Old Navy and Madewell. Drexler, who is further recognized for:” … redefining Gap in the 1990’s and transforming J. Crew into a household name, is now scrambling to keep the company he took private in a leveraged buyout from ending up in bankruptcy.” In this report, Mr. Drexler readily admits that he missed the biggest trend of all- “how quickly technology would change the retail industry.” The commentary goes on to observe that today, retail competitors with high-tech, data-driven supply chains can copy styles faster and move them into retail channels in a matter of weeks. Posed is the question: “Who would have predicted that in 2017 the No. 1 online retailer of clothing to millennials would be Amazon?”

A second WSJ commentary, CEO’s Must Grasp Tech Like Never Before, (Paid subscription also required) opens with the statement: “Investors and boards long obsessed with quarterly profits are now hunting for leaders to make big, fast bets to fend off upstarts shooting for the moon.” Observed is the recent sudden replacement of the CEO at Ford Motor, as well as other CEO’s whose companies have faced tech-heavy competitive disruptors within their industry. This commentary observes how some manufacturers and retailers are making big bets on disruptive, tech-driven businesses, protecting them as they develop and willing to absorb losses in the short-term.  The prime takeaway seems to be that today’s new business leaders are caught between the proverbial rock and hard place. While activist investors continually call for more short-term profitability and dividends, other investors are becoming more consumed with industry disruptors who are becoming more prevalent and visible. The theme is that CEO’s must possess the rare skills of being able to nurture new disruptive businesses while maintaining an existing business. One example provided is General Electric and its nurturing of its Digital Business unit. The commentary concludes with the observation that the advantage of bigger companies in this transition, is the manufacturing and supply chain infrastructure sufficient to deliver newer businesses and products globally.

Given the themes that regardless, the supply chain plays a critical enabling role, Supply Chain Matters feels compelled to add some other thoughts.

Industry supply chains are once again caught in the web of the need to continue to reduce overall value-chain costs, while at the same time, having the ability to nurture the required capabilities for digital transformation. From our specific lens, one of the most destructive forces underway in some industry settings is the zeal of zero-based budgeting techniques.

The same messages related to CEO’s and their ability to grasp tech trends and move toward new digital-based business models more quickly equally applies to senior supply chain leaders. That requires added investments in supply-chain wide process innovation, along with needed skills and augmented talent. To do this, supply chain leaders must be able to effectively communicate a dual-mission, one that can support ongoing needs for added productivity and costs-savings for existing traditional businesses, while investing in the new capabilities that will make digital based models more successful. In some cases, supply chain leaders will serve as a communicator and change agent for the broader senior management team.

Leaders can make such tradeoffs if they are willing to communicate and contract with the CFO and CEO on a parallel cost savings and investment plan.  As an example, for every dollar of cost savings achieved, a certain amount of such savings can be put aside for re-investment in required new capabilities in people, process, and technology. Likewise, senior management incentives and bonus plans must reflect parallel capabilities, that of building a new business while managing the needs of existing business.

Another equally important risk is one of complacency in timing.  One criticism that this independent analyst has of certain top-tier analyst firms is their tendency to context certain technology changes in rather long timing windows.

As an example, by 2025, eight years from today, a certain technology will become more mainstream in utilization. From my lens, such generalizations are a dis-service to industry leaders. Such predictions are much to generalist, serving to protect the brand or aura of the industry analyst firm in terms of prediction accuracy than to depict more boldness and detail related to a technology’s impact. A current example relates to Internet of Things (IoT) focused technologies and its impacts to traditional businesses. By our research lens, for some industries, the disruption brought about by new IoT driven business models will come sooner, rather than later, and despite current challenges in data security and standards.

Technology’s impact on businesses is indeed accelerating, and potentially more CEO’s will pay the price for not recognizing the timing, and for not moving the business fast enough to stay ahead of the challenge.  The same risks apply to supply chain leaders who opt for the conservative path of driving added cost savings regardless of external threats.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Component Part Snafu Impacts BMW Production of Multiple Models

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Sales and Operations Planning (S&OP) and procurement teams understand that a parts shortage originating in the lower-tiers of the product value-chain can provide a noteworthy overall supply chain disruption.  Last week, luxury car producer BMW AG experienced such a situation, a component shortage that impacted the production schedule of multiple models.

BMW 4 Series 450 Component Part Snafu Impacts BMW Production of Multiple Models

Source; BMW

According to published reports, the German luxury car maker is slowing or halting production of certain models in response to a shortage of parts caused by delivery problems from supplier Bosch GmbH. The hiccups in the reportedly normally smooth operation show how dependent manufacturers are on a global, smoothly running supply chain.

In last week’s BMW’s case, the culprit is noted as a “Lenkergetriebe,” or steering gears used in BMW’s 1-Series, 2-Series, 3-Series, and 4-Series compact cars. Reports point to the supply disruption caused by a bottleneck at an Italian company that supplies the casings for Bosch’s electronic-steering systems. Bosch has since dispatched employees to Italy to help resolve the problem.

A report published in both the Financial Times and the Irish Times, quotes a BMW spokesman indicating that the 1- and 2-Series cars had come to a standstill on Friday and Saturday, whereas production of the i3 and i8 electric cars was running as normal. The plan, reportedly was to resume production by today, but BMW conceded yesterday that the “situation is unlikely to change this week”.

Bloomberg reports that BMW will seek financial compensation from Bosch. BMW purchasing chief Markus Duesmann indicated on Monday in an emailed statement to Bloomberg that there is only limited vehicle production at various German plants, while factories in Tiexi, China, and Rosslyn, South Africa, have moved up or extended planned interruptions.

No doubt, the current component supply shortage will be rectified.  As is the case for many of such incidents, the question is how soon.

Once again, another current day reminder that in today’s globally extended manufacturing and supply chain networks, a snafu or glitch at any tier of the value-chain can have widescale impacts without adequate supply chain risk mitigation planning.

Bob Ferrari


A More Visible Challenge for Tesla Model 3 Production

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The visibility on Tesla’s Model 3 production ramp-up took on some new dimensions this week, as U.S. national morning news program CBS This Morning aired a segment featuring Tesla auto workers expressing concerns about on the job safety.

Supply Chain Matters has featured several prior blog commentaries regarding the both the supply chain and actual production ramp-up challenges for the new Model 3 sedan. The reality remains that Tesla must ramp-up its annual production from the current rate of 84,000 to 500,000 vehicles per year over the next two years.  tesla model 3 450 300x148 A More Visible Challenge for Tesla Model 3 Production

Tesla initiated pilot production of the soon to be mass-produced for the masses Model 3 in February, to coincide with company’s annual report to stockholders. In a letter to shareholders, CEO Elon Musk declared that Model 3 product development, supply chain and manufacturing are on-track to support volume deliveries in the second-half of this year, while installation of manufacturing equipment was underway at both the Fremont California and the Nevada based Gigafactory. The company expects to invest somewhere between $2 billion and $2.5 billion in capital expenditures ahead of the start of Model 3 production and by our lens, there is little tolerance for missteps in engineering and process design. Initial reports of strains in the workforce came after the final quarter of 2016 when production workers were called upon to make-up production time for some supply-chain snafus. Additional reports of worker fatigue came prior to Tesla’s February formal reporting of both Q4 and 2016 performance.

This week’s televised report adds yet another dimension, that of a production workforce that continues to express concerns related to excessive work hours leading to added workplace accidents.

The CBS News report cites data from advocacy group Worksafe that released Tesla safety data to back-up worker concerns. A Tesla production worker, on the advice of the United Auto Workers labor union, obtained three years of worker injury reports. A reported independent analysis of the numbers pointed to a 31 percent higher than industry average rate of serious injuries, that resulted in either days away from work or restricted duty.

The segment also features video of Tesla’s HR Manager and three production managers all indicating that the company maintains worker safety as a top priority.  Ongoing efforts to prepare for the addition of Model 3 production include ergonomics experts being brought in and the addition of an extra third-shift, to replace two 12-hour shifts, to mitigate worker fatigue and burnout.

To be balanced, the CBS News report does provide an undertone of an effort by the four interviewed production workers to seek other safeguards. The other backdrop is that the United Auto Workers is possibly marshaling a labor union representation campaign. That adds another dimension of ongoing challenges for Tesla

In either case, as this news report implies in video, Tesla will need to re-double efforts to make the majority of its production workers feel more optimistic that the full ramp-up will not be perceived to be at the expense of worker safety and burnout.

No one, including production workers, seems to be disputing the engineering and design features of the Model 3. But, something compelled a small group of production workers to go public and voice concerns, and that adds a more visible dimension to Tesla’s supply chain and manufacturing ramp-up.

 

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Q1 Economic Data Again Echoes Challenges in Integrated Business Planning

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For multi-industry sales and operations planning (S&OP) teams, keeping an eye on the global economy and on individual global regions has been an important consideration in efforts to meet business planning goals and achieve proper supply chain alignment. Yet, global and individual region economic and supply chain indices often reflect a differing collection of trending and forecasting.

Entering the year, there was little doubt that 2017 would provide a multitude of uncertainties related to both global economies and geo-political developments that could impact economies. In its World Economic Outlook published in October 2016, the International Monetary Fund (IMF) cited a subdued outlook for 2017 with political tensions and policy uncertainties prevalent. The October WTO forecast called for anticipated global growth rate of 3.4 percent in 2017.

Last week’s Spring meeting of world finance chiefs in Washington brought forward a more optimistic outlook. The IMF has raised its forecast for global growth to 3.5 percent, the first time this agency has elevated its original forecast in the past six years. The agency cited a stronger reported growth rate in China in Q1 along with improving economies in Europe and Japan. The IMF chief economist indicated to the Financial Times that the world economy was firing on all engines, albeit not very strongly. Another former IMF chief economist indicated to the FT that the low-growth legacies of the 2008 financial crisis have literally reached an end.

That data alone would obviously fuel optimistic perspectives for integrated business planning.

However, during the past few days, GDP growth and PMI indices point to varying sign points.The U.S. Commerce Department reported that the U.S. economy literally stumbled in Q1, as manifested by a 0.7 percent annual growth rate in the January through March period. That figure reflected the slowest pace of expansion in almost three years. According to various commentaries, American consumers sharply cut-back on spending despite consumer optimism being at an all-time high. A drawback in inventories had a significant negative effect on growth in the quarter. Yet, economists and the Commerce Department remain optimistic since other data points to increased business investment and stronger growth in the months to come. The new Trump Administration has put forth a U.S. GDP growth target of 3.5 to 4 percent for the year.

Meanwhile, a review of major global and regional PMI indices indicates that:

  • Global manufacturing and PMI activity reflected by the P. Morgan Global Manufacturing PMI index slipped to a three-month low for April. This recognized benchmark of global supply chain activity registered a value of 52.7 at the close of 2016. The April value was reported as 52.8.
  • The ISM Report on Business PMI (United States) decreased 2.4 percentage points in April, while the accompanying New Orders index decreased 7 percentage points in April.
  • Eurozone manufacturing expanded at the fastest pace in six years during April.
  • China’s General Manufacturing PMI reflected that the country’s manufacturers started Q2 with a further slowdown in production and new business growth momentum.

The above data points, by our lens, are a reinforcement of what integrated business planning processes must now deal with on a continuous basis. There are now multitudes of different data and information points that must be synthesized, weighted, and factored with more emphasis on the weighting of regional or country-specific product demand sensing. General forecasts based on historic data are no longer sufficient. Planning is now a continuous process with continual input at a much more granular level.

Some current examples of the implications can be observed in the consumer packaged goods and automotive industry sectors.

Market data from Nielson indicates that volume sales for packaged food products in the U.S. fell 2.4 percent in the first quarter of 2017. Noted in one of our prior blog postings, many branded CPG food producers continue to deal with challenges of low growth and permanent changes in consumer buying. For the automotive industry, a multi-year period of robust sales growth in North America is showing signs of more subdued growth. Producers such as Ford Motor, Fiat Chrysler and General Motors reported April monthly sales declines, including popular selling truck and SUV models. According to data from WardsAuto.com, U.S. auto dealers are now languished with a 72-day supply of unsold new vehicles. A report by The Wall Street Journal indicates that GM has nearly one million vehicles sitting on dealer lots. Additional manufacturing cutbacks are now being considered even though the late Spring and Summer are traditional periods of higher volume sales.

Our prediction for 2016, and again for 2017 is that resiliency, adaptability, and risk mitigation are very important competencies since the pace of business and of economic data are in constant flux. It is much more important for teams to be able to constantly sense market demand and look-ahead to what is occurring in specific regions.

The takeaway is that S&OP and respective supply chain planning teams are tasked to insure bimodal business plan performance which implies growing the top revenue line, insuring business margins are fulfilled, and that proper contingencies for the business and for the supply chain are always in-play, regardless of the constant ebbs and flows of the global economy.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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