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Lessons of the 2011 Japan Earthquake and Tsunami Applied in 2016

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This week, our thoughts and prayers are with all those that have impacted by the recent significant earthquakes that have occurred in Italy, northwest of Rome. News images once again remind us of the death and destruction of such natural disasters. We trust that those affected by the latest quakes in Italy will be able to bounce back to some normalcy in the not too distant future.

As many of our Supply Chain Matters readers may be aware, a series of significant destructive earthquakes struck southern Japan in April, with concerning supply chain disruption indications.  We touched upon the many multi-industry implications in a mid-April commentary. Almost four months after this latest round of quakes, it appears that many Japan based manufacturers and component suppliers have instituted effective supply chain risk mitigation efforts.

The Associated Press reported this week that the Honda motorcycle facility near Kumamoto, on the southern island of Kyushu has “virtually normalized” production operations as of this week. The report notes that the plant, severely damaged by the quakes and completely idled for the first two weeks after the major quakes struck, has gradually restored output. However, Honda is still working to stabilize its supply network for engine parts related to mini-vehicles.

Similarly, automotive producers Nissan and Toyota collaborated and worked with major supplier Aisin Seiki Co. to restore production operations among two major component supply facilities located in Kumamoto region that incurred damages as a result of the quakes.  Seiki acknowledged the discovery of broken walls, windows and assembly equipment at its facilities in the quake area but quickly shifted the production of door and engine parts to other owned facilities located in other parts of Japan and outside the country as well. Toyota was able to resume assembly operations among four plants in early May.

In our Q1 Newsletter, we called attention to a Reuters article indicating that after the devastating earthquakes and subsequent tsunami that struck northern Japan in 2011, many Japan based manufacturers elected to reassess their supply chain risk mitigation and inventory management practices. Some Japan supply chain experts advocated that holding more safety stock inventory or adding another contingency production line would deter from the global competiveness of Japan based manufacturers.  Yet, examples were provided where foreign based suppliers such as German based Merck KGaA and ZF-TRW analyzed strategic inventory strategies and indeed elected to hold more safety stock. TRW, a producer of auto safety systems now stores back-up production equipment at more of its supplier plants.

Thus it would appear that manufacturers have indeed applied the lessons of 2011 in supply chain risk mitigation.


The Newest Phase for Elongated Supplier Payments- More Aggressive Supplier Push-Back

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Of late, the trend of extending payment terms to suppliers should not be any new news to many of our Supply Chain Matters readers since such practices continue to gain multi-industry momentum. Such momentum continues because private equity firms and high powered consultants in finance now advocate and practice this tactic as a means to boost earnings and operating cash flow.  However, what we view as an even more disturbing trend is current more aggressive efforts by suppliers to now push back by exercising whatever options they have, up to and including significant supply disruptions.

To ascertain the scope of the trend towards extending payments to suppliers, we exercised a Google search this morning on the term: News- suppliers not being paid. That search yielded and eye-popping 9.7 million item results, an obvious indication of industry-wide trending.

Just about a year ago, Bloomberg published an article: Big Companies Don’t Pay Their Bills on Time. The author, Justin Fox attributed the increased trend among large global companies to extend payments to suppliers to two principle influences. The first was Amazon, that being yet another aspect what we often describe as “the Amazon effect.”  In essence, the online retailer had a cash conversion cycle of negative 24 days in 2014, meaning the online retailer received cash from customers 24 days before it was paid out to suppliers. The other major influence was noted as Brazilian private-equity firm 3G Capital which has acquired well known consumer brands and operates primarily today as Anheuser-Busch InBev. A chart in the Bloomberg report indicates that since the acquisition of Anheuser in 2008, supplier payments stretched to near 260 days by 2014 with InBev on-average paying suppliers 176 days after the company was paid by customers. That is nearly six months of cash float.

Similarly, after previously attending this year’s Institute of Supply Management (ISM) annual conference, this author penned a blog commentary on a session where private equity firm representatives leveraged their stated tactic of operational intervention and improvement, namely concentration in procurement policies to harvest cash flow and margin savings.

The Bloomberg article further charts well-known names Procter and Gamble, Mondelez and Kimberly-Clark, who collectively have to now respond to 3G’s industry presence with the acquisition of both Heinz and Kraft. in the consumer-goods sector. By 2014, days payable outstanding for all three had grown to between 70 and 85 days.

And so the ripple effect of this trend continues offering the brand owner opportunities to leverage cash flows, product margins and profitability, while the ripple effects cascade down the to the remainder of the supply chain.

The open question now remains as to what are various industry norms for paying suppliers, and invariably, the principles of supplier survival and stakeholder interest come into play when such practices become more wide-spread. More and more, such incidents seem to be on the increase.

In early July, General Motors encountered a brief supply disruption over a contract dispute and bankruptcy filing from Clark-Cutler-McDermott Co. a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America. The supplier stopped producing parts for GM after work shifts on a Friday and laid off its workforce. Subsequently the supplier refused to grant GM access to any remaining inventory or production tools forcing GM layers to enter a legal process proceeding in bankruptcy court to gain rights to tooling and any leftover inventory.

In late July, avionics producer Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments and noted as a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. In its reporting, The Wall Street Journal observed that the industry relationship among Rockwell and Boeing was previously noted for positive collaboration in ongoing cost-control efforts resulting in Rockwell gaining additional supply contracts involving other produced commercial and military aircraft.

Similarly, British based GKN, a supplier of cabin windows, ice protection systems and winglets, openly called Boeing to task for extending supplier payments. Both Reuters and The Wall Street Journal had earlier reported that to boost its cash flows, Boeing was extending supplier payments from 30 days, too upwards of 120 days while at the same time continuing efforts to scale-up the supply chain to address upwards of ten years in booked orders.

Other noteworthy news related to supplier push have involved UK retailer Tesco as well as global  iron and steel producer Rio Tinto.

The most recent public incident of outright supply disruption is now Volkswagen dealing with the possibility of reduced working hours involving multiple German based final assembly plants resulting from a supplier dispute with two suppliers, Car Trim and ES Automobilguss. Car Trim reportedly supplies parts for seating and ES Automobilguss produces gearbox components for a variety of different VW car models. As of today, business media is reporting that negotiations are ongoing to resolve the matter after the suppliers cut component supply deliveries feeding four final assembly plants. The suppliers have denied responsibility for the situation, indicating that VW cancelled contracts without explanation or compensation and the decision to halt delivery was taken to protect their own workforces. As we pen this posting, upwards of 10,000 workers at VW’s main plant in Wolfsburg, Germany are close to being idled due to parts shortages. Both suppliers, which are part of holding company Prevent, have denied any responsibility in the pending supply disruption claiming that VW is responsible for creating its own supply crisis because of the lack of timely payments to suppliers and that the suppliers’ decisions were taken to protect their own workforces and financial health.

Thus we observe a common theme beginning to manifest across different industry supply chain settings, more aggressive supplier push-back to existing payment terms and the transfer of the burden of cash-flow.

In prior Supply Chain Matters postings, this Editor has not been very keen on such strategies namely because of the short and longer-term havoc imposed on supply chain capabilities and ongoing relationships. But, with the realities of the current business environment being what they are, and with so many firms now under the short-term professional looking glass, the elongated payment strategies extend, testing such relationships. This is obviously not healthy, and many other voices are beginning or have already concluded as-such.

Our prior advice to procurement professionals was essentially to be forewarned and prepared since those possessing or prepared with termed financial engineering skills can reap some short-term financial and other bonus rewards.

We now extend advice to the broader supply chain management leadership and operations management communities. If you have little choice but to exercise such strategies, best be prepared for the new consequences of supplier push back and potentially harmful supply disruptions and eroded supplier relationships.

The age old adage remains that long-term success is built on two-way, win-win relationships. An I win-you lose relationships helps lawyers to stay gainfully engaged and your supply chain to be in constant jeopardy. When times are good, such strategies can yield some benefits. When times are challenged, such as the 2008-2009 global recession, they often lead to massive supply disruptions or calls for mutual sacrifice from suppliers.  They further lead to missed opportunities for joint-collaboration on product and process innovation since suppliers are indeed savvy to stick with customers to consistently try to adhere to win-win relationship building.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.

 


New Acquisitions Occurring Involving Integrated Supply Chain Planning and Execution Technology

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Acquisition interest focused on integrated supply chain planning and execution technology has indeed re-energized during this Q3 period. We previously alerted our Supply Chain Matters readership to last week’s published report indicating that Honeywell was in talks to acquire JDA Software. Also last week, mid-market ERP technology provider Plex Systems announced that it had acquired supply chain planning technology provider DemandCaster.

Last week’s blockbuster news regarding the potential acquisition of JDA Software came from an exclusive report published by Reuters which cited unnamed sources familiar with the negotiations. Today, The Wall Street Journal, further citing its own sources, reports that a deal is near among the two parties. The report further highlights JDA’s former strategy for integrating planning and execution including its prior acquisition of RedPrairie. The WSJ confirms that the deal values JDA at around $3 billion and could be announced rather shortly.  The acquisition would reportedly boost Honeywell’s efforts to enter the software area with an integrated supply chain planning and execution provider.

Our Supply Chain Matters view of this latest report leads us to believe that Honeywell may be making a play to penetrate the Internet-of-Things (IoT) segment with a concentration on supply chain management and execution focused processes, We will know more once a deal is announced and consummated. Keep in-mind that another suitor could surface by the revelation of the very significant $2 billion debt burden of JDA places a high hurdle, one that only a large enterprise software vendor would undertake.

Plex’s Acquisition of DemandCaster

Plex’s acquisition, on the other hand, is focused on further enhancing its Cloud-based ERP platform with broader capabilities in supply chain and sales and operations planning support for its traditional manufacturing based customers. Since both firms are privately-held, no financial terms were disclosed.

For those unfamiliar, Plex has its original roots in support for the Automotive industry supply chain, specially multi-tier suppliers that constantly respond to changing component demand and replenishment signals from various OEM’s. The firm’s technology has had an end-to-end focus that includes a strong concentration and linkage of ERP to manufacturing execution systems (MES). The mid-market ERP provider has since branched out to other manufacturing industry verticals including after-market services and support.

DemandCaster was founded in 2004 principally by a former manufacturing operations executive who had a vision for a more user-friendly approach in supply chain and manufacturing support needs. Many former supply chain planning providers were founded by entrepreneurs with operations research or academic resumes. Its approach to the market is somewhat novel in that DemandCaster offers all of its customers the option to cancel their subscription at any time if the service is not providing expected value.  The firm and its founders pride themselves in their intuitive end-user interfaces included within applications. The firm’s technology is native Microsoft Cloud multi-tenant based, providing a familiar MS Office and Microsoft Azure based look and feel. The founders additionally have shunned external financial investment partners electing a pure organic growth strategy.

Supply chain focused technology applications include support for basic forecasting and inventory planning, inventory optimization, distribution requirements planning (DRP) and capacity planning. A sales and operations application includes support for demand and supply planning. DemandCaster actually partnered with Plex about a year ago in an OEM arrangement. Earlier, the firm also partnered with Cloud-based ERP provider NetSuite as a supply chain planning focused extension application in a referral arrangement.

This author had the opportunity to directly speak with Jim Shepherd, Plex’s Vice-President of Strategy who confirmed that Plex had initiated its interest in DemandCaster prior to the recent announcement by Oracle of its intent to acquire NetSuite.  Most all of Plex’s customers have global based supply chains that require more responsive capabilities to constantly changing product demand and supply needs. Plex was further attracted to the user-friendliness of various supply chain planning modules, the native Cloud based technology as well as the built-in integration to other ERP or best-of-breed SCM focused platforms. Plex having the established one-year relationship provided further awareness to the attractiveness of DemandCaster’s approach to supply chain planning and execution capabilities.

We would quickly add that from our lens, DeamndCaster has more appeal to line-of-business buyer teams who often weigh user-friendliness and time-to-technology value higher in the ultimate buying decision. Shepherd further confirmed that DemandCaster will remain an independent brand, as well as an inherent part of Plex’s future ERP capabilities. This is a similar strategy that ERP providers such as Oracle and QAD have employed in acquisitions specifically related to supply chain management focused technology. Such a strategy opens the door for cross-selling into other ERP or best-of-breed supply chain dominant environments.

Shepherd reiterated that a long list of planned additional investments is planned for DemandCaster, investments that could not be achieved without an external investor. Mentioned were building-out comprehensive analytics capabilities directly related to S&OP focused processes, and that DemandCaster would part of future supply chain focused analytics down the road.

What it Means

While both of these new developments come from somewhat different strategic motivations, they point to renewed and building market interest in integrated supply chain planning and execution capabilities that can be tied to future needs in enhanced analytics driven decision-making, more integrated business planning and abilities to support future IoT based business models that provide enhanced decision-making based on connecting physical and digital processes. By our lens, it will place additional pressures on existing best-of-breed supply chain technology players to further enhance their integration to physical supply chain execution.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Key Autopilot Technology Supplier Elects to Part Ways with Tesla

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It is not that often that one reads about a key supplier that has elected to dismiss a major customer, let alone a customer that has high consumer and industry appeal.  Thus the indication published by The Wall Street Journal today reporting that Mobileye, a key supplier of autopilot technology has elected to part ways with Tesla Motors.(Paid subscription required)

According to the report, the supplier will no longer provide its auto pilot computer chips after the current supply agreement ends because of disagreements about how the technology was deployed.  The WSJ report points to the recent tragic accident involving a driver in Florida whose Tesla autopilot failed to recognize a turning tractor-trailer vehicle, causing a fatal crash. The supplier indicated to the publication that its current system was not designed to always detect vehicles cutting in-front, and that a new software release scheduled for 2018 would be able to do so. The report quotes Mobileye’s Chief Technology Officer indicating that in a partnership, the supplier needs to be there regarding all aspects on how the technology is being utilized.

According to the report, Israel based Mobileye is a current supplier to more than a dozen separate auto producers and that Tesla sales account for about one percent of its current revenues.

Tesla’s CEO Elon Musk indicated in an email to the WSJ that the split would not affect the company’s plan to develop more advanced versions of its Autopilot system and further indicated that the move was expected. Yesterday, the disclosure by Mobileye pushed its stock into a reported decline of 8 percent at the day’ close.

One could certainly speculate whether this announcement is either directly related to pending litigation or whether the partnership was straining for other reasons related to development timetables. However, it is noteworthy when a supplier takes the bold initiative to walk away from one of the most visible automotive industry companies on a global basis, one that is gearing-up to produce upwards of 500,000 electric powered vehicles in the coming few years.

As noted and observed in our prior and most recent Supply Chain Matters commentaries related to Tesla, it adds yet another challenge on the need to develop and nurture a supplier base that can provide continued leading-edge technology and volume requirements that can match Tesla’s timetables and aggressive product development and deployment needs.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.


Tesla’s Revised Master Plan Provides More Product Engineering and Supply Chain Implications

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Last week, Tesla founder and CEO Elon Musk penned a blog posting that essentially updated the master plan for the company that called for a broader product development thrust into hybrid trucks and buses. This places a far broader emphasis on the firm’s supply chain ramp-up challenges, one with the implication that Tesla will, by our view, have to seriously consider adding to existing final assembly production capacity beyond its current Fremont California facility.Tesla ModelX_Live

The commentary itself not only provides an argument for why the electric car company must merge with SolarCity, but a further expansion of the master plan that includes:

  • Create stunning solar roofs with seamlessly integrated battery storage
  • Expand the electric vehicle product line to address all major segments
  • Develop a self-driving capability that is 10X safer than manual via massive fleet learning
  • Enable your car to make money for you when you aren’t using it

New product offerings were described as a new form of pick-up truck, and beyond the consumer vehicles market, an innovative heavy-duty trucks and high passenger density urban transport vehicle. Regarding the latter, Musk envisions a smaller footprint of urban busses with a transition from the role of individual bus driver to one of fleet manager. Both are noted as in the early stages of development at Tesla and should be available for unveiling next year, and will follow the availability of the more affordable Model 3 currently due in 2017.

Supply Chain Matters previously highlighted efforts of truck maker Nicola Motor Company in developing a Class 8, 2000 horsepower electric powered semi-tractor truck that will be named the Nicola One. This manufacturer has to-date booked 7000 reservations, each accompanied by a $1500 deposit, totaling more than $2.3 billion in cash to secure a reservation for this new vehicle, hence the sense of urgency for Tesla to enter such a market.

To state that the latest master plan is audacious or ambitious is an understatement. It places a far more concentrated focus on whether product development and the supply chain can rise to the challenge in such a short timeframe.

As noted, our last Supply Chain Matters commentary on Tesla concluded that the company remains challenged by supply chain ramp-up issues as it strives to meet aggressive short and long-term production and supply chain needs of existing announced vehicles. Musk has literally accelerated by two years, his goal to have the California final assembly facility output 500,000 vehicles per year. In his latest blog post, Musk once again re-iterated that this will be addressed as a function of engineering:

What really matters to accelerate a sustainable future is being able to scale up production volume as quickly as possible. That is why Tesla engineering has transitioned to focus heavily on designing the machine that makes the machine — turning the factory itself into a product.

The adding of commercial vehicles with more innovative hardware and software designs implies no choice but to accelerate capacity, strategic commodity and supply chain wide resources. Just today, The Wall Street Journal reports (Paid subscription required) that Tesla’s new $5 billion “gigafactory” near Sparks Nevada to produce the combined company’s battery component needs is currently one-sixth of its planned future footprint. Currently, 1000 construction workers are working two shifts per day, seven days per week to prepare for 2017 needs in the output of lithium-ion cells. Primary battery supplier Panasonic admits to the current challenges of finding qualified production workers, and with the addition of even more models of transport vehicles, the scale of the battery plant’s capability become crucial.  But so does final assembly and distribution as well, in an area that is noted for rather expensive real estate and distribution space.

Thus, any experienced or even entry level supply chain and manufacturing professionals that enjoy an environment of fast-paced innovation and creativity in business process and physical supply chain processes best route your resumes to Tesla. We anticipate a razor-like focus that harnesses the fusion of engineering, product development and supply chain management into a kaleidoscope of expansion that will test current norms and thinking.

Bob Ferrari


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