In conjunction with the Detroit Auto Show that has been underway in the U.S. there has been no shortage of business media news stories related to the state of the industry. No doubt, the headline for industry and associated supply chain oriented audiences reflects on what a difference one year can make.

Readers can certainly recall that during the past global financial crisis, two of the largest automotive OEM’s were in bankruptcy and in need of large scale restructuring. Global markets were weak and many governments had to initiate stimulus programs to salvage their respective home country manufacturers along with industry jobs. Japanese brands were dominant, but Korean brands such as Hyundai were starting a thrust.

As we enter 2012, the industry has a far different picture. Both General Motors and Chrysler Group are doing superbly after re-structuring and new management. Auto sales among the “big three” U.S. OEM’s rose 13 percent in 2011. Volkswagen and Hyundai have garnered tremendous momentum while Toyota and Honda continue to respond to significant supply setbacks brought about by supply chain disruption.

From a global markets perspective, the largest growth market for autos was in the U.S. which experienced a 10 percent growth rate.  A review of individual OEM U.S. sales growth rates in 2011 reveals:

• Chrysler up 26 percent
• Volkswagen up 26 percent
• Hyundai up 20 percent
• Nissan up 15 percent
• General Motors up 13 percent
• Ford up 11 percent
• Honda down 7.1 percent
• Toyota down 6.7 percent

The state of the U.S. automotive supply chains has transformed and is in far better shape than just a year ago. OEM’s have worked hard on global-wide platform product strategies along with improved flexible manufacturing techniques that allow factories to be able to support multiple models with different market growth rates. The industry has also gained more sensitivity to positive supplier relationships and participation in globally focused S&OP planning activities.

China, the world’s other market in terms of long-term growth potential, only grew 2.5 percent in 2011 as suspended government subsidies took a toll on overall demand. Of more interest, foreign brands such as BMW, GM, Ford, and Volkswagen demonstrated healthier growth levels which indicate that Chinese consumers are very particular with the brands they ultimately purchase.

Europe’s auto sales actually contracted by more than one percent and the ongoing Eurozone financial crisis do not provide optimism that Europe’s market will improve anytime soon.  Europe continues to suffer from far too much production capacity, and industry executives such as Fiat / Chrysler chief Sergio Marchionne predict more consolidation among industry participants.

In recent weeks, as a result of these trends, as well as the worsening currency exchange and energy supply problems affecting Japan, there has been a spate of announcements from automakers who have now decided to additionally invest in U.S. production capability.  In addition to Honda’s significant announcement in December, BMW, Chrysler, Daimler, Ford and others have each announcement significant new investments in U.S. production capacity.

Hyundai has had such a spectacular growth in the U.S. and other global regions that its management has announced that it has throttled-back growth expectations to take the time to focus instead to build on process quality and customer service needs. The Financial Times last week noted that Hyundai management wants to avoid the mistakes made by GM and Toyota that put too much emphasis on growing market share than in quality.  Supply Chain Matters commends Hyundai for that decision.

A rapidly changing global economy, changed make-up of executive leadership, significant unplanned supply disruptions and continued investments in value-chain capabilities have resulted in the automotive industry being in a far different landscape in the coming months.  This is yet another reinforcement that for this economy the need for teams to have the supply chain in constant alignment to a rapidly changing set of business strategies is a continuous imperative.

In our soon to be published Supply Chain Matters Q4-2011 Quarterly Newsletter, we will provide additional commentary relative to the signs of a renaissance for U.S. manufacturing.

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

Supply Chain Matters provides another reader update regarding the global supply chain impacts from the devastating monsoon floods that impacted Thailand and other Southeast Asian countries in the Fall of 2011. Readers might recall that beyond the tragic loss of life, the flooding impacted over two-thirds of the country’s provinces and that seven of country’s important industrial manufacturing parks were severely flooded. While some factories have restarted operations, others continue to struggle with various issues.

In our previous general update in mid-November, we honed in on the specific impacts that both the high tech and automotive industries would potentially encounter. As we enter 2012, these impacts continue, although the picture appears to be a bit more optimistic.  On the other hand, as noted in our 2012 Predictions for Global Supply Chains, the broader and more far reaching implications concerning the Thai flooding and other 2011 disruptive events are raising significant new considerations for strategic and other product sourcing decisions in the months to come.

For high tech and consumer electronics, all eyes remained focused on hard disk drives (HDD) production.  Western Digital, initially the most impacted manufacturer, re-started some partial HDD production in its Thai Bang Pa-in facility in the first week of December, one week ahead of schedule.  That facility had been submerged under six feet of water.  Western Digital expects to ramp-up production at this facility during the March 2012 quarter. Other of the company’s production facilities in Thailand are in the process of re-starting.  The expected impacts on reduced overall HDD supply and pricing are underway.  Both EMC and HP increased large-scale storage system pricing in late December in the range of 5 to 15 percent, but supply shortages have amplified price levels even further. In Asia, there are reports that HDD pricing at the retail level has spiked as much as 50 to 100 percent. The Semiconductor Industry Association (SIA) released a statement in early January noting: “Supply chain disruptions resulting from the floods in Thailand have impacted semiconductor sales in the near term, however OEM’s are expected to recover production losses over the course of the next few months.” Industry leader Intel attributed its latest quarterly decline in revenues to the impact of supply brought about from the result of the floods.

Computer OEM’s such as Apple, HP, Lenovo and Dell remain publically silent concerning an ongoing shortage of disk drives but we are sure that internal supply planning teams have been hard at work sorting out disk allocation and various product offering scenarios.  As anticipated, most of the available supply is being allocated to higher priced, more profitable PC products.

Regarding other industry impacts, reports from Japan indicate that the country experienced a 2.6 percent month-to-month drop in factory production for November, which was worse than had been predicted. According to an AFP report, production of passenger cars and mobile phones were among the hardest hit because of the supply shortage impacts emanating from Japanese-plant sourcing in Thailand. However, Japanese automotive providers were reported to be more optimistic for December and January production output levels. Both Toyota and Honda have now acknowledged that the combination of massive supply disruption brought about from the earthquake and tsunami that impacted Japan in March, and the Thai monsoon related floods, have caused both to lose market share because of reduced vehicle output.

Other industry impacts have come to light.  PPG Industries has indicated that production of certain optical components prevented that company from satisfying supply contracts and conducting normal business.  Goodyear Tire and Rubber warned in December that impacts of the Thai flooding could result in “a potential global shortage” of aircraft tires.

Beyond the tragic loss of life, the World Bank estimates that flood damage has reached $45 billion and rebuilding efforts are estimated at about $25 billion. This loss, along with the unprecedented magnitude of loses emanating from certain areas of Asia and Australia has motivated major global insurers and re-insurance firms to reduce their exposure to certain catastrophe prone areas.  The Financial Times recently reported that exposures in Australia, Indonesia, Taiwan and Vietnam have all experienced large insurance premium rises during key early January policy renewal negotiations.  Noted were premium rate increases in the range of 10 percent to as high as 35 percent in these countries, with certain exposures in Australia rising in the range of 40-75 percent, and New Zealand 80-150 percent.

Supply Chain Matters continues to believe that these developments will motivate CFO’s and Chief Supply Chain Officer’s to revisit near and longer-term sourcing strategies that directly relate to regions deemed high risk for natural or catastrophic future incidents.  Beyond the cost of direct labor and transportation, a new, more sobering financial input has been added to the evaluation of strategic sourcing, and that should be prompting strategic sourcing teams to begin to revisit sourcing strategies.

The year 2012 has not added to the confidence of a year that was not like 2011 in terms of global supply chain disruption.  Last week, a 7.2 magnitude earthquake that struck of the coast of Indonesia prompted a brief tsunami warning.  Luckily, the tsunami did not occur and damage was reported as minimal, but nerves were definitely rattled.  The bottom-line is that the probability for global supply chain disruption prompted by natural disasters and catastrophe events remains high and manufacturers are about to actively re-examine global sourcing strategies weighting a new and financial sobering aspect of geographic exposure to regions more prone to these incidents going forward.

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and Supply Chain Matters blog, All rights reserved.

A highly significant supply chain related news story comes this week from Honda Motor Co., one that has the potential to bring significant change to North America based manufacturing.  As the Christmas holidays approach, Honda’s North American and supply chain partner employees will certainly have some cheer.

According to an article published in the Wall Street Journal (paid subscription or free metered view restriction), Honda plans to shift a major portion of its production capacity into North America over the next few years.

The implication for Honda’s current North American production facilities and supporting supply chains are highly significant since the numbers indicate as much as a 40 percent increase in production and the positioning of Honda North America as both a producer for both domestic and global export markets.  If the full plans are implemented, North America would represent more than 50 percent of Honda’s global production capability, with export volumes in the range of 200,000 to 300,000 vehicles annually.

The reasons for this major announcement are fairly obvious and far reaching.  With the continued stubborn strength of the Japanese yen making manufacturing exports highly unprofitable, many Japanese based manufacturers can no longer afford to have the bulk of export oriented manufacturing based in Japan.  This has led to many difficult decisions, not only for Japan’s automotive producers, but high tech and consumer electronics manufacturers as well.  The one high visibility exception has been Toyota, with its chairmen continuing to believe that the company has a commitment to continue to have some export production based in Japan. But even Toyota has begun planning for shifting increased capacity and output to North America and other global based facilities.

The other motivation points to global supply chain risk mitigation. The major disruptions concerning the devastating earthquake and tsunami that struck northern Japan and the monsoon-related floods that impacted numerous manufacturing facilities within Thailand have exposed certain risk vulnerabilities. At the height of the tsunami crisis that impacted Japan, Nissan exported V6 engines from its North America plants to Japan in order to keep its southern Japan plants operating. That action, along with others, caused Nissan to overcome the crisis much quicker than some of its Japan based competitors.

As noted in our 2012 Predictions series, 2011 events have been a wake-up call for globally sourced manufacturers, and global insurance and reinsurance carriers are in the process of re-evaluating high risk geographies, which could result in higher insurance premiums for regions more vulnerable to catastrophic natural disaster.

The prospects for increased manufacturing and automotive supply chain related jobs for the U.S. are obvious.  Supply Chain Matters, however, would add a note of caution.  For North America to become a new source of global export capability there will need to be major investments in supply chain and skills infrastructure.  In the case of Honda, the concentration of North American production and supply chain facilities lies in the U.S. Midwest region (Ohio, Indiana, Ontario Canada), and vehicles will have to be transported to export ports on either the U.S. west or east coasts.  If other Japanese and foreign owned manufacturers also expand, current facilities in the U.S. Southern region would add transportation segments to export-related ports.  With the pending opening of an expanded Panama Canal, U.S. ports could experience a dramatic increase in operations. Air freight hubs such as Huntsville and Nashville would be impacted with increased operational volumes.  With inter-modal trucking and rail capacity currently constrained, port authorities as well as rail, third party logistics and trucking carriers will need to invest in added infrastructure, equipment and productivity tools.  In the area of skills, many U.S. manufacturers complain that they cannot fill existing needs because of a lack of technically skilled people.

Our readers in North America should have one significant takeaway from the implications of this latest Honda announcement.  Now is the time to hold politicians and industry accountable for actively supporting and shepherding the required investments in world class transportation, logistics and skills infrastructure that can sustain North America as a global manufacturing hub and a generator of jobs.

The current Congressional gridlock must move beyond partisan politics and focus on what generating jobs really implies.  Recent opinion polls indicate that the U.S. electorate holds their Congressional legislators in the lowest regards.  News commentators now joke that criminals have higher public opinion ratings.

Supply Chain Matters continues to believe that the U.S. Presidential Commission on Jobs and Competitiveness must include in its recommendations both assessment and specific action plans for needed changes in U.S. supply chain and logistics infrastructure, and Congress and industry should immediately act in concert for active implementation of needs.

As the saying goes, when opportunity strikes, take action!

Job growth is on the doorstep, but it comes with a resolve to action. Get involved and have your voice heard.

Bob Ferrari

The following commentary is also featured on the Supply Chain Expert Community web site where the author is a featured guest contributor.

Much has been stated and written noting the fact that global enterprises compete not only on the differentiation of offered products and services, but also on the differentiated capabilities of individual supply chains.  There are many industry case studies, but one that continues to evolve is the global automotive industry.

The global automotive industry has experienced a post-recessionary comeback from the depths of the 2008-2009 global financial crises. Growth markets have been in Eastern Europe, China, Latin and North America. There is, however, a strong possibility that the top three players including Toyota, will shift in ranking status because of a series of quality, supply chain disruption and economic setbacks.  Some industry watchers are predicting that Volkswagen will surpass both Toyota and General Motors for the top global spot.

The Financial Times (paid subscription or free metered view) has been featuring a series of running commentaries related to Volkswagen.  This auto maker is current on-track to sell 8 million vehicles on a global basis in 2011, and deploys a supply chain presence involving more than 90 manufacturing plants, over $80 billion in procurement activities supporting the building of 200 different vehicle models.  Revenues have increased 26 percent in the latest quarter with profits surpassing 13.6 billion euros. More importantly, the Times points out that industry competitors view VW as the benchmark for manufacturing efficiency and profitability, a competency that was once the sole purview of Toyota. VW was one of the first auto makers to invest in China, choosing a partnership strategy with existing Chinese producers SAIC and FAW.  Today, VW brands have the number one market status within China, followed by GM and Hyundai.

What is important to keep in mind relative to VW is its diversity of 10 car and truck brands, from low-cost to ultra- premium, its emphasis on integrating product engineering with production and global supply strategy needs, and a ruthless focus of product quality that stems from senior management. While various brands adhere to autonomy in vehicle design and pricing, areas of procurement and production focus on global supply chain leverage.  The more expensive Audi  and lower-cost VW brands are often produced with the same underlying platforms sharing similar supply components. Of late, various brands have customized vehicle features to accommodate local market needs and desires.

The competitive strategy among global automotive players is having the ability to leverage large volumes of vehicle production leveraging just a few vehicle platforms. We recently penned a Supply Chain Expert Community commentary reflecting on Fiat and Chrysler’s efforts to deploy a global supply chain strategy.

Another evolving strategy has been a renewed emphasis on vertical integration of supply, for instance, the ability to customize specialty steel designs.  Supply Chain Matters recently penned a commentary on Hyundai’s efforts in this area.

VW has been hard at work consolidating underlying product platforms to just two basic architectures, engine in transverse position, and engine in a longitudinal position. Engine and drivetrain production is shared among brands, and each Volkswagen-owned factory features the same processes and controls across the globe. VW is in the process of rolling out a “modular toolbox” manufacturing system that allows for platform sharing on a global-wide scale.

VW also believes in leveraged investment in IT technologies to streamline information flows, increase productivity among procurement and supply chain teams as well as enabling sense and respond capabilities to enhance local and global-wide decision-making.

But as the FT article rightfully points out, vast scale and commonality in procurement of components can lead to increased exposure to risk, as Toyota and other Japanese car makers discovered with the effects of the 2011 Japan tsunami and Thailand monsoon related floods. This places a renewed emphasis on risk mitigation and response management as important supply chain capability differentiators.  Recent reports indicate that Nissan may overtake Honda in global ranking, primarily because it was able to overcome recent natural disaster impacts more quickly.  For its part, VW management is reported to have been closely observing the effects that supply chain disruption can have to the overall business, along with the need for geographical redundancy of parts and production capability.

The global automotive industry ranking may well be different in the coming months and years, and the differentiators in our view, will be the seamless integration of product platform design, procurement sourcing, consistency in manufacturing and agility in global supply chain response capabilities.

Bob Ferrari

©2011, The Ferrari Consulting and Research Group LLC and Supply Chain Matters, All rights reserved.

This commentary can also be viewed on the Supply Chain Expert Community web site, upon which the author is a featured guest blogger.

One of the cornerstones of the Supply Chain Matters blog is to track the history of specific supply chain related events involving industries and to help our readers connect the dots in term of strategy and results. In May 2009, we featured a commentary regarding Fiat Group and its unfolding strategy of opportunistic supply chain strategy, specifically its planned acquisition of Chrysler in the U.S..  At the time, this author was impressed with Fiat chairmen Sergio Marchionne and his strategy to make both companies global players in the industry.

As we approach the end of 2011, the story of Fiat and Chrysler is much more positive, with an even stronger potential.  We call readers attention to an article published in the December 19 edition of Time, Power Steering- How Chrysler’s Italian boss drives an American auto rival. (paid subscription required) Author Bill Saporito pens a very insightful look at Chrysler, where it was, and what it is becoming, and in particular, the noticeable leadership of its chairmen, Sergio Marchionne. Sergio has a knack for turning around dysfunctional automobile companies along with a keen understanding of operations and value-chain management.

The article points out that Fiat’s small-car prowess, engine technology and superior manufacturing capability was a perfect complement to Chrysler’s needs. Fiat which now owns 53.5 percent of Chrysler, has made its impact. Chrysler revenues were up 23 percent in Q3-2011 and could top $55 billion.  Operating profit could reach $5 billion vs. hemorrhaging $1 billion a month in 2009. In May, Chrysler transferred $5.9 billion to the U.S. treasury, paying off its bailout loan six years ahead of schedule.

The article goes on to expound on 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.  He has thus far resized the company, flattened management layers, and overhauled the vehicle line-up in record time. Mr. Marchionne is a strong believer in elimination of management layers and practices promoting people buried in the ranks to higher levels of responsibility, giving such people all that they need to succeed and prove their potential. It is referred to as loose-tight management, a concept which many successful companies have practiced.  At the same time, he also holds people accountable for definitive results and is not shy about pulling the plug when results are not forthcoming. The author notes that: “Marchionne has the Steve Jobs gift of absolute focus.” He gets into the details. He also does not choose to have his office within Chrysler’s former executive penthouse, opting instead to locate his office in the engineering department, a visual reinforcement that it is no longer business as usual.

As was noted in 2009, Marchionne has a vision that the surviving global automotive OEM’s will need to have sufficient volumes of production to support each of the major world markets, at least one million for each major product platform in order to drive required global production cost efficiency and sustained profitability.  This translates to a combined goal for producing 6 million vehicles among the Fiat and Chrysler brands, with today’s volumes at 4.2 million vehicles. Fiat has become a global leader in efficient, high-volume, robotized production of small displacement engines and there are plans to have a similar focus for V6 engines.  Fiat also excels in small diesel powered engines, and its production facility in Poland recently exceeded a production target of 4 million 1.3 litre, 16 valve MultiJet technology engines. Technology and world class manufacturing knowledge transfer is underway among both companies with a cultural premise that production workers, not engineers, own the quality control process.  A global manufacturing boss has been appointed to oversee both Chrysler and Fiat, and the article points out that Mr. Marchionne has been known to show up from time-to-time at warranty analysis and quality performance meetings. Chrysler itself has not been known to invest in advanced supply chain software technology for planning and business intelligence but that may perhaps change.

The first totally new vehicle of the combined Fiat-Chrysler collaboration will debut in 2012 with a C-class Dodge branded vehicle. It will be based on the Fiat platform of the Alfa Romeo Giulietta, adapted for U.S. market requirements. There is a further plan to invest $23 billion to develop new vehicles for Chrysler through 2014, a rather aggressive plan by U.S. automotive industry standards, and all vehicle can be adapted by Fiat for other global sales needs.

The Time article concludes with a very characteristic Marchionne quote: “People need to trust you that you’re going to pull them out and that they will follow you when you pull them out.  If they don’t get that comfort, they’re going to drop you. This is true of organizations.  It’s true of countries.”

We would add that this quote represents a philosophy that is rather important for senior and team focused supply chain management in the coming year and beyond, namely the ability to lead, get into the details, provide people with the means and tools to accomplish their goals, and to foster consistent accountability.

In our 2009 commentary, we closed with the statement that whether the combined force of Fiat and Chrysler was totally successful, we have the opportunity to observe a visionary company with a leader that truly understands the importance of a leveraged global value-chain and integrated supply chain execution.  Two years later, this case study continues to play out with positive potentials.

Time will tell if this will become a definitive case study in vision and consistent execution in supply chain management but the scorecard thus far is rather positive.

Bob Ferrari

© 2011, The Ferrari Consulting and Research Group LLC and Supply Chain Matters.  All rights reserved.

The following commentary can also be viewed and commented on the Supply Chain Expert Community web site.

There is a developing story that should capture community reading interest because of its supply chain related learning.

General Motors Photo

One of the current day business news headlines concerns the General Motors developed Chevrolet Volt, the company’s premiere entry into the plug-in hybrid automobile market. The Volt has been highly touted as the future of automotive technology, and aggressive production, marketing and sales goals have been established for 2012. The vehicle currently comes with a rather pricey sticker price, namely $41,000, and GM believes that the innovative features of the futurist car will overcome price concerns.

After some months of initial sales, The National Highway Traffic Safety Administration (NHTSA) in its initial testing of the Volt has discovered instances of battery related fires.  Three NHTSA crash tests caused the car’s batteries to catch fire days or weeks after the test, a somewhat unusual occurrence.  While GM is still investigating root cause, suspicion points to a battery cooling system which may have been damaged as a result of the crashes.  GM has been quick and proactive to respond to this situation, has placed retail sales on-hold pending further investigation and has offered concerned owners options for either a free loaner car or the opportunity to return the vehicle.  GM however indicates that it remains highly confident of the safety and ultimate consumer acceptance of the Volt, and on resolving the current issues.

There is also a broader supply chain voice perspective to this story, one from which senior executives and cross-functional supply chain teams may benefit.

In late August, Bloomberg BusinessWeek featured an article; General Motors CEO Dan Akerson is Not a Car Guy.  We had cited this article in previous Supply Chain Matters commentary. The article itself reflects on GM’s newly appointed CEO, his lack of direct automotive industry experience, and more importantly his mission to change years of previous in-bred management culture at GM.  With the help of a hefty U.S. government financial subsidy and massive re-organization plan, GM is transforming itself to a leaner company.  Thousands of jobs have been shed and the survivors are being asked to be much more productive, agile and out-of-the-box thinkers. The article provides one management perspective quote from Akerson: “It’s not my role to make people comfortable. I don’t know what it was like five years ago, and really I don’t care. We are in a war.”

The article, however unintended, perhaps provides us another perspective relative to the current Volt situation. It cites a December 2010 management meeting when the Volt product development team had developed its plan to initially build 45,000 Volts, and assumed that the plan was “baked and ready to go”. Akerson instead challenged the team to come up with a plan to build 120,000 units, under the assumption that someone informed him (perhaps from sales and marketing) that a vehicle needs to sell at least 100,000 units to be successful.  Volt engineering and product development teams however were keenly aware that it took Toyota and its Prius model about seven years to hit the numbers that Akerson was requesting.  The other looming implication was that contracted suppliers would have to quickly nearly triple the volume of the vehicle’s high tech parts, especially its volume supply of lithium-ion batteries.

While readers can take in the rest of the story, we jump ahead to note that the final decision was to set a build plan for 60,000 units, one-third more than the originally recommended plan, but half the Akerson unconstrained challenge plan of 120,000.

A recent Wall Street Journal article  (paid subscription or free metered view) reflects on the current Volt situation before the fires.   The article also notes that supply was especially short through July, when only 550 of 2600 interested dealers had a Volt to show off to customers. Toward  the article’s  end, there are comments from GM legend and former Vice Chairman Bob Lutz, the originator of the Volt concept design.  Lutz notes that the car’s main problem is the high expectations it faces, and that this year’s build plan was far  too ambitious and the ramp-up was just too slow. Mr. Lutz affirmed his belief in the success of the Volt and described its ultimate success in  baseball analogy  as a “bases-loaded home run “. While we certainly do not profess to know all of the facts and details surrounding the Volt’s product plans and can only speculate what is being written, there is some learning surrounding this evolving story.

The point of view of Supply Chain Matters is that CEO’s and senior management have every right to challenge the status quo and encourage innovative thinking.  That stated, there is also the notion that operational and supply chain experience provides a basis of some understanding of what may be realistic plans, given various realities of ramp-up planning, volume production and testing.  Readers may also recall that other hybrids such as the Prius have experienced other problems along the way, such as braking, engine stalling and software issues, which were all overcome.  After all, this is new technology.

The most innovative design or coolest product can only succeed when all the links in the supply chain operate together, and, when appropriate, the voice and experience of supply chain should trump the needs for bravado.

Bob Ferrari