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Supply Chain Matters Update Two: Automotive Service and Spare Parts Networks Respond to Crisis

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Supply Chain Matters provides another update to the ongoing crisis involving aftermarket spare parts and service management supply chains within the Automotive sector as unprecedented levels of product recalls stress the system to its limits. U.S. automakers alone Airbaghave recalled more than 30 million vehicles this year as a result of a heightened regulatory environment that has prompted auto makers to issue a recall out of an Abundance of caution and legal protection.

Regarding the product recalls related to the airbag inflators produced by Takata Corrp., this has been a rather busy week of finger-pointing and consternation.

Last week, U.S. regulators nearly doubled the estimate of vehicles subject to recall. Reports have come to light that auto makers and regulators were aware of Takata air bag inflator problems for several years. The Manhattan U.S. attorney’s office that led the investigation and $1.2 billion fine on Toyota to settle a previous incident related to unintended acceleration of vehicles is now reported to have launched a preliminary investigation of the ongoing Takata inflator incident. On the political front, Congressional leaders in Washington are threatening more probes of the National Highway Safety and Traffic Administration (NHSTA) for its handling on the ongoing air bag inflator incidents, a sure sign of more political pressures and maneuvering.

On Tuesday, the CEO of AutoNation, the largest auto retailer in the U.S. indicated that he has instructed his dealerships to halt the sales of 400 used cars that are subject to the airbag inflator recall. He further urged regulators to get control of an “incoherent response”.

Yesterday, NHSTA gave inflator supplier Takata a deadline of December 1 to supply added documents and respond under oath to additional questions.

From a service supply chain perspective, NHTSA released details of industry meetings indicating that it will take several months before there are enough spare parts to support the current inflator recall. It appears that most automotive manufacturers are prioritizing the limited supply of replacement inflators to warm and humid regions, which has been identified as the most probable risk for failure and subsequent injury. Reports indicate that BMW, Ford and Mazda are limiting spare replacements to the few identified high-humidity southern U.S. states, Puerto Rico and the U.S. Virgin Islands. Indeed, NHTSA had issued guidelines supporting prioritization of replacement parts to these most at-risk regions, but automobile owners remain confused and frustrated as to what to do.  That continues to add more pressure to automobile dealers and their associated services businesses to be able to respond to consumer fears for driving an unsafe vehicle.  In our conversation with various people this week we have already heard stories from those impacted by recall or service campaign notices.

The colliding forces of regulatory, political, and automotive replacement spare parts networks continue and may well continue for many more months.

Bob Ferrari


Automotive Service Supply Chains Undergo Even More Stress

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In a published Supply Chain Matters commentary in June, Service Supply Chains Put to the Ultimate Stress Test in the Automotive Industry, we focused on General Motors, which Automotive Industry Airbag Inflator Product Recallafter intense scrutiny from U.S. regulators and legislators regarding faulty ignition switches among multiple models, had recalled thousands of vehicles. At that time, GM had announced a cumulative 44 product recalls involving nearly 18 million previously sold vehicles not only for faulty ignition switches but for various other lingering quality problems.

Other Automotive OEM’s have also found themselves under intense regulatory scrutiny, and many elected to err on the side of caution and declare product recalls if there were any concerns regarding vehicle or occupant safety. The result led to a Washington Post headline indicating that one out of every ten vehicles on the road had been subject to a recall notice. That amounts to a lot of motor vehicles.

Beyond the challenge of potential damage to brands and subsequent consumer brand loyalty, our primary concern in June was that automotive service and aftermarket supply chains were about to face their biggest stress test ever. The sheer numbers implied that required replacement part inventories were not going to be able to match expected demand and that inventory would have to be re-allocated or alternate suppliers would have to be sourced.  Dealers and authorized repair facilities had to be very careful in scheduling service appointments and setting customer expectations regarding replacement part availability and concerns for vehicle safety. 

Also included in our June commentary, was reference to reports that product recalls related to defective airbag inflators produced by supplier Takata Corp. were expected to increase after a series of investigations.

Flash forward to today, and now the sheer scope and impact of the unfolding product recalls involving defective Takata airbag inflators is approaching millions of additional vehicles and multiple other brands. U.S. regulatory agencies have raised alarms for the safety of occupants with calls for immediate attention.  Web sites are swapped with consumers seeking the status of their vehicles. Business and general media have not taken the time to get the facts sorted out regarding the largest concern being potential defective airbag inflators operating in warm and humid climates. Instead, consumers from across the U.S. are forced to seek answers and demand attention as to whether their vehicle is safe to operate.

By our lens, automotive aftermarket service and parts networks have now been literally thrown under the proverbial bus. 

It wasn’t their fault.

The events did not allow the planning for adequate replacement parts or analysis to the required capacity of service repair and replacement resources. The problem was thrown over the wall because quality monitoring mechanisms stalled and time had run out for planned response. Organizational interplays and CYA were probably at-play as well.

Already, OEM’s such as Toyota are trying to proactively respond to this defective air bag inflator crisis in the most realistic manner.  Reports indicate that Toyota dealers are being requested to disable the potential defective airbag mechanisms of recalled vehicles and instruct vehicle owners to return when replacement parts are made available.  They are doing so because of the reality of backlogged replacement parts which are substantial. In the meantime, temporary labels affixed on vehicles warn occupants of a safety hazard of not having operating airbags.

How comforting is that?

But, without adequate replacement part inventories, there are little options right now.

Service supply networks will invariably come-up with means to prioritize the most important and time sensitive parts requirements and then move on to the various other replacement part requirements to get through this crisis.

The takeaway from these ongoing unprecedented set of automotive industry product recall events is that if the business situation requires much more responsive, supply-chain wide  quality monitoring  mechanisms and more informed service and aftermarket spare parts networks, than provide the necessary tools and resources required to get the job done.

No doubt, there will be considerable repercussions and learning that come from these events. There will invariable be far more attention paid toward vehicle safety, regulatory safety and reporting and supply chain wide quality adherence.

In the meantime, as automotive consumers, we need to allow the time and patience for the dedicated professionals who plan and fulfill aftermarket parts and service event requirements to adequately respond to the crisis at-hand while more attention is directed toward more responsive quality management.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.


More Negative Visibility to Product Recalls and One Supplier in Automotive Supply Chains

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In a June 2014 Supply Chain Matters commentary, Automotive Component Supply Strategy Meets Sensitized Regulatory Environment, we called attention to a published Reuters report indicating that product recalls involving airbags supplied by Japan based Takata Corp. would  expand and involve millions of affected motor vehicles and ensnarl many global brands.

That situation has become ever more visible in a multitude of cascading product recalls and urgent consumer advisories involving many auto brands from entry-level to upscale luxury.

Today, the National Highway Traffic Safety Administration (NHTSA) issued a high visibility consumer advisory, urging owners of over 4.7 million recalled vehicles to act immediately on recall notices and replace defective Takata airbags due to suspected defective air bag inflators.  Brands involve BMW, General Motors, Honda, Mazda and Nissan and the vehicle models date back as far as 2000-2001. While this advisory notes specific urgency for certain U.S. states and regions featuring warm, humid climates that fact seems to be blurred by the blast of Monday news from general media. The other reality is that many vehicle owners may have ignored previous recall notices which could jeopardize the safety of occupants.

Aftermarket service and spare part networks are already stressed by a surge of product recalls issued from an abundance of caution to avoid punitive financial fines. This latest high profile consumer warning related to certain airbag deflator defects will add more stress to overly stressed networks that lack the tools to handle such volumes.

Automotive OEM’s have fostered component product innovation strategies among a key set of lower-tiered component system suppliers, and OEM’s leverage such innovation across multiple vehicle and brand platforms. These strategies were put in place to foster both faster product innovation cycles as well as to be able to leverage volume supply costs across multiple global platforms. The objective of leveraging lower component costs has never gone away, at least for certain OEM’s.

Earlier this month, The Wall Street Journal featured a report (paid subscription or free metered view) indicating that Honda, after a long supplier relationship, is re-evaluating that arrangement with Takada in light of a series of airbag inflator product defects. Reports indicate that defective air bags, some dating back to the early 2000’s, could send metal shrapnel flying upon air bag inflation, posing serious injury risk to drivers and/or passengers. According to reports, Takada utilizes a different propellant than other suppliers, one that is cheaper but more volatile. Rival air bag suppliers that could benefit from the current crisis include Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which is being acquired by German based ZF. The WSJ further reported that Toyota and Nissan are also concerned about Takata air bag systems in the light of the current circumstances. But, switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.

The WSJ report provides some in-depth perspective on how Takada has expanded its global just-in-time supplier footprint to accommodate individual OEM platform demand. The report alludes that the product quality problems may have stemmed from a period of rapid growth, testing communication and process discipline among far-flung regional plants. After two years of investigation, Honda and Takata joint quality teams discovered certain machine defects in a plant in Washington state and in process parameters in a Mexican plant. At times, poor record keeping hindered the ability to figure out which cars had defective inflators installed.

Whether Takada can recover from this ongoing and compounding product recall and branding crisis is certainly open to skepticism and speculation.  However, Supply Chain Matters feels that automotive OEM’s face their-own realities related to product development and global product platform cycles.  A global platform strategy supported by component supply agreements has to be balanced with supplier risk. Requiring suppliers to locate just-in-time production across far-flung global regions requires an assessment of rigid process control discipline and conformance. When such controls indicate cause for concern, two-way communication must be forthright and honest and procurement teams need to be proactive in assessing and communicating risk implications.

Today’s overly sensitized regulatory environment requires timely feedback and responsive risk mitigation.

The passenger safety, financial, and brand risks are far higher.

Bob Ferrari


General Motors Attempts to Turn to a New Chapter of Growth, Customer Loyalty and Supply Chain Practices

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The public relations teams supporting General Motors have been in high gear these past weeks for obvious reasons.  Lapses in product design and quality management practices, and what has been billed by business and general mediaas the worst U.S. product safety crisis in recent memory has led to a series of product recalls among multiple GM brands involving upwards of 2.6 million vehicles.

GM desperately needs to move beyond its current state and restore confidence in its brands and in its business management model.  Suppliers and partners associated with supporting this U.S. based OEM need to also move on to more collaborative and win-win relationships, but that requires a different GM perspective.

When Mary Barra was appointed CEO of General Motors, this author communicated our Supply Chain Matters elation for this announcement. Our enthusiasm came from the dual fact that not only was Barra the first senior female executive ever to lead a global automobile manufacturer, but more importantly, because her 35 year background included plant management, manufacturing, product design and development leadership experience. She is also an engineer by training. Barra likely understands the elements of producing high quality cars and trucks and the important contribution of the GM supply chain ecosystem in achieving that goal.

If readers want to gain a candid perspective on Mary Barra’s current challenges in transforming GM, we recommend the recently published Time article, Mary Barra’s Bumpy Ride at the Wheel of GM. Author Rana Foroohar pens an insightful perspective on Barra’s management style and her efforts to change a rather in-bred corporate culture built around functional fiefdoms and little accountability. She describes Barra as the consummate “outsider-insider” with a far different style from most of her CEO predecessors. She has been put in charge to become the change agent and apparently has the support of many of GM’s employees in that task.  In our previous commentary in December 2013, we called attention to the Wall Street Journal characterizing Barra as “having a reputation for speaking her mind, a trait that hasn’t always been appreciated in GM’s executive suite.”

This week, business and general media are featuring reports of GM’s latest earnings announcement. The WSJ reported that after nine months, Barra wants to switch gears towards a multi-year strategy to deliver increased revenues and profits while restoring consumer trust. She explained to a group of GM’s top 300 executives that the company must do what it takes to be the “world’s most valued automotive company”.  The going forward strategy leans heavily on reliance on planned new models expected to come to market, many of which were shepherded under the leadership of Barra when she previously led new product development. A goal is to have 47 percent of global sales to be fueled by these new models by 2019. It further includes market expansion and growth within China through investing in five additional auto assembly plants and he introduction of nine new Cadillac models in that country.

GM will further focus on the broader supply chain’s contribution to its renewed business goals.

According to a recent WSJ report, there is an internal belief that GM pays more than its competitors for materials and technology because the company bases parts purchases on unrealistically high forecasts that burden suppliers with high fixed costs when ultimate demand falls short. Our community is more blunt in such an explanation: it is lousy forecasting predicated on achieving functional stovepiped goals. The WSJ quotes some analysts as indicating that the automaker could save upwards of $1 billion a year with smarter purchasing practices, which as we know, is a typical Wall Street short-term perspective these days. Squeeze those suppliers!

GM’s existing product development chief, Mark Reuss, actually met with executives representing 700 suppliers indicating that the company is ready to share more financial risks if sales projections are high. At that same meeting, GM’s purchasing boss, Grace Lieblein indicated that the supplier base will likely need to add capacity to support growth plans. In a Detroit Free Press published report, she is quoted as stating: “we just have to be cautious and strategic about how we add that capacity and not move too fast.” Lieblein further communicated that an important strategy is convincing suppliers to locate closer to GM assembly plants to reduce transportation costs.

Obviously that’s a tall order for suppliers since transportation cost savings do not necessarily weight themselves to the benefit of the supplier. Adding production capacity to support additional volume and spreading that capacity further across the globe requires a significant financial investment. Add some history of throwing suppliers “under the bus” when quality plans go south because of component design flaws, well, you get the picture of legacy trust.

The new era of GM obviously requires what Barra has described as bold thinking and leadership. What this author was hoping to read is that goal of GM’s supply chain going forward is to support continued product innovation while controlling costs and accelerating productivity. Perhaps that will be articulated in the coming months.

It is this author’s view that such thinking can benefit by a broader and deeper perspective by GM’s executive leaders on how more modernized supply chain business practices, new product introduction (NPI) practices incorporated to supply chain impacts, more collaborative based inventory and supply chain planning practices  have led to benefits among other industries as well as other automotive OEM’s. Today’s supply chain and B2B business network technology capabilities can further link the global end-to-end supply chain with more granular levels of planning and supply chain execution synchronization.  

The business practices and enabling technology are available but it requires a good dose of change management infusion before real benefits can flow. We trust GM will hence forth nurture the leadership to set such perspectives.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and Supply Chain Matters. All rights reserved.


Germany’s ZF to Acquire TRW Automotive for Product Innovation Leveraging

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The current waves of industry acquisition frenzy continue as cheap money remains available, and as usual, industry supply chains are impacted.

Today’s business headlines include a massive deal involving two global automobile systems, components and parts suppliers.  ZF Friedrichshafen AG announced its intent to acquire TRW Automotive Holdings in a reported all-cash deal that is estimated to be in excess of $11 billion.  According to reports, this deal would form an industry supplier with combined annual revenues near $41 billion, rivaling the size of other major global industry suppliers Robert Bosch and Denso. Under the deal, TRW would become an integrated but separate operating unit of ZF. The combined research and development investment portfolio exceeds $2 billion. This transaction requires several closing conditions and the approval of TRW stockholders, and is expected to close in the first-half of 2015.

According to the press release and statements from ZF’s CEO, the prime motivation for this combination is combining of product innovation resources applied to markets in electro-mobility and autonomous driving.  TRW Automotive is a supplier of automotive integrated safety electronics, sensors, steering, suspension and integrated braking systems. TRW’s production and supply chain resources are global in scope and include support for major automotive production regions of United States, Europe, Asia and Latin America. ZF is a closely-held global supplier in transmission driveline, axle and chassis technology with 122 facilities in 26 countries and is a major supplier to German based mainline and premium model OEMS’s including Volkswagen. Combined, both suppliers will more than double revenues in support of major regions of China and the United States, and be able to support a fairly broad area of automotive and truck component system supply needs. With its combination with TRW, ZF has the opportunity to significantly increase its revenues and presence in the U.S. market.

The talks between these two automotive industry suppliers have been percolating for some time, and according to a published report from The Wall Street Journal, other suppliers such as Delphi Automotive, BorgWarner and AutoLiv have each expressed interest in “bulking up through acquisitions” in order to have sufficient scale to further stay ahead of product innovation needs to support various global automotive OEM’s. OEM’s have a desire to move forward in electric drivetrains and autonomous driving systems but prefer that system component innovation come from Tier One and other suppliers.

This wave of acquisitions involves other industry as well. Business headlines today include reports of a percolating massive mega-deal between Anheuser-Busch InBev and SAB Miller that could involve upwards of $122 billion. That would involve the combination of two of the world’s largest brewers and according to the WSJ, put control of nearly one-third of global beer supply under one company, and a wide range of brands.

The beat goes on and industry supply chains will have to continue to deal with the opportunities and/or consequences.

Bob Ferrari

 


Gartner Announces Ranking of Top 15 European Supply Chains

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This week, Gartner unveiled its annual regional listing of what the analyst firm considers to be fifteen of the best supply chains in the European region. Gartner conducts this ranking as a supplement to its Top 25 Global Supply Chain rankings that are traditionally announced in the fall.  According to Gartner, the top three European supply chains, Unilever,Inditex and H&M, remain unchanged and continue to lead in supply chain excellence while Seagate Technology made its debut in the number four ranking. Three new company supply chains also made a presence in the Gartner Europe ranking.

The published ranking for Europe Top 15 supply chains were noted as:

  1. Unilever (ranked 4th in 2014 Top 25 global ranking)
  2. Inditex (ranked 11th in 2014 Top 25 global ranking)
  3. H&M (ranked 13th in 2014 Top 25 global ranking)
  4. Seagate Technology (ranked 20th in 2014 Top 25 ranking)
  5. Nestle (ranked 25th in 2014 Top 25 ranking)
  6. L’Oreal
  7. BMW
  8. GlaxoSmithKline
  9. Diageo
  10.  Ahold
  11. Delphi Automotive
  12. BASF
  13. Volkswagen
  14. Reckitt Benckiser
  15. Syngenta

 

Similar to our view of this week’s Gartner’s Asia-Pacific rankings, Supply Chain Matters believes that this ranking reflects how we would have voted if we were part of the external or peer voting panel.  Unilever is indeed a great supply chain competing in a very challenging CPG industry group. As we noted in our commentary associated with Gartner’s Top 25 ranking, Unilever has made steady progress over the past three years and deserves special recognition. Inditex has long been an icon when describing a top retail focused supply chain that is extraordinary in sensing and responding to fashion and customer demand. Seagate Technology as well, has bounced back from the near disaster of disruption and supply shortages caused by the 2011 floods in Thailand. L’Oreal has made great strides in integrating supply chain planning and execution across its supply chain business network. Nestle deserves its recognition especially in leading with industry-leading supply chain sustainability initiatives.

Three of the Gartner European Top 15 reside in the automotive industry sector which has been an industry segment not previously noted for consistent supply chain excellence. Both BMW and Volkswagen have been deploying a global based product platform strategy and have weathered the European economic crisis through a focus on international markets.

Also noteworthy is the appearance of two pharmaceutical supply chains, Glaxo and Reckitt in Gartner’s Europe ranking.

We believe that a ranking of the top Europe supply chains has even more significance given the ongoing challenges related to the severe economic conditions that have impacted Europe. These are supply chains that had to demonstrate various aspects of resiliency to insure required business and product outcomes.

Tip of the HatSupply Chain Matters again extends its congratulations and recognition to each of the named supply chain organizations for achieving such recognition.  There is obviously hard work that goes into achieving such recognition and citation and it should be acknowledged.

Bob Ferrari

 


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