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Reminders of Tighter Information Linkages Among Product Management and the B2B Supply Chain

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On Sunday, this author flew to Nashville Tennessee to both attend and moderate a panel discussion at the annual Supply Chain World North America and Global Member Meeting 2014 conference sponsored by the Supply Chain Council. Supply Chain Matters will share highlights from that conference in an upcoming commentary. Flying provides the opportunity to catch-up on reading, and for this author, my prior unread issues of The Economist magazine. Two specific articles with a common theme captured my interest and I wanted to share such observations with you in this commentary.

At the many industry conferences I get the opportunity to attend, I often hear supply chain leaders speak to accelerated clock-speed of product innovation, and how that can add additional challenges and potential havoc for the end-to-end supply chain, particularly when that supply chain is significantly outsourced. For a supply chain that is primarily supporting product innovation, a major industry product shift has significant implications.

The April 5th edition of the The Economist featured the article: General Motors’ woes: What do you recall? (paid print and digital subscription) The article notes that automobile design has become far more complex with thousands of mechanical and electronic parts. If you have acquired a new vehicle in the past three years, you probably have experienced the availability of so many new electronic-based systems such as in-car navigation, satellite radio, in-car diagnostics, and powered operational components and, of course, prompted service reminders. Couple the increased product innovation with supply chain and manufacturing strategies that leverage common global platforms sharing common parts components, and the potential effects of a product recall can be significantly magnified.  In the specific case of General Motors, the article states that what appeared at the surface to be a routine recall of 800,000 older models due to a faulty ignition switch has turned out to be anything but. As many of you have been reading in business and mass media, that initial product recall has increased to upwards of 26 million vehicles because the ignition design was shared within so many other models. The Economist authors opine that despite a growing list of reported crashes and human injury, a part that likely costs a few dollars at most now involves significant potential monetary expense for GM. Further stated: “A small part can do great harm if bad publicity leads to reputational corrosion, lost sales and litigation, which in America can include hefty punitive damages.” The article authors point out that carmakers need to spot trends in warranty repairs across global regions in far more timely manner and be able to more quickly respond to these indicators. While the terms of GM’s exit from bankruptcy provided immunity to lawsuits involving products produced prior to bankruptcy, GM will likely have to compensate injured parties to avoid a reputational impact to its product brands.

As noted in a previous Supply Chain Matters commentary related to the GM ignition switch recall, another industry backdrop concerns the Toyota agreement to pony-up a $1.2 billion criminal penalty settlement with the United States Justice Department after acknowledging that it misled consumers regarding unintended acceleration problems (SUA) that occurred from 2009 through 2011. That in the view of many will force automakers to be even quicker to declare a product recall for fear of punitive consequences.

A second article concerning a different industry provides yet another edge to product innovation and its impact on an industry supply chain. Many first-time global-wide smartphone consumers care less about brands and more about price. The Economist article titled: The rise of the cheap smartphone, points out that because the cost of making smartphones has declined so quickly, newer or existing market players can now acquires standardized processors and other components to offer smartphones priced below $80. Some of the brands mentioned are France based Wiko, Micromax and Karbonn in India and Symphony in Bangladesh. The article cites an analyst at IDC indicating that shipments of smartphones priced below $80 more than quintupled, and devices priced under $100 make up one-sixth of the current market. “Two years ago, while the median price of a smartphone was $325. Last year it was $250. This year it may be $200.”

With Apple and Samsung are noted as the only market providers making money, the implication is how long will this continue. Then, there has to consideration to last weekend’s announcement from Amazon indicating that it will enter the market with its own branded competitively priced smartphone.  That has set-off additional industry tremors.

If your supply chain exists in this segment, these quickly changing dynamics have implications for supply chain strategy, specifically how the supply chain will be called upon to either differentiate the brand, or drive even more scale and volume efficiencies.

The reading of both of these timely articles reinforced for this author that the linkages from product design and management directly to the manufacturing floor and the broader multi-tiered B2B value-chain network have got to be stronger than ever because the clock speed of industry change requires less information latency and more responsiveness. Stay tuned for an upcoming announcement regarding my participation in a webinar addressing this area in more detail.

Bob Ferrari


Product Recalls Among Two Automotive OEM’s- Which is the More Significant?

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General and business media has provided much amplification of the latest product recall troubles involving General Motors. In the past few weeks GM has recalled upwards of 6.3 million vehicles globally for quality issues related to faulty ignition switches, a sudden loss of electric power-steering assistance and other issues. The incidents have once again raised issues as to why certain automotive manufacturers allow quality conformance issues regarding products to fester until consumers experience the results of such non-conformance, or in some cases suffer personal injury or death. The GM crisis has been billed as the first test of the leadership of newly appointed CEO Mary Barra, who just happens to have a supply chain, product and operations management career background prior to assuming her new top leadership role.  Indeed this latest crisis might have been the legacy handed over from previous GM CEO’s. Given Ms. Barra’s background, Supply Chain Matters has confidence that this CEO will eventually insure that GM identifies the root causes that have led to these issues, including product design flaws, organizational culture, supplier related quality conformance, conflicting performance metrics or just plain bureaucracy and overhead.

But alas, GM is not the only automotive OEM that will be skewered by general and social media. Today, Toyota announced that it was recalling upwards of 6.4 million vehicles consisting of five different product recalls. The recalls involve 27 globally based vehicle models and are reportedly prompted by defects involving seat rails, air bag cable connections, engine starters, steering column brackets and windshield wiper motors. Did we mention a repair parts crisis as well?

The latest recalls appear just a few weeks after Toyota agreed to pony-up a $1.2 billion criminal penalty settlement with the United States Justice Department after acknowledging that it misled consumers regarding unintended acceleration problems (SUA) that occurred from 2009 through 2011. In 2012, Toyota had to take a $1.1 billion charge after reaching agreements with customers over liability lawsuits related to the prior SUA incidents.

But the track record of Toyota product recalls continued after the SUA debacle. In October of 2012 Toyota announced the global recall of 7.43 million vehicles, the equivalent number involved in the SUA incidents, this time related to a master power window switch defect. At the time, The Washington Post was quick to note that this flaw “raises questions about whether Toyota Motor Corp. has solved quality and safety issues that embarrassed the company in 2009 and 2010.” Also at the time, The Financial Times indicated in its reporting that Toyota was aware of the master window switch problem as far back as four years prior. It further indicated that Toyota did not respond sooner because it was unable to replicate the root cause. Somewhat of a familiar theme to the current GM ignition switch saga.

Supply Chain Matters readers will further recall that Toyota announced a series of major organizational changes to insure that accountability for quality among its vehicles was more transparent, including the empowerment of geographic based Chief Quality Officers that had the power to investigate and correct any quality issues. Our Supply Chain Matters commentary in January 2013 called into question the cost of Toyota’s anointment as global automotive industry leader. In a Financial Times interview in 2013, Toyota Motor USA CEO Jim Lentz indicated that the company had strengthened its customer care functions and had much greater ability to analyze data related to emerging quality problems. Lentz noted Toyota CEO Akio Toyoda as urging: “Make sure that we still are built on a solid foundation of quality, reliability and value because that is the hallmark of the company.” In essence, that was the declaration of the core business value of the company.

Which of these two different OEM incidents is the more significant indicator of a systemic process issue?

From our lens, a comparison of GM’s current quality crisis pales in comparison to that of Toyota, since the global industry leader has had more time and singular senior management attention to correct systemic process issues involving product quality, whether they involved the supply chain, or Toyota’s own product design or quality conformance.

Since both of these OEM’s remain in the race for global volume leadership, the price to the brand and of consumer brand loyalty we posed in 2013 is again an open question. Each of their supply chain ecosystems will again be forced to rally and respond to crisis and disruption to insure new and revised parts are made available to dealers, distributors and assembly lines.

The race to the top invariably comes with a price, and at least two automotive supply chain ecosystems  will continue to feel the effects of the vortex.

Time for our readers to weigh in: by your view, which of these two ongoing automotive OEM quality crisis developments are the most troublesome for the industry? Share your view in either the Comments area associated to this posting, or if you prefer, email them to info <at> supply-chain-matters <dot> com.

Bob Ferrari

 


BMW Announces Significant Investment in U.S. Manufacturing

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Two of the most strategic markets for global automotive supply chains are that of China and the United States. That is especially pertinent in the premium model segment.

Thus, it was rather noteworthy that last week, German premium auto maker BMW AG announced plans to invest a $1 billion dollars to expand its existing sports utility production facility located near Spartanburg South Carolina.  This plant currently produces all of BMW’s X3, X4, X5, and X6 sports utility models for global market needs and serves as the global competency center for BMW SUV’s.  BMW had previously invested upwards of $900 million in Spartanburg.

When completed by 2016, this additional investment will make the U.S. based Spartanburg facility, BMW’s only manufacturing presence in the United States, the largest manufacturing plant for BMW globally, a significant milestone for a German based OEM. The added investment calls for increasing the production capacity of this facility by 50 percent to 450,000 vehicles.  This expansion is further expected to add several hundred new jobs, making this facility one of the largest auto plants in the United States. The Wall Street Journal cites familiar sources as indicating that plans call for construction of a third body shop that would help produce the new X7 sport utility vehicle.

According to a published Bloomberg report, Audi, BMW and Mercedes-Benz are each planning at least a fourth consecutive record of volume deliveries in China and the U.S. as the European market continues to be weak. Demand for SUV’s continues to outpace other models.

Separately, Daimler AG, the parent of Mercedes-Benz announced plans to invest upwards of $1 billion to double capacity at its Beijing production facility, to increase capacity to 200,00 units by 2015. Mercedes currently produces SUV’s at its plant in Tuscaloosa, Alabama with plans to incorporate production of it C-Class sedan in June of this year. Mercedes CEO Dieter Zetsche further indicated that his company may set-up a new plant in North America to add more capacity.

Audi, a division of Volkswagen, is constructing a $1.3 billion factory in San Jose Chiapa, Mexico that includes plans to produce the Audi Q5 SUV in 2016.

One of our Predictions for 2014 (available for complimentary download in our Research Center), called for continued momentum in the resurgence of U.S. and North America based manufacturing. In the case of the premium automobile market, a favorable exchange rate, a lower-cost labor environment and a more productive workforce are all favorable trends that adding to these significant new investments.


Telsa’s Gigafactory Announcement- Another Movement Toward Supply Chain Vertical Integration

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Supply Chain Matters has provided a number of previous commentaries regarding when is it appropriate to execute a more vertical integration strategy within a specific industry supply chain. Our commentaries on this strategy focused on General Electric in aerospace engines, Delta Airlines in airline service operations, Hon-Hai Precision in high-tech contract manufacturing services and Hyundai Motors in automotive manufacturing.

This week, general, business and social media as abuzz with the announcement that electric automobile maker Telsa Motors has announced audacious plans to build its own $5 billion electric battery “gigafactory capable of supplying up to 500,000 electric vehicles per year.  This strategy is fairly savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric Telsa Motors Model Spowered automobile, the batteries are indeed the highest portion of cost.  The location of this factory is stated as somewhere within the U.S. Southwest, with locations in Arizona, New Mexico, Nevada and Texas all being explored.  The area of the U.S. is an obvious choice because of its proximity to the supply of lithium carbonate, a key raw material for lithium-ion batteries. Another neat aspect to the proposed 10 million square foot production facility are plans to have the factory green and sustainable, including solar and wind farms for supporting internal power needs. Telsa’s blog features a presentation that describes the conceptual plans for the proposed “gigafactory”.

According to published reports, the total cost of the plant is estimated in a range of $4-$5 billion, with $1.6 billion raised through a convertible bond issue and a $2 billion investment from Telsa. Panasonic is the current primary supplier for Telsa’s lithium-ion batteries and in its reporting, the Wall Street Journal indicated the possibility that Panasonic and other unnamed Japanese suppliers could contemplating a $1 billion investment in this proposed facility. Reports caution, however, that Panasonic’s plans are still fluid.

Telsa currently supplies batteries for the Toyota RAV4 EV and the Mercedes B-Class electric. In its reporting, the San Jose Mercury Times notes that Telsa’s prime assembly facility in Fremont California is directly located on a Union Pacific railway spur line and that the “gigafactory” will more than likely be serviced by rail as well, to control transportation costs in shipping batteries to the final assembly point.

Telsa expects that the new factory would reduce its current battery costs by 30 percent in its first year, which as we all know, is a significant contribution to COGS, and further opens up opportunities to produce electric cars for the mass market. The WSJ further reported that Telsa is attempting to break through the $200 per kilowatt hour cost point which affords the opportunity for these types of batteries to be economical as backup power supplies for electric utilities along with other forms of static energy storage. Telsa CEO and principal owner Elon Musk also is chairmen of SolarCity Corp., a solar energy provider, and that is fueling additional speculation among certain Wall Street analysts that Telsa could morph to become a power storage company.

From an industry value-chain perspective, reports that that the proposed facility will produce more lithium-ion batteries than the entire global supply for 2013 has incredible meaning with the implication for establishing a highly significant alternative energy value chain capability within the United States.  It is obviously an attempt to provide a more competitive lithium battery sourcing strategy from current areas such as China, South Korea and other countries. By our view, is a rather exciting and bold announcement, one that has the potential to add more to U.S. manufacturing and value-chain momentum for alternative energy, high-tech, consumer electronics and other industries.

Investors seem also impressed since Telsa stock has shot-up since the announcement.

Forms of vertical integration or closed supply chain strategies do indeed have their applicability and seem to be garnering additional favor.

Bob Ferrari


The Most Important Implications of the Volkswagen Chattanooga Unionization Vote

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Over the weekend and again this week, business media has provided amplification of the labor union representation vote held at the Volkswagen manufacturing facility located in Chattanooga, Tennessee.  It was obviously a significant development concerning labor organizing efforts across the U.S. and the implications for management and labor relationships.

For readers who are not familiar with the events leading up to this election, they involve Volkswagen’s sanctioning of a union representation vote. Many of Germany’s large and small manufacturing and services enterprises embrace the concept of a “Works Council”, where direct representation from labor at the highest levels of management incorporates labor’s input on policies and practices related to work conditions, employee grievances or other matters related to compensation and benefits. Enterprise software provider SAP AG, incorporates the Works Council structure along with many other German firms. They are very much the fabric of encouragement of management and labor collaboration and shared benefits for companies.

The Chattanooga production facility was one of a very few Volkswagen global based facilities not having a formal Works Council and thus the German based IG Metall labor union advocated to Volkswagen’s senior management to encourage the formation of such a structure in the U.S.  It so happens that this same facility is located in the heart of the U.S. Southeast region where multiple automotive OEM’s have located their facilities because of the “right-to-work” non-union environment fostered across this region. Certain politicians across the South were not that pleased with the concept of a foreign based manufacturer actively supporting a unionization election. Thus, a large-scale lobbying effort began to unfold for fears that a union vote in Chattanooga would lead to other organizing efforts in this region.

The ultimate vote concerning the United Auto Workers (UAW) union attempts to represent Volkswagen’s Chattanooga’s workers failed to win a majority, but the vote was close, with a final reported tally of 712 to 626 indicating rejection of labor union organization.

Prior to the vote, the highly conservative leaning Wall Street Journal featured an Editorial striking fear for workers and other automotive manufacturers if the UAW was successful in its recruiting efforts. Elements of Republican Party led conservatives including anti-everything activist Grover Norquist, Tennessee U.S. Senator Bob Corker and Tennessee Governor Bill Haslam mounted a strong anti-union campaign including fears that future work at the plant would be suspended or at-risk if the plant voted for UAW representation. Vocal factions among Volkswagen’s production workforce added their own voices as well, mostly anti-union, with accusations that these factions were supported by outside interests.

With the election results now recorded, Supply Chain Matters wanted to weigh-in in an argument for civility and objectivity on both sides. First and foremost, our intent is not to take bias to either side, but rather to point out some observations that we believe need reflection and consideration.

On the anti-union side, it seems that we all tend to suffer from long-term memory loss. Reflect back to 2008-2009 when two of the largest automotive OEM’s in the United States, General Motors and Chrysler, were forced into bankruptcy. The situation was dire and there was a need for significant business re-structuring, to include finding an alternative to a significant industry burden of high direct labor, pension and healthcare costs.  During that crisis, the UAW worked with both OEM’s and U.S. government re-structuring teams to grant tiered wage concessions, reform pension programs and develop the creative solution for forming and funding a separate Healthcare Trust entity under the umbrella of the UAW, which allowed the industry to shift its legacy burdens to this trust. The trust itself was funded by one-time payments from individual OEM’s and from granted OEM stock ownership to the UAW which has its own value for the Trust. Today, both GM and Chrysler are again competitive and better able to compete in global and domestic markets.

During the same global economic crisis that severely impacted the Eurozone region, Works Councils across Germany collaborated with manufacturers large and specialized to avoid outright layoffs by agreeing to modify compensation structures and allow workers to keep their jobs. The solution was for labor to work somewhat less hours, with additional subsidies from the government of Germany provided to maintain adequate wage levels.  It is a recognized fact that these same German manufacturers were able to bounce back from the recession much more quickly because workers were not permanently displaced and skill levels were maintained. That by our lens, was evidence that Works Councils can be a positive force in business and labor collaboration and mutual gain sharing.

Certain labor unions are obviously not without fault.  Polls continue to indicate that non-unionized workers across the southern region of the U.S. generally are not favorable to unionization because workers do not perceive some of the value outlined above.  Workers have also voiced displeasure on being burdened with union dues that do not provide perceived continuous value.  Thus, U.S. labor unions need to continue with efforts to target the needs of workers and substantiate their value. Yet, across the U.S., there is mounting evidence that the income gap among the wealthiest and the rest of the working population grows ever wider.

When either of these factions begins what are perceived as heavy-handed tactics or threats, the other faction cries fowl.  Some manufacturers threaten to withdraw, suspend or not source work to a unionized facility.  Local politicians provide manufacturers incentives to locate in specific U.S. states that will foster right-to-work laws. National politicians advocate for less regulation, particularly when it concerns rights to organize and card check campaigns. Certain labor unions evangelize the evils of management, top-heavy management and the declared rights of workers to maintain a living wage.

What is missing is a level playing field where workers can determine in their own wisdom and judgment, whether their rights and welfare are being well served or whether they desire to be more represented directly at the management table.

The need for skilled manufacturing talent remains critical across multiple industry supply chains yet candidates are not attracted by perceived low current compensation levels for entry-level workers. Securing experienced talent that incorporates the voice and collaboration of direct labor workers remains a critical need for innovative, industry leading manufacturers. Whether that voice is obtained by small work groups, Works Councils or a unionized work force should be the purview of both parties, and without the need for threats and heavy-handed tactics.

In either case, supply chain leaders should have the leadership and collaboration skills to be able to manage in either environment.

Bob Ferrari


Honda and Japananese Automotive OEM’s Increase U.S. Production Based Exports

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In late August of 2012, Supply Chain Matters raised awareness to Japan based automotive OEM Honda and its plans to shift a major portion of its export production capability from North America instead of from Japan.  We updated readers on the interim results this strategy in a July 2013 posting.

The motivations for Honda were the continued appreciation of the Japanese yen and the risk implications of the 2011 devastating earthquake and tsunami that stuck Northern Japan. Honda’s long-term plans included the ability to ship 200,000 to 300,000 autos from North America to global export markets in addition to satisfying U.S. domestic demand.

This week, business media is reporting an update from Honda indicating that its U.S. vehicle production export activity exceeded its rate of Japanese imports for the first time. Honda exported 108,705 U.S. made vehicles to 50 countries in 2013. That compared to importing 88,537 vehicles produced in Japan for U.S. consumer fulfillment. Overall, Honda produced 1.3 million vehicles across seven production facilities in the U.S. This milestone indicates good progress toward the ultimate goal for exporting upwards of 300,000 vehicles.

As reinforcement to this U.S. export strategy, Nissan indicated that it exported 100,608 vehicles from its U.S. based factories in 2013, an increase of 37 percent from 2012. The Japan based OEM is also in the process of moving additional production of models to the U.S. including the Murano sport utility model.

As we have previously noted, the implication in these shifting manufacturing export trends is that U.S. automotive supply chains must now cater to the product-unique needs of certain export markets and there lies the importance of global product platform development strategies.  However, there is a stark need to dynamically plan and respond to constantly changing and different geographic market scenarios. An industry that traditionally does not have tendencies to invest in more sophisticated business planning, end-to-end supply chain visibility, control tower and more predictive capabilities has the most to benefit from these capabilities.


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