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Automotive Component Supply Strategy Meets Sensitized Regulatory Environment

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Have you ever considered a supply scenario where a key supplier to multiple industry brands encounters a significant or troubling quality problem?

Could that scenario be greatly magnified with a highly sensitized regulatory environment?

That scenario is currently playing out across certain automotive supply chains and reflects that even the smallest part or component failure has far greater brand implications.

According to an exclusive published report from Reuters, product recalls involving airbags supplied by Japan based Takata Corp. will expand and involve millions of affected vehicles. According to the Reuters report, this week, Toyota recalled an additional 1.6 million previously recalled vehicles outside of Japan, as well as 650,000 within Japan because of a believed Takada manufactured airbag defect that has the potential to cause personal injury due to faulty inflators within these airbags. The additional recalled vehicles brought the total number of Toyota branded vehicles subject to airbag recall to more than 7 million over the last five years. 

Reuters further reports that Honda is considering a recall involving more than one million additional vehicles with potentially defective air bags, citing a source familiar with the matter. Last year Honda recalled over a million vehicles because of airbag inflation concerns. The Honda announcement could come by the end of June pending further information from Takata regarding specific inflator component information.  The report additionally indicates that U.S. auto industry regulator, the National Highway Traffic Safety Administration (NHTSA) has this week opened a probe involving an estimated one million vehicles made by Nissan, Mazda and Fiat, in addition to Toyota and Honda. That probe is focused on six reported incidents of airbags not deploying properly in Florida and Puerto Rico.

This news comes in the wake of the increasing high visibility being placed on General Motors and its associated brands due a series of prior product defect awareness and recall snafu’s involving certain ignition switches.   The initial GM incident has prompted additional product recalls involving a multitude of components and millions of vehicles. The entire industry is now highly sensitive to increased  regulatory sensitivity with significant potential monetary fines if known consumer safety issues are not reported on a timely basis. The result has been an explosion of product recall announcements because of such increased scrutiny and regulatory concern with industry supply chains scrambling to provide necessary modified repair parts.

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.  As an example, prior Toyota airbag related product recalls involved both the Toyota and luxury Lexus brand. GM’s current wave of product recalls involve many of its brands including Cadillac.

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.

According to the Takata web site, the firm serves as a supplier of automotive safety systems and products including airbags, seat belts, restraint systems and other safety related components. This supplier operates 56 plants among 20 countries and is obviously a key supplier for many brands in many production geographies.

From our lens, the current mix of developments at play across multiple automotive brand supply chains provides keen reminders for the needs for more early warning awareness related to component failure trends, the ability to sense and share such information across and among both functional and product design teams with the ability to more adequately identify and trace specific components with their production lots.

Certainly within the automotive industry, supplier management and early warning is no longer the sole purview of procurement teams.  It is fast become a cross-functional, cross-business responsibility led by procurement with the active support and involvement of product design and management. When all the dust settles concerning GM’s ongoing investigations and response plan, much of this learning will be evident.  While automotive has its unique challenges, other industry value-chain teams can also apply similar learning. The product focused and post-sale service focused supply chain are additionally now highly information dependent.

Worst case scenarios involving a product brand and perceptions of quality and safety are not out of the realm of possibility. Speak to procurement, supply chain and product management team members in automotive and you will probably get a clear sense of how distributed product innovation is highly dependent on higher levels of information awareness and product quality measures.

Bob Ferrari

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

All rights reserved.

Supply Chain Matters Friday News Roundup

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It’s the end of the work week and we continue with our news update series related to previous Supply Chain Matters posted commentaries or news developments.

Greenbrier and Watco U.S. Railcar Alliance

Incidents of increasing rail derailment accidents and subsequent exploding tank cars involving shipment of bulk crude oil across the U.S. and Canada have precipitated a shortfall of bulk railcars that can meet required new fire and accident safety standards, railcar producer Greenbrier and railine services operator Watco have formed a 50-50 joint venture to be named GBW Railcar Services. The move is being reported as the first significant railroad industry to retrofit thousands of tank cars that require upgrading to more stringent safety standards being formulated by both Canadian and U.S. regulators. According to published reports, the new venture is expected to begin operations sometime in the third quarter consisting of 38 service repair shops across North America. According to a Wall Street Journal report, estimates are that upgrading tank cars to DOT-111 standards with cost an estimated $15,000-$80,000 per railcar.

The open question remains who pays for the required retrofits: oil company shippers, railcar lessors, railroads or combinations of each.

Tesla Electric Battery Gigafactory

We along with general business media has made note of Tesla Motors CEO Elon Musk’s bold plans to build a massive electric battery manufacturing supply facility with the United States. This week, at Tesla’s annual stockholders meeting, Musk indicated that he was “quite optimistic” that Tesla can achieve a greater than 30 percent cost savings in battery packs to power Tesla and other electric vehicles. Musk further indicated that major supplier Panasonic, whom was at first undecided on the potential cost savings, is now in agreement, although the supplier’s ultimate joint-investment in the factory is still to be determined.  Also disclosed is that Tesla is considering designing and building an electric truck model.

Regulatory Approval of P3 Network Nearing Approval

The proposed network alliance among the top three ocean container shipping lines, A.P. Moeller Maersk, CMA CGM and Mediterranean Shipping passed another milestone this week. Business and industry media are reporting that this week, European maritime regulators indicated that they would not raise anti-trust objections with the proposed P3 network, leaving Chinese approval as the final regulatory hurdle remaining.  A few months ago, U.S. maritime regulators also voiced no-objections.

Kinaxis Initial Public Offering Scheduled

A few weeks ago, Supply Chain Matters picked-up on a Canadian Wall Street Journal published report indicating that supply chain planning and response management technology provider Kinaxis was in the midst of preparing for an IPO. Subsequent reports have confirmed the existence of an IPO prospectus and offering that is being planned within Canada only.

This week, Kinaxis issued a press release, restricted to Canada only, which indicates that closing of the public offering is scheduled to take place on or about June 10th.  Earlier in the week, a published Canadian Wall Street Journal report indicated that the target offering price was being lowered to generate sufficient demand, according to people familiar with the matter. According to the Kinaxis release, the initial public offering and secondary offering will result in aggregate gross proceeds of Cdn$65.0 million to Kinaxis and Cdn$35.6 million to the selling shareholders, based on a Canadian $13 per share target price. According to the latest Canada WSJ report, the target number was lowered from a previous target of C$14-C$16 per share.

What Comes Around: A Rating of Automotive OEM’s from Suppliers

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A posting on Supply & Demand Chain Executive highlights the results of the 14th annual North American Automotive Tier 1 Supplier Working Relations Index, which is an industry study on the major U.S. and Japanese automotive OEM’s relationships with suppliers. This annual study focuses primarily on OEM’s Chrysler, Ford, General Motors, Nissan, Honda and Toyota which currently comprise upwards of 80 percent of U.S. vehicle sales.

This ranking study is rather significant since it ranks purchasing top leadership, buyer behavior and transparency and other factors that lead to perceived positive supplier relationships.

The article highlights that both Toyota and Honda’s efforts to improve supplier innovation and relationships have, once again, gained the upper hand. Both OEM’s are ranked first and second respectively with Honda rated as “most preferred” customer among all OEM’s rated. Honda’s increase was reported to come primarily to improvements in three foundational key areas: supplier relationship, supplier communication, and supplier profit opportunity. “Honda is top-rated with Toyota in paying invoices on time and according to terms, as well as in resolving invoice payment issues. Honda is also tied with Toyota in allowing suppliers to recover material cost increases and in the confidential treatment of proprietary information and intellectual property.”

This author has personal consumer experience on the benefits of such supplier collaboration.  Our household recently purchased the latest Honda Accord and it impressed and sold us with its array of on-board technology and driver improvements. Our purchase came after evaluating and test driving most all of the automotive premium brands.

Nissan was noted as second most improved, and took over the third place rating that previously was attributed to Ford Motor Company, which slipped to the fourth position. The article notes: “Significant improvement occurred due to suppliers being given greater flexibility in meeting piece price and tooling objectives, and in Nissan covering sunk costs when programs were delayed or cancelled. Nissan, however, is the least fair, along with Chrysler, in allocating chargebacks to suppliers, but its treatment of confidential proprietary information and intellectual property is significantly higher than Chrysler or GM.”

Of far more significance, General Motors has fallen into last place among the six U.S. and Japanese OEM’s ranked. According to the Supply & Demand Chain report: “The primary reasons for the drop are a decrease in supplier trust, in supplier communication and the amount of help GM provides (or doesn’t provide) to suppliers to reduce cost and improve quality. GM is ranked lowest in protecting suppliers’ intellectual property and proprietary information. GM is also the least likely to allow recovery of material cost increases. As a result, GM is now the least preferred customer of suppliers, in spite of the efforts of the purchasing VP to improve, an example of good leadership, but poor execution by buyers who interface with suppliers on a daily basis.”

In the light of the current blitz of product recalls emanating from General Motors, 29 at last count involving upwards of 15.4 million vehicles, Supply Chain Matters could not help but conclude that the current supplier ranking at the GM recall crisis do not make for a positive mix right now, when supplier responsiveness is the most crucial.

The article further notes that if German auto brands were added to the study, BMW would likely be ranked second overall, while Mercedes would be well below Volkswagen and General Motors. That seemed even more profound.

This study’s authors noted the overall results of this recent supplier relationship survey as history repeating itself. U.S. OEM’s, under new purchasing leadership, made previous significant improvements in supplier relationships, only to once-again, fall back to prior levels. Chrysler’s deterioration has come under the leadership of Fiat, which has aspirations to increase its North American and global presence.

By our lens, the overall takeaway from this latest survey is that core standards that value suppliers in foundational and innovation focused elements remain as differentiators while old ways and practices of beating up suppliers often persist, even after an industry crisis would have provided a motivation to change.

Bob Ferrari

A Look Inside: Tesla Motors Fremont Manufacturing Facility

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Supply Chain Matters has featured a variety of prior commentaries concerning the current resurgence in U.S. manufacturing. Recently, Al Powell, Vice President of Sales at Serus Corporation called our attention to a WiredYouTube video that features an inside look at Tesla Motors manufacturing facility in Fremont California.

This three minute video takes the viewer inside the predominantly vertically integrated factory that literally transforms coils of sheet metal to fabricated car bodies through automated processes. Tesla’s Model S electrically powered automobile is produced in 3-5 days, starting with rolled sheet-metal to rolling off the assembly line. Included is a look at the totally automated paint and body shop along with the general vehicle assembly line that supports an inside-out process. Notice that some of the advanced robots are able to change their own tools and perform different assorted assembly tasks.

We were fascinated by watching this video.  It provides a look at how innovative advanced manufacturing techniques can provide a competitive edge for U.S. based manufacturing.  We can just imagine how the proposed Tesla gigafactory will look like.

Readers can view the video by clicking on this web link.


Factory Destruction Across Vietnam: Supply Chain Sourcing Flexibility and Resiliency Has Never Been as Important

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In the quest to seek alternative global low-cost manufacturing sourcing across multi-industry supply chains, countries such as Thailand and Vietnam were high on the list.  Both offered relatively attractive direct labor wage rates while offering a highly educated and motivated workforce. Up to this point, that has resulted in a steady flow of foreign investment in these countries including internal supply chain ecosystem capabilities.

All of this is now subject to current re-evaluation because of new political and social unrest that is occurring in these countries.  The most visible has been Vietnam where this week, anti-China related violence has caused widespread rioting across the country, targeting factories and industrial parks that rioters believe are owned by Chinese interests. This rioting began earlier this week and according to various global media reports has resulted in arson and vandalism involving multitudes of factories and businesses owned by Japanese, Malaysian, South Korean and Taiwanese ownership since rioters have not been precise in targeting.

The protests were apparently prompted by Vietnamese citizen outrage over an oil rig that China placed in a disputed part of the South China Sea. We have read reports of some speculation that the core anger may be more broadly directed at accumulated anger against foreign-based exploitation within the country. The government of China is holding the Vietnamese government responsible for not taking more definitive actions to curb the rioting and damage.  A report published by the Wall Street Journal today indicates that upwards of 3000 Taiwanese and 600 Chinese citizens were fleeing the country amid fear of further violence. 

While foreign based business people flee Vietnam for fear of personal safety, a large number of factories have halted production because of either damage or lack of workers. Thus, the potential for significant industry supply chain disruption in the automotive, footwear, high tech, consumer goods and other areas is growing each day. It would appear that many brand owners and foreign interests are looking to the government of Vietnam to curb the current building wave of violence and factory destruction and avoid the current situation from quickly moving from the current bad to a far worse situation.

Meanwhile, continued political unrest across Thailand continues to provide an uneasy environment as violent protests continue sporadically across that country.  Yesterday, there were reports that at least three anti-government protestors were killed and 22 were injured as government authorities fired guns and lobbed grenades at antigovernment protestors.

Supply Chain Matters has previously noted how significant incidents social unrest has led to a new wave of worker protests within China’s low-cost manufacturing sectors such as footwear. Political tensions involving China and Japan over disputed ownership of islands continue and have both supply and product demand impacts to certain Japan based firms.

From our lens, the notions of global sourcing are beginning to take on a new risk management perspective, that being social, national and political unrest along with the longer-term implications of that unrest.  The notions that industry supply chains can continually follow a singular strategy that is solely directed at sourcing in low-cost countries is being challenged, and increasingly requires a re-evaluation. Global sourcing now includes far more considerations beyond the cost of direct labor, and as we have continually noted, are now taking on social, political and employer of choice perception aspects.  The ramifications apply not only to product brand owners, but to industry supply ecosystems. 

We believe that these incidents are not isolated and business and supply chain teams need to focus on much broader trends and their implications in access to foreign markets and supply chain ecosystems. The need for supply chain sourcing flexibility and resiliency has never been as important as it is now becoming. Insure that your firm and its supply chain strategies are prepared to manage among these new challenges and needs.

Bob Ferrari

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

Join the Upcoming Webinar: The Importance for Tightly Integrating Product and Supply Chain Management

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Because of rapid advances in product innovation and advanced technology, products have become more sophisticated and incorporate broader combinations of physical hardware, software and associated services.  This invariable adds more challenges for product design and management teams, especially when key aspects of a product’s value-chain are part of a predominately outsourced supply chain. In a Supply Chain Matters commentary published in mid-April, we brought forward current day evidence that the linkages from product design and management directly to the manufacturing floor, and the broader multi-tiered value-chain network have got to be stronger than ever because the clock speed of industry change requires less information latency and more responsiveness.

This author will be the primary speaker in an upcoming webinar sponsored by Serus on Wednesday, May 28 at 11:00am PDT.  The title of my presentation is: The Increasing Importance for Tightly Integrating Product Design and Supply Chain Management. This presentation will address converging trends in business, supply chain and manufacturing, as well as IT and will address the new opportunities to leverage product management and timely new product introduction practices on an end-to-end B2B platform.

Questions I will address in this interactive webinar presentation will include:

• What exactly are the converging forces in Product Design and Supply Chain Management for today’s manufacturers?

• What learnings can be derived from the recent Boeing, Toyota, and GM product recalls?

• How should a product brand owner harness today’s converging trends to it’s obtain industry competitive advantage?

There is time allowed for webinar viewers to ask additional questions. Join us in the complimentary no-cost webinar by registering at this designated Serus webinar link.

Bob Ferrari, Founder and Executive Editor

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