Supply Chain Matters will at times focus on senior business or industry executives whom we believe really understand the essence of supply chain strategies and how the supply chain plays an important role in enabling desired corporate outcomes. In that vein, we continue to be impressed with Sergio Marchionne, Chairmen of Fiat and CEO of Chrysler Group. We have held this opinion since 2009. Not much has been written about this visionary, probably because of his no-nonsense style to shun away from the sometimes superstar status that some CEO’s savor.

A little over a year ago we posted a commentary, Chrysler-Fiat Continues its Journey Towards Synergistic Supply Chain and Manufacturing Strategy Execution. In that commentary, we summarized the positive aspects of Chrysler’s comeback from the depths of bankruptcy, and how the marriage of Fiat and Chrysler turned out to be positive in many respects. 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 continue to be recognized as being instrumental in this turnaround. Chrysler has performed well in 2012, both in sales and in execution.

At breakfast this morning, this author was listening to National Public Radio in the U.S., who in conjunction with this week’s Detroit Auto Show conducted an interview with the Chrysler CEO.  I was especially impressed with Mr. Marchionne’s description of his initial assessment of the company at the time of the takeover.  He describes an insular top level management structure that did not have sensitivity to conditions within manufacturing and the supply chain.  In spite of the financial crisis circling the company, it was essential to invest in the manufacturing processes and working environment to restore a quality oriented culture. He admits to ripping off major elements of the Toyota Production System which was renamed World Class Manufacturing System for Fiat, and instilling that philosophy in all production facilities.

We felt that our readers would enjoy listening to this NPR interview. (you will have to select the specific interview from the menu choices) Pay particular attention to Marchionne’s communication style, and picture yourself as a member of his management team.  He speaks to never falling into a state of complacency, in spite of the business successes at Chrysler, and instilling a commitment to quality and excellence.

Listeners should have little doubt, after listening to just this short snippet, about where the business priorities reside with this business leader. That is so very important in any organization.

Bob Ferrari

It has been interesting to view the slant of business media coverage these past few days over the topic of the global automotive industry.

In Europe, which can be best manifested by coverage of the Financial Times, last week’s headline was that for the first time, according to estimates provided by FT and five forecasting groups, China would outstrip Europe in global auto production in 2013.  China’s collective auto makers have plans to produce 19.6 million light vehicles compared with Europe’s current plans to produce 18.3 million units. In 2012, industry estimates are that China produced 17.8 million units while Europe produced 18.9 million units, a 6.2 percent reduction over 2011. However, in our view, the real headline for Europe is that the industry that commanded 35 percent of global production in 2001 is on course to produce just 20 percent of production in 2013 as it continues to deal with its ongoing economic debt crisis.  In contrast, China’s auto industry is set to increase production 10 fold in this same time period, fulfilling the prior expectations of a huge untapped market. As Supply Chain Matters noted in our 2013 Honorable Mentions Predictions commentary, the European auto industry faces more painful capacity reduction and/or plant closure decisions in the coming months.

On the U.S. side, the headline in The Wall Street Journal this week was: U.S. Car Sales to Zoom Past Europe’s. In the WSJ article, U.S. auto sales for 2012 are reported to be 14.4 million light vehicles, while the estimate for 2013 is 16 million vehicles. That article’s bias is that the U.S. market will be growth star for this year.

If you are confused with the contrast in headlines, you are not alone.  Beyond the typical bias, the real issues of confusion are around the definition of Europe’s auto industry.  There are the classic European Union countries and the extended Eurozone countries that include countries such Russia and Turkey.

The important takeaway for global automotive supply chains, however, is that market conditions in 2013 will be challenging to say the least. Three forecasting groups project that overall global auto production will grow a mere 2.2 percent in 2013.  A weak and uncertain global economy points to a highly competitive market in 2013, where market share will differentiate the survivors and losers.  There will be a need by global producers to have razor-sharp product and marketing strategies focused on the two countries with the most overall growth potential, that being China and the U.S.  While many global producers have adopted global-based model platform strategies that share common components and suppliers, we believe that the ability to customize these platforms for the unique needs of a regional market will be the ultimate test for automakers in 2013.  A great example has been how Mazda Motors  was able to modify its CX-5 SUV model with a diesel engine option for the Japanese market that achieves in excess of 45 miles-per-gallon.  The model has experienced tremendous appeal from Japanese auto consumers and Mazda would be wise to consider offering this same variation of the platform in the North American market.

Product and supply chain production and distribution strategies will more than likely be the differentiator in profitability, since global currency rates and market share will determine margin growth.  As an example, according to FT, one in every three cars produced by Volkswagen in 2013 will emerge from a factory in Asia.  Hyundai Motor recently completed its third plant in China and is re-visiting its production and component supply strategies in the wake of a precipitous increase in the Korean won. Ford Motor is aggressively attempting to catch-up in its supply chain investments in China and broader Asia. Supply Chain Matters has previously noted that Japan OEM’s have re-positioned strategies to have North America based plants serve as both domestic and export production hubs.

The ability to demonstrate continued supply chain efficiency, keen production and supplier sourcing strategies, proactive risk management and local market product uniqueness collectively make-up the most important 2013 headlines for the global automotive industry.

Bob Ferrari

Today we completed all seven parts of our deep dives into our Supply Chain Matters ten predictions for global supply chains in 2013.  We trust that our readers will gain benefit and insights from reviewing each of the predictions.  As noted, we will monitor each of these predictions in the coming year.

Every year that we develop and assimilate annual predictions brings certain amounts that do not make it to the final cut.  These are predictions that merit a brief, honorable mention, which we address in this posting.

The following 2013 predictions were also on our mind:

Prediction: Another significant and costly earthquake event originating from Asia’s “Ring of Fire” disrupts global supply chains.

We read a mid-December commentary published in the Guardian Express  which notes that geologists believe that a 7.9 magnitude earthquake could hit the “Ring of Fire” sometime next year.  The “Ring of Fire” is an arc stretching from New Zealand, along the eastern edge of Asia, north across the Aleutian Islands of Alaska, and south along the coast of North and South America. The Ring of Fire is composed over 75% of the world’s active and dormant volcanoes and earthquakes. In its commentary, the Guardian Express noted that the U.S. Geological Survey had detected 176 earthquake events that occurred in just a four day period from December 15-18, while a 6.1 magnitude earthquake impacted Indonesia and a 7.3 magnitude earthquake impacted Japan in a single day.

We should also note that while we do not want to be depicted as alarmists, it is important for supply chain teams to be aware for potentially more major disruption in 2013.

Prediction: Additive and 3D Printing Manufacturing techniques gather even more momentum in 2013

The term “3D printing” was coined in 1995 but it was not until 2011 that interest started to pick up and 2012 was the year that ‘additive manufacturing’ really captured the imagination of manufacturing teams. 2012 was also the year that 3D printing became ‘affordable’ as serious attempts were made to simplify the design and printing process. A recent article featured on ExtremeTech notes that 3D printing to fabricate metal parts is now coming into the fold. The real breakthrough that has enabled 3D printing for the masses has been the laser, which can cut metal more readily. It also reports that NASA recently used a technique called selective metal melting (SLM) with great success to build rocket motor components out of steel. “NASA’s engineers have been able to produce parts with complex geometry only previously imagined, and with dimensional accuracy beyond that possible with traditional fabrication methods.”

Increased adoption of additive manufacturing techniques brings true “mass customization” to manufacturing and supply chains, and 2013 may well be the year where more momentum gathers across multi-industry supply chains.

Prediction: Continued deep economic worries across the Eurozone countries cause more tough times and further needs for re-structuring among Europe’s automotive supply chains.

The entire automotive industry across Europe suffered from overcapacity before the onslaught of the current recession that is gripping Europe. The Wall Street Journal recently noted that the European Automotive Manufacturers Association recorded a 7.6 percent decline in Europe’s auto sales in 2012 while Moody’s Investor Service predicts a further 3 percent decline in 2013. Now the situation has worsened, European OEM’s will be forced to deal with realities. The situation is more complicated because various European governments have been resistant to mass layoffs and/or re-structuring, opting for economic stimulus to affected OEM’s.

Supply Chain Matters has already commented on Ford’s announcement to shutter European plants which was followed by General Motors Europe. France’s Peugeot has been hemorrhaging losses but the French government has resisted any further layoffs and restructuring. Fiat has taken a different track, cutting a quarter of its workforce in Poland while refitting some of its Italian based production plants to export more cars outside of Europe.  All eyes are focused on Europe’s largest automaker, Volkswagen.

There will no doubt that the upcoming year be another challenging year for Europe’s auto makers.

Prediction: Much needed and overdue consolidation occurs among global ocean container carriers in 2013.

The first signs of pending consolidation came just a few weeks ago with reports that two of Germany’s largest ocean container shipping companies, Hapag-Lloyd and Hamburg Sud, are engaged in talks over a possible merger of the two lines.  Supply Chain Matters, as well as other industry watchers are of the belief that the ocean container industry is currently anchored in way too much capacity and arrogance toward shipper needs. Hundreds of ocean container vessels lie idle without cargoes, as newer ships have subsumed current operating routes. With continued severe economic contraction occurring in Europe resulting in consequent slowdowns in China’s manufacturing export volumes, the writing is on the wall for industry consolidation to occur.   The open question is what impact such consolidation will have on shippers.  We believe, when the dust settles, there will be an overall positive impact for shippers.

We wish all of our Supply Chain Matters readers best wishes in 2013 and a Happy New Year.

Bob Ferrari

In July, Supply Chain Matters called attention to A Changing Collection of Supply Chain Related Business Challenges Facing Ford Motor Company. Of particular note was a product recall involving 11,500 brand new 2013 Ford Escape vehicles equipped with the 1.6 liter engine because of a serious potential for a fuel leak. Ford took the unusual measure of instructing owners to stop driving their vehicles altogether and make arrangements to have their recalled vehicles transported to local dealers for repair. In its press release announcing the July recall, Ford indicated the need to replace an engine compartment fuel line that could potentially result in a fire. It further noted that dealers were instructed to stop demonstrating or delivering the new Escape model to customers until the problem was corrected.

Ford had issued an additional recall concerning 8,266 redesigned 2013 Escape SUVs in the U.S. to fix carpet padding that could hinder proper braking. Ford indicated that wrongly positioned carpet padding could reduce space around the pedals and cause drivers to hit the side of the brake pedal when switching from the accelerator.  The 2013 Ford Escape was totally redesigned for 2013 to leverage Ford’s global single platform strategy, and represented one of the two critical product launches planned for 2012.

Now comes word that last week, Ford had to issue a series of two other recalls within a week regarding its newly launched Ford Fusion sedan. Ford recalled about 19,000 2013 Fusion sedans to replace headlights because of a defect that could cause them to become blurry.  Ford indicated that the coating on the polycarbonate lamp may not have been cured properly in manufacturing. The recall was described by the U.S. National Highway Traffic Safety Administration (NHTSA) as a violation of Federal guidelines related to visibility.  Ford also recalled 19,000 Fusion SE and SEL models, and 73,230 separate Escape models equipped with the 1.6 liter engine because of guess what- the threat of engine fires.  According to today’s update printed in The Wall Street Journal, Ford has disclosed that the problem is linked to 13 separate reported engine fires in certain 2013 Fusion and Escape models.

Ford is not the only automotive OEM to experience notable product glitches in new model platforms. In October, Supply Chain Matters called attention to a recent increase in product recalls involving newly released models of highly anticipated automobiles including the 2013 Nissan Altima and the 2012/2013 Hyundai Sonata, and the recently re-designed Honda Civic.

As noted in October, any new product has an initial period where certain undiscovered flaws can initially appear.  Product teams anticipate these circumstances and compensate with added inspections and checks.  With so much written about the maturity and deeper collaboration of new product introduction processes, we can all wonder why the frequency of product recall incidents involving re-designed products continues.  There are considerations for common component parts utilized across all product platforms, newer and older.  There are considerations related to the global platform strategy itself, magnifying the impact of a quality or product design flaw.  The increasing use of more sophisticated on-board electronics certainly adds a new dimension, coupled with the burden of component product innovation transferred to supplier responsibility.

For Ford, it may be a more acute problem that can effect perceptions of brand and model image. Previous product defect incidents involving fires have led to considerable image problems, not to mention Toyota’s two year challenges with unintended vehicle acceleration with suspicions of sticking accelerators and misaligned floor mats.

Open questions remain on the integrity of quality monitoring processes for both new global platforms as well as existing vehicles.

Bob Ferrari

The following posting is this author’s weekly guest commentary on the Supply Chain Expert Community web site.

Today’s Wall Street Journal features an article, Detroit’s Unsold Cars Pile Up (paid subscription or free metered preview) regarding the building inventory of unsold cars among the U.S. big-three OEM manufacturers, namely General Motors, Ford and Chrysler.  The premise of the article is that despite brisk levels of auto sales across the U.S., domestic manufacturers have built up some alarming levels of finished goods inventories, akin to the economic downturn three year ago.

I call special attention to both supply chain management and sales and operations planning (S&OP) teams to perhaps share awareness of the lessons brought forward since, in my view, it is a classic example of how corporate business strategy and desired business outcome can conflict with the realities of the processes and tools provided to operations and supply chain management.  It is perhaps another industry example of how the conflicting goals among finance, sales and marketing as well as supply chain can result in an undesirable situation.  Also, at least in my view, it presents a snapshot of certain S&OP processes not factoring the realities of the market with the required capabilities desired within the overall supply chain.

This industry situation developed when Japan based automotive brands, such as Honda, Nissan and Toyota, who were recovering from huge sales setbacks as a result of the 2011 Japan tsunami supply disruption, began to aggressively market their models in the U.S. market at the beginning of this year.  The goal was clear- regain lost U.S. market share through aggressive marketing and discounting of vehicles. Some industry players would refer to this as “old behaviors”.  Regardless, U.S. consumers responded by scooping-up Japanese branded models, and sales volume growth among Japanese nameplates has soared to near double digit levels almost every month.

U.S. OEM’s, especially GM and Chrysler, renewed by the bankruptcy and legacy infrastructure bailouts of 2008, have established corporate goals of increased profitability. GM’s goal is to boost sales, market share and profitability without the need for promotional discounting. That strategy would be fine, provided the S&OP and supply chain management process had a means to dynamically adjust the supply chain based on actual vs. predicted demand, with the means to both identify and dynamically adjust inventories by model, by region, or by geographic region.  Chrysler and Ford were somewhat more pragmatic and elected to continue aggressive promotions on certain specific models of vehicles.

According to the WSJ article, GM both miscalculated actual demand for certain models of its products while not dynamically adjusting inventory and capacity output. Normal industry finished goods levels average between 60 and 70 days.  GM entered December with over 788,000 unsold vehicles, which included 138 days inventory of various model pick-up trucks, 96 days inventory of the newly introduced Chevrolet Cruze model, and a five month supply of Chevrolet Malibu and Camaro’s.  Other examples cited were Chrysler, having nearly a six month inventory of its new Dodge Dart model and over 3 months of Dodge Ram pickup truck inventory. Ford has more than four months’ worth of Fiesta subcompacts.  Contrasted are Toyota’s current 60 days of actual inventory, and Honda is now operating its North America plants at 90 percent capacity to satisfy consumer demand.

While the U.S. market has been the bright spot, global automotive demand has been on the decline, especially across Europe where the ongoing severe economic crisis has cut deeply into auto sales volume. The overall market in China is contracting, with the exception of GM, where its model line-up is currently highly favored by Chinese consumers. Not only must automotive supply chains deal with the sales incentive dynamics of the U.S. market, they must also deal with the realities of a currently hemorrhaging market across Europe, dynamically changing markets in China, Asia and other developing markets.  The industry realities are radically different market demand pictures, highly competitive market competition, all fueled by singular global product platform and supply strategies. If there were ever a definition of a highly dynamic industry supply chain with conflicting forces, it would be today’s global automotive industry.

Supply chains can indeed impact business outcomes and help deliver bottom-line results provided they have the tools and processes that are necessary.  In the case of the U.S. automotive market, and certain U.S. automotive OEM’s, these supply chains need senior management support, involvement and commitment in the understanding that a highly dynamic supply chain requires highly responsive supply chain resource and decision-making capabilities. That would include the ability to sense individual product, market, and geographic demand, with the ability of the supply chain to dynamically and flexibly change resource plans.

This latest automotive industry development perhaps provides evidence that while come OEM’s get it, other do not quite get-it.

I encourage feedback and comments from Community members currently residing or interacting with this industry.

Bob Ferrari

Many supply chain professionals residing in high tech, automotive, and other industries can well recall the 2011 incident of heavy monsoon-driven floods that impacted the country of Thailand. The flooding of hundreds of production factories resulted in significant disruption of industry supply chains not the least of which was nearly 30 percent of global hard disk drive supply.

After such incidents, it is often important to reflect on what’s occurred since that incident.

We call Supply Chain Matters reader attention to an article published in Bloomberg Businesweek that snapshots the current situation in that country as it relates to luring manufacturing back. It reports that “workers at the Hi-Tech Industrial Estate are completing construction of a levy that’s 1.2 meters (3.9 feet) higher and twice as wide as the one that failed when waters rose 4.9 meters above sea level last year. The barrier is central to convincing suppliers to companies such as Apple Inc. (AAPL) and Samsung Electronics Co. to move production back to Ayutthaya province.”

Some rather revealing statistics are shared in this article. According to the Industrial Estate Authority of Thailand, of the 839 affected plants in the seven industrial business parks, 459 have fully resumed operations, 225 have partially opened and 68 have closed or relocated. These numbers indicate that one year since the floods, nearly 35 percent of the factories have either closed, or are operating at partial capacity.  The Thai agency also notes the loss of 20,000 jobs among the affected factories.

The article notes that Thai industrial output has yet to surpass pre-flood levels, and industry and government officials are stepping-up efforts to recruit manufacturers, including tours of the new levies and flood control infrastructure that have constructed since the floods. The new construction includes a 75 kilometer concrete wall erected to protect the 213 factories within the Rojana Industrial Estate in Ayutthaya.

Japan based automakers Toyota and Honda have indicated that they will continue to source production in Thailand, while Sony has relocated its two previously flooded factories to another area of Thailand. Thai officials are also quick to note that if another major flood occurs, with damage, all bets are off.

Bob Ferrari