In early July, Supply Chain Matters called reader attention to two contrasting examples of how supply chain process capabilities matter. One of the examples was that of U.S. automotive manufacturer Chrysler and challenges and setbacks related to the production ramp-up and market release of its new midsized model Jeep Cherokee model. This innovative new model SUV is crucial to the company’s 2013 revenue and profitability plans in a highly competitive automotive segment. The new Cherokee was originally planned to be introduced to dealers in May, then it pushed to June, and then to September.
Two weeks ago, the Wall Street Journal reported some further specifics including one of the prime causes of the delay. The new Cherokee includes the first application of a nine-speed transmission mated to two new engines and three complex 4-wheel drive systems. Apparently there were calibration problems related to the shifting of the transmission which involved applying some software engineering fixes which are now reported as being resolved. Chrysler actually asked some of its workers on temporary layoff to drive the vehicles to ensure that the transmission were shifting properly at different speeds and driving conditions. By our view, that qualifies for an innovative and team-based solution.
Chrysler actually began pre-build in June and about 10,000 new Cherokee’s were produced off the line before required software fixes were determined. The plan now calls for workers to plug hand-held computers into each of the produced vehicles and upload the new software changes, along with incorporating the revised transmission control software into current production.
A spokesperson told the WSJ that Chrysler management will only introduce a vehicle when teams are completely satisfied. The President of the United Auto Workers (UAW) local chapter is also quoted as indicating that that the production team does not desire to release a car and find out six months later that there is a problem.
In our original posting we speculated how dynamic the conversations within the Chrysler S&OP team may have been during this process of high visibility and expectations. Now that we have more of a view as to what could have been occurring behind the scenes, Chrysler has demonstrated something praiseworthy, putting quality and the customer before arbitrarily checking-off a product introduction milestone. They have demonstrated a hierarchy of goal attainment, something very refreshing in today’s business and supply chain climate.
Supply chain process capabilities do matter, and in times of crisis or business challenge, adhering to stated management principles and beliefs, demonstrating cross-functional and cross-organizational teamwork matters even more. Many auto manufacturers have come to learn that with today’s more modern vehicles including far more software and advanced technology elements, marrying mechanical and software engineering and process capabilities in lock step are very important as well as challenging.
We trust Chrysler will successfully complete its product introduction of the Jeep Cherokee, albeit late from the original goal, because of demonstrated teamwork and adhering to the principle of quality comes first.
Market competitive design and production of electric powered motor vehicles has been a challenge for the global automotive industry. Challenges have included the high material cost of batteries as well as the energy consumption of the vehicles themselves.
Supply Chain Matters recently read news reports that BMW AG has launched production of the carmaker’s new Project i electric automobiles, its first ultra-light family of city focused vehicles constructed of carbon fiber and reinforced plastic materials. The BMW i-car family of products will be a combination of all-electric or plug-in hybrid vehicles constructed of these more sophisticated materials.
The material concepts are so innovative that BMW wisely invested in a $530 million new Project i production facility in Leipzig Germany that according to a report published in the Wall Street Journal, (paid subscription or free metered view) represents an effort to reinvent mass car production in a far smaller factory and supply chain footprint.
The carbon-fiber plastic skins are supplied by a joint venture with SGL Group in the United States. The car’s body consists of 30 percent fewer parts that a traditional body made of steel, but requires far more sophisticated production processes. That includes stacking sheets of material followed by molding and heating to form door frames and fenders. Because the car construction materials are so light, less expensive robots and conveyors can be deployed for supporting line output. Instead of a high concentration of air-powered ratchet guns, there are glue guns. A specialized painting line generates no wastewater and costs one-fifth the cost of a traditional steel body paint line. Overall production requires 70 percent less water and 50 percent less energy than a regular car factory, positively contributing to supply chain sustainability goals. The factory’s overall noise footprint is far quieter for workers because of the overall reduction in manufacturing complexity.
Innovative products require innovative processes and in the case of BMW, a far different and more holistic approach to automobile fabrication and assembly while delivering on social and environmental sustainability goals. Continued challenges in reducing the material costs of batteries are still evident but these new innovations in materials and fabrication could prove noteworthy.
According to reports, BMW has priced the all-electric i3 city car at $41,350, about the same range as its mid-sized vehicles. How consumers respond is, of course, the next chapter, but rather than a factory retrofit, BMW’s efforts in dramatically changing how electric powered vehicles are designed and produced bear watching in the months to come.
Last week, industry analyst firm Gartner announced its Top 25 Supply Chains Ranking for the Asia Pacific Region, which deserves some commentary on our part.
Supply Chain Matters has in the past been a bit critical of Gartner for not including Asia Pacific based supply chain organizations in its global rankings of Top 25 Supply Chains. Gartner responded by re-positioning its rankings among major global regions, which although has obvious connotations for further client business development in succinct global regions, none the less affords demonstrated supply chains competencies greater recognition when ranked on a regional basis. We praise Gartner for it efforts to provide broader recognition of supply chains in the Asia Pacific region.
According to the Gartner report (free registration required in order to download), supply chain resilience is high on the agenda for most Asia Pacific based supply chains along with rising costs, a shortage of talent and increased regulatory pressures. Volatility in demand, particularly from western based companies, continues to present challenges for these Asia Pacific based teams. According to Gartner, the three year weighted average of revenue growth slowed to 25 percent.
Five new organizations move into the top ranking, while others moved-up in ranking. It should be of no surprise that Samsung was ranked the number one supply chain for Asia Pacific in 2013 because of its efforts in innovation and supply chain talent development. Lenovo was ranked as number two, moving up two spots from 2012, gaining high marks for revenue growth and deployment of a hybrid supply chain model. Supply Chain Matters has featured two previous commentaries of Lenovo’s unique supply chain process capabilities, along with its recent announcement of U.S. manufacturing presence.
The top five further includes Haier (Number #3), Hyundai Motor (Number #4) and Tata Motors (Number #5). Toyota Motor came in at Number #6, jumping 11 positions from its former 2012 ranking based on volume recovery from a series of major supply chain disruptions. Honda Motor was ranked Number #8.
We found it quite interesting to observe four automotive industry supply chains ranked in the Asia Pacific top ten, when no automotive supply chain is ranked in the Gartner global top ten.
We also expected to see more global contract manufacturers appearing in this ranking. Singapore based Flextronics moved into the top ten for the first time, attributed to strong financial results along with advanced planning and risk mitigation capabilities. Remarkably missing from the latest top ten ranking is Foxconn or its parent Hon Hai Precision, which is a prime manufacturing contractor to the 2013 global number #1 ranked supply chain of Apple. That deserves some explanation and we were disappointed that we could not retrieve any explanation from Gartner as to why. Also missing was Jabil and Taiwan Semiconductor Manufacturing Company (TSMC), which by our view, deserve top ten recognition.
Cannon and LG Electronics round out the 2013 Gartner Top Ten, reflecting that High Tech, Consumer Electronics and Automotive are the sole industries represented in the Asia Pacific Top Ten supply chains. Perhaps a future ranking will include recognition of a consumer goods and/or diversified discrete manufacturer or retailer in this region.
Gartner concludes: “The ability to segment supply chains that are aligned to different customer expectations, backed by improved cost-to-serve, will differentiate the leaders from the followers. Supply chain leaders in Asia Pacific must enhance collaboration capabilities to integrate internal functions and key external trading partners across the value network.”
Supply Chain Matters would hasten to add that given the prior history in the region for potential major supply chain disruption brought about by natural catastrophe or extreme weather events, that investments in supply chain risk mitigation, more predictive capabilities and enhanced end-to-end visibility should also be a part of this message for future performance.
What is your view regarding Gartner’s current ranking of Top Asia Pacific Supply Chains? Agree or are there omissions?
In mid-May, Supply Chain Matters called reader attention to a study issued by Alix Partners that cited a narrowing gap in the sourcing of production in China vs. the United States. Last month the Boston Consulting Group reiterated its prior message that the increased competitiveness in United States based manufacturing will capture $70 billion to $115 billion in annual exports from other nations by the end of the decade. In an August 20th published BCG Perspectives report (no-cost sign-up required), BCG declares that the current momentum in U.S. manufacturing is just the beginning, and that by 2020, higher U.S. exports combined with production work that will likely be “re-shored”, could create 2.5 to 5 million additional factory and service jobs. The strategy firm declares that its analysis suggests that the U.S. is steadily becoming one of the lowest-cost countries for manufacturing in the developed world, as much as 8 to 18 percent lower than countries such as France, Germany, Italy, Japan and the United Kingdom. The full impact of the shifting cost advantage is expected to take several years to be felt and BCG advises that manufacturers and retailers should recognize that structural cost changes underway represent a potential paradigm shift in global manufacturing sourcing. At the same time, BCG advises supply chain teams to maintain diversified manufacturing operations around the globe.
Some well-known retailers and manufacturers are now demonstrating more noticeable awareness to these trends, for obvious business reasons.
On August 22nd, global retailer Wal-Mart sponsored a U.S. Manufacturing Summit. At the event, Bill Simon, President and CEO of this retailer’s U.S. based operations delivered what seems to be a passionate address to the attendees where the transcript was captured on the Wal-Mart web site. Simon declared his belief that this is a transformative period in history, that opportunity in America and growth of the middle class was predicated on a job at the local factory. His argument is that the current U.S. “hourglass” economy has caused a rift, with groups calling for reform of either too much wealth or too little unskilled wages. He argues that filling in the middle through a revitalization of U.S. manufacturing could help boast the U.S. economy. He reiterated a takeaway from this Wal-Mart sponsored summit that: “the next generation of production will need to be built closer to the points of consumption.”
Of course, Wal-Mart has skin-in-the-game on these arguments since its core customers represent a good portion of middle class consumers, and they have been showing a tendency of late to shop at other lower-cost outlets. None-the-less, Wal-Mart continues in its effort to commit $50 billion, no small sum, toward increased sourcing of products among goods manufactured in the U.S. The retailer has appointed a senior team to lead this effort and has stated its willingness to sign long-term supplier agreements when it makes sense to provide manufacturers more certainty in sourcing. Simon implored other retailers to do more in their sourcing commitments. Some other passionate statements were: “I tell my team all the time that that our $50 billion commitment is our starting point. If we put our minds to it, there’s no question to me that we can achieve and exceed it. I want us to think bigger.”
Supply Chain Matters readers will recall that our numerous ongoing commentaries regarding Apple and its supply chain, cite CEO’s Tim Cook’s commitment to bring forward a U.S. based manufacturing presence it its assembly of end-products, albeit an initial small presence. That announcement was been communicated in the declared commitment to produce a new line of Mac computers in 2013 at a U.S. based facility. In late May, Cook declared to a U.S. Senate Subcommittee that the new Mac assembly facility would be in Texas. According to his testimony” “The product will be assembled in Texas, and include components made in Illinois and Florida, and rely on equipment produced in Kentucky and Michigan.” While we and other sites speculated that the new U.S. presence would be overseen by contract manufacturer Foxconn, a mid-June posting on Mac Rumors.com quotes a Taiwanese equity analyst as indicating that Apple will actually be partnering with contract manufacturer Flextronics for the new upcoming Mac Pro. The 450,000 square foot Flextronics facility near Fort Worth is also reported to be the manufacturing site for Motorola’s new Moto X smartphone. Astute readers may also pick up on the fact that Texas is a no-income tax state, which provides an added incentive and economic justification to make it the home of Mac Pro production.
Yesterday, Parade Magazine featured an article, Made in the U.S.A., which cited other manufacturers upping their commitment to increased U.S. manufacturing including General Electric and a host of non-U.S. automotive brands. One interesting statistic: “according to Libby Newman, a vice-president at the American International Auto Dealers Association, about 55 percent of all light vehicles sold in the U.S. through July were foreign brands- but more than half were built in America.”
While readers might argue that some of the cited companies we note in this commentary have obvious motives behind their renewed interest in U.S. based manufacturing sourcing, the economics and the noticeable shifts in momentum towards a re-discovery of U.S. based manufacturing attractiveness is underway. Supply Chain Matters has further cited structural shifts in global transportation that reinforce a paradigm shift in supply chain related economics.
Each supply chain organization will have to analyze their own business factors but take heed to these messages since more noticeable momentum and commitment towards favoring U.S. manufacturing is underway.
Has your senior management teams been advised of these trends?
If you are a frequent reader of this blog than you know all too well, about our constant reminders of having a robust supply chain risk mitigation plan in-place. Search on that very topic under Categories on the right-hand panel and you fill find over 280 Supply Chain Matters postings referring to various updates on this topic.
Last week, supply chain resiliency services provider Resilinc alertedSupply Chain Matters to recent findings from mapping exercisesconducted on a subset of supply chain sourcing data involving hundreds of suppliers across thousands of supplier sites spread among 50 countries. These findings, by our view, are indications that those manufacturers in certain industries have not done due-diligence regarding mitigation of potential supply chain risk.
The analysis specifically focused on sub-tiers of certain industry supply chains. Industries included involved high tech and automotive. Recall that during the 2011 severe earthquake and tsunami that struck Japan, and later that year the monsoon floods that devastated certain industrial parks in Thailand, many manufacturers discovered later the most significant supply disruptions occurring in these supply chain sub-tiers, often discovering that certain components were either sole-sourced, or that the vast majority of manufacturing capability for certain key components were concentrated in one specific geographic region. In most cases, these sub-tier suppliers lack full visibility from existing supply planning or S&OP processes of higher tiered manufacturers and OEM’s.
The summary of findings uncovered by Resilinc indicates that global supply chain risk continues to be concentrated in certain sub-tiers of industry supply chains. That should be of high concern for either Chief Supply Chain or Procurement Officers.
The most profound aspect of this study is that within certain automotive and high tech supply chains, Resilinc uncovered the fact that a vast majority of suppliers are dependent on component supply from just four semiconductor suppliers: Amkor, ASE, United Microelectronics (UMC) and Taiwan Semiconductor (TSMC). The surprise for some readers may be the new dependence that automobile manufacturers have on intelligent electronics in motor vehicles.
More than half of all sites are located in just four countries: China, Japan, Taiwan and the United States, as noted in the graphic provided by Resilinc:
What struck us is that certain sites within both Japan and Taiwan geographically lie in high earthquake-prone regions. China has had its share of recent major disasters and certain semiconductor manufacturing areas within the U.S. west-coast region either lie on well-known earthquake fault lines or have been impacted by recent unusual weather involving heavy rains, mudslides or severe drought and wild fires.
We recently called attention to how Apple was changing its semiconductor sourcing strategies to buffer the previous high dependency on Samsung Electronics, and now including TSMC for sourcing of important microprocessors. Samsung itself has sourced from other semiconductor suppliers.
Once again we state the obvious. Every supply chain management team needs to have a vibrant supply chain risk mitigation and management plans in-place. Evidence continues to point to yet more profound reminders to the ongoing existence of supply chain risk.
Since our founding, we have always looked forward to the annual REL Working Capital Scorecard, and specifically its reporting of inventory performance. We have provided Supply Chain Matters readers our observations and insights that were related to reported performance in individual industry sectors.
The data was collected by REL, which is now a division of The Hackett Group, and published each year in CFO Magazine. These indices, particularly the calculation of the metric Days Inventory Outstanding (DIO), are rather important because they reflect a generally accepted method for how CFO’s measured their supply chain inventory performance. While many in the supply chain community have adopted and are very comfortable with inventory turns calculation methods, DIO is, in our view and others, a broader financial indicator of inventory performance contrasted to annual sales trends. DIO reflects if inventory management is tracking to revenue performance, and that interests the C-Suite, stockholders and the Wall Street community.
Since CFO Magazine discontinued its sponsorship of the REL Scorecard, Supply Chain Digest took the initiative this year to actually perform the DIO calculations based on raw data supplied by REL. A few weeks ago, Dan Gilmore issued a two-part commentary providing his analysis of 2012 inventory performance which our readers can review. Supply Chain Matters provides a shout-out to Dan and his editorial team for undertaking this calculation task and allowing our community to once again review performance.
Gilmore discovered that the previous industry grouping categories were somewhat misaligned. We also have been observing that since we began reviewing the annual reporting. Gilmore further points out that mergers, acquisitions and private equity deals make the continuity of the industry groupings difficult to pin down. We speculate that the previous CFO Magazine industry groupings were formed to insure that readers in those industries would not rebel when reviewing specific industry results. Supply Chain Digest was able to provide a DIO inventory performance view that spanned the years 2006, 2011 and 2012. We reviewed our files and were able to review published data from 2008, 2009 and 2010. Although we noted that there are problems in the continuity of the trend reporting, the numbers do provide important trend indicators.
An observation and insight we do want to share reflects on the marginally performing industry sectors, those whose performance reflects an increase in inventory when compared to revenue trends. A snapshot of the 6 year DIO inventory performance as reported by Supply Chain Digest reflects:
Construction Equipment 58.4 percent increase
Chemicals and Gases 27.2 percent
Metals Manufacturing and Distribution 19.5 percent
Retail- Electronics and Home Improvement 12.5 and 11.6 percent respectively
Auto Parts and Components 12.7 percent
Toy Manufacturing 10.2 percent
Apparel and Shoe Manufacturing 7.2 percent
Auto-Truck Related OEM’s 4.2 percent
Computers and Peripheral Manufacturing 3.2 percent
Can you spot a common denominator?
Most of these industries plunged big-time into global sourcing and distribution of products and were subject to global economic developments, supply chain disruptions and slower transport times. In 2011, the automotive and high tech sectors were significantly impacted by supply chain disruption. Apparel and toys have been forced to deal with exploding direct labor costs in China, and have since altered some sourcing of production. On a positive note, Consumer Packaged Goods, which also plunged into global markets, demonstrated a 7.3 percent decrease over six years.
We share one other comment regarding Aerospace and Defense Components, which according to the analysis had a 30.1 percent increase in DIO over 6 years. This should really not be all that surprising, given the multi-year delays encountered in the major new aircraft programs from both Airbus and Boeing that overlapped this period. If there were a need for definitive evidence on the impact of these delays, particularly on aerospace component suppliers, it would be reflected in this DIO trending.
Despite all the technological and process advances in supply chain planning and inventory management, business factors often complicate overall supply chain inventory management. It is not so much a reflection on the technology, but rather the implications of globalization and increased supply chain complexity and disruption.
What is your view?
Reviewing this six year trending data on inventory performance, along with your experience in having to manage inventory in these specific industries, do you believe that external business forces have been the real challenge?