Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains. We trust that our Supply Chain Matters readers are garnering insights from these prediction sand they have been helpful for setting objectives and work agendas in the coming year.
We have one prediction remaining which for this year is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year. This year’s industry-specific challenges were especially challenging in that we contemplated adding a lot of industries, more so than prior years. In the end, we will hone in on those industries that merit additional monitoring and updates in the coming months.
As Editor, I has also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be posting these industry-specific predictions in a faster cadence.
We begin, to perhaps no one’s surprise, with the North America based Automotive sector.
Automotive Supply Chains Residing Across North America
We cite unique challenges for automotive supply chains residing across North America for two specific reasons. One relates to the ongoing industry dynamics related to accommodating product demand mix with inventory and capacity levels. The other with the potential impact of the new Trump Administration policies related to both North America and global trade that has certain automakers in the cross-hairs of direct Presidential criticism, and of U.S. Congressional efforts directed at U.S. corporate tax reform policies.
Record low gasoline prices in the first-half of the year boosted U.S. light vehicle auto sales to hit a record high of 17.6 million vehicles in 2016. That number was only slightly larger than the 17.5 million vehicles sold in 2015. Strong sales momentum in December reflecting 1.7 million vehicles sold during the last month had pushed the seasonally adjusted annual selling pace momentum to 18.4 million vehicles.
Of the total vehicles sold in the U.S. during 2016, 60 percent were classified as higher-margin light trucks. Promotional discounts heavily influenced sales of sedans and compacts, with the growth in demand for pricier pick-up trucks and SUV’s generally boosting auto maker profit margins. That helped to fund innovation efforts directed at autonomous vehicle technologies and efforts to meet stricter emission standards in future years. At the end of the year, the industry-wide average of new vehicle unsold inventories was the equivalent of three months, while the average of U.S. big-three automakers averaged upwards of 100 days of unsold inventories.
Looking to 2017, some auto dealers were uncertain if the sales momentum would last, given the current length post-recession sales cycle and the growing credit burden of U.S. and North American consumers in outstanding auto loans. Finished goods inventory levels for certain auto and truck models trended higher in the final quarter and some U.S. based OEM’s elected to curtail factory output levels and lower inventories in late December and January. Factory headcount cutbacks were further being exercised.
The challenge for automotive product management, supply chain management, sales and operations planning teams in 2017 will therefore be effectively managing model and volume mix sales and production output and overall inventory levels while maintaining or exceeding line-of-business goals related to product margins and profitability. To cite just one-example, the traditionally largest selling sedan in the U.S. market has been the Toyota Camry. As we publish this prediction in early February, Toyota reported a 25 percent decline in Camry demand while the smaller RAV 4 SUV outsold the Camry in January.
A singular planning framework can sometimes be a daunting challenge for automotive producers with independent product business groups. The problem can come-down to unaligned business processes and a lack of consistent data and information standards. In October, we featured a Supply Chain Matters commentary reporting on how Ford Motor was addressing such challenges in an effort towards a singular, global S&OP planning framework.
From the longer-term perspective, consumer affinity towards ride-sharing services, higher tech electronics and autonomous vehicle capabilities and IoT enabled vehicle services weighs heavy on future model product planning. The open question is how long will most North American consumers favor trucks and all forms of SUV’s vs more fuel-efficient smaller cars and traditional sedans. It usually comes down to the average cost of gasoline and on the continuation of promotional buying incentives. It’s a constant back and forth among product management and supply chain teams shepherded by longer-term goal setting from sales and operations planning teams.
Tesla the Disruptor
There remains the presence of industry disruptor Tesla Motors, which has successfully captured consumer brand loyalty through leveraged advanced technology in alternative energy powered vehicle models. Tesla has broken the mold in the notions of a vertically integrated supply chain, and is now, with the acquisition of Solar City, rebranding the company to be one of alternative energy. Thus, far has the bulk of its supply chain strategy anchored in the U.S. but that may have to change to accommodate two evident challenges. In order to support required broader annual global sales growth and especially for the over 300,000 booked orders for the Model 3, production volumes need to expand significantly the strategy to source and construct the huge lithium-ion gigafactory in the U.S. may well turn out to be a brilliant decision in the light of increased U.S. protectionism forces. If the U.S. Congress adopts corporate tax reform that exempts exports and taxes imports, Tesla may well find itself in a strategic advantage with other alternative energy powered vehicles who sell in the United States and globally.
Global Sourcing Dynamics
Automotive executives, both global and domestic, with U.S. and North America production and supply chain presence had their primary attention focused on incoming U.S. President Trump and his vow to stop job losses at U.S. automotive factories in favor of job gains within other countries. In January, The Wall Street Journal observed: “Few industries have spent as much time in Mr. trump’s crosshairs as the U.S. auto sector.” Trump stunningly defeated his rival by winning key U.S. Midwest states whose populations have a high dependency on automotive industry and services focused employment.
Mr. Trump’s statements on trade, border or import taxes have rattled auto executives. The President has signaled intent to re-negotiate trade policies within the existing North America Free Trade Agreement (NAFTA) and to impose added tariffs or a border tax on automotive imports from Canada, China, Mexico, and other countries. Mr. Trump specifically targeted Ford, General Motors, and Toyota for prior decisions to source new auto production manufacturing in Mexico. Auto executives have been packaging strategy announcements to invest more in U.S. based manufacturing.
The strategic stakes are high in that the entire industry has become globally integrated in production and supply chain component and finished goods flow. Mexico was especially being positioned as a North American product hub for lower margin vehicles and as a lower cost manufacturing hub for thousands of automotive component parts.
The larger concerns rest with the imposition of a border or import tax in conjunction with overall corporate tax reform. Such added costs may well tip the balance in landed costs significantly impacting existing margins and overall profitability. Imposing anywhere from a 20 percent to as much as a 40 percent tax on imports to the U.S. could force consumers to pay thousands more for new vehicles and similarly double-digit increases for auto component and aftermarket parts. Each could have a profound impact on future product demand and as we all know, it is quite difficult to predict the outcome of a political process.
As we pen our industry-specific predictions, such proposals remain a matter of speculation and a focus on intense lobbying efforts directed at the U.S. Congress. Where such efforts lead to will ebb and flow during the year, but a certainty is that automotive supply chains will have their teams quite involved in all levels of supply chain sourcing analysis and in supplier contingency planning. Supply chains that have a high product value-added profile dependency for importing component and finished goods parts into the U.S. will especially be challenged.
Further, there is the reality that automotive supply chains must continue to be globally focused to remain competitive and thus countries such as Mexico will continue to play a pivotal role in supply chain strategy. Bottom-line, the environment will be dynamic, and automotive supply chain teams will have little option but to serve as strategic advisors and counselors to line-of-business and product management teams.
This concludes our 2017 prediction related specially to automotive. In our next posting, related to Prediction Ten, we will dive into Commercial Aerospace manufacturers and respective supply chains.
Readers are reminded to review all our prior 2017 predictions postings. And a final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading by February 10th.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Our ongoing Supply Chain Matters commentaries regarding certain product design flaws, quality conformance shortfalls and subsequent efforts at covering-up such flaws have drawn similar takeaways, but it now appears that the stakes are growing far higher.
In the case of the diesel engine emissions manipulation scandal involving Volkswagen, the financial, legal and brand impact implications remain ongoing. A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers is learning some tough lessons because of this scandal. Financially, the global tally is now exceeding $20 billion in product recall, legal settlement, and other costs with potentially more remaining.
Last week, in response to U.S. Justice Department investigative efforts, VW admitted guilt in the manipulation of auto emissions standards along with efforts to cover-up such activities. Six individual VW executives were criminally indicted because of the emissions cheating case. One was once responsible for ensuring that vehicles complied with U.S. emissions standards. Five others had senior leadership roles in the product development organization in Germany.
In its plea agreement, VW admitted that its supervisors and employees agreed to deceive regulators and customers regarding the actual emissions performance of engines. According to published reports, the indictment states that some of the supervisors encouraged employees to create software to evade emissions standards.
A published report by both the New York Times, Reuters, and global business network CNBC, cites content taken directly from the U.S. Justice Department indictment. Noted is man identified as “Supervisor B,” who overruled nervous subordinates and allegedly instructed them to develop the overriding software program to defeat emissions readings. According to the court documents, this supervisor instructed the subordinates to not get caught.
Further noted in this report is a statement from the federal indictment indicating: “In 2012, for example, senior executives rebuffed a group of Volkswagen engineers who had discovered the illegal software. The engineers were told to destroy the documents they had prepared showing how the software worked.”
The whole affair represents the first time that the U.S. Justice Department has elected to pursue responsible individual employees as well as companies themselves in such criminal investigation cases and the admission of guilt.
Also last week, a U.S federal grand jury indicted three former Takata Corp. executives, charging them with conspiring to provide auto makers with misleading test reports on rupture-prone air bag inflators at the center of unprecedented products recalls involving upwards of 42 million vehicles involving multiple brands. These executives held senior positions overseeing air bag product management and engineering at the Japan based supplier. Takata itself separately pleaded guilty to criminal wire fraud and agreed to pay $1 billion to resolve a two-year long U.S. Justice Department probe of the supplier’s handling of air bags that risk rupturing and spraying shrapnel in vehicle cabins. The safety problem is linked to 11 deaths and 184 injuries in the U.S. alone. According to court documents, a senior Takata executive at one point directed a junior engineer to remove data showing ruptures during testing from a report later given to an auto maker
Product and quality management professionals with on-the-job experience in regulated industry environments have likely encountered certain situations of organizational tendencies to cover-up potential product, process, or software design flaws. Such tendencies can sometimes come from verbal directives from above to “make the problem go-away.” Often, pressures to make operational and financial performance milestones can motivate such actions.
Yet, with each passing year, the scope and implications of such actions have grown to unprecedented dimensions. And now, these latest actions point to executives and individuals collectively being held criminally accountable for their specific actions.
We need to be clear, we are not at-all dismissing any of these actions and behavior.
Instead, we observe that product and quality management professionals have now been placed in a more precarious role.
Accommodate pressures to make problems go away so that business goals and performance bonuses are met, or stand on principled legal grounds to do the right thing for customers, corporate and individual legal protections. The challenge becomes ever more magnified as increasingly specifications, process performance activities and management actions are stored in digital files and available for internal or external review.
Such actions represent a slippery slope, one that probably does not get adequate attention in employee and management leadership training, but surely will in the coming months.
The notions of “make the problem go-away’ needs to be supplanted by “we all need to do the right thing” for customers and employees. It starts with corporate leadership, culture, ethics and resolve.
Unfortunately, in today’s global business climate of intense pressures for results, the challenge appears to be more elusive, and individual careers and reputations may well suffer the consequences.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Deep Dive on 2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Provide Added Global Sourcing Challenges
The following Supply Chain Matters blog is part of our ongoing series of deep dives into each of our previously unveiled ten 2017 Predictions for Industry and Global Supply Chains.
At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, provide a series of predictions for the coming year. These predictions are shared in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.
The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.
In an earlier Supply Chain Matters blog postings, we provided deep dives related to:
In this deep-dive series posting, we drill down on Prediction Four.
2017 Prediction Four: Increased Anti-Trade Geopolitical Forces Will Provide Added Sourcing Challenges for Industry Supply Chains
In our predictions concerning 2016, we stated that major developments surrounding global trade policies would occupy the attention of many industry supply chain organizations during the year. Our context was the potential adoption of major global trade agreement such as the Trans Pacific Partnership (TPP), China’s competing One Belt, One Road (OBOR) initiative, and the Transatlantic Trade Investment Partnership (T-TIP). Geopolitical events turned quite negative in terms of expanded global trade and thus the attention of industry supply chains never materialized.
For 2017, our prediction remains that major developments surrounding global trade policies will occupy the attention of many industry supply chain organizations during the year, but now from a far different and perhaps opposite perspective.
Across the globe, growing gaps in income inequality and rising political discontent against elements of domestic and international status quo are fueling a growing backlash towards global trade and unfettered open markets. With heightened global tensions now turning toward more anti-trade and possibly more protectionist rhetoric among developed nations, industry supply chains must now be prepared to deal with potential near and longer term implications that such policies will bring about.
A global environment that begins to turn hostile toward open global trade policies could result in increased import tariffs and added protectionist measures among trading nations, particularly China and the United States. According to the IMF’s October 2016 World Economic Outlook: “In short, turning back the clock on trade can only deepen and prolong the world economy’s doldrums.”
As we pen this prediction in early January, the World Bank declared that political and policy uncertainty in China, Europe, and the United States and in other major global economies are at unprecedented levels. There are fears that the Administration of Donald Trump could trigger a trade war with China and Mexico with threats to impose higher import tariffs for components and products entering the United States. The bank cautions that such a trade war may offset any gains from corporate tax cuts for U.S. businesses.
Further as we pen this prediction, proposals being floated by the Republican Party dominated U.S. Congress that are being directed at corporate tax reform feature border adjustment concepts. Essentially, the concept is applying taxes based on where a product is sold rather than where it is made or where the producer’s operations or executives are based. Imports would not be deducted as a cost of doing business, while exports would be exempted from taxes. The Wall Street Journal and other business media have already raised awareness as to the potential impact on industries that sell most their products domestically while sourcing most production externally in lower cost manufacturing regions. Examples are toys, consumer electronics, apparel and footwear and other products. Such concepts, if enacted, will place a far different financial perspective related to lower-cost production sourcing.
We anticipate that industry supply chain network models will undergo continuous analysis and scrutiny in the coming year as respective supply chain teams assess various changing landed cost and tax factors among product management models. That will likely require a lot of analytical modeling to ascertain impacts to product margins and line-of-business financial metrics. They could further impact today’s contract manufacturing services model in the notions of where bill-of-material components originate from and where final products are shipped to.
Global trade issues indeed percolate in the coming year and they will likely be complex and confusing to sort out in terms of which will ultimately come to fruition. We concur with the IMF and the World Bank assessments that the Trump Administration could well be part of the epicenter of anti-trade disruption rhetoric to fulfill the political promise of Make America Great Again, and that may well include heightened trade tensions involving China or other lower-cost manufacturing nations.
Global trade advisory firms and consultants will be quite busy in 2017 in advising clients of potential implications of more protectionist trade policies or the heightened risk factors for certain global markets.
As noted in Prediction One, the ability to analyze and share important information, and to educate the business and C-Suite executives on supply chain impacts and/or risk tradeoffs of changed trade policies that potentially impact existing global and product innovation sourcing will be an important differentiator and competency throughout 2017. Collaboration among product sourcing, product development and supply chain strategy teams is essential. Organizations should further consider the value of organizing centralized, dedicated sourcing strategy and impact teams responsible for ad-hoc analysis while fostering a common foundation of analysis data and information. In essence, the task may be more of multiple scenario based analysis predicated on different input and output factors.
Our takeaway is that an assumed static global sourcing strategy could prove to be rather risky in 2017. Technology supporting more analytically focused analysis and decision-making will likely play a very important role in the coming year.
This concludes our Prediction Four drill-down. In our next posting of this series, we will dive into Prediction Five that predicts continued turbulence across global transportation networks.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
This week, Tesla Motors announced that the innovative auto manufacturer reluctantly fell short in its 2016 operational milestone goal to deliver between 80,000 to 90,000 vehicles to customers during 2016.
The electric vehicle manufacturer delivered a reported 22,200 vehicles to worldwide customers during the December-ending quarter. When added to prior quarter deliveries, total year 2016 deliveries were approximately 76,230 vehicles, a shortfall amounting to just over 3700 vehicles to the 80,000 threshold.
Q4 vehicle deliveries were impacted by what Tesla described as short-term production challenges that began at the end of October and extended through early December. This delay was attributed to the transition to new autopilot hardware needing to be installed in vehicles.
In July, Israeli-based advanced technology camera supplier Mobileye elected to drop Tesla as a customer, and according to news reports, the cause was attributed to “disagreements about how the technology was deployed.” Earlier in May, a fatal crash involving a Model S operating on semiautonomous mode autopilot control had reportedly motivated the decision to drop Tesla at contract renewal time because this supplier wanted more control as to how its camera technology would be operationally deployed. Tesla has since indicated that its autopilot system will rely more on its radar sensors and advanced software to detect obstacles, rather than the forward-facing camera.
In its published update, Tesla indicated that teams were ultimately able to recover and fulfill its Q4 production goal, but the delay led to cars missing shipping cutoffs for Europe and Asia based customer deliveries. As manufacturing and supply chain teams know all too well, the best planning can often be impacted by unplanned events or disruptions, and the ability to recover quickly is what really matters. In addition to the 22,200 recorded deliveries in Q4, about 6450 vehicles were in various stages of transit to customers at the end of the quarter. These in-transit vehicles will be counted in the Q1-2017 revenue bucket.
As we have noted in prior Tesla focused commentaries, the company’s unique and self-perceived conservative customer fulfillment model is made-to-order and self-distribution driven, and calls for not recording full revenue until a car is manufactured and physically delivered into the hands of a customer with all ownership paperwork correctly transferred and acknowledged. For internationally focused deliveries, the fulfillment cycle is literally many weeks.
Readers could surmise that Tesla indeed had the capability to actually exceed its 2016 customer delivery goals of between 80,000 to 90,000 vehicles. A total of 83, 922 vehicles were produced during the full year.
We believe Tesla should be lauded for consistently adhering to its conservative customer fulfillment policies of complete physical delivery, and for efforts to fulfill Q4 operational delivery milestones despite a noteworthy supply glitch involving a modified supply plan.
Perhaps in the future, customer delivery hurdles will be overcome by formally inviting the customers to Tesla manufacturing facilities to participate in a formal physical delivery transfer process that includes a maiden test driving experience on a test track. Who knows!
To get back to serious, CEO Elon Musk Tesla has committed to investors that the company would have the capability to produce upwards of 500,000 vehicles annually by the end of 2018. More than 300,000 people have put down deposits to reserve the newly announced Model 3, scheduled for 2018 delivery. That represents over a six-fold scaling from 2016 operational performance. If there is going to be a notion of how to improve required production and delivery scale in the months to come, it will likely center on more innovative and globally centric vehicle manufacturing and distribution processes.
Musk has challenged Tesla engineering teams to the principles of “you build the machines that build the machine.” In other words, the context is in thinking that the factory is the ultimate product of engineering, and that you design a factory with similar principles as in designing an advanced computer with needs for many interlinking operational performance requirements. In November, the company acquired German consulting firm Grohmann Engineering to add specific manufacturing automation engineering expertise.
Much work remains, but then again, Tesla has always been a manufacturer that thinks and acts beyond industry convention.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
What is fast becoming a new norm for business risk is that of a direct public attack via a Twitter “tweet” from U.S. President Elect Donald Trump. Before formally taking office on January 20th, Mr. Trump has already attacked corporations such as United Technologies for presumably outsourcing U.S. jobs to Mexico. Other public confrontations have involved Boeing and Northup Grumman for perceived excessive development costs related to new U.S. government aircraft.
Today, this Presidential social media campaign took on direct industry supply chain implications.
In a series of Twitter postings, the President Elect took direct aim at General Motors regarding the Chevrolet Cruze model. Mr. Trump accused GM of importing this vehicle from Mexico to U.S. dealers without having to pay U.S. import duties. GM quickly responded that the bulk of the Cruze was produced in a plant in Lordstown, Ohio.
Trump’s other automotive industry target has been Ford Motor, who had previously announced plans last February to build and staff a new manufacturing facility in Mexico to produce smaller vehicles. An editorial at the time published by The Wall Street Journal reflected that Ford’s strategic sourcing moves were indicators of a strategy to offset the signing of a new labor agreement among its U.S. unionized work force, which raised direct labor costs to nearly $30 per hour in the coming years. Mexico’s direct labor rates were indicated as being one-fifth that of unionized workers in the U.S.
Today, Ford suddenly scrapped its plans to build the previously announced $1.6 billion small car factory in Mexico in favor of a modified plan that would share production among existing plants in the U.S. and Mexico. Ford’s CEO Mark Fields took to the business airwaves to declare a new meeting of the minds regarding the incoming POTUS to include a planned $700 million incremental investment in the Flat Rock Michigan assembly plant.
We call reader attention to a CNBC business network report which we believe provides far more insight as to what is really at-stake in this developing direct public confrontation of U.S. auto manufacturers. That insight involves the current automotive value-chain of parts and component sourcing.
The CNBC report notes that under the existing North America Free Trade Agreement (NAFTA) the parts components that make-up a finished automobile and truck are increasingly sourced in Mexico. In 2015 alone, 60 percent of the $5 billion in direct foreign investment associated with Mexico’s automotive industry sector was associated with parts and component manufacturing. As we have previously noted on this blog, Mexico’s direct labor costs averaging in some cases $2.50 per hour are a compelling attraction for parts producers, especially when various global OEM producers demand that a contiguous component supply chain be developed to support both Mexican and other North American production needs.
In 2014, we called Supply Chain Matters reader attention to the then prevalent trend that for the automotive industry, Mexico was fast becoming a North America production and global export production hub. We echoed that global automotive brands BMW, Honda, Kia, Mazda, Nissan, Volkswagen, Nissan, and others had announced strategic Mexican production sourcing decisions that amounted to billions of dollars of investment. This was beyond U.S. automotive branded companies, reflecting that Mexico would soon become an alternative global automotive manufacturing hub for smaller, lower-margin vehicle line-ups.
The CNBC report cites U.S. trade data for the first 10 months of 2016 indicating that “parts imports from Mexico totaled $89.6 billion, dwarfing the next biggest import nations, Canada with $54 billion and Japan, at $44 billion. While vehicles were the main imports from Canada and Japan, more than half- $46.8 billion of the automotive-related imports from Mexico- were vehicle parts in that 10-month period. U.S. government data show that car parts imports into the U.S. nearly doubled in the past five years.”
It would appear to this blog, that Mr. Trump has gathered advisors who appear very knowledgeable of automotive supply chain sourcing strategies particularly as it relates to current NAFTA agreements. The Trump campaign promises to thwart the exodus of U.S. jobs has obviously already begun, and the stakes are threatened import tariffs involving imported auto parts originating from Mexico and Canada. Thus far, it would appear that Ford has been willing to meet the incoming Administration halfway with new concessions. Perhaps, GM and others will follow in a meeting of minds or the Republican dominated Congress will act on Trump’s threatened NAFTA agenda.
With the first direct skirmishes involving public confrontation underway and other U.S. based industry supply chains should be prepared for an environment of changing assumptions related to the landed cost of component sourcing.
Where all of this give, and take ultimately lands is very much uncertain especially in the new tendencies toward direct confrontation. The sheer facts of dramatically different direct labor costs among Mexico and the U.S. workers remains. Worker productivity and automation are the new variants in global sourcing coupled with threatened new import tariffs or open market retaliation.
Preparation and timely detailed knowledge of component sourcing and production costs coupled with backup contingency sourcing plans are fast becoming a required capability in this evolving new era of populism and anti-global trade.