More information continues to come forth regarding Samsung’s bold decision to permanently suspend production and sale of its newly announced Galaxy Note 7 smartphone. Thus far, the information points to both product design/management as well as supply chain related learning. While it is still rather early to be able to definitely conclude what led to this brand debacle, the one clear aspect is that the Samsung Note 7 incident will be of multi-industry discussion, thought exchange and study for many months to come.
Many industry, business and other media voices are already concluding that Samsung’s decision to terminate the Note 7 product represents a bold effort to protect its overall brand and creditability with customers. The more that the negative publicity continued regarding Samsung, the more the damage. New reports and social media commentary are surfacing that the manufacturer’s engineering teams were themselves challenged with determining the specific root cause(s) of the thermal runaway fires.
We initially call Supply Chain Matters reader attention to a recently published and rather insightful New York Times report: Why Samsung Abandoned Its Galaxy Note 7 Flagship Phone. This report indicates that within its process of overall response to reports of phones exploding and catching fire, Samsung’s engineers were unable to replicate the fire conditions. Further noted was that because of the tight deadlines and intense internal visibility to find root cause, engineering elected to conclude that the effect had to be associated with faulty batteries or battery design.
In August, the looking glass, as this blog speculated, quickly turned to battery supplier Samsung SDI. The Times citing documents from a South Korean product safety regulator as a source, indicates speculation that either the plates inside the battery were too close or the battery had defects in insulation or coating of electrodes. The early September product recall of 2.5 million phones was targeted to those Note 7’s that had Samsung SDI batteries. Both Samsung and the Korean regulatory agency turned to batteries supplied by alternative battery ATL to be those to be incorporated with the recall’s replacement phones. That decision reportedly backfired when reports of fires associated specifically to the replacement phones began to quickly surface.
No doubt, these efforts involving suspicions with battery design operation caused Samsung’s internal supply chain teams to scramble for a response plan. We speculated in our prior blog commentary that the rest of smartphone and consumer electronics industry was obviously watching events very closely as well to ensure that a battery defect was not involved with other product supply chains. Samsung SDI itself is a supplier to many other branded smartphones including Apple’s iPhone.
The Times article goes on to cite a former director and battery expert at the Korea Electronics Technology Institute as indicating that blaming the batteries as the problem was too quick to judgement given the lack of definitive post-testing data. Instead this expert noted: “The problem seems to be far more complex”.
Other reports that we have reviewed thus far also point to engineers under the gun to quickly resolve the cause of fires with un-conclusive or definitive test data. In the end, concerns for the brand, and concerns for short and longer term revenues and profitability seemed to have taken hold. Equity analysts at Credit Suisse had recently estimated that the Note 7 recall could cost Samsung upwards of $19 billion in lost revenues. Research firm Strategy Analytics had earlier estimated more than $10 billion in financial losses. Samsung itself has indicated to shareholders that it anticipates A $5.3 billion loss during the next few quarters. The manufacturer has already downward adjusted its third-quarter profit forecast by $2.6 billion. Thus the financial implications of this incident can be substantial.
In today’s world of global business, events reverberate continuously at the speed of social and traditional media. Staying in-front of and in-control of such information flow, particularly when it involves brand crisis is a daunting challenge that requires expert resources. Industries further exist in an overall business environment more inclined to lawsuits and litigation response to product recall incidents which often hampers open communication and timely response when lawyers become the filter for external and internal communications and investigation mechanisms. We have observed that theme consistently in these incidents as well as the supplier implications.
While information, discourse and industry implications related to the 2016 Samsung Note 7 product management events will continue to unfold, we offer one clear takeaway. The business process, information, market intelligence and decision-making relationships among product design, management, procurement and broader supply chain strategy teams is ever more important and required in today’s global business environment. No company is immune, regardless of stature or brand identity. The supply and product value chain leadership and accountability umbrella is broad and ever more inter-dependent.
Supply Chain Matters advocates that Sales and Operations Planning and internal organizational management mechanisms include product design and management as an entity within integrated business and operations planning.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Supply Chain Matters has previously posted commentaries regarding the ongoing brand, product and supply chain learning implications regarding the product recall surrounding the fairly newly announced Samsung Galaxy Note 7 and its manufacturer, Samsung Electronics. Incidents of fires presumably caused by lithium ion battery thermal runaway remain a concern, as is the damage to the Samsung brand. The Note 7 represents the premium smartphone model offering in the Samsung product lineup and now upwards of 2.5 million of these devices have been recalled across 10 geographic markets.
The initial news of the recall prompted Samsung investors to punish the stock to a 13 percent decline, but the company’s stock quickly bounced back on news of the product recall efforts.
Since our last update at the end of September, there was a fire incident involving a phone belonging to a passenger flying on a Southwest Airlines flight traveling from Louisville Kentucky to Baltimore Maryland. The fire incident caused the evacuation of that aircraft. The Galaxy Note 7 phone in that incident was a new replacement phone and battery, raising added concerns that the battery fire incidents may or may not be addressed in the prior product recall. Other incidents involving replacement phones are also being investigated by safety agencies and Samsung.
The Wall Street Journal, citing a source familiar with the matter is today reporting that Samsung has now temporarily halted production of the troubled Note 7. A statement by Samsung indicates that the manufacturer was “temporarily adjusting the Galaxy Note 7 production schedule in order to take further steps to ensure quality and safety matters.” Samsung is further offering a software update for customers in South Korea that limits the charging to only 60 percent of battery capacity.
In its reporting the WSJ opines that this latest production halt underscores the growing seriousness of how Samsung is dealing with its largest product recall to-date. The publication also points to the global supply chain implications involved in the production of the product’s battery. Noted is that the smartphone battery cells are produced in both South Korea and China but the unit’s packaging is performed in Vietnam.
The manufacturer further indicated to the WSJ: “If we determine if a product-safety issue exists, Samsung will take immediate steps approved by the CPSC (U.S. Consumer Product Safety Commission) to resolve the situation.”
On the distribution front, AT&T, T-Mobile and Verizon Communications have now indicated that each would stop issuing new replacement Galaxy Note 7’s to replace recalled units, in essence forcing customers to select other Samsung model phones as replacements or to seek a refund.
Obviously this latest news adds many more dimensions to the ongoing Samsung product recall efforts involving the Galaxy Note 7 smartphones and perhaps to other smartphone manufacturers who may have a similar supply chain profile. Time, product and supply chain troubleshooting and degree of response are all key to this ongoing set of challenges that are impacting Samsung.
Consumer trust is all important and for current Galaxy Note 7 owners, such trust is growing quite thin.
In July, innovative electric car manufacturer Tesla Motors announced its Q2 product and operational results. In our July Supply Chain Matters blog posting related to Q2’s performance, we concluded that Tesla remained challenged with supply chain ramp-up issues as it strives to meet aggressive short and required longer-term production scale-up needs for existing as well as future model needs.
Yesterday, Tesla reported its Q3 operating performance and it would appear that the auto maker is now responding to its short-term supply chain challenges.
According to a published report by The Wall Street Journal, CEO Elon Musk called for a strong third quarter to strengthen his equity raising case for scaling up the supply chain and production needs of the newly announced Model 3, along with massive lithium-ion battery facility, the termed gigafactory, near Sparks Nevada. It appears that operational teams indeed performed in Q3.
From an operational perspective, Tesla delivered approximately 24,500 vehicles across the globe in Q3, of which 15,800 were Model S and 8,700 were Model X. That level of output was nearly double that of the year-earlier quarter. The Model X production performance improvement stands out because of that vehicle’s previous production hiccups due to design-for-supply chain challenges causing some components such as the vehicle’s doors to be brought in-house. It further represented an increase of just over 70 percent from last quarter’s deliveries of 14,402. Quite impressive. In addition to Q3 deliveries, the manufacturer indicated about 5,500 vehicles were still in transit to customers at the end of the quarter and these will not be counted as deliveries until Q4. Tesla further reiterated its prior guidance of 50,000 vehicles being delivered for the second-half of 2016.
In late July, we posted a blog commentary reflecting on Tesla’s revised master plan as communicated by founder Elon Musk. After taking hundreds of thousands of advanced reservations and up-front financial deposits for the Model 3, Tesla’s initial answer to a mass-produced and more affordable electric vehicle, Tesla had to revise its longer term production plans to target total annual vehicle output of 500,000 vehicles two years earlier than originally planned, which is now planned to occur by 2018. Musk’s response has been to rally his engineering teams to now focus on what is termed: “designing the machine that makes the machine.” In essence, the effort reflects on turning Tesla’s supply chain and existing production facilities into an engineering design challenge in accelerating capacity, integrated design and tory automation. As readers are also aware, Tesla maintains its own global wide logistics and delivery network for finished vehicles, without the use of traditional dealers and finished automobile lot inventories. That adds to the challenge.
If Tesla indeed continues to perform and deliver its anticipated 50,000 vehicles in the second-half of this year, 2016 will close with a production rate of slightly over 83,000 vehicles. That will set the stage for 2017/2018 to ramp-up to the 500,000 volume target, a near tripling of existing capacity and value-chain ramp-up volumes.
While short-term performance indeed looks better, the longer-term challenges remain and it will obviously involve all of the best engineering, supply chain operational minds and advanced technology adoption that Tesla can muster. That is not to state that the goal is not achievable, but rather the effort will be one that will make-up business case stories for many years to come.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Note: This is the second of two postings providing more specific evidence that a shift in the contract manufacturing services is now underway and involves multiple industry sectors. We began with a commentary related to automotive industry product design supply chain strategy. In this posting, we focus on the changing services model of Jabil Circuit.
As far back as 2011, this analyst began to share observations on a growing reality of a changed model of contract manufacturing services (CMS) among high tech and consumer electronics supply chains. The reasons were obvious five years ago, and far more obvious today. The ability to continually experience a mere one to two percent in operating margins, regardless of volume scale, was unsustainable for the industry as a whole. Once more, with direct labor costs increasing in major manufacturing hubs across China and other areas, and with technology cycles changing more quickly, the need for constant capital infusion in investments in the newest technologies and automation further requires an increased return for such investments. Remember that the CMS model evolved from a need by OEM’s to avoid the need to invest in manufacturing assets and process automation. More and more now, the industry is moving to umbrella capabilities in product innovation and design, supply chain network design as well as digitally enabled manufacturing capabilities.
In our last commentary specifically related to Jabil published in May, we shared highlights of our interview with the Vice President of Supply Chain Solutions and Global Logistics. Our byline was that if readers had any perceptions that CMS firms were laggards in advanced technology adoption, our interview led to quite a contrary perception.
This week the $18 billion manufacturing partner to some of the most well-known high tech and consumer brands made a rather significant announcement, one that places this contract manufacturer in the category of original design manufacturer as well as a managed services provider.
The Jabil announcement outlines the introduction of what is being termed as: “Innovation Acceleration services that compress the entire product lifecycle” New services include:
- Digital Prototype Lab and associated services to deliver enhanced speed to product innovation
- Managed Supply Chain Services to enhance supply chain network visibility and mitigate risk.
- Managed Procurement Services to boost purchasing efficiencies and drive cost saving opportunities.
- Additive manufacturing and 3D printing services to accelerate new product introduction for larger-scale volume manufacturing.
To gain additional perspectives, Supply Chain Matters was invited to speak with John Caltabiano, Vice President of Supply Chain at Jabil along with Chuck Conley, Director of Product Marketing, Digital Supply Chain solutions. We learned that Jabil’s value to clients has expanded across different industry markets, engineering, supply chain and contract manufacturing capabilities. With this week’s announcement, Jabil is transitioning to an expanded services model that is enabled through broader strategic capabilities and digital based services that can speed time-to-market and provide added opportunities to reduce supply chain wide costs.
In essence, Jabil is now positioning services to support product strategy, product design and innovation, supply chain network performance and customer services, thus moving upstream in the product value-chain.
These new services come about from Jabil’s prior acquisition of radius in product innovation, development and prototyping services. The Digital Prototype Lab includes capabilities in 3D Printing technology, CT Scanning and rapid iteration off existing CAD data.
The 3D Printing capabilities are underscored by a partnership with HP Inc. and other printer device providers. Jabil considers itself to be a leader in additive manufacturing and the new services in this area provide materials development and certification, process validation and 3D supply chain integration. This can allow customers to move beyond use of 3D printing for product prototyping and more into the rigors of leveraging additive techniques for higher volume manufacturing needs.
As for the two new services, Procurement as a Service is designed to encompass procurement strategy and vision, sourcing of direct materials, purchasing execution and business process outsourcing for supporting procure-to-pay (PTP) processes. We were informed that this service leverages Jabil’s own knowledge in the procurement and supplier capabilities of thousands of various components globally.
Supply Chain as a Service is more consultative and strategy focused, providing customers assistance in supply chain network optimization, design for supply chain strategies, supply network inventory optimization and supply chain risk management. While availability for network optimization and compliance and conflict materials tracking is now available, the other elements of end-to-end visibility, risk management and inventory optimization are planned for a Q1-2017 release.
Underpinning both of the above new services is Jabil’s own developed Jabil InControl and Procurement Intelligence Platforms. They include 45 various applications connected together in a management utility. There are elements of SAP backbone applications, a unique PDM application, Kinaxis Rapid Response supply chain planning, along with newly developed capabilities directed as normalizing data feeds across all Jabil support applications. Regarding the latter, Jabil has been working with Microsoft to build capabilities for analyzing massive amounts of structured and unstructured data. Our previous check-in with Jabil in May explored enabling end-to-end planning and customer fulfillment visibility and the context of ‘actionable visibility’ supported by ‘in-control’ digitized streaming of information that is anchored in analytics-driven decision support capabilities.
As our readers may be aware, one of the more sensitive concerns for OEM based manufacturers involve intellectual property protection (IPP) related to product designs, particularly when they are shared with contract manufacturers or ODM’s. IPP can often be a concern or roadblock in an outsourcing decision. Our briefers addressed that concern by indicating that Jabil has no intentions to be viewed as a product company, and that product design IP will also remain with client. However, in this new era of digital-enabled manufacturing and supply chain, process-focused IP remains with that of the manufacturing or supply chain partner. Further, through its relationships with existing 3D printing and additive manufacturing partners, contract manufacturers themselves may be bounded by the process protection rights of the individual additive manufacturing technology providers.
We would hasten to add that certain industry disruptors may be willing to trade-off production and supply chain IP rights to gain faster market entry, enable more accelerated new product introduction cycles and avoid the costs of investing in the costs of more automated and digitally enabled manufacturing. It relates to strategy trade-off decisions.
Obviously, Jabil is not alone in this industry-wide transition. Globally based CMS providers Flex and Foxconn are moving upstream as-well while making augmented investments in additive and digitally enabled manufacturing and supply chain capabilities supported by more predictive based sly chain applications and decision-making.
More and more, traditional CMS providers are moving to umbrella capabilities in product innovation and design, supply chain network design as well as digitally enabled manufacturing capabilities. Once more, these capabilities have resonance with more and more industry settings beyond high-tech and consumer electronics. We previously highlighted capabilities for the automotive industry and these new models have attraction in many other industry sectors as well.
The common business phrase among many C-suite executives is that in today’s business world you either disrupt or be disrupted. That includes contract manufacturers who have now figured out that their futures rest with broader support for industry disruptors.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Supply Chain Matters has previously posted commentaries reflecting on the ongoing brand, product and supply chain learning implications regarding the Samsung Galaxy Note 7 product recall crisis. Incidents of fires presumably caused by lithium ion battery thermal runaway remain a concern, as is the damage to the Samsung brand. If you have recently flown on a commercial airline, you may have noted specific announcements that any passenger in possession of a new Galaxy Note 7 is specifically directed to not turn the device on during flight. Ouch!
There are now some additional perspectives related to this ongoing situation. Bloomberg Businessweek has just published a report: Samsung’s $2 billion Mistake. This report opens with the declaration: “Few things motivate Samsung employees like the opportunity to take advantage of weakness at Apple Inc.” The essence of the Bloomberg report is a belief that Samsung thought it could one-up rival Apple’s lackluster product launch by rushing out the new Note 7 phone before the launch of Apple’s new lineup of iPhones. Bloomberg indicated that the approved launch of the new model was 10 days earlier than last year’s model.
In today’s environment of more complex supply chains, 10 days can provide a significant challenge.
By pushing up the deadline for product launch, suppliers were reportedly pushed to meet tighter deadlines despite significant technology features including a more powerful and faster charging battery. A supplier source with knowledge of the situation indicated to Bloomberg that Samsung employees repeatedly changed their minds about product specifications and schedules. Samsung reportedly declined to comment to Bloomberg as to whether it indeed pushed up its product release timeline for the new Galaxy Note 7.
The report further cites a source with knowledge of the matter as indicating that the main battery supplier for the Note 7 was indeed Samsung SDI, which is 20 percent owned by Samsung Electronics. The report indicates that during the initial crisis period, the phone division pointed fingers at its sister battery division, while teams argued that the problem could lie elsewhere, including the circuit design or insulation. Samsung did indicate to Bloomberg that there is no longer debate and that the phone division has ken responsibility.
Reports to government agencies in South Korea, China and the United States have since concluded that an error in production may have put pressure on the plates within the battery cells, causing the anode and cathode poles to come into contact and trigger excessive heat. That was indeed the explanation of a well written analysis by Brian Morin on Seeking Alpha which we highlighted in our September 16 Supply Chain Matters commentary. Bloomberg further made reference to the chairman of the U.S. Consumer Protection Safety Commission (CPSC) as being more explicit. He indicated that the new battery was slightly too big for its compartment and tight spacing caused a pinch that may have created the short circuit.
Since the announcement of the Galaxy Note 7 product recall, there has been one report from China indicated that a phone, installed with the new replacement battery, also encountered a battery fire. That is raising new concerns and Samsung is investigating these new incidents.
Reports now indicate that the current recall could cost Samsung as much as $2 billion. That would be a costly lesson in rushing a product to market before engineering designs are adequately tested. A further on question is whether the product design defect resides just with Samsung or Samsung SDI, the battery supplier. In the latter, batteries are supplied to other smartphone manufacturers.
To its credit, Samsung management has listened to employee feedback to never compromise on customer service and to conduct the ongoing global product recall. However, when all the dust settles, the Note 7 incident will provide some expensive learning om many dimensions.