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.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
We previously alerted our Supply Chain Matters readers to the stunning and somewhat embarrassing news that Samsung initiated on its own, a global recall of its newly announced Galaxy Note 7® smartphones due to reports of battery fires. It is now becoming much more evident that Samsung has created additional customer creditability and market perception challenges by attempting to manage its ongoing faulty battery issues on its own, without timely notification to product safety regulators. Yet, once again, there exists other multi-industry supply chain learning regarding needs to closely coordinate potential product or equipment safety issues with governmental regulatory agencies. Learning that other manufacturers and their respective suppliers have painfully encountered.
As of this week, Samsung has received 92 reports of the batteries overheating in the U.S., including 26 reports of burns and 55 reports of property damage, including fires in cars and a garage. And that is just for the U.S. The consumer electronics provider itself has been reluctant to share details relative to which supplier batteries are suspected (there are multiple battery suppliers) and why the uncontrollable thermal events are occurring. We came across a well written analysis commentary penned by Brian Morin on Seeking Alpha that points to overheating of a battery cell as a result of anode-to-cathode shorting caused by flawed separators as a potential cause. This analysis raises speculation that the problem may not just concern Samsung but other smartphone manufacturers as well, depending on the specific supplier involved. Again, Samsung has yet to identify the specific battery supplier involved in the recall, or whether the battery performance issue extends to other models.
Samsung launched the top-of-the line Galaxy Note 7 on August 17 in an effort to announce the new model prior to Apple’s expected iPhone 7 product launch. Approximately two weeks later, reports surfaced as to occurrences of faulty batteries that were exploding during the recharging process. Now as the hubris of Apple’s iPhone 7 permeates media channels, Samsung must deal with effects and visuals of battery fires among its smartphones.
Today, a published report by The Wall Street Journal, coupled with other business media reports all seem to conclude that Samsung has fumbled this recall because of attempts to singularly investigate and respond to the occurrences of faulty lithium-ion batteries that were causing unexpected explosions and fires. Global wide telecommunications carriers as the principle distributors of the Note 7 were caught in the middle of this situation, receiving conflicting information from the manufacturer and from consumers, while unable to act without a formal product recall notice. It still remains unclear as to whether the problem can be corrected by a different battery, and when supplies of that different battery are made available. Meanwhile, individual consumers and business customers are reluctant to suspend using their new smartphones without having a replacement in-hand.
This week. The United States Consumer Product Safety Commission (CPSC) was obligated to take direct control of the ongoing issues with the occurrence of some overheating batteries by issuing a formal and immediate product recall notice. The notice urges consumers to “immediately stop using and power down the recalled Galaxy Note 7 devices purchased before September 15, 2016.” They are further instructed “to contact the wireless carrier, retail outlet or Samsung.com where they purchased the device to receive free of charge a new smartphone with a different battery, a refund, or a new replacement device.” The latter statement is of course what will obviously lead to other confusion but the timing and the urgency left little choice.
According to U.S. law, the CPSC must be notified within 24 hours after a product safety risk has been identified. The agency did not issue a statement until a week after Samsung’s initial announcement. The chairman of the CPSC indicated to the WSJ that for a company to go out on its own is not a recipe for a successful product recall, and in other media interviews, was somewhat blunter in his remarks.
This 24-hour notification was initiated as a result of the aftereffects of the prior sudden unattended vehicle acceleration and other perceived vehicle safety issues that impacted Toyota during the period from 2009-2010. Three years later, Toyota was still dealing with the after effects and U.S. legislators collectively called for stricter controls related to product safety. Today the automotive industry as a whole continues to deal with the challenges of faulty air bag inflators and other product safety related recalls that have now exceeded all previous records for total number of recalled automobiles. The 24-hour threshold coupled with the potential for significant financial and litigation implications related to the mere potential of product safety concerns has led automotive producers to err on the side of caution and engage regulators much earlier in the process and issue a product recall. Currently it seems that not a week can go by without news of some major recall involving an automotive brand.
Samsung’s faulty battery issues further have some parallels to the 2013 challenges that impacted Boeing’s 787 Dreamliner aircraft as a result of unexplained lithium ion battery fires affecting the aircraft’s own power systems. A series of unexplained battery compartment fire incidents triggered a subsequent six-month grounding of all existing operational 787 aircraft while government safety agencies and Boeing searched for the cause. The aircraft was later approved for service after Boeing reluctantly initiated a complete redesign of the battery housing unit containing lithium-ion batteries. The incident was very costly or Boeing from both a financial as well as brand reputation basis. Airline flyers began to question the overall safety of the 787.
Boeing’s initial reaction was to push-back on government regulators. An NTSB investigative report later concluded that the probable cause was an internal short circuit within a battery cell which led to a condition of thermal runway. The report also pointed to cell manufacturing defects and oversight of cell manufacturing processes involving the battery manufacturer. Today, there are little incidents of battery issues for operational 787’s but there will also be some concerns on the part of airline travelers as more and more lithium ion battery related fires come to the forefront. U.S. and other airline safety regulators are considering outright bans on allowing bulk quantities of the batteries to fly in aircraft cargo compartments.
Hence the learning is again that product defects often involve the supply chain, not just your organization, but others as well. In this specific Galaxy Note 7 issue, Samsung SDI is a supplier, along with other battery suppliers. The open question is whether Samsung was somehow trying to control the broader industry fallout of its battery manufacturing process. We will not likely know the answer to that until later in the investigative process.
Like others, Samsung will eventually garner important learning regarding the control or management of consumer focused product performance data and in trying to control the fallout. On the one-hand, today’s social media based channels, whether good, or not so good, provide instantaneous feedback and perceptions related to consumer experiences and product performance. A belief that the fallout can be controlled or buffered by internal control processes has passed. Like any other challenge involving major supply chain disruption or business continuity, there must always exist a set of response plans that include important decision criteria as to what needs to occur at any point. Lawyers, corporate risk and other senior managers will often have their own viewpoints but they must understand that this new world of always-on media and instantaneous information requires the most-timely responses, often with a supply chain purview.
The lesson for all is to look to multi-industry learning from past events and not let internal or external perceptual concerns cloud regulatory requirements, regardless of how your organization views such requirements. In the minds of consumers and customers, product and supply chain component safety trumps all other concerns.
It is that time of the year again, one which has become rather predictable for Apple’s supply chain ecosystem. Every year in the September-November time period, the world anticipates Apple’s announcements of its newest products including the all critical iPhone.
September triggers other external industry actions as well that reflect on what may be occurring across the company’s supply chain.
Apple has established a predictable pattern for announcing its new products in the September-November period, and the consumer giant’s loyal followers are patterned to anticipate such announcements in-time for Q4 holiday gratification. Every other year, Apple’s new product announcements typically include a compelling hardware revamp.
However, patterning and predictability has allowed Apple’s principal competitors such as Samsung, Huawei Technologies, Xiomi and others to move their new product announcements to occur mid-year, prior to Apple, in-essence scooping Apple in marketing features and function buzz.
We have longed praised Apple’s public relations and marketing teams for the superb job they do in building-up the hype interest related to Apple’s newest products. Every September, not only do social media channels buzz with comments related to what may be announced in the latest iteration of iPhone, in this year’s case, the iPhone7, but also the usual rumors of supply chain challenges that may hinder consumers in getting one’s hands on the newest phone by the holidays.
This week was no exception with Apple’s iPhone7 announcement, only this time, Apple’s PR teams have what appears to be a greater challenge of convincing existing iPhone owners of the compelling need to upgrade to the newest model. Already, the initial buzz seems to be that Apple has not included enough compelling evidence to warrant a new upgrade purchase. Then again, there are always those that have to get their hands on the latest iPhone model.
The new iPhone7 and iPhone7 Plus models were announced with longer battery life, sharper screens and long awaited larger storage, but alas, the elimination of the headphone jack has captured most of the initial social commentary. The jack was eliminated to make the newest model thinner and allow for more waterproofing. Instead of the traditional plug-in jack, Apple has introduced AirPods, wireless headphones that are designed around a wireless microprocessor that can be obtained for a mere $159. According to a report from today’s edition of The Wall Street Journal, technophiles in China have affectionately dubbed the new AirPods as hair dryers.
For customers in the all-important China region, it would appear that the new features and functions can be garnered from competitor manufacturers at less cost.
This week’s iPhone7 announcement schedule was far more aggressive. Orders for the new model will begin shipping on September 16 for 28 countries, up from an initial 12 countries for last year’s iPhone6 launch.
Supply Chain Ramp-Up and Sourcing
August and September are when Apple’s component suppliers and contract manufacturers ramp-up volume production to build inventories for the all-important holiday fulfillment quarter. Multitudes of temporary workers are brought on-board, and select Asian country production and inventory activity indices predictably spike in Q3/Q4 to reflect the Apple wave. This year, as is in past years, rumors are prevalent about production ramp-up challenges, lower than expected production yields and other supply challenges. Most are directed as the new dual-lens camera feature.
Earlier this month, the WSJ reported that as Apple grapples with subsequent quarters of declining iPhone sales, the consumer electronics icon began an effort in January to once-again cut better supplier deals, However the latest development is the double whammy of cutting prices as well as setting lower volume expectations with component suppliers and contract manufacturers, threatening to further impact various supplier financial performance. According to the report, suppliers are wary about the lack of a smash hit and the demands from Apple for additional discounts is not sitting well. Foxconn, one of Apple’s largest and most trusted contract manufacturers has seen its operating margin slip from 3.4 percent to 2.3 percent in Q2. Other Q1 and Q2 financial performance results from various key Apple suppliers reflect weakening results and increasing operating margin stress,
No doubt, Apple will be closely monitoring weekly fulfillment results and will dynamically adjust supply requirements. Suppliers will be expected to respond and conform to any required changes either up or down in nature.
Social Responsibility Concerns Continue
Also every September, social responsibility watchdog China Labor Watch, reports on its latest findings of alleged labor abuses involving Apple’s major suppliers. This year is no exception, with the watchdog group again focusing on reported abuses involving contract manufacturer Pegatron. Readers may recall that in 2015, Apple further segmented its supply chain with the addition of Pegatron as a supplemental, lower-cost contract manufacturer.
In a report published in late August, the labor watchdog analyzed over 12 months of payroll statements from select Pegatron workers. This latest report concludes that while the average wage rates in China have steadily increased, contract manufacturer worker wages decreased significantly in the past 8 months from a series of payroll practice changes along with added worker deductions. The report further points to the occurrence of excessive overtime work particularly occurring during production ramp-up periods. The China Watch analysis of 2015 pay statements concludes that 62 percent of Pegatron workers worked over 82 hours of overtime per month, and that factory workers continue to be forced to work overtime hours. The labor watchdog group indicates that it has shared its findings with Apple.
In fairness to Apple, labor conditions across China’s consumer electronics sectors are not just common to Apple. China Labor Watch has issued similar concerns regarding Samsung’s China based suppliers as well as other manufacturers, which reflect a continual environment of accepted or tolerated labor abuses. At least Apple is willing to put more effort and broader visibility to its social responsibility expectations and audit practices.
Thus, the Apple supply chain enters another Q3-Q4 period of expected performance and miracle-making but with far more uncertainties related to the financial fortunes for being an Apple supplier. Meanwhile, Apple itself seems to be protecting its high operating margins and the potential expense of a more volatile supply chain.
This will indeed be an interesting subsequent period of the new iPhone and other newer Apple product models. Apple’s influence and clout remain open to challengers. If you had thoughts that your firm or organization’s sales and operations planning (S&OP) was continually challenged and constantly changing, think perhaps of Apple.