Whether you reside in a large or smaller, up and coming business, accurate product planning is always essential to insure timely and responsive supply chain customer fulfillment, especially when new products are introduced to the market. For consumer electronics, the first few months of customer demand are the most critical. That includes the demand expected among different model variants of a product.
A reminder of such importance is reflected in this week’s business headlines concerning Samsung Electronics, and its recent release of the Galaxy S6 smartphone family. The company alerted its investors this week that second-quarter earnings would be disappointing because of laggard sales of its new Galaxy S6 model. According to a published report by The Wall Street Journal, Samsung may have misjudged demand.
The WSJ cites informed sources as indicating that when the Galaxy S6 family was launched April, the established supply and manufacturing plan called for demand for the Galaxy S6 to be four times more than that of the Galaxy S6 Edge, curve screen variant. It turned out that consumer demand was evenly split between both devices which led to a surplus of unsold S6 devices and an eventual shortage of the higher priced Edge model. Samsung’s supply chain teams then had to scramble to boost component supply and contract manufacturing levels of the Edge model.
As to how much the planning snafu contributed to a sales or revenue shortfall will come when formal quarterly results are reported. Final quarterly results are due later this month. However, the WSJ observed that the company’s stock has fallen 17 percent since the April launch of the Galaxy S6.
Certainly, Samsung is but one visible example of the importance of more dynamic and agile supply chain planning. Other manufacturers and retailers have experienced similar lessons, some public, others not as public but equally challenging.
The report serves as another timely reminder of insuring that adequate resources and more agile planning methods that sense product demand are continually incorporated in your supply chain planning.
As many of our Supply Chain Matters readers are aware, the July 4th holiday in the U.S. is a big one. Not only is it the annual celebration of U.S. liberty and independence, complete with numerous concerts, picnics and fireworks demonstrations, the holiday serves as the symbolic kickoff to summer vacation and other family-based activities.
The first two weeks in July is often a period when firms take the opportunity to shut down or scale-back operations to refit or perform major maintenance on manufacturing and other equipment as well as IT applications and systems.
One high tech and consumer electronics manufacturer that will be very busy this summer is that of Hewlett Packard which is in the key preparation stages of splitting the former company into two equally sized companies on November 1st. One company, Hewlett Packard Enterprise Company will oversee operations of the now HP Enterprise division, A $55 billion dollar entity. The other, HP Inc., will oversee operations of the now HP Printer and PC divisions, of equivalent revenue size.
The HP split involves separating balance sheets, facilities, IT systems and applications, including those related directly to the support of HP’s end-to-end supply chain. Purchase agreements among various suppliers must to recast foe each new company along with various special agreements. HP operations currently span 600 locations in 170 countries.
The split comes in the midst of massive headcount reductions that have already occurred across many business and functional groups.
Supply Chain Matters has featured prior commentaries related to the risks in splitting-up HP’s vast and complex supply chain ecosystem of suppliers and manufacturing partners. Most important was the global buying scale of a singular HP that was constantly leveraged among suppliers.
Management of the upcoming split is being overseen by a 500 person Separation Management Office that includes key executives that will make-up both split companies, including HP’s current CIO.
This week, The Wall Street Journal featured an interview of HP CIO Scott Spradley, who described a complex surgery analogy for separating various IT systems. Keep in-mind that HP is primarily supported by an SAP ERP and Business Suite infrastructure and applications backbone. According to the report, HP is about to initiate a global network of IT command centers designed to keep operations humming amid the combined $1.8 billion restructuring effort. The report cites the closing of 2600 internal computing programs that include those supply chain related.
Another sudden twist to this ongoing story comes from today’s WSJ which reports that the executive tasked with leading the HP Separation Management Office announced his departure from HP this week. According to the report, this was an unanticipated setback in what so far has been a smooth transition process.
Obviously it is going to be a rather busy summer across the many halls of HP, particularly the halls of the company’s combined and soon to be separated supply chain ecosystem of suppliers and supply chain support teams.
In the meantime, we extend best wishes to all of our U.S. based readers for a joyous and safe 4th of July weekend.
In our prior Supply Chain Matters commentary concerning Sharp Corporation, we reiterated the two sides of supplier based relationships involving the most recognized supply chain, that being Apple. On the one hand, being chosen as an Apple supplier can provide enormous scale, global reach and financial rewards. However, Apple is a demanding customer with unique and exacting processes that can test any supplier.
Apple further practices very active supplier risk mitigation, insuring that this global consumer electronics provider has at least two or more supplier agreements in-place for key components.
In a May commentary, Supply Chain Matters highlighted a report indicating that one of the key technology components within the Apple Watch had experienced reliability issues. The taptic engine component, which controls the sensation of tapping the watch while transmitting heart-rate data, was sourced among two key suppliers. Citing people familiar with the matter, The Wall Street Journal reported at the time that reliability testing has discovered that the taptic engines supplied by a China based supplier demonstrated reliability problems, with Apple electing to scrap some completed watches. Engines produced by Japan based Nidec Corp., the backup supplier, reportedly had not experienced the same problem. Apple subsequently moved all remaining sourcing of this component to Nidec.
Today’s WSJ report regarding Sharp also makes mention of the Apple Watch component issue in the context of how manufacturers can discard faulty products when design issues or production snafus are evident. The report again noted how Apple subsequently turned to Nidec for nearly all of its taptic engine production needs, but it took time for this other supplier to ramp-up its own production processes to be able to accommodate Apple’s overall production volumes. Thus, for our readers who were wondering what was causing the delay in the delivery of their new Apple Watch, now you know.
The obvious takeaway is that active supply risk mitigation is essential for key technological components, as well as the ability to lend a helping hand to suppliers in time of product or business crisis. Such risk mitigation is especially critical in new product ramp-up stages as volume production processes are tested for volume scale.
There are two-sides to supplier loyalty and management, and how they are practiced goes a long way in the determination of overall supply chain agility and responsiveness.
In November of last year, the WSJ stated in a report related specifically to Apple’s supply chain: “If you cut a deal with Apple, you better know what you’re getting into.” That statement continues to sum it all.
Supply Chain Matters has featured several prior commentaries specifically related to Sharp Corporation, one of three current liquid crystal display (LCD) screen suppliers in Apple’s supply chain.
Sharp has a track record of innovation in LCD technology but a rather rocky financial history as well. Our last commentary in early April, Perils of an Apple Supplier- Sharp Corporation, highlighted continuing reports of severe financial crisis surrounding Sharp. The Wall Street Journal reported at the time that various restructuring options were being considered but no final decision had been made. One reported option was that this supplier was moving to spin-off a portion of its LCD panel business unit with intent to seek a new capital injection from Innovation Network Corp. of Japan, a governmental entity overseen by Japan’s Ministry of Economic Trade and Industry. One of the tenets of Japan’s high tech industry is to rely on government funded agencies to bridge times of financial crisis. Since our April commentary, Sharp’s bankers agreed to provide an additional $1 billion plus lifeline, the second in three years, in exchange for restructuring measures that included a 10 percent workforce reduction. Also since that time, the market prices for LCD panels remain in significant decline as other suppliers turn more to China based smartphone manufacturers for revenue needs. The WSJ cites data stemming from market research firm IHS indicating that 5 inch HD smartphone panel components prices have dropped nearly 60 percent from Q1 2013 through the current quarter.
Today, the WSJ featured a report (paid subscription required) indicating that Sharp has warned that its survival could be at-stake, and that it is now pushing suppliers for deeper price cuts and that it further considering sourcing of display components from new China based suppliers rather than its former Japan based suppliers. At its annual meeting for shareholders held this week, sales directly attributed to Apple accounted for 20 percent of Sharp’s fiscal year revenues.
For the fiscal year that ended in March, Sharp racked up a loss reported to be $1.8 billion, due to write-downs of its LCD operations. Yet, this supplier maintains a public confidence that it can implement steps to maintain its ongoing viability, despite its share price haven fallen upwards of half over the past year.
LCD screens are highly strategic for Apple, and the consumer electronics juggernaut has elected to initiate strategic supply agreement among three different suppliers to insure both leading-edge technologies as well as the ability to scale to Apple’s flexible volume requirements.
All of which leads back to the perils of being an Apple supplier. In a recent Spend Matters sponsored webinar (no relation to this blog), chief research officer Pierre Mitchell observed that Apple imposes very strict contract terms among its supplier base, shifting considerable risk on the backs of suppliers while preserving major rights to product based intellectual rights. So much so that GT Advanced Technologies recently elected to seek voluntary bankruptcy in order to gain leverage with Apple over what was described as onerous contract terms.
The conundrum for Sharp and other Japan based high tech component suppliers is that bankruptcy is culturally looked upon as a major failure and embarrassment of senior management. So much so that the most optimistic financial forecasts are stubbornly held to up to just prior to the formal reporting of the bad news. On the other hand, firms such as Apple that practice active supply risk mitigation for key components will often have contingency options to buffer the shortfalls or stumbles of any one key supplier.
The financial challenges involving Sharp will most likely linger and through its ongoing re-structuring efforts, this supplier could introduce even more risk into its ability to deliver to customer needs.
The takeaway for the broader high-tech supplier community is to insure you understand all the terms and risk implications of your supply and technology agreements.
Our readers among high-tech and consumer electronics supply chains are well aware that the supply and costs of rare earth minerals continues to be a supply chain. China has positioned itself to the primary global supplier of such strategic materials and has in the past exercised export quotas to favor its own domestic high tech industry needs. Supply Chain Matters touched upon this challenge in a 2011 commentary related to Phillips Electronics.
Bloomberg recently reported that a closely held miner from the country of Chile, Mineria Activa, has come up with a far different, green-mining and perhaps more sustainable approach for the mining of rare earths. The report indicates that elements such as neodymium and dysprosium are contained in clay soils near the city of Concepcion in concentrations similar to China. The difference, however, is rather than pumping chemicals into the ground for extracting these minerals, methods have been derived to dig out the clay, place it in a tank-leaching process with biodegradable chemicals and return the clean clay to the ground, while replanting displaced vegetation and trees.
The bet here is that certain manufacturers and OEM’s such as Apple, ThyssenKrupp or Raytheon are willing to pay a premium knowing that the supply is not destroying the planet.
Bloomberg points out that given the current recent capacity glut resulting in declines in the prices of certain rare earth materials, the timing of this development may not be ideal. The again, companies such as Apple with strong commitments to sustainability and green supply chain practices may be willing to consider a strategic supply alternative.
Yesterday, a fire broke out at an Apple facility located in Mesa Arizona, just outside of Phoenix, which initially made lots of news. According to a video report from a local news channel, the fire spread rather fast and was believed to have been ignited by solar panels on the roof of this facility. Various news reports indicate that a dozen people were evacuated from the facility, and it took 35 minutes for the fire department to put out the flames. The Deputy Chief of the Mesa Fire Department is quoted as indicating that the fire spread rather rapidly at the 1.3 million-square-foot plant but was confined to a section of the roof over a loading dock.
What is somewhat significant is that this facility was previously designated by former supplier GT Advanced Technologies to be a high volume plant for the production of sapphire glass. That plan was abandoned with the sudden bankruptcy of GT Advanced and Apple has since taken possession of the facility. In February, Apple announced that it would instead convert the Mesa facility into a world class, sustainable data center. At the time, Supply Chain Matters voiced its disappointment that Apple did not consider sourcing more manufacturing at this facility.
Such an incident involving an Apple facility was assured to garner both traditional and social media coverage. As we pen this posting, Google had indexed nearly 100 different reports related to yesterday’s fire. Apple stock also took a hit yesterday on the news.
It is not likely that this incident will be of any major concern to Apple’s supply chain teams but perhaps Apple’s facility teams will seek an in-depth investigation as to whether the solar panels contributed to the cause of the blaze. Investing in the most modern, state-of-art energy and sustainably efficient mega data center probably needs assurances that solar panels will not erupt into flames.