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.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
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.
As businesses enter the all-important final four months of 2016, news of supply chain disruptions are permeating business media channels.
We, along with global media, have already alerted readers to the ongoing and quickly cascading implications of Hanjin Shipping’s financial receivership, which we have characterized as a financial shot heard across the globe. The potential for supply chain disruptions is imminent along with other cascading implications for shipping rates or further ocean container industry consolidation moves.
Samsung Galaxy Note 7 Product Recall
Today brings the stunning and somewhat embarrassing news that Samsung has initiated a global recall of its newly announced Galaxy Note 7® smartphones due to reports of battery fires. All sales have been halted pending an investigation of why certain batteries are exploding during the re-charging process. According to a published report by The Wall Street Journal, Samsung had logged 35 cases of battery explosions which has prompted the electronics giant to issue a global recall. Apparently, Samsung has multiple suppliers for the lithium-ion batteries of the Note 7 and not all of the phones are affected. Samsung teams are now in the process of tracing the faults to a specific supplier. Still unclear at this point is whether suspect batteries effect other new Samsung models. An estimated 2.5 million of this model phone have been shipped since its availability announcement of two weeks ago.
The glitch comes at an obvious awkward time for Samsung, with holiday sales looming and with next week’s planned announcement from rival Apple rumored to be about the announcement of the newest versions of iPhones.
Gap Distribution Center Fire
Clothing retail chain Gap is dealing with its own supply chain disruption as a result of a fire that occurred at one of the retailer’s online support distribution center located in Fishkill New York. According to business media reports, the fire that occurred on Wednesday of this week, completely destroyed about 25 percent of the warehouse while the remainder of the facility suffered extensive smoke and water damage. The center supports Northeast U.S. online and store fulfillment needs for both Gap and Banana Republic branded merchandise and according to one report, represents 10 percent of the retailer’s nationwide warehouse capacity. In reporting of the incident, The Wall Street Journal quotes a Wells Fargo equity analyst advisory as indicating that the disruption of the fire could: “create a meaningful bottleneck given the upcoming critical holiday season.”
According to the WSJ, the retailer’s logistics and distribution teams are now working on plans to rely on other distribution centers located in Ohio and Tennessee, as well direct shipments from retail stores to support Northeast online fulfillment needs. Teams are further working to accelerate the reopening of a nearby New York warehouse that was planned to supply Old Navy branded merchandise.
This fire is obviously untimely since Gap has been in the process of a merchandising turnaround to boost sales and profitability.
Continuous Natural Disasters
It seemed that during the months of July and August, a week did not pass without some occurrence of natural disaster. Whether it was continuous wild fires across the U.S. West, severe flooding southern Louisiana and China, devastating earthquakes in Peru and Italy or this week, the first hurricane in 10 years to impact southern Florida and the U.S. Southeastern coast, supply chains are continually disrupted in various degrees.
Indeed, the timing and occurrences of major supply chain disruption cannot be controlled, especially when occurrence is just prior to one of the most important and meaningful revenue and profitability quarters. After and in spite of such occurrences, supply chain teams learn more of the critical importance of active supply chain risk mitigation and business continuity planning.
As our U.S. readers prepare to take advantage of the summer’s last long Labor Day holiday weekend, keep in mind that supply chain teams remain engaged in responding to supply chain disruptions.
A significant announcement caught our attention this week, one related to the global race for next-generation high technology development. China Daily echoed a report from China’s Xinhua news agency indicating that the country’s first flexible display production line will go into operation next year. We believe that this is a rather significant development for high tech and consumer electronics product development and supply chain sourcing strategy.
According to Wikipedia: “A flexible display is an electronic visual display which is flexible in nature; differentiable from the more prevalent traditional flat screen displays used in most electronics devices. In the recent years there has been a growing interest from numerous consumer electronics manufacturers to apply this display technology in e-readers, mobile phones and other consumer electronics.” The technology is evolving to feature more flexible screens with higher contrast and wider visual angles compared with traditional flat-screen display found on many of today’s electronic devices.
Further noted is that research and development into flexible e-paper-based displays largely began in late 2000s with the main intentions of implementing this technology in mobile devices. However, this technology has recently made an appearance, to a moderate extent, in consumer television displays as well.
Since 2005, Sony Electronics has had interests in a flexible display video, promising to commercialize this technology in TVs and cellphones sometime and in May 2010 Sony showcased a rollable TFT-driven OLED display.
In 2008, Nokia first conceptualized the application of flexible OLED displays in mobile phone with the Nokia Morph concept mobile phone.
In 2010, Samsung Electronics announced the development of a prototype 4.5 inch flexible AMOLED display. In early 2012 Samsung acquired Liquavista, a tech firm with expertise in manufacturing flexible displays. By October of 2013, the Samsung Galaxy Round was unveiled as the world’s first mobile phone with flexible display that featured a 5.7″ touchscreen display made of flexible material, allowing its body or the screen to be bendable. The concept would later surface as part of the Samsung Galaxy Note Edge and today, Samsung is seen as a recognized leader in this type of technology.
This week’s investment news stems from BOE Technology Group Co., Ltd. is a supplier of display products founded in 1993 and now headquartered in Beijing The firm’s business profile indicates that it is engaged in research, development, and technology accumulation which led them in establishing business units such as TFT-LCD for IT, mobile and TV products.
The report indicate that BOE will invest almost $7 billion on its 6th generation AMOLED production line in Chengdu, which is scheduled to go into operation by sometime next year., no doubt in an attempt to directly compete as a supply chain component alternative to Samsung.
From our Supply Chain Matters lens, there are two significant aspects to this week’s announcement.
The first is the government of China’s strategic plan for the country to be much further invested in advanced technologies. BOE recently reported first-half 2016 results that reflected net losses amounting to upwards of 600 million yuan. Thus, obtaining such significant financial investment implies external assistance from China’s resident banks, municipal investment agencies and/or other governmental agencies. China based smartphone producers have been increasingly gaining domestic market share based on their ability to offer premium functionality at more affordable price points. The existence of a new domestic source of the production of flexible screens can add to that momentum and provide domestic producers a value-chain technology edge.
Further, with Apple so significantly invested in China based value-chain capabilities, we wonder aloud if the potential of Apple’s future product development and supply needs had anything to do with such an investment. Apple currently sources its LCD display needs among four suppliers including Samsung Electronics. A China based sourcing could provide Apple additional bargaining leverage for future sourcing decisions related to flexible displays. Such capability could also be viewed as a threat to Japan, Taiwan and South Korea based LCD screen providers, not to mention any hopes of the U.S. to be sourced with such advanced screen technology.
LCD display technology development and advanced production process capabilities are very expensive to maintain with each technology evolution and thus supply agreements assuring large volumes are essential.
Thus, this week’s announcement should be noted as rather noteworthy, and if BOE is successful in its development and production timetables, it will present a different competitive dynamic in the volume production of flexible screen technology, not to mention triggering other rather expensive rounds of additional investments from other existing screen suppliers.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
This week, our thoughts and prayers are with all those that have impacted by the recent significant earthquakes that have occurred in Italy, northwest of Rome. News images once again remind us of the death and destruction of such natural disasters. We trust that those affected by the latest quakes in Italy will be able to bounce back to some normalcy in the not too distant future.
As many of our Supply Chain Matters readers may be aware, a series of significant destructive earthquakes struck southern Japan in April, with concerning supply chain disruption indications. We touched upon the many multi-industry implications in a mid-April commentary. Almost four months after this latest round of quakes, it appears that many Japan based manufacturers and component suppliers have instituted effective supply chain risk mitigation efforts.
The Associated Press reported this week that the Honda motorcycle facility near Kumamoto, on the southern island of Kyushu has “virtually normalized” production operations as of this week. The report notes that the plant, severely damaged by the quakes and completely idled for the first two weeks after the major quakes struck, has gradually restored output. However, Honda is still working to stabilize its supply network for engine parts related to mini-vehicles.
Similarly, automotive producers Nissan and Toyota collaborated and worked with major supplier Aisin Seiki Co. to restore production operations among two major component supply facilities located in Kumamoto region that incurred damages as a result of the quakes. Seiki acknowledged the discovery of broken walls, windows and assembly equipment at its facilities in the quake area but quickly shifted the production of door and engine parts to other owned facilities located in other parts of Japan and outside the country as well. Toyota was able to resume assembly operations among four plants in early May.
In our Q1 Newsletter, we called attention to a Reuters article indicating that after the devastating earthquakes and subsequent tsunami that struck northern Japan in 2011, many Japan based manufacturers elected to reassess their supply chain risk mitigation and inventory management practices. Some Japan supply chain experts advocated that holding more safety stock inventory or adding another contingency production line would deter from the global competiveness of Japan based manufacturers. Yet, examples were provided where foreign based suppliers such as German based Merck KGaA and ZF-TRW analyzed strategic inventory strategies and indeed elected to hold more safety stock. TRW, a producer of auto safety systems now stores back-up production equipment at more of its supplier plants.
Thus it would appear that manufacturers have indeed applied the lessons of 2011 in supply chain risk mitigation.