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Evidence of a New Business and Supply Chain Headwind: A Stronger U.S. Dollar

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During this period of earnings announcements for the December-ending quarter, a new and significant headwind, the effects of the U.S. dollar, has appeared for industry supply chains with operations anchored in the United States.  That was significantly delivered to Wall Street by yesterday’s earnings announcement from Procter and Gamble, which currently has nearly two-thirds of its revenues coming from outside of the U.S. Procter and Gamble was not alone, even the likes of Apple encountered the same headwinds.

P&G reported a 31 percent drop in profit as the stronger U.S. dollar diluted the effects of a modest 2 percent organic sales growth. Net income dropped nearly a billion dollars from the year earlier quarter. According to business media reporting, foreign exchange pressures reduced net sales by 5 percentage points. Once more, P&G indicated that these currency effects will continue to be a drag within 2015, potentially cutting net earnings by 12 percent or in excess of another billion dollars.

The implications are obvious including a continued selloff of underperforming brands and businesses.  One published financial commentary report by The Wall Street Journal implied the continuance of “ruthless cost cutting” and a continued slim-down of brands. P&G has further undertaken ongoing efforts to source more production among emerging global regions, and those efforts are likely to accelerate in momentum.

The strong headwinds of currency were not just restricted to consumer product goods. Today’s WSJ reports that it is now evident that:

“The currency effects are hitting a wide swath of corporate America- from consumer products giant Procter and Gamble Co. to technology stalwart Microsoft Corp.  to pharmaceutical company Pfizer Inc.. Those companies and others have expanded aggressively overseas in search of growth and now are finding that those sales are shrinking in value or not keeping-up with dollar-based costs.”

Further cited was a quote from the CEO of Caterpillar indicating: “The rising dollar will not be good for U.S. manufacturing or the U.S. economy.” The obvious fears for investors and economists alike is that the U.S. dollar’s explosive gains will backfire for U.S. based companies by reducing the price attractiveness of goods offered in foreign countries as well as reducing the value of foreign-based revenues.

The implications to U.S. centered industry supply chains are the needs for yet further shifting of strategies and resources. The existing momentum for U.S. manufacturing may well moderate with these latest developments. Initiatives directed at supporting increased top-line revenue growth now have the added challenges for more flexible, global-wide sourcing of production and distribution needs. Operations, procurement and product management teams that believed that they could get a breather from draconian and distracting cost-cutting directives will once again face the realities of having to cut deeply into domestic focused capabilities and resources.

We often cite the accelerated clock speed of business as a crucial indicator for agility and resiliency for industry supply chain strategy. Here is yet another example where perceptions of a  booming U.S. economy quickly change to the overall business and supply chain implications of the subsequent currency effects.

Bob Ferrari


Apple Supply Chain Supports Spectacular iPhone Fulfillment Results

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Throughout the summer and especially in September of 2014, we featured a number of Supply Chain Matters commentaries reflecting on yet another series of Apple supply chain product Apple Logointroduction ramp-ups, and specifically whether the Apple supply chain ecosystem and its internal supply chain teams could yet again pull rabbits out the hat proverbial hat and deliver on business expectations for the all-important holiday fulfillment quarter.

Specifically in our mid-September commentary we noted:

“Over the coming weeks, as the marketing and sales machine cranks-up consumer motivations to buy, the supply chain will deal with the realities of limited supply, production hiccups and product allocation conflicts among various channels that invariably come up in such situations.”

We further declared:

While some supply chains are challenged with collaborating with sales and marketing on stimulating and shaping product demand, Apple has the current challenge of meeting very high expectations involving an outsourced supply network with many moving parts.  They have pulled miracles in the past, and the stakes get even higher.”

Yesterday after the stock market close, Apple announced financial results for its fiscal first quarter ending in December, and the results were staggering, along with the business headlines.  The Wall Street Journal headline story today was titled: Apple Delivers Quarter for the Ages.

Apple reported net income of $18 billion for the quarter, was described as more than 435 of the companies within the S&P 500 Index each made in total profits. But the supply chain headline was fulfilling all-time record customer demand for 74.5 million new iPhones. This was up 46 percent from the same holiday fulfillment quarter a year ago, reflecting a lot of pent-up upgrade demand for the new iPhone6 models. In its reporting, the WSJ equated such volume output to more than 34,000 phones per hour, around the clock.

Gross margin was reported as 39.9 percent, nearly two percentage points higher than last year’s similar period. Once more, average sale volume for the iPhone increased to $687, nearly $50 higher than a year ago.

Apple also managed to double its iPhone sales volumes within China during the quarter despite delayed availability slipping to mid-October from the scheduled simultaneous September product launch.

Readers who followed our Apple commentaries should recall that the iPhone6 incurred its own set of production ramp-up challenges including a last-minute design change involving its larger screen displays. There was the usual production yield challenges associated with the fingerprint scanner and with the LCD displays themselves. We called attention to a TechCrunch report that cited sources in September indicating that Apple had already contracted air freight capacity anticipating to flood channels with last-minute shipments.

All was not spectacular news regarding Apple’s latest performance. Sales of the iPad were reported to be down 18 percent from the year ago period. The long-anticipated iWatch availability has now slipped to April of this year. However, these do not take away from the extraordinary performance of the Apple supplier ecosystem, and in particular, its contract manufacturers who had to successfully support the four month production and fulfillment ramp amidst the production challenges.

The Apple supply chain did indeed again pull rabbits out the hat. It performed to enable an expected business outcome, despite operational challenges.

Supply Chain Matters Tip of the Hat Award

 

 

We extend our Supply Chain Matters Tip-of-the Hat recognition for such performance.  Let’s hope that the supply chain ecosystem will share in similar financial rewards.

 

Bob Ferrari

 

 


August Explosion at Auto Parts Factory in China- Authorities Clamp-Down on Workplace Safety

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In early August, Supply Chain Matters called attention to a tragic explosion and subsequent fire that occurred at a factory belonging to a Tier Two auto parts supplier located in China. The factory belonged to Kunshan Zhongrong Metal Production Co. and was located in a development zone in the Jiangsu provincial city Kunshan City located about 50 kilometers west of Shanghai. The plant performed plating and polishing of metal hubs that include wheel hubs, a pre-production preparation for aluminum car wheels used by automakers. The explosion was initially believed to have been caused by accumulation of metal dust particles within the facility. At the time of this incident, media reports were unclear as to the full extent of deaths or injuries but the government news agency indicated that 75 workers perished as a result of this accident. The accident was China’s worst industrial disaster in nine years and highlighted continuing problems with workplace safety.

Earlier this week, Chinese investigative authorities reported that the blast killed at least 146 workers, nearly double the initial reported death toll.  Reports in August indicated that there were upwards of 260 workers in the plant at the time of the explosion, and this revised number amounts to a significant casualty toll. According to various global and business media reports, Chinese authorities indicated this week that they would prosecute three senior executives of Kunshan Zhongrong Metal Production as well as 15 Kunshan governmental officials. China’s government further announced the firing of two top officials within the city of Kunshan.

According a published report by the New York Times, Beijing has been holding local government officials and company executives accountable by handing out harsh penalties for work accidents with high casualties. In Kunshan, the investigation team found that local officials were negligent in enforcing safety regulations and that plant management failed to provide safety training for workers, ignored rules on building spacing, density in manufacturing lines, dust cleanup, and use of anti-explosion equipment.

As noted in our August posting, previous incidents of explosions caused from combustible metal parts involved two different suppliers to Apple. In May of 2011, a significant explosion rocked a Foxconn Technology Group production facility located in Chengdu, China where two workers were reported killed. In December of that same year, an explosion at a manufacturing facility of Ri Teng Computer Accessory Co., a subsidiary of Pegatron Corp, located in Shanghai’s Songjiang Industrial Park, injured upwards of 60 workers.

This latest report is a further indication that China’s governmental leaders are indeed clamping down on factory safety standards by holding individual executives and investigative agencies accountable for enforcing worker safety standards.


New EBook: The Case for Tightly Integrating New Product Introduction and Supply Chain Management

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The business-to-business (B2B) network has become the new opportunity for fostering stronger supply chain and product business relationships with suppliers. More often today, this includes integrating new product management and introduction (NPI) with product design, collaborative manufacturing design and supply chain fulfillment.

Recently, Supply Chain Matters has highlighted a number of current day examples of the critical importance of these relationships. We highlighted recent accident investigation findings from previous Boeing 787 Dreamliner lithium ion battery fires along with findings from a joint FAA and Boeing study published in March which reviewed the broader 787 build program.  Among report findings was added credence to the reality that globally extended aerospace and complex equipment supply chains need to consider more timely two-way integration of product lifecycle management (PLM) and manufacturing process test information across B2B supply chain networks.

In the high tech and consumer electronics sector, product lifecycles are far shorter and NPI cycles occur more frequently. The recent unexpected bankruptcy of a prototype Apple supplier of sapphire glass provided yet another example. Apple’s peak and valley tendencies for extraordinary new product ramp-up and corresponding large-scale production volume surges that correlate with condensed product release cycles place enormous pressures on suppliers and any last-minute product design changes can be a disaster without timely two-way information integration and change assessment. Within automotive supply chains, recent unprecedented levels of product recalls are a reflection of the exposure of common product platform strategies, where common component design is leveraged across multiple models or brands. Many if not all of these multi-industry examples point to the product and production information alignment disconnect.

Under sponsorship of E2open Inc., our research parent The Ferrari Consulting and Research Group recently published an E-Book, The Case for Tightly Integrating New Product Introduction and Supply Chain Management. This document identifies the new opportunity for leveraging the end-to-end supply chain business networks not only for synchronizing planning and fulfillment execution but the new opportunities for incorporating two-way NPI process information as well. Certain B2B networks provide the ability to support a hub-and-spoke, federated data model that spans these broader process areas and bridge the gap in existing PLM and ERP systems for integrating broader forms of process information across extended supply and demand networks.

The E-book is available for complimentary downloading with registration at the following E2open web link. Later this month, we will also feature this E-book in the complimentary section of the Research Center associated with this site.

Bob Ferrari

Disclosure: E2open, Inc. is both a Named Sponsor of Supply Chain Matters and a client of the Ferrari Consulting and Research Group.


Ex-Apple Procurement Manager Sentenced- Have We Learned Anything?

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In the summer of 2010, a global supply manager at Apple was charged with wire fraud, money laundering and unlawful transactions in an alleged kickback scheme that involved multiple Apple suppliers. In our Supply Chain Matters commentary in August of 2010, we highlighted the alleged scope of the conspiracy along with a report indicating that the kickback scheme was believed to have dated back as far as 2006. The elaborate scheme was believed at the time to have involved at least three Apple suppliers where confidential information would allow such suppliers to negotiate on more favorable terms with Apple.  The suppliers in question provided mechanical parts, tooling and fixtures related to the manufacture of Apple iPads and iPhones. Information allegedly shared included Apple’s planned sales volumes, product specifications, competitors target prices and bids, which in essence provided overall intelligence on how to best bid for Apple’s business.

In late February of 2011, Paul Devine, a now former Apple manager, pleaded guilty to 23 counts of felony fraud and conspiracy charges in connection with this incident.  Mr. Devine admitted receiving kickbacks from six different Asia based suppliers in exchange for Apple related confidential information. Devine was further ordered to turn over $2.3 million in money and property acquired from the conspiracy.

This week provided news that Mr. Devine has now been sentenced to one year in prison, three years of subsequent probation and fined $4.5 million for his role in the former conspiracy. Devine will begin serving his prison term in late February 2015.

The halls of justice indeed run slow.

According to a published report on Computerworld, Devine’s activities were discovered after Apple reviewed personal email messages from his Hotmail and Gmail accounts on his company-provided notebook. The report further speculates that Devine’s relatively light prison sentence “may have been because he cooperated with authorities in their pursuit of others including Chua (Jacky Chua, former managing director of Singapore based Jin Li Mould Manufacturing) and Ang (Andrew Ang, an employee of Jin Li and a relative of Devine by marriage).”

In a separate posting this week on the appleinsider blog, at the time Devine plead guilty in 2011, “he was ordered to forfeit some $2.3 million in property and money. The federal government had seized $150,000 in cash from Devine’s home — which he reportedly stashed in shoe boxes — alongside nearly $1 million from various bank accounts in both his and his wife’s name.” That posting has thus garnered 50 Comments by today’s count, most of which focused on the greed of an individual who worked for a great employer, seemed to be well compensated by that employer, and chose to pursue unsavory business behavior instead. 

We suppose that these are understandable reactions.

But, as Supply Chain Matters noted in a separate 2010 commentary, this incident should have provided a wake-up call on the state of ethical procurement practices when business pressures and various outside cultures collide.  While some may deflect such remedies toward this being an isolated incident or the moral principles or motivations of the individuals involved, hiring policy has little to do with the underlying root cause of this and other related episodes. It would seem that within today’s business culture, some select firms and individuals within these firms continue with the belief that presumes that all confidential or proprietary information can be had with certain methods.  After all, isn’t business about what is portrayed in today’s reality television programming such as Survivor or the Bachelor?

We should not kid ourselves that such practices exist just in certain financial hedge funds or increased cases of insider stock trading. Once more, information leaks throughout the global supply chain appear to be fair game, and it’s not just a problem solely related to Apple. It is a cross-industry, global-wide problem manifested by different degrees in various geographies.

Firms will continue to scrutinize hiring and procurement business practices and augment such practices with audits and controls.  However, there needs to be heightened visibility and consequences for selling confidential or proprietary information to the highest bidder.

Bob Ferrari

 


Added Visibility to the Challenges of an Apple Supplier- The Increased Importance of New Product Information Integration

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Supply Chain Matters has featured a number of commentaries regarding the perils and pitfalls for being an Apple supplier.  Our commentary in early October reflected on challenges at Foxconn and the sudden bankruptcy filing of sapphire glass supplier GT Advanced Technologies. Subsequent information has come to light from the unsealing of information filed in relation to GT Advanced Technology’s bankruptcy. Embedded in these reports are important insights on the increased importance of more timely integration of new product introduction information across the extended supply chain business network.

This week, The Wall Street Journal Digits blog (paid subscription or free metered view) featured its own commentary regarding the lessons of being an Apple supplier. The WSJ was successful in gathering specific responses from other Apple suppliers including Pegatron and Wintek. Regardless of the significant customer demands, suppliers do not turn away from Apple’s business because it provides scale, volume and the potential for profits in far higher dimensions.

The WSJ commentary also cites Apple’s peak and valley tendencies for extraordinary new product ramp-up and corresponding large-scale production volume surges that correlate with condensed product release cycles. In one recent example, Supply Chain Matters called specific attention to a rather last-minute product design change that impacted the current iPhone 6 NPI process.

Apple’s key suppliers point to a common strategy to not have a singular reliance on any large, highly demanding customer but rather a diversification among several high-profile customers.   Apple is often cited as a rather demanding customer, having key knowledge on a supplier’s cost and production process structures which is an important indicator for having the most up-to-date knowledge and detailed information on a new product’s required test and production process changes or needs.

These reports provide continued learning for high tech and other industry suppliers that feature highly complex, globally extended supply chain networks.  Needs for timely two-way integration of new product introduction (NPI) information across the extended supply chain has become far more evident. Product innovation involves time sensitive collaboration for product design and test changes as well as supply chain production ramp-up needs.  That is why product design process information is quickly becoming the new requirement for inclusion within end-to-end supply chain business and collaboration networks.

Bob Ferrari


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