Join the Upcoming Webinar: The Importance for Tightly Integrating Product and Supply Chain Management
Because of rapid advances in product innovation and advanced technology, products have become more sophisticated and incorporate broader combinations of physical hardware, software and associated services. This invariable adds more challenges for product design and management teams, especially when key aspects of a product’s value-chain are part of a predominately outsourced supply chain. In a Supply Chain Matters commentary published in mid-April, we brought forward current day evidence that the linkages from product design and management directly to the manufacturing floor, and the broader multi-tiered value-chain network have got to be stronger than ever because the clock speed of industry change requires less information latency and more responsiveness.
This author will be the primary speaker in an upcoming webinar sponsored by Serus on Wednesday, May 28 at 11:00am PDT. The title of my presentation is: The Increasing Importance for Tightly Integrating Product Design and Supply Chain Management. This presentation will address converging trends in business, supply chain and manufacturing, as well as IT and will address the new opportunities to leverage product management and timely new product introduction practices on an end-to-end B2B platform.
Questions I will address in this interactive webinar presentation will include:
• What exactly are the converging forces in Product Design and Supply Chain Management for today’s manufacturers?
• What learnings can be derived from the recent Boeing, Toyota, and GM product recalls?
• How should a product brand owner harness today’s converging trends to it’s obtain industry competitive advantage?
There is time allowed for webinar viewers to ask additional questions. Join us in the complimentary no-cost webinar by registering at this designated Serus webinar link.
Bob Ferrari, Founder and Executive Editor
On Sunday, this author flew to Nashville Tennessee to both attend and moderate a panel discussion at the annual Supply Chain World North America and Global Member Meeting 2014 conference sponsored by the Supply Chain Council. Supply Chain Matters will share highlights from that conference in an upcoming commentary. Flying provides the opportunity to catch-up on reading, and for this author, my prior unread issues of The Economist magazine. Two specific articles with a common theme captured my interest and I wanted to share such observations with you in this commentary.
At the many industry conferences I get the opportunity to attend, I often hear supply chain leaders speak to accelerated clock-speed of product innovation, and how that can add additional challenges and potential havoc for the end-to-end supply chain, particularly when that supply chain is significantly outsourced. For a supply chain that is primarily supporting product innovation, a major industry product shift has significant implications.
The April 5th edition of the The Economist featured the article: General Motors’ woes: What do you recall? (paid print and digital subscription) The article notes that automobile design has become far more complex with thousands of mechanical and electronic parts. If you have acquired a new vehicle in the past three years, you probably have experienced the availability of so many new electronic-based systems such as in-car navigation, satellite radio, in-car diagnostics, and powered operational components and, of course, prompted service reminders. Couple the increased product innovation with supply chain and manufacturing strategies that leverage common global platforms sharing common parts components, and the potential effects of a product recall can be significantly magnified. In the specific case of General Motors, the article states that what appeared at the surface to be a routine recall of 800,000 older models due to a faulty ignition switch has turned out to be anything but. As many of you have been reading in business and mass media, that initial product recall has increased to upwards of 26 million vehicles because the ignition design was shared within so many other models. The Economist authors opine that despite a growing list of reported crashes and human injury, a part that likely costs a few dollars at most now involves significant potential monetary expense for GM. Further stated: “A small part can do great harm if bad publicity leads to reputational corrosion, lost sales and litigation, which in America can include hefty punitive damages.” The article authors point out that carmakers need to spot trends in warranty repairs across global regions in far more timely manner and be able to more quickly respond to these indicators. While the terms of GM’s exit from bankruptcy provided immunity to lawsuits involving products produced prior to bankruptcy, GM will likely have to compensate injured parties to avoid a reputational impact to its product brands.
As noted in a previous Supply Chain Matters commentary related to the GM ignition switch recall, another industry backdrop concerns the Toyota agreement to pony-up a $1.2 billion criminal penalty settlement with the United States Justice Department after acknowledging that it misled consumers regarding unintended acceleration problems (SUA) that occurred from 2009 through 2011. That in the view of many will force automakers to be even quicker to declare a product recall for fear of punitive consequences.
A second article concerning a different industry provides yet another edge to product innovation and its impact on an industry supply chain. Many first-time global-wide smartphone consumers care less about brands and more about price. The Economist article titled: The rise of the cheap smartphone, points out that because the cost of making smartphones has declined so quickly, newer or existing market players can now acquires standardized processors and other components to offer smartphones priced below $80. Some of the brands mentioned are France based Wiko, Micromax and Karbonn in India and Symphony in Bangladesh. The article cites an analyst at IDC indicating that shipments of smartphones priced below $80 more than quintupled, and devices priced under $100 make up one-sixth of the current market. “Two years ago, while the median price of a smartphone was $325. Last year it was $250. This year it may be $200.”
With Apple and Samsung are noted as the only market providers making money, the implication is how long will this continue. Then, there has to consideration to last weekend’s announcement from Amazon indicating that it will enter the market with its own branded competitively priced smartphone. That has set-off additional industry tremors.
If your supply chain exists in this segment, these quickly changing dynamics have implications for supply chain strategy, specifically how the supply chain will be called upon to either differentiate the brand, or drive even more scale and volume efficiencies.
The reading of both of these timely articles reinforced for this author that the linkages from product design and management directly to the manufacturing floor and the broader multi-tiered B2B value-chain network have got to be stronger than ever because the clock speed of industry change requires less information latency and more responsiveness. Stay tuned for an upcoming announcement regarding my participation in a webinar addressing this area in more detail.
The Wall Street Journal is citing familiar sources (paid subscription) as indicating that Globalfoundaries Inc. has emerged as the leading candidate to potentially acquire IBM’s semiconductor production operations unit. The WSJ reports that other interested candidates were Intel and TSMC, but the latter has apparently dropped out of ongoing talks because its primary interest was in IBM’s semiconductor R&D capabilities. The publication further reports that a deal is not imminent because it involves thorny issues including total asking price as well as intellectual property (IP) protection and long-term supply agreements with IBM for future semiconductor needs.
For the supply chain and B2B community, this move, if consummated, obviously represents a significant strategic shift for IBM. After the now pending sale of its low-end x86 server based operations to Lenovo, a sale of the semiconductor operations would position IBM in essentially a totally outsourced supply chain footprint while retaining product design. That may afford IBM greater flexibilities in sourcing of supply agreements or in accelerating product innovation across global market segments. Then again, it may springboard IBM’s ongoing shift into broader information technology , cloud computing and services segments.
This will be an interesting ongoing development worthy of community observation.
Supply Chain Matters has featured a number of commentaries regarding the challenges for being selected as a key component or contract manufacturing supplier to Apple. On the one hand, the designation for being a key supplier in the Apple value chain can lead to enormous revenue potential and scale along with providing much cache for landing additional industry business. On the other hand, Apple aggressive product margin goals coupled with steep and constantly changing production volume ramp-up or ramp-down requirements can challenge any supplier organization. Apple sets high expectations and expects total responsiveness and virtual flexibility from its key suppliers, especially those residing in lower-cost manufacturing regions such as China.
The past two weeks have provided two interesting contrasts in terms of strategy and financial results among two of Apple’s key contract manufacturers.
In May of 2013, Supply Chain Matters reinforced and amplified the observation that Apple had begun to actively pursue its own supply chain risk mitigation and supply chain segmentation plan by electing to dual source some of its contract manufacturing needs with the use of Pegatron, one of Taiwan’s largest contract and original equipment manufacturers, in addition to longstanding CMS provider, Foxconn. We cited a Wall Street Journal report indicating that Pegatron was willing to accept thinner profit margins in courting Apple’s massive business.
However, Pegatron was put to the test with last year’s massive pre-holiday production ramp-ups and ramp-downs to support the changing volume production requirements of the new iPhone 5c and iPhone Mini. The market reception for iPhone 5c was not as originally planned, prompting Apple to cut-back on original pre-holiday production forecasts. The iPad Mini however, experienced high consumer acceptance. Pegatron had other challenges and there were reports indicating the alleged use of underage workers in some of this company’s factories in China, along with allegations from China Labor Watch related to excessive working hours and challenging working conditions. At the time, China Labor Watch alleged that worker conditions at Pegatron factories were worse than those of previous Foxconn conditions.
Last week Pegatron reported fiscal fourth quarter results and posted a 22 percent jump in net profits even though its overall revenues fell slightly from year ago results. Revenues derived from the manufacturing of communications products, gaming consoles, smartphones and tablet computers rose 20 percent while those associated with PC’s and consumer products including televisions, declined. In its latest reporting regarding Pegatron’s earnings, the WSJ cites a KGI Securities analyst as indicating that Apple now represents upwards of 40 percent of this company’s revenues, which is significant considering the brief history of relationship. Further cited was that initially low yield rates in producing Apple’s products have now improved. Operating margin improved to 1.9 percent from a previous 1.6 percent, but how many firms can sustain at such a low margin? Once more, without any planned launches of new Apple products in the first-half of 2014, Pegatron is forecasting that shipments of smartphones, tablets and game consoles will likely decline in a range between 15 and 20 percent in the current first quarter.
The parent of Apple’s other longstanding prime contract manufacturer Foxconn, which is Hon Hai Precision Industry, last week reported that its profits rose 13 percent, boosted by increases in iPhone and iPad sales. Total revenues increased slightly to 3.95 trillion new Taiwan dollars. It is estimated that Hon Hai garners more than 40 percent of its revenues from its various supply relationships with Apple.
However, this company continues to exercise a broader diversification strategy as revenues and margins derived from contract manufacturing continue to decline. In a Supply Chain Matters posting in July 2013, we observed that Foxconn continues in its process for diversifying by moving downstream and upstream in the consumer electronics value-stream, possibly resulting in some Foxconn branded consumer electronics devices.
Last week, Hon Hai announced investments of $90 million in various strategic manufacturing related projects with a focus toward higher value chain activities along with advanced automation. These investments include $42 million to establish a trading and manufacturing unit for China based components, $30 million in a new software development unit and $15 million in a robot manufacturing and sales unit. In early February, Supply Chain Matters commented on Foxconn’s current collaboration with Google in the area of advanced robotics.
Foxconn is once again shifting some of its manufacturing presence into lower-cost, more interior regions of China. According to a WSJ report, facilities will be built in the central and western provinces of Chengdu, Wuhan and Zhengzhou where direct labor rates are as much as two-thirds less than those in the coastal regions.
Wall Street and business media has increasingly been skeptical of Apple amid stronger competition in smartphones, tablets and other consumer electronics devices. Doubt has been raised as to whether Apple has lost its mojo in product innovation cycles. In exercising a supply diversification and segmentation strategy among its contract manufacturing supply base, other dynamics are underway. While Pegatron has pinned its fortunes on Apple to offset other areas of declining business, Hon Hai is exercising a broader diversification strategy that will likely lessen its dependence on Apple. How both fare in these different strategies will be certainly worth observing in the coming months.
©2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
Organizations can sometimes suffer from symptoms of denial regarding external market forces which can adversely impact supply chain strategy and objectives. The reasons are often obvious. An organizational culture that values short-term operational or tactical prowess over big-picture understanding, or management incentives too grounded in short-term performance objectives vs. critical thinking.
Supply Chain Matters has featured many commentaries related to supply chains within the smartphone and electronic tablet industry which has experienced explosive market and margin growth these past years. We all know that one of the top rated global supply chains has been that of Apple, followed by arch competitor Samsung. While each remains in a fierce battle, other players such as Lenovo and a host of other surging Chinese and India brands have been more responsive to the product needs of their specific targeted geographic market segments.
However, stronger warning signs appear among industry watchers in California’s Silicon Valley. For instance, a column published by the San Jose Mercury Times raises concerns that the best days of the prior booming smartphone industry may be behind. This commentary specifically cites Apple, Intel, HP and Samsung with the supposition that the smartphone segment may have seen its best days because much of any future growth resides in the emerging market sectors, where competition is fierce and price sensitivity is a critical factor for purchase. Further cited is a J.P. Morgan report concluding that the smartphone segment “has the hallmarks of the (current) PC market- slowing growth, vendor consolidation and limited technology differentiation.” Also declared: “Apple’s penetration of the higher-end segment of the smartphone market is reaching a saturation point”
The authors poll analysts and industry observers that indicate that certainly the market is not going away, but rather moving toward a transition toward possibly two spectrums: a high end brand-driven segment with premium product features possibly characterized by lower volumes and a lower-cost and a high volume segment to drive sales and market-share penetration in emerging markets. There is a further belief that smartphones will morph into a more all-encompassing mobile device, with the combined features of a tablet, PC and mobile phone. Each of these spectrums drives different value-chain characteristics and business needs and that is where supply chain strategy can become conflicted.
Each of the individual supply chains associated to the market players will no doubt have to respond to these rapidly changing industry dynamics. Supply Chain Matters previously observed that Apple has already begun transitioning its supply and contract manufacturing networks to deal with its perceptions of a changing market. Samsung has the advantage of already strategically positioned as a vertically integrated industry player with far more control relative to component product innovations across the various tiers of the value-chain. Lenovo has been making strategic acquisitions to take advantage of a market shift.
The takeaway of our commentary is that when business and general media concludes that your industry has seen its best days and that a significant industry shift is underway, it may well be too late to adjust. It is far better to foster a culture of strategic and predictive thinking where market and business assumptions are continually being reviewed and external signposts are embraced rather than dismissed. A supply chain that is fundamentally driven by cost advantage, may not necessarily be able to shift itself toward support enhanced product innovation. A supply chain that is driven by continuous product innovation may not necessarily be position for industry cost advantage. In today’s rapid clock speed of business, supply chain must be able to adapt to different business needs where value-chain agility, critical thinking and more prescriptive planning are the basis of supply chain strategy.
Supply Chain Matters continues to advocate that when considerations concern a goal for an end-to-end value-chain information integration strategy, supply chain teams that deal with complex, global-based process integration should give consideration to adopting an end-to-end B2B backbone platform. Such a backbone needs to transcend beyond mere EDI transactional or P2P procurement processes and include much broader supply chain process and information integration support that captures as much of the value-chain that is feasible.
As an industry analyst at AMR Research back in 2000 (not Gartner as it is today), I was one of a small handful of analysts that introduced the first iterations of so-termed trading or industry exchanges to the market. Most of these were about transactional connectivity across supplier networks with some purchasing services. Very view survived, mainly those that focused on solving broader supply chain information integration problems. Quite a lot has changed in over a decade, both on the vendor and technology innovation fronts.
For our part, Supply Chain Matters will continue to provide education and awareness to various B2B technology capabilities concerning such platforms along with the potential value that they can provide.
We recently had the opportunity to be briefed by SERUS, a one too many cloud-based B2B platform provider catering to the unique support capabilities for the needs of high-tech and consumer electronics supply chains. This provider started its efforts supporting needs among semiconductor industry supply chains where there are characteristics of complex value-chain routings within a primarily outsourced supply chain network that is intensely product-driven. Product information in the form of specifications, schedule milestones and engineering changes are in a constant state of movement. The need is often to connect product design and management directly with mostly outsourced fab production, test and assembly partners. The platform must further be able to interface and provide structured and unstructured information insights among various existing planning and fulfillment applications. SERUS has now transitioned its experience in semiconductor to target other high tech industry customers and B2B value-chains. This provider currently cites approximately 400 suppliers on its network. Named lighthouse customers include Juniper, HP, Nvidia, Sun Division of Oracle, Qualcomm/Atheros, among others.
One of the more interesting capabilities of SERUS is its concentration in actionable intelligence and analytics capabilities. Much of this functionality is provided by an OEM agreement with Tableau Software, which was recently ranked among other vendors in the leaders quadrant of Gartner’s Magic Quadrant for Business Intelligence and Analytics Platforms. According to Gartner, Tableau achieved above-average ratings for reporting and ad-hoc query, and a top ranking for dashboard, business user mash-up and data visualization capabilities. Supply Chain Matters will provide a separate commentary concerning Tableau.
This platform provider has another partnership with GT Nexus to augment supply chain logistics and execution coordination and control needs, and go-to-market partnership with AT Kearney.
In addition to Visibility and Intelligence, other applications making up the SERUS Virtual Manufacturing and Supply Chain System are Design for Manufacturing and Supplier Contract Compliance application support.
In last year’s edition of our Supply Chain Matters Predictions for Global Supply Chains, we noted that products have become more technologically sophisticated and today incorporate broader combinations of physical hardware, bundled software and services components. Product design, customer fulfillment, satisfaction and service now umbrella many more functionally driven activities and the supply chain now finds itself involved, either voluntarily, or involuntarily, in each of these various dimensions. Retail, B2B, and B2C online fulfillment supply chains also find themselves dealing with many other moving parts in coordinating an on-time and complete customer shipment or responding to customer service requests. While suppliers are often reluctant to share certain information regarding quality and conformance, a product recall event is literally too late in the process and to damaging to the brand to experience a major component or process defect. For all the above reasons, and others, we predicted that in 2013, the executive level voice and shared accountability of the supply chain organization will further extend itself into the areas of product and service lifecycle management.
While we admittedly may have been slightly pre-mature in the timing, product innovation focused supply chains are clearly more challenged in the ability to integrate product information with manufacturing and other supply chain business process needs. Having a B2B collaboration platform that considers such needs is a definite consideration. Our impression of SERUS is that they “get-it”, in the sense of integrating product management with other process coordination needs across a primarily outsourced value-chain.