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Factory Destruction Across Vietnam: Supply Chain Sourcing Flexibility and Resiliency Has Never Been as Important

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In the quest to seek alternative global low-cost manufacturing sourcing across multi-industry supply chains, countries such as Thailand and Vietnam were high on the list.  Both offered relatively attractive direct labor wage rates while offering a highly educated and motivated workforce. Up to this point, that has resulted in a steady flow of foreign investment in these countries including internal supply chain ecosystem capabilities.

All of this is now subject to current re-evaluation because of new political and social unrest that is occurring in these countries.  The most visible has been Vietnam where this week, anti-China related violence has caused widespread rioting across the country, targeting factories and industrial parks that rioters believe are owned by Chinese interests. This rioting began earlier this week and according to various global media reports has resulted in arson and vandalism involving multitudes of factories and businesses owned by Japanese, Malaysian, South Korean and Taiwanese ownership since rioters have not been precise in targeting.

The protests were apparently prompted by Vietnamese citizen outrage over an oil rig that China placed in a disputed part of the South China Sea. We have read reports of some speculation that the core anger may be more broadly directed at accumulated anger against foreign-based exploitation within the country. The government of China is holding the Vietnamese government responsible for not taking more definitive actions to curb the rioting and damage.  A report published by the Wall Street Journal today indicates that upwards of 3000 Taiwanese and 600 Chinese citizens were fleeing the country amid fear of further violence. 

While foreign based business people flee Vietnam for fear of personal safety, a large number of factories have halted production because of either damage or lack of workers. Thus, the potential for significant industry supply chain disruption in the automotive, footwear, high tech, consumer goods and other areas is growing each day. It would appear that many brand owners and foreign interests are looking to the government of Vietnam to curb the current building wave of violence and factory destruction and avoid the current situation from quickly moving from the current bad to a far worse situation.

Meanwhile, continued political unrest across Thailand continues to provide an uneasy environment as violent protests continue sporadically across that country.  Yesterday, there were reports that at least three anti-government protestors were killed and 22 were injured as government authorities fired guns and lobbed grenades at antigovernment protestors.

Supply Chain Matters has previously noted how significant incidents social unrest has led to a new wave of worker protests within China’s low-cost manufacturing sectors such as footwear. Political tensions involving China and Japan over disputed ownership of islands continue and have both supply and product demand impacts to certain Japan based firms.

From our lens, the notions of global sourcing are beginning to take on a new risk management perspective, that being social, national and political unrest along with the longer-term implications of that unrest.  The notions that industry supply chains can continually follow a singular strategy that is solely directed at sourcing in low-cost countries is being challenged, and increasingly requires a re-evaluation. Global sourcing now includes far more considerations beyond the cost of direct labor, and as we have continually noted, are now taking on social, political and employer of choice perception aspects.  The ramifications apply not only to product brand owners, but to industry supply ecosystems. 

We believe that these incidents are not isolated and business and supply chain teams need to focus on much broader trends and their implications in access to foreign markets and supply chain ecosystems. The need for supply chain sourcing flexibility and resiliency has never been as important as it is now becoming. Insure that your firm and its supply chain strategies are prepared to manage among these new challenges and needs.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


The Need for More Active and Measurable Social Responsibility Committments

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While on an airplane early this morning flying to Tampa Florida, this author had the opportunity to catch-up on business magazine readings.  Two articles published in two different editions of Bloomberg BusinessWeek provided us more evidence that labor social responsibility trends concerning global-based production sourcing will occupy more agenda time for supply management and other executives. Labor activism continues to be a trend among so-termed, lower cost manufacturing regions, and the implications are significant for cost and product branding considerations over the coming months.

Supply Chain Matters has featured a number of commentaries concerning the ongoing social responsibility developments concerning Bangladesh, specifically those impacting apparel and retail supply chains. The production of garments and apparel accounts for 6 percent of that country’s GDP, and almost 80 percent is exported to other global markets. In the April 28- May 4, 2014 edition of Bloomberg BusinessWeek, the article: For Bangladeshi Women, Work is Worth the Risks, profiles a trend of a predominantly female dominated workforce in that country’s garment factories.  This article profiles a mother who was injured but able to survive the fire that occurred at the Tazreen Fashions factory killing 112 of her co-workers, yet she continues in her occupation to better the livelihood for her children.  It cites that in 2011, according to a Yale University study, about 12 percent of Bangladeshi women, ages 15 to 30 worked in the garment industry and that hunching over a sewing machine in a 10 hour shift is perceived as a once-in-a-generation opportunity to better the lives of their family members. According to this article, despite the deaths of at least 2000 factory workers since 2005 because of fires and accidents, women in this nation view apparel factory work as a means to claw their way out of poverty, yet they continue to fear for their personal safety and a decent work environment. The cited Yale University study indicates that 27 percent more of young girls have been able to attend school and obtain a basic education than before the garment industry began its increased sourcing in the country.

However, global retailers and factory owners remain at a crossroads as to actively supporting industry initiatives, consortium funding mechanisms and product sourcing incentives to improve basic safety and working conditions among the country’s apparel factories.

A contrast concerns China, where a once predominantly female workforce among this country’s electronics, apparel, and other industries has transformed to a more male dominated workforce. The May 5-May 11 edition of BloombergBusinessWeek features an article, China’s Young Men Act Out in Factories.  It quotes a spokesperson at Foxconn, the largest global contract manufacturer, that: “…the factory workforce is now about two-thirds male and more “rowdy” than when it was half female five years ago. The younger generation doesn’t want to continue doing work that is very mundane.” The article points to the trend of a more activist workforce willing to undergo work stoppages to gain more economic benefits. Other workforce issues, such as on-the-job sexual harassment that include offensive comments and grouping of female workers are cited. The article quotes a source as indicating that the recent labor strike involving athletic shoe producer Yue Yuen Industrial was led by 100 all-male workers.  Contract manufacturers Foxconn and Flextronics are reported to be responding to these demographic workforce shifts by sponsoring “date nights” and other worker counseling programs.

What struck this author were the contrasts and similarities for both reports.  A female dominated workforce in Bangladesh for the most part, endures workplace perils to sacrifice for the better good of families.  A now predominately male workforce in China has become much more activist and vocal for motivations of career, marriage, and future benefits. The commonality is increased activism, appealing to social conscience and the collective voice of many to stop abuses and the taking of workers welfare and advancement opportunities for granted.

The primary motivations for the era of global outsourcing, namely significantly lower costs, is being challenged among multiple industry supply chains. A surgical approach to these trends is to address them in isolation.  A general assumption that social responsibility and conscience can be outsourced or belongs solely to individual suppliers is wearing thin.  There needs to be monetary qualifiers and incentives that address a brand owner’s commitment to social responsibility in the same light and milestones that are affixed to many of today’s environmental responsibility commitments.

Adding more pressures for increased automation or production robots for specific supplier factories, finding the next low-cost sourcing alternative, negotiating for even lower unit costs or adding more action phrases to corporate social responsibility policies that umbrella the supply chain are not the sole remedies. An industry social conscience needs to step forward, one that positions supply chains squarely into key performance indicators and performance objectives directly related to achievement of global social responsibility.

Bob Ferrari

 


Join the Upcoming Webinar: The Importance for Tightly Integrating Product and Supply Chain Management

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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


Reminders of Tighter Information Linkages Among Product Management and the B2B Supply Chain

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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.

Bob Ferrari


Reports of Suitors for IBM’s Semiconductor Operations

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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.


Two Contrasts in Contract Manufacturing Direction for Apple Suppliers

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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   Apple Logogoals   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.

Bob Ferrari

©2014, The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.

 


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