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Untimely Occurrences of Multi-Industry Supply Chain Disruptions

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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.

Bob Ferrari


Announcement of China’s first Flexible Display Production Line is Significant

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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.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Lessons of the 2011 Japan Earthquake and Tsunami Applied in 2016

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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.


The Newest Phase for Elongated Supplier Payments- More Aggressive Supplier Push-Back

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Of late, the trend of extending payment terms to suppliers should not be any new news to many of our Supply Chain Matters readers since such practices continue to gain multi-industry momentum. Such momentum continues because private equity firms and high powered consultants in finance now advocate and practice this tactic as a means to boost earnings and operating cash flow.  However, what we view as an even more disturbing trend is current more aggressive efforts by suppliers to now push back by exercising whatever options they have, up to and including significant supply disruptions.

To ascertain the scope of the trend towards extending payments to suppliers, we exercised a Google search this morning on the term: News- suppliers not being paid. That search yielded and eye-popping 9.7 million item results, an obvious indication of industry-wide trending.

Just about a year ago, Bloomberg published an article: Big Companies Don’t Pay Their Bills on Time. The author, Justin Fox attributed the increased trend among large global companies to extend payments to suppliers to two principle influences. The first was Amazon, that being yet another aspect what we often describe as “the Amazon effect.”  In essence, the online retailer had a cash conversion cycle of negative 24 days in 2014, meaning the online retailer received cash from customers 24 days before it was paid out to suppliers. The other major influence was noted as Brazilian private-equity firm 3G Capital which has acquired well known consumer brands and operates primarily today as Anheuser-Busch InBev. A chart in the Bloomberg report indicates that since the acquisition of Anheuser in 2008, supplier payments stretched to near 260 days by 2014 with InBev on-average paying suppliers 176 days after the company was paid by customers. That is nearly six months of cash float.

Similarly, after previously attending this year’s Institute of Supply Management (ISM) annual conference, this author penned a blog commentary on a session where private equity firm representatives leveraged their stated tactic of operational intervention and improvement, namely concentration in procurement policies to harvest cash flow and margin savings.

The Bloomberg article further charts well-known names Procter and Gamble, Mondelez and Kimberly-Clark, who collectively have to now respond to 3G’s industry presence with the acquisition of both Heinz and Kraft. in the consumer-goods sector. By 2014, days payable outstanding for all three had grown to between 70 and 85 days.

And so the ripple effect of this trend continues offering the brand owner opportunities to leverage cash flows, product margins and profitability, while the ripple effects cascade down the to the remainder of the supply chain.

The open question now remains as to what are various industry norms for paying suppliers, and invariably, the principles of supplier survival and stakeholder interest come into play when such practices become more wide-spread. More and more, such incidents seem to be on the increase.

In early July, General Motors encountered a brief supply disruption over a contract dispute and bankruptcy filing from Clark-Cutler-McDermott Co. a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America. The supplier stopped producing parts for GM after work shifts on a Friday and laid off its workforce. Subsequently the supplier refused to grant GM access to any remaining inventory or production tools forcing GM layers to enter a legal process proceeding in bankruptcy court to gain rights to tooling and any leftover inventory.

In late July, avionics producer Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments and noted as a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. In its reporting, The Wall Street Journal observed that the industry relationship among Rockwell and Boeing was previously noted for positive collaboration in ongoing cost-control efforts resulting in Rockwell gaining additional supply contracts involving other produced commercial and military aircraft.

Similarly, British based GKN, a supplier of cabin windows, ice protection systems and winglets, openly called Boeing to task for extending supplier payments. Both Reuters and The Wall Street Journal had earlier reported that to boost its cash flows, Boeing was extending supplier payments from 30 days, too upwards of 120 days while at the same time continuing efforts to scale-up the supply chain to address upwards of ten years in booked orders.

Other noteworthy news related to supplier push have involved UK retailer Tesco as well as global  iron and steel producer Rio Tinto.

The most recent public incident of outright supply disruption is now Volkswagen dealing with the possibility of reduced working hours involving multiple German based final assembly plants resulting from a supplier dispute with two suppliers, Car Trim and ES Automobilguss. Car Trim reportedly supplies parts for seating and ES Automobilguss produces gearbox components for a variety of different VW car models. As of today, business media is reporting that negotiations are ongoing to resolve the matter after the suppliers cut component supply deliveries feeding four final assembly plants. The suppliers have denied responsibility for the situation, indicating that VW cancelled contracts without explanation or compensation and the decision to halt delivery was taken to protect their own workforces. As we pen this posting, upwards of 10,000 workers at VW’s main plant in Wolfsburg, Germany are close to being idled due to parts shortages. Both suppliers, which are part of holding company Prevent, have denied any responsibility in the pending supply disruption claiming that VW is responsible for creating its own supply crisis because of the lack of timely payments to suppliers and that the suppliers’ decisions were taken to protect their own workforces and financial health.

Thus we observe a common theme beginning to manifest across different industry supply chain settings, more aggressive supplier push-back to existing payment terms and the transfer of the burden of cash-flow.

In prior Supply Chain Matters postings, this Editor has not been very keen on such strategies namely because of the short and longer-term havoc imposed on supply chain capabilities and ongoing relationships. But, with the realities of the current business environment being what they are, and with so many firms now under the short-term professional looking glass, the elongated payment strategies extend, testing such relationships. This is obviously not healthy, and many other voices are beginning or have already concluded as-such.

Our prior advice to procurement professionals was essentially to be forewarned and prepared since those possessing or prepared with termed financial engineering skills can reap some short-term financial and other bonus rewards.

We now extend advice to the broader supply chain management leadership and operations management communities. If you have little choice but to exercise such strategies, best be prepared for the new consequences of supplier push back and potentially harmful supply disruptions and eroded supplier relationships.

The age old adage remains that long-term success is built on two-way, win-win relationships. An I win-you lose relationships helps lawyers to stay gainfully engaged and your supply chain to be in constant jeopardy. When times are good, such strategies can yield some benefits. When times are challenged, such as the 2008-2009 global recession, they often lead to massive supply disruptions or calls for mutual sacrifice from suppliers.  They further lead to missed opportunities for joint-collaboration on product and process innovation since suppliers are indeed savvy to stick with customers to consistently try to adhere to win-win relationship building.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.

 


Apple’s Fiscal Third Quarter Performance Provides Added Concerns and Heightened Expectations

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Yesterday, Apple reported its fiscal third quarter financial performance for the period that ended in June and the results were somewhat concerning from both a financial and supply chain strategy perspective.  Apple Logo

On the financial side, the business media headlines reflected the first prolonged slump in iPhone sales since that product was introduced in 2007. That is especially concerning since the iPhone is the prime revenue and profit generator for this prominent consumer electronics producer. Total revenues declined 14.6 percent while net income decreased nearly 27 percent or $2.9 billion from the year-earlier quarter. Gross margin for the recent came in lower at 38 percent, primarily attributed to the introduction of the lower-priced Apple iPhone SE model. The average selling price for the company’s iPhone lineup dropped to $595 from $662 in the year earlier quarter.

From a supply chain volume perspective, the company indicated it sold 40.4 million iPhones and close to 10 million iPads in the quarter.  Regarding the former, CEO Tim Cooke indicated that sales interest in iPhones was higher but was constrained by a decision to reduce four million units of overall iPhone inventory in its various retail channels. Regarding the latter, iPad volume has now dropped for 10 consecutive quarters with the latest 9 percent volume decline. From a global perspective, more concerning was a 33 percent drop in sales within Greater China that includes Hong Kong and Taiwan in addition to the mainland. Smartphone sales in this region continue to increase and have benefitted other domestic and foreign producers.

In its reporting, The Wall Street Journal opined that the company’s main hardware products remain in decline and that new products are not successful enough to pick-up the slack. Further indicated is a concern that Apple may have lost its innovative touch.

Thus, Apple’s current new product development and product release phase looms even larger to convince investors and the market as a whole that Apple will retain its innovative edge.  Once again, the Apple supply chain must deliver on both higher expectations and now, new pressures to reduce costs along with smarter management of overall inventories. With a continued decline of the company’s traditional hardware products added to what is likely to be highly optimistic forecasts and expectations for pending new products, Longer-term, expectations remain high for Apple’s entry into other markets such as electric powered vehicles.

Apple’s sales and operations team members have yet another challenging 6 months in planning for the all-important year-end holiday period where sales and profitability needs are so important. Compounding this problem is yet another shift in supplier strategies and constant information leaks across the supply chain.

Indeed, Apple has reached an interesting crossroads. The again, there could well be other interesting developments in the weeks to come given Apple’s massive cash balance and propensity to generate considerable profits. We should all not be surprised by other strategic moves.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.


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