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A Commentary Reflecting on a CEO Change for General Electric

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General Electric made major business headlines today in announcing that Jeff Immelt will step down as CEO on August 1 after a 16-year run as the company’s chief executive officer.  The announcement was somewhat unexpected and came because of an ongoing CEO succession planning process overseen by GE’s board. None the lees, it was somewhat of a shock to many.

Supply Chain Matters views this announcement with some disappointment.

Succeeding Immelt is John Flannery, a 30-year veteran who has served the bulk of his GE career among the conglomerate’s financial businesses. Mr. Flannery’s most recent position was head of GE’s healthcare unit.

This senior leadership move comes amid a backdrop of increasing pressure from Wall Street and GE investors on a consistently lower stock price of the company’s shares during Immelt’s tenure. A further backdrop has been the presence of private equity ownership of the company’s stock, specifically Trian Fund Management to accelerate cost reductions and boost profits among GE’s core industrial businesses. In its reporting, The Wall Street Journal was quick to cite knowledgeable sources as indicating that Trian was not actively involved in the CEO succession process. We tend to believe otherwise. If not direct, certainly a major influencer to the culmination of today’s announcement.

As a blog focused on global supply chain management, we have consistently admired GE’s efforts both in the company’s global supply chain efforts and IT practices, but also in the vision and current unfolding strategies surrounding the GE Digital Manufacturing and Industrial Internet strategies. Under Immelt’s leadership, GE became to understand that digital disruption was a major threat as well as an opportunity. GE was bold in stating that factories no longer need to be sourced where labor is cheaper, but rather to best service major geographical markets. Instead, they can compete where educated workers can make the most of advanced technology, and where opportunities can be leveraged to shorten supply chains and reduce inventories. The company further understood the various tenets of supply chain risk and of supply chain risk mitigation. GE embraced the notions of Cloud-based ERP technology and was one of the early transformation adopters under the leadership of Immelt and GE’s CIO.

During the second term of the Obama Administration, Immelt served as an influential leader on the Presidential Commission on U.S. Manufacturing Competitiveness, adding an important voice both in words and corporate actions.

The notions of GE transforming itself from that of a traditional manufacturing focused company to a software-driven company were noteworthy and gutsy. CEO Immelt was by our lens, a visionary in understanding the implications of digital manufacturing both from an internal operations and external business perspective. We believe that GE will hence forth be recognized as a pathfinder in the notions of connected machines and Internet-of-Things enabled business models.

The bold decision to move corporate headquarters from a tranquil suburban Connecticut to Boston’s seaport district was to spur a campus environment of constant innovation and paranoia on market competitiveness.

In a call with investors, incoming CEO Flannery indicated he will take a fresh look at various GE businesses, establishing stronger shareholder returns as a goal of this broad review. Business media seems to be of the initial viewpoint that Flannery was chosen because of his financial industry experiences in creating value for shareholders.

In its reporting, the WSJ indicated that succession planning included consideration of both external and subsequently four internal executives including the CFO and heads of the power as well as oil and gas business units. As with all things GE, including the succession of former CEO Jack Welch, today’s announcement may serve as the prelude for other senior leadership or other organizational changes to come in the coming weeks and months. Their impact to ongoing initiatives, particularly the Digital Business and Industrial Internet initiatives is an open question.

It is indeed unfortunate that today’s Wall Street and investor environment remains one of a short-term focus and on individual reward.  Icons such as Dupont, Procter & Gamble and others must now constantly respond to such short-term thinking. Missing is a recollection that it took multiple years of internal investment and corporate-wide initiatives by Amazon to create the ultimate retail industry disruptor that the online provider and technology services provider is today. There again, Wall Street grumbled and grew impatient with near-term stockholder returns. Not so much today.

As a manufacturing and supply chain management social platform, we expressly tank Jeff Immelt for his visions, tenacity and understanding of manufacturing and supply chain needs, and that both truly matter in business outcomes.

We trust that John Flannery will take GE to its next dimension.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Chinese Branded Railway Cars Appearing in Major U.S. Cities- The Momentum Has Increased

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In October of 2014 we alerted Supply Chain Matters readers to what we thought was a noteworthy milestone development, namely Chinese designed and branded railway cars appearing in a U.S. subway system.

The headline back then was that the State of Massachusetts Department of Transportation selected China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars for the Massachusetts Bay Transportation Authority (MBTA), also locally known as the ’T’. This was the first Chinese manufacturer to win a U.S. based major transit system equipment replacement contract.Boston CRRC subway cars sized Chinese Branded Railway Cars Appearing in Major U.S. Cities  The Momentum Has Increased The further significance of this development was twofold. First, the awarded contract cost, namely $566 million, was a rather affordable sum for this amount of modern rail equipment. A further significance was that the contract called for the railcars to be assembled at a new final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. Assembly operations would therefore be U.S. based, with the expectation that other U.S. equipment supply contracts could follow.

Subsequently, China’s government facilitated the merger of China’s two major state-owned rail manufacturers which included CNR. The combined China Railroad Rolling Stock Corp. (CRRC Corp. Ltd.) then created a local U.S. subsidiary to administer contract delivery needs involving the U.S.

The state-owned China U.S. subsidiary has since landed a major equipment replacement deal with the Chicago Transit Authority, described as a monumental overhaul of the transit authority rail car equipment, amounting to a $1.3 billion contract to replace 846 rail cars, about half of the existing subway car fleet — the biggest car purchase in that agency’s history. The described new generation of railcars also called for localized final assembly to be performed at a new final assembly manufacturing facility to be located on the Southeast Side of Chicago.

The State of Massachusetts has since opted for adding more subway cars to its original contract agreement, again calling for local assembly with fabricated steel and carriage equipment sourced in China and domestic sourcing of other equipment.

On March 16, CRRC Corp. held a groundbreaking ceremony and began work on the Chicago manufacturing facility. According to a published report by the Caixen News Agency, the 45-acre facility, located in the Hegewisch neighborhood of Chicago is expected to cost $100 million with assembly lines producing 168 rail cars annually starting in November 2018. This facility will similarly assemble subway cars from major fabricated steel components imported from China, combined with domestically sourced U.S. component content, and will employ only 168 people in Chicago.

Yesterday, this same new agency, citing knowledgeable sources, reported that CRRC Corp. Ltd. has now won contracts to supply subway cars to both Philadelphia and Los Angeles transit agencies. According to this report, the Los Angeles deal will see CRRC supply 64 rail cars for the red and purple lines on the city’s subway system with delivery set for either 2020 or 2021. The Philadelphia deal reportedly calls for CRRC to deliver 45 subway cars to the U.S. east coast city for a total price of about $137.5 million. Neither of these deals have been officially announced yet by the respective transit agencies.

This Caixen report further indicates that like the deals in Boston and Chicago, the new agreements for Philadelphia and Los Angeles will require CRRC to set up local manufacturing facilities and buy more than half of components for rail cars domestically.

Further reported, and somewhat even more interesting, is that a consortium led by CRRC and Canada’s Bombardier Rail Unit is currently the lead candidate to supply subway cars to New York City in a deal that could soon be announced.

Thus, in a matter of three years, it appears that China’s state-owned railway equipment manufacturer has been gaining momentum as a provider of modern, technology-laden subway and rail passenger cars with somewhat attractive pricing.

Beyond all the political dimensions of the above, there are now the geopolitical dimensions to consider as well.

If the new Trump Administration in the United States follows through with campaign promises to significantly step-up spending on U.S. transportation infrastructure, would U.S. Congressional leaders be open to a Chinese state-owned company as a qualified supplier of competitive equipment to other U.S. rail networks?

If the Administration further influences the U.S. Congress to pass major corporate tax reform legislation that includes an import tax, or perhaps higher duties for equipment manufactured or fabricated in global manufacturing regions such as China, how would such legislation impact the economics of these recent U.S. transit equipment deals?

These are interesting forces at-play, forces that may have major U.S. cities possibly advocating for open access to global markets like China to modernize long overdue urban and inner city transit at a more affordable cost, while balancing the supply chain with imported as well as localized supply chain content.

Obviously, this is an area that will provide interesting developments in the weeks and months to come.

Stay tuned.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


2017 Predictions- The 3M Perspective on the Need for Bimodal Supply Chain Capabilities

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In preparing our overall 2017 Predictions for Industry and Global Supply Chains, and specifically our prior posting, Prediction One- What to Expect in Global Economic Activity, we had the opportunity to speak with both industry, supply chain and technology executives to gain current perspectives of what supply chains should anticipate in the coming months and how to be prepared.

One opportunity was a discussion with Paul Keel, Senior Vice President, Supply Chain for diversified manufacturer 3M Company. In my role as a supply chain industry analyst, my perspectives of 3M extend nearly 15 years, when I first interacted with members of the 3M supply chain leadership team. A lot has occurred since that time, and that came to be the context of the discussion with Keel.

The 3M of today is a $30 billion diversified manufacturer whose supply chains support 5 different business sectors that span both B2B and B2C focused market segments. Industry products are quite diversified spanning industries such as automotive, commercial aerospace, communications, healthcare, high tech electronics and transportation. The consumer segment is the wide variety of 3M branded products that many of us are familiar with including the iconic branded Post-It note pads. Today’s 3M has deeper roots as multi-industry supplier. The company has always been anchored in core manufacturing and today that includes upwards of 220 worldwide manufacturing plants. It all amounts to a considerable scope for 3M’s supply chain teams.

In our interview, Keel referenced Q4 of 2008 as an important milestone checkpoint for 3M, one that created acute awareness to the potential of heightened volatility of industry and global markets brought about by the global financial crisis. He described that point as “opening the aperture” of the 3M of 30 years ago, as a $3B manufacturer, and the aspirations of what 3M has become today in ten-fold revenue growth.  The described anchor has been that of a complete product innovation and continuous improvement mindset across the company. It was also a wake-up call that supply chain capabilities do matter, and that 3M had to excel in all aspects of supply chain competencies.

Regarding 2017 predictions relative to heightened industry competition, continued market uncertainties and potential volatility, Keel remains of the belief that the supply chain will play an increasingly differentiating role for high-performing organizations. He states:

In the hyper-competitive world of global business, we’re finding new ways that supply chain must lead. While historically organizations looked to their supply chains primarily for productivity and cost reduction, today high-performing companies count on us for much more – developing new products, protecting our environment, serving our customers, and driving meaningful value creation across the enterprise.  Fully leveraging the power of supply chain begins with the proper mindset.  ‘Make and deliver’ is no longer enough.  To win in 2017, we’ll need to ‘amaze and delight.’”

Keel further described the notions of a bimodal supply chain perspective:

There was a time when supply chains could settle for trade-offs…cost or speed, service or quality, flexibility or reliability.   Those days are long gone.  The equation has shifted from an imbalanced ‘or’ to an equilibrium centered on ‘and.’  Information and technology are central to achieving this synchronization.  The leaders of tomorrow will be the organizations that can effectively manage a bimodal supply chain.”

We also discussed technology as the enabler of bimodal capabilities. Keel described 3M’s perspective as: “Asset-light and Information-heavy.” In the bimodal lens, it translates to enabling greater levels of efficiency in overall productivity levers, in an end-to-end supply chain risk mitigation approach to manage volatility, and general in moving forward with overall global optimization. The other technology lens is that of the business growth enablement lever, manifested by enabling continued end-to-end supply chain segmentation capabilities along with digitization of supply chain processes and decision-making needs.

Keel further pointed to corporate sustainability and social responsibility initiatives as an essential mindset going forward and a further component of bimodal. For 3M, this equates to declared responsibilities to communities, to employees and to the environment.

Bob Ferrari

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

 


New Developments and Potential Added Risks for Chinese Branded Subway Cars in the U.S.

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In October of 2014 we alerted Supply Chain Matters readers to a noteworthy milestone development, namely Chinese designed and branded railway cars appearing in a U.S. subway system. Since that time, much as occurred, and this week, there is yet another development, one that perhaps has implications for the upcoming administration of President- Elect Donald Trump.

The headline back in 2014 was that the State of Massachusetts Department of Transportation selected China’s state-owned CNR Corp. for the replacement and delivery of 284 modern subway cars for the Massachusetts Bay Transportation Authority (MBTA), also locally known as the “T’.

This was the first Chinese manufacturer to win a U.S. based major transit system equipment replacement contract. The further significance was twofold. First, the awarded contract cost, namely $566 million, was a rather affordable sum for this amount of modern rail equipment, far underbidding other railcar manufacturers. According to local news reports, CNR aggressively courted the Massachusetts transit system to gain a foothold in the U.S. rail equipment market. A further significance was that the contract called for the railcars to be assembled at a new final assembly manufacturing facility at a former closed Westinghouse factory site located in Springfield, a central city in Massachusetts. Assembly operations would therefore be U.S. based, with the expectation that other U.S. equipment supply contracts could follow. Major components however, would be produced in China and transported to the U.S. for final assembly of railcars.

Since that time, there have been other developments.

China’s government facilitated the merger of China’s two major state-owned rail manufacturers which included CNR. The combined China Railroad Rolling Stock Corp. then created a local U.S. subsidiary to administer contract delivery needs involving the U.S. including the MBTA contract.

The state-owned China U.S. subsidiary has since landed a major equipment replacement deal with the Chicago Transit Authority, described as a monumental overhaul of the transit authority rail car equipment, amounting to a $1.3 billion contract to replace 846 rail cars, about half of the existing subway car fleet — the biggest car purchase in that agency’s history. The described new generation of railcars also called for localized final assembly to be performed at a new final assembly manufacturing facility to be located on the Southeast Side of Chicago. This assembly facility is expected to be in operation for a total of 10 years with railcar prototypes coming out in 2019, and initial cars being delivered into operational service  in 2020. The CSR Sifang America bid came in $226 million lower than that of Bombardier Railcar Equipment, the most recent manufacturer of Chicago’s railcar fleet. Since that time, competing bidder Bombardier filed a protest with the agency, saying that the bidding process was rigged in favor of a Chinese firm that promised to bring manufacturing jobs to Chicago.

This week, the Massachusetts based MBTA control board voted to authorize as much as $277 million to acquire an additional 134 Red Line railcars as an extension of the existing contract with the China based railcar producer. This amended change to the existing contract bypassed standard bidding procedures because the agency indicated that it was seeking to standardize its entire network-wide fleet of both Orange and Red Line cars. The MBTA considered rebuilding the 184 existing Red Line cars not scheduled to be replaced in the initial contract, but a financial analysis had indicated that brand new cars would cost as much as $310,000 less than overhauling the existing ones. The added Red Line cars are expected to replace the entire existing fleet by the end of 2023.

Specifics of the amended agreement were reportedly revealed publicly for the first time on Monday of this week.  Board members were asked to approve the deal that same day, to supposedly avoid a price increase and to secure local manufacturing capacity.

Supply Chain Matters brought initial attention to China’s state-owned railway efforts to make a more sustained equipment presence within the U.S. because it included both global and domestic supply chain implications.  The plans calling for many of the major train components to be produced in China and shipped to the U.S. for final assembly within local U.S. final facilities insured some local jobs, which was an obvious big deal for local governments. That theme has more current resonance with the discourse that came out of the recently completed U.S. Presidential election. Voters opted for the candidate they perceived to have a more aggressive protectionist stance on jobs and who would take on China as a perceived currency manipulator and in the consequent outsourcing of jobs to that country.

However, from our lens, the real question will come as the new Trump administration begins to unfold its trade protectionist policies.

Current speculation is that the incoming administration will not be shy in slapping increased tariffs on Chinese parts and components imported into the United States. Some plans call for a revised tax code that would feature a form of a value-added-tax or tariff on imported goods. If that comes to fruition, then the economics related to the existing U.S. subway equipment replacement contracts could well be impacted. The question is how much and whether local final assembly turns into something quite different, or whether new subway cars can indeed be delivered at such attractive pricing.

This is an area worthy of observation over the coming months. On the one hand, U.S. taxpayers are saving money and supposedly gaining use of very modern, technology-laden passenger railcars for urban transportation needs. They also gain some local manufacturing jobs.

On the other hand, China’s existing lower direct labor costs, overcapacity situation in steel production, and needs to insure continuous employment among state-owned manufacturers make the landed cost more attractive for local transportation agencies. It is a delicate balance that may well be subject to change, especially if the expected costs of landed components increase substantially.

Stay tuned.

Bob Ferrari

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


Breaking Supply Chain News: Blast Occurrence at BASF Ludwigshafen Chemical Production Complex

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Reports indicated that that an explosion has occurred at the massive BASF chemical production complex in Ludwigshafen Germany.

Initial indications are that two employees have unfortunately lost their lives and two others are currently missing.  Six people are reported as seriously injured as a result of the explosion which reportedly occurred on a supply line connecting a harbor and a tank depot on the Ludwigshafen site at around 1120 local time (0920 GMT).

As many our readers may be aware, BASF is one of the largest global manufacturers of chemicals utilized across multi-industry supply chains.The Ludwigshafen site, which is 50 miles south of Frankfurt, is recognized as world’s largest chemical complex, covering an area of 10 square kilometers (four square miles) and employing 39,000 workers.

Reports we are monitoring indicate that production operations have been suspended at the BASF steamcrackers utilized to convert hydrocarbons into other chemicals. According to a published report from The Wall Street Journal, it is believed that the current suspension will initially suspend the supply of raw material chemicals supporting 20 other plants which are either in the process of shutdown or only partially operating.

According to a published report by Reuters, news of the explosion came less than two hours after BASF ad indicated that four people were injured in a gas explosion at its Lampertheim facility, a plant near Ludwigshafen that makes additives for plastics.

Obviously this is troubling news for many industry supply chains, particularly those residing in the Eurozone, and bears continual monitoring for any ongoing disruption of product supply chains.

 


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