The bulk of Apple’s component supplier and contract manufacturing partners reside in China and Asia where many high tech electronics products are produced. Unfortunately, this is an area that continues to deal with high levels of industrial pollution, worker safety and industrial accidents.
Apple is now taking meaningful steps to initiate substance regulations across its supplier network.
According to a recent posting appearing on Apple Insider, the company is banning the use of cleaning agents’ benzene and n-hexane within supplier factories. This moves is part of Apple published Regulated Substances Specification which has recently been made available for open viewing. The purpose of this specification reads in-part:
“We require our suppliers to adhere to this Regulated Substances Specification, which describes Apple’s global restrictions on the use of certain chemical substances or materials in our products, accessories, manufacturing processes, and packaging used for shipping products to Apple’s customers.”
Apple’s vice-president of Environmental Initiatives has additionally published a letter regarding the company’s stance on safe working environments. Apple further intends to establish a new advisory board made up of chemical and pollution prevention experts who are tasked with finding additional ways to minimize or eliminate the use of toxins across Apple’s supplier network.
These moves come after activist groups submitted petitions calling for the company to place a ban on dangerous substances.
The fact that one of the top rated global supply chains has taken this proactive stance regarding supply chain safety and environmental responsibility is quite meaningful. Hopefully it will be an impetus for more high tech and consumer electronics brand owners to join in citing higher standards for safe chemical use.
Earlier this year, severe winter conditions across North America coupled with the continued boom of bulk crude oil shipments originating from the Bakken region of North Dakota led to significant railcar bottlenecks and shortages. Business media was quick to note that the rail car shortage problems stemmed from pileups at the BNSF Railway, which was one of other railroads heavily burdened by surging demand for crude oil transport. The problem was a classic capacity-constrained network, as winter conditions incurred a heavy toll on equipment and schedules. At the time, the railcar shortage was expected in extend further into the year.
A recent published report from Bloomberg now indicates that grain farmers in the upper Mid-West region of the United States now have a compounding problem. The article quotes grain industry sources indicating that 10 to 15 percent of last year’s grain crop still remains stored in silos because of the continued lack of availability of specialized bulk rail cars to transport the crop. Some contracts for delivery of grain from as far back as March remain unfulfilled.
This problem is expected to now compound further because the harvest of spring wheat is about to take place. Grain elevators still contain storage of the prior harvest while an expected large harvest needs to be stored and transported to designated domestic and export markets. According to the U.S. Department of Agriculture, the U.S. spring wheat crop will rise to a four year high in the coming weeks, the bulk of which coming from the Dakotas, Minnesota and Montana. The president of the North Dakota Grain Growers Association is quoted as indicating: “With the railroad situation the way it is, it almost looks hopeless as far as catching up.”
From our Supply Chain Matters lens, the key railroad carriers, BNSF and Canadian Pacific seem to be taking the classic rear-view mirror approach to the problem. A BNSF group vice president reports to Bloomberg that the backlog is expected to be down to less than 2000 past-due railcars by the middle of September. Bloomberg further reports that as of the end of July, the Canadian Pacific reported in excess of 22,000 requests for grain cars in North Dakota being an average 11.7 weeks late while over 7000 rail cars are over 12 weeks late in Minnesota.
We strongly suspect that farmers, agricultural distributors and consumer goods companies are more interested in the plans that railroads will put in-place to avoid both the past and expected upcoming railcar backlogs. What are these railroads specifically addressing to get in front of the problem? More than likely the resolution involves broader considerations including crude-oil shipments taking up the bulk of line capacities, along with compounding specialty rail car supply and demand imbalances.
Last winter, rail bottlenecks and delays rippled not only to grain and crude oil, but to other bulk commodities such as sugar and fertilizer, and to the shipment of automobiles and steel. According to this latest Bloomberg report, rail lines anticipate the backlog of grain rail shipments could extend through the October-November period, which overlaps with other agricultural harvests. Some railroads may not recover at all, which will present additional shipping challenges for farmers, grain operators, and indeed other industry supply chains in the coming months. As noted in previous commentaries, ongoing capacity and driver shortages among U.S. trucking companies cannot be relied on to solve this problem, nor is it economical for shippers and producers.
U.S. rail transportation infrastructure remains challenged and there needs to be concerted efforts to address both short and longer-term resolution of consistent reliability in rail shipping networks.
To our readers directly involved in the impacts of these bottlenecks, let us know what you are observing. How can and should railroads resolve these bottlenecks?
This is a follow-up commentary related to Tesla Motors, specifically this electric powered automotive manufacturer’s efforts in supply in deploying a broader supply chain vertical integration strategy. In our Supply Chain Matters commentary in February, we noted Tesla’s announcement to build its own $5 billion electric battery supply facility which is termed the “gigafactory”, capable of supplying up to 500,000 electric vehicles per year. That level of supply commitment exceeds Tesla’s current planned output and implies providing a U.S. based manufacturing presence for electric batteries that would be available to other automotive and vehicle producers. Tesla currently supplies batteries for the ToyotaRAV4 EV and the Mercedes B-Class electric.
We noted that the strategy savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric Tesla Motors Model S powered automobile, the batteries are indeed the highest portion of material cost. Tesla expects that the new factory would reduce its current battery costs by 30 percent in its first year,
In late July, during its second-quarter earnings report, Tesla executives made a side announcement indicating that the company had reached a final agreement with Panasonic Corp. as the supplier partner in the construction and operation of the planned gigafactory. Five western U.S. states continue to be cited as potential sites for either one or two linked supply facilities, although site work has actually begun in an area near Reno Nevada. Other potential U.S. states in the running are Arizona, California, New Mexico and Texas. The western portion of the U.S. is an obvious choice because of its proximity to the supply of lithium carbonate, a key raw material for lithium-ion batteries.
Journalist Michelle Quinn pens in a report posted by the San Jose Mercury News that the potential for landing this new battery factory with upwards of 6500 manufacturing continues to fuel a massive wooing and lobbying effort among each of the potential states. State legislatures are rushing through incentive packages to sweeten prospects in their individual states and Governors and city mayors have resorted to novel efforts in demonstrating enthusiasm and keen interest. One example, Texas Governor Rick Perry drove a Tesla Model S to California and taunted California officials about the overwhelming advantages of locating manufacturing in the Lone Star State. Quinn describes these lobbying efforts as a ‘beauty pageant” and: “if a song and dance could help (California), let’s do it.”
Readers should recall that Boeing launched a nationwide RFP bidding effort among potential U.S. states for selection of component and final assembly facilities for its new announced 777x commercial aircraft program. In our January posting, Collaboration According to Boeing, we noted that Boeing’s ultimate objective was to secure the most lucrative economic incentives related to production sourcing. Boeing was in-essence conducting a reverse auction, seeking the lowest economic bidder. In the end, a package of incentives described as the largest of its kind in U.S. history assured that new generation 777 production would remain in the OEM’s current Seattle area.
One of the learnings from the deep economic recession of 2008-2009 is that state, local and provincial governments will do all that is required to secure needed jobs and an economic future in times of uncertain economic growth. If that requires massive incentives in tax breaks, site location subsidies, workforce training and infrastructure developments, so be it. Current efforts among local and state governments to top one another only adds to the reality that manufacturers can hold out for the sweetest deal available with lucrative benefits. Appearances, stunts and lobbying add more leveraging power for the manufacturer.
In the specific case of Tesla, a company well known for its innovative and bold thinking. When the company announced that it would manufacture autos in California, many auto industry observers scoffed at that decision. California is not known as a low-cost manufacturing region.
The ultimate selection of its U.S. based battery gigafactory will accomplish four objectives:
- Bold supply chain vertical integration
- Proximity to key commodity supply and transport networks
- A well trained and technically savvy workforce
- Subsidies that may well defray the overall cost burden.
At this point, Tesla has more than likely honed its selection list based on the above objectives. The thinking is bold and timing is exquisite. It’s time to move beyond the politics and to the objective at-hand.
Many supply chain industry publications, forums, industry analysts and indeed Supply Chain Matters have made note of the discernable shift in production outsourcing strategies in favor of near-shoring strategies where production is located in proximity to large geographic markets.
Changing economics, the intent to protect valued intellectual property and the discovery of cheap and abundant forms of oil and natural gas have further fueled the continuing resurgence in U.S. and North American based manufacturing among many industry sectors. This trend is especially prevalent for small and medium-sized manufacturers who cannot afford to have elongated supply chains. The Wall Street Journal recently cited a statistic indicating that more than 80 percent of companies bringing work back to the U.S. have $200 million or less in revenue volumes.
If you have been reading reports reflecting companies within industries such as apparel, footwear or consumer electronics moving production operations from China back to the U.S., a challenge often cited is the lack of a reliable and industry competitive network of component or value-chain suppliers. That was understandable given the mass exodus of such suppliers when industries flocked to China to secure direct labor savings. Rebuilding industry focused world-class component suppliers will take additional time as well as other economic and business related factors.
However, our news alerts came across quantification of a significant new data point and trend that could hasten the maturity of lower-tier supply chain networks within the U.S.
The South China Morning Post published a report that indicates that China’s low-end manufacturers have also identified advantages for moving production operations from China to the United States and are moving operations at a quiet but aggressive pace. The report quotes a consultancy as indicating that in the two year span from 2011 to 2013, investment by Chinese manufacturers in operations within the U.S. grew from $400 million to $2 billion, while the number of U.S. based jobs provided by Chinese manufacturers nearly quadrupled. Obviously, if these numbers are accurate, they reflect a significant and noteworthy trend.
While China’s manufacturers will remain dominant in their home country, the fact that value-chain and component suppliers are practicing nearshoring of certain operations is an obvious reflection that U.S. component supply chain capability will indeed improve. OEM and brand manufacturers are obviously influencing their China based suppliers to assist in the effort.
Once more, U.S. based manufacturers or all sizes , if they have not done so already, will discover that Chinese competitors can, and are more than willing to implement their own near-shoring strategies to support specific global markets.
If readers can provide additional quantification of this trend within their specific industry sectors, please share them in Comments area or send them directly via email.
It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.
In this capsule commentary, we include the following topics: APICS Finalizes Merger with Supply Chain Council (SCC); U.S. Manufacturing Growth Continues at a Scorching Pace; U.S. Regulators Approve Hapag-Lloyd and CSAV Merger But Additional Hurdles Remain; Resilinc Announces Release of Conflict Minerals Reporting Module
APICS Finalizes Merger with Supply Chain Council (SCC)
The merger of APICS and the Supply Chain Council announced in April is now finalized. An APICS press release notes that the merger “was ratified by a near-unanimous majority of SCC voting members.” APICS SCC is the new entity that reflects the combining of SCC and APICS Foundation research and development programs.
According to the announcement, APICS and APICS SCC will share more details about the benefits of the merger early next year. The completion announcement does make note of broader training curriculum, capturing additional operational efficiencies in back-office support through the sharing of technology platforms. The latest announcement does not include mention of prior SCC executives and staff.
U.S. Manufacturing Growth Continues at a Scorching Pace
U.S. manufacturing and supply chain activity in July was reported to have expanded for the 14th consecutive month and reached a new high. The ISM PMI index rose to 57.1 in July from the 55.3 recoded in July. The new orders and employment indexes registered healthy gains, an indication of continued momentum as manufacturers move to the second-half of 2014. The New Orders index grew by 4.5 points while the Employment index grew a phenomenal 5.4 points from June. Industry growth was broad, with 17 of the 18 industries tracked reporting increased activity. An economist for Markit noted: “U.S. manufacturers are enjoying a summer of scorching growth.”
U.S. Regulators Approve Hapag-Lloyd and CSAV Merger- Additional Hurdles Remain
Also in April, two high profile ocean container shipping lines, German based Hapag-Lloyd and Chile based CSAV announced a merger deal. The combination of these two shipping lines is expected to create the fourth-largest global shipping company in terms of capacity.
This week, U.S. regulators gave the green light to the proposed merger. Chinese and European Commission regulators have yet to weigh in but business media is reporting that approval is expected. That was the same expectation regarding approval of the proposed P3 Network involving the top three container lines, but China’s maritime regulators balked at approval.
Resilinc Announces Release of Conflict Minerals Reporting Module
Supply chain resiliency technology provider Resilinc announced a new release of the provider’s Conflict Minerals Module, designed to simplify compliance reporting, and align with the provider’s supply chain mapping software. The module is described as providing a network-based approach to enable suppliers to publish conformance information relative to the Dodd-Frank ACT utilizing a singular template. The module is offered at no-cost to the supplier, incorporates multi-language and time-zone report needs while supporting automated assessment tests to categorize incorrect responses and assist suppliers with accurate reporting.
Commercial aerospace and aircraft producer Boeing has recently initiated some supply chain risk mitigation and strategic sourcing moves which demonstrate responses to important business needs.
Many headlines of late report on the continuing tensions among Russia and the United States concerning ongoing events in the Ukraine. Today’s Wall Street Journal reports (paid subscription or metered view) that certain aerospace manufacturers, namely Boeing and United Technologies, have been augmenting safety stock supplies of titanium, a critical material utilized in the fabrication of critical aircraft components. One of the world’s largest producers of this material is VSMPO-Avisma, which has a parent company with direct ties to the government of Russia. VSMPO is reported as supplying upwards of 30 percent of the total volume requirements used in the aerospace industry each year. Ukraine, currently involved in political and social unrest, provides almost all of the concentrates used by VSMPO. The combination of severe economic sanctions being placed on the Russian economy and the unrest in Ukraine has logically prompted concerns about the continuity of titanium supply.
In its reporting, the WSJ cites sources as indicating that Boeing and UA have been stockpiling as much as six months of safety stock supply of highly customized titanium forgings, which are supplied by a single provider such as VSMPO. Boeing confirmed to the WSJ the existence of the strategic reserves from its Russian supplier, with the material accounting for 15 percent of the airframe weight of the Boeing 787 Dreamliner. UA utilizes the subject titanium forgings to produce landing gears for Boeing and other producers, as well aircraft engine components for its Pratt & Whitney division. VSMPO further confirmed that customers had placed buffers in place as part of their risk management planning and that customers would go back to buying as needed for standard production. The WSJ further reports that Airbus has not acknowledged a safety stock strategy for titanium forgings.
Inventory management strategies are often a flash point among discussions involving supply chain planners and finance. However, insuring continuity of strategic supply components can be a far different dialogue. Supply Chain Matters has made note of other previous decisions made within industry supply chains to insure strategic continuity of supply when significant risk conditions are present.
South Carolina Facility Tapped
Electing to further dual source production, Boeing announced that the largest to date Dreamliner model, the 787-10 aircraft, scheduled for market delivery in 2018, will be built solely within the company’s non-union production assembly facility in North Charleston South Carolina. Statements to business and general media indicate that the sourcing decision was prompted by the stretched length of the aircraft’s fuselage. The suppliers of this 114 foot long stretch fuselage are within Italy and Japan, and normally the fuselage components are flown in on a special fitted Boeing-owned 747 Dreamlifter cargo plane. Boeing indicates that the elongated fuselage components required for the 787-10 will not fit the existing cargo aircraft.
Regarding the South Carolina sourcing decision, a published report by the Seattle Times reports: “It makes clearer the profound impact of Boeing’s 2009 decision to bypass its unionized stronghold in Washington in favor of building a second 787 assembly line in nonunion South Carolina. In six years, Dreamliner final assembly will be equally divided between the East and West Coast sites.” The Times report further notes: “So by the end of the decade, the prospect for Boeing widebody-jet production is that North Charleston and Everett will each be rolling out seven Dreamliners per month, while Everett will in addition be producing up to eight 777s per month, plus two 767 tankers for the Air Force.”
Meanwhile, a labor union among Boeing’s Everett Washington production facilities were naturally not pleased with the sourcing decision, indicating that while not surprised, they were certainly disappointed in the final decision.
Reports indicate that the Everett facility will continue to sustain a production level of seven Dreamliners per month while the North Charleston facility will ramp-up from three aircraft per-month today, to five in 2016 and seven by the end of the decade. According to Boeing, both production facilities will have similar production practices and standards.