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The Reality of 4PL Business Model Takes Hold in Today’s Logistics Services Landscape


Supply Chain Matters and other supply chain focused media has called specific attention to the current wave of mergers and acquisitions impacting the global logistics sector. Yet, it is quite important that supply chain leaders pay close attention to the motivations of such actions, as well as the implications related to providing more one-stop services. Incorporating a logistics provider as an extension of complex and often changing supply chain business processes comes with an expectation that such a provider has the asset, process and technology enabled capabilities that can accomplish the job and meet operational milestones and performance measures.

The Wall Street Journal recently noted that there have been 10 major acquisition deals totaling $18 billion since early 2014.  The most notable have been the recent XPO Logistics acquisition of Conway Way, FedEx’s acquisition of GENCO and Bongo International as well as TNT Express, and UPS’s acquisition of Coyote Logistics. Once more, there are strong indications that this trend will continue.

The primary reasons are that globalization, increased process complexity and impacts of online and Omni-channel fulfillment are motivating more and more firms to seek one-stop services or to outsource various value-added logistics processes.  In essence, the third-party logistics (3PL) logistics business model is fundamentally moving toward the termed fourth-party logistics (4PL) model. Many supply chain and logistics professionals recognize the 4PL model as one that provides an extension of the customer’s current business process needs, including the integration of information and technology systems. However, the misnomer is that many 3PL’s who have shied from significant investments in technology and processes now look to acquisitions to quickly gain such capabilities.

But alas, the ability to be an extension of a customer’s business processes presents its own challenges, even for the largest and most savvy logistics providers.

The Wall Street Journal published a report indicating how aircraft jet-engine producer Pratt & Whitney’s production was stalled nearly a month because of issues at a UPS logistics center. (Paid subscription).  Pratt had contracted with UPS to streamline its manufacturing processes and ramp-up production levels of its newly designed aircraft engine. Readers will recall that that Pratt’s new and more fuel efficient engine will power new aircraft models including the Airbus A320 neo. Pratt’s current customer booking stands at 7000 orders.

A UPS logistics center would receive parts from various Pratt engine suppliers and package them into kits holding 8000 parts and ship them to various final assembly production facilities.  According to the report, the logistics center was beset with problems when it first opened in July that slowed Pratt assembly operations to a crawl. Kits were received with what was described as dirty, damaged or missing parts, prompting Pratt production workers scrounge among multiple kits to find a full complement.

Pratt and UPS quickly assembled dedicated teams to address these process start-up issues that included additional training as well glitches in inventory tracking software. The problems are now reported as resolved but Pratt’s production levels in August nearly came to a crawl.

Pratt’s parent is United Technologies and its CEO indicated to the WSJ: “It’s the ramp. The technology, I’m very confident we’ve got that right. But you’re only as good as your worst supplier. When you’ve got 8,000 parts in an engine, one of those parts aren’t there, you’re not building an engine.”

Pratt had turned to UPS to eliminate low-value work and avoid holding extensive inventory on its own books.  The engine producer has a unionized work force and the WSJ report indicates that union members were not all that pleased with this new arrangement. Pratt transferred management of parts and inventory to an automated UPS warehouse system.

The Pratt story is somewhat of a typical example of what is currently driving the logistics industry today, along with the challenges for becoming the extension of an existing manufacturing, supply chain or customer fulfillment business process. The fact that a provider the size, scope and resources of UPS initially stumbled is indeed an indicator that beyond business growth through acquisition, the logistics industry has to concentrate on added technology and information integration capabilities.

Bob Ferrari


The Culmination of the 2009 Peanut Corporation of America Salmonella Incident


When it comes to certain cases related to food safety, the wheels of justice turn mighty slow.  But recently, the judicial system has sent a powerful and far-reaching message to the food and other consumer products focused industry and to their respective supply chain partners.

In early 2009, there was an incident involving a salmonella outbreak linked to peanuts and peanut butter products distributed by Peanut Corporation of America (PCA).  That salmonella outbreak sickened over 700 people and led to the liquidation of PCA.

Four former executives of PCA and a related company faced criminal charges for covering up information that peanut butter produced was contaminated with salmonella bacteria.  The 76 count indictment included charges of conspiracy, mail and wire fraud, obstruction of justice, among others related to distributing adulterated or misbranded food. Federal officials alleged that certain executives at PCA were aware of salmonella testing results, failed to alert consumers, and lied about test results to inspectors from the U.S. Food and Drug Administration (FDA).

This week, a U.S. District Court judge sentenced two former plant managers at the PCA Georgia peanut processing plant identified in the 2009 incident to six year and three year prison sentences. Both would have probably faced higher sentences if they had faced trial and not pleaded guilty. Both made deals with prosecutors to testify against Stewart Parnell, the owner of PCA. The Georgia plant’s quality control manager received a five year prison sentence.

Last week, Parnell was sentenced to 28 years in prison after being found guilty on 67 criminal counts. Some noted that the Parnell sentence was too harsh, especially in the light of convictions in similar salmonella related cases.

According to a published AP report syndicated on

Investigators discovered the Georgia plant had a leaky roof, roaches and evidence of rodents, all ingredients for brewing salmonella. They also uncovered emails and records showing food confirmed by lab tests to contain salmonella was shipped to customers anyway. Other batches were never tested at all, but got shipped with fake lab records stating that salmonella screenings turned out negative.”

Once more, tainted peanut products were shipped up the supply chain to other producers who used them to make snack crackers and other products.

Parnell’s attorneys blamed the scheming on the two former plant mangers. They argued Parnell, who ran the business from his home, was a poor manager who failed to keep up with his employees’ actions.

It may indeed seem that the wheels of justice do turn slow, six years in this case.  But a strong and powerful message has been administered, one that will reverberate across food and consumer goods supply chains.  Food safety is paramount and knowingly and willingly supporting or advocating the shipment of tainted food or improper quality monitoring processes will have a consequence, one that has taken on even more meaning.

Boeing’s Strategic Carbon Fiber Supplier Hints of Global Supply Diversification Strategy

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In the backdrop our previous Supply Chain Matters commentary related to Boeing and its decision to shortly assemble new 737 commercial jets in China, we provide another related development.

In November of 2014, we called initial attention to the announcement that Boeing had initiated a multi-billion long-term supply agreement with Japan based Toray Industries for the supply of carbon fiber composite material. This ten year strategic supply agreement was initiated to provide continuity of supply of carbon fiber material needed for the production of Boeing’s 787 Dreamliner and new 777X aircraft. Apparently Boeing is now considering a supply risk strategy regarding this strategic material.

Last week, The Seattle Times reported that Toray Composites America (TCA) celebrated the completion of a fifth production line at its plant near Tacoma Washington, but further warned that additional expansion will center on other U.S. east coast and overseas investments.

Noted in this Seattle Times report is that each pre-preg carbon fiber assembly line requires a $100 million investment and 14 months of rigorous testing before such line is qualified to produce high specification material.  With the addition of this fifth assembly line, executives at parent Toray in Japan now indicate that any further investments will be directed at the existing TCA facility located in Spartanburg South Carolina.

Toray has purchased an additional 400 acres of land with plans to build a $1 billion fully integrated composites production facility that will span precursor chemical to finished carbon fiber tape. According to the article, Toray has signed additional supply contracts with Bell Helicopters and Brazilian jet producer Embraer.

A Toray executive is reported as indicating that diversifying supply in South Carolina is a desire by both Toray and Boeing to insure supply continuity, in the event of a shutdown at the Tacoma based facility. More revealing are statements by this same executive indicating that Boeing’s longer-term thinking centers on the labor cost intensity associated with manufacturing this material in the U.S. , with an eagerness to transfer some composite supply sourcing to perhaps India, which has a growing demand for new commercial aircraft, and could provide more attractive labor costs.

In the lens of Supply Chain Matters, this may be an additional indication that growing demand for new commercial aircraft within specific Asian countries may include additional provisions for more supply chain presence and value-add activity.

Manufacturing Sourcing in China- What Have We Learned?


I recently came across a report from business network CNBC that had the eye-gripping title; Why US Manufacturers are Nixing the US for China. The premise of this report was that the combination of applied robotics and the devalued yuan are now lowering manufacturing costs for the global manufacturing hub. This was not the only report we have seen that suddenly trumps the new attractiveness for sourcing in China.  However, industry sourcing teams need to be cautious and thorough in their positioning and weighting of manufacturing sourcing decisions.

The argument seems compelling. Chinese factories are cutting prices because their costs are going down as a result of devaluation of China’s currency, not to mention that the current downswing impacting China’s economy has motivated many manufacturers to become more aggressive in preserving existing business or seeking additional customers.

The other compelling force noted was the offset of raising direct labor costs by the shift to more automated manufacturing enabled by robotics. However, a recent posting by China Tech provides a different picture or reality, with the headline: The manufacturing boom in Guangdong is over’: Industrial robot makers the latest to get swallowed up by China’s economic slowdown.  A senior salesperson of a leading Chinese robotics firm predicts that only 5 percent of current robotics producers will survive in the next two years because manufacturers do not have the available capital to invest in automation.  Apparently many Chinese robotic manufacturers set overly aggressive sales targets and did not factor an economic downturn. Declaring that the export-led boom in coastal region Guangdong is over, exports continue to decline every month.

The specific geography of Guangdong is a key since this was the former lower cost direct labor manufacturing region for apparel, footwear, toys and electronics that can benefit from the application of robotics and automation.  Instead, manufacturing has shifted to more interior regions of China, seeking lower direct labor costs.

A separate recent article states that the world’s largest contract manufacturer Foxconn, has throttled back its robotics targets to target 30 percent automation in its factories by 2020. Previous reports had cited a 70 percent target. This report indicates that Foxconn’s Chinese factories, including those in Shenzhen, have 50,000 fully functional robots currently operating. Replicating human tasks in high volumes is not as easy as it seems.

While both outlined factors, the devaluation of Chinese currency and the promise of increased automation to offset increasing direct labor costs would appear to be a compelling argument to once again consider China for manufacturing sourcing, we advise caution for manufacturers and retailers.

The primary lesson learned from the initial wave of strategic sourcing decisions that favored China so many years ago was the one-dimensional view that weighted so many industry sourcing decisions. That sole weighting was the attractive cost of direct labor.

Industries have since learned that intellectual property protection, added logistics and transportation costs and the risks inherent within China and across global distribution networks are all added factors.  The same holds true for current decisions, but the assumptions have somewhat changed.

More and more manufacturing has moved to the interior regions of China, requiring added logistics and transportation factors. The global transportation industry has its own set of problems.  Ocean container carriers are in a race of survival of the fittest, those with the biggest ships, lowest costs and highest revenue potential. Air freight capacity has been dramatically reduced, and existing air service comes with a premium. Last year’s massive disruption involving U.S. West Coast ports provided a lesson in overburdened port infrastructure and increased transportation risks. Supply chain teams must now balance their transportation risks among both U.S. East and West Coast port entries.  For Europe based firms, a massive overcapacity of ocean container vessels on the China to Europe segment has yet to shake out as to which multi-carrier network will garner the most leverage in shipping rates.

China’s leaders are desperately trying to move the economy to one of consumption-based vs. the prior export led, and that will drive capital availability. A consumption-based economy places the priority on China’s own manufacturers and service providers to fuel job growth and compete for business within China.  The government has identified strategic industries that will fuel China’s economic growth over the next five years and they will have access to advanced research and needed capital. If you happen to compete in these industries, your business risks are magnified, especially if you source within China.  Consider the recent challenges of Western brands competing within China, as their supply chains came under attack for poor quality or sub-standard practices.

Technology is a new imperative, particularly in gaining end-to-end and multi-tiered supply chain visibility across global supply networks.

The takeaway of our commentary is to not be swayed by a singular trend or singular factors.  Sourcing decisions continue to require a holistic analysis that not only includes the cost of manufacturing, but the various other factors related to landed costs, inventory investment, security of information and added supply chain risks.

A given in today’s increasingly competitive global economy is that change is a constant, and assumptions prevalent today will be different in the not too distant future.

Industry supply chain teams have hopefully learned that strategic sourcing decisions need to stand the test of landed costs, market access, supply chain resiliency and risk mitigation. While China will remain an important and meaningful source of manufacturing and value-chain capability, industry supply chain teams will require a balanced global approach in sourcing, one that spans cost, technology capabilities, IP protection and risk mitigation.

Bob Ferrari

High Tech CEO’s Meet with the President of China to Gain Favor


Supply Chain Matters provides a follow-up to our prior commentary: high tech supply chains- increased risks associated with global access.  In that commentary, we posed the question of balancing the need of high tech firms for increased market access to China’s market with the added risks of intellectual property protection.  Leading up to the visit by Chinese President Xi Jinping to the United States last week, prominent high tech firms elected to seek favor and seek new deals with Chinese partners.

The U.S.-China summit managed to yield some significant deals. On Friday, both countries agreed not to direct or support cyber-attacks that steal corporate information for economic benefit. The countries further agreed to cooperate more closely on the investigation of cybercrimes along with the creation of a high-level working group to combat such attacks. However, beyond the agreement are the actions and will of enforcement. President Obama declared: “We (United States) will be watching carefully as to make an assessment as to whether progress has been made in this area.” President Xi declared that the proper approach was to strengthen cooperation to avoid confrontation and politicization of the issue.

Prior to his summit meeting with President Obama, President Xi Jinping hosted an Internet Industry Forum meeting of prominent corporate high tech executives at the Seattle campus of Microsoft. In its reporting, The Seattle Times features a photo of the prominent high tech CEO’s invited to attend. The optics are stark. The CEO of Alibaba, Amazon, Apple, Cisco, Facebook, IBM, Lenovo, among others are shown as participants. U.S. and China based alike. The Times notes: “Based on the attendance for what was essentially a photo-op in Redmond, that tech industry is betting that their future relies on China.”

In conjunction with the Seattle and Washington meetings, Cisco Systems announced a partnership with China based Inspur Group Co.  In June, Cisco indicated that it was prepared to invest more than $10 billion in China over the next several years. The irony of the current announcement was that Cisco was the key supplier to help build China’s internal Internet and was later accused of spying on Chinese citizens. Now its CEO declares: “There are certain geopolitical dynamics that we have to navigate.”

As we along with business media has noted, Chinese authorities have informed state-owned companies and agencies to buy more locally owned and produced high tech equipment and that has accelerated the strategic importance of domestic technology. Foreign based high tech companies now have to pick their partners in order to continue to expand revenues in China.

Surely not as a coincidence, India’s Prime Minister Narendra Modi visited Silicon Valley last week and made time to speak with prominent high tech and consumer electronics executives about investments in the country.

Market and technology access along with job-growth needs are all interwoven in moving parts with implications to global product innovation and value-chain strategies. There are no easy answers and thus are the risks, perils and strategy implications that continue to unwind within today’s globally based and far more competitive supply chains.



Report that Intel LTE Chips May Make a Presence on iPhones in 2016


This week, Venture Beat, citing knowledgeable sources, indicated that Intel’s new 7360 LTE wireless modem chip will likely be some part of the new Apple iPhones in 2016. The commentary goes on to indicate that Intel’s inclusion as an iPhone supplier: “is as much about “second-sourcing’ as it is about the quality of the 7360 chip.”  The report cautions that it remains unclear exactly which iPhone SKUs will contain the Intel sourced chip.

As Supply Chain Matters has previously echoed, Apple has active strategies addressing strategic and tactical supply risk and segmentation needs. This includes areas related to key components such as processor chips, displays, along with contract manufacturing needs. For the supply of modem chips for the iPhone, Qualcomm has far been the dominant supplier.

Intel arrived late to the mobile phone market and has since initiated earnest product development and other efforts directed at gaining traction. Venture Beat notes that Intel’s modem chip is highly regarded for being well-built, power efficient as well as fast. Further noted is that Intel acquired the former Infineon’s communications chip business in 2010 and since turned it into a seat of research and development for Intel’s next generation of LTE chips. Interesting enough and according to Venture Beat, Infineon once produced the 3G modem chips for iPhones at the Munich facility, but Apple quickly stopped sourcing the chips from Infineon after Intel bought the company.

Neither Intel nor Apple chose to comment to Venture Beat on their story.

We have often called attention to the risk, reward and peril aspects for being an Apple supplier. Even a high tech provider the size and stature of an Intel is not immune to procurement influence and supplier criteria factors that Apple can garner.

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