There are many ways to remediate a perceived supply risk management problem and Constellation Brands has just exercised its bold and approach.
The beer and spirits producer recently reported fiscal 2015 second-quarter results. While total revenues increased 10 percent, the company had to reverse approximately $37 million of net sales in the quarter as a result of a product recall at the height of the seasonal beer consumption period in August. This recall was prompted by the discovery that some glass beer bottles contained tiny bits of glass. In what the company describes as an abundance of caution regarding these glass bottles, two million case shipments of Corona Extra branded beer were recalled from wholesalers and retailers during several weeks in August. Perhaps some of our readers experienced the effects of this recall, not being able to drink their favorite beer brand. According to Constellation, there have been no reported injuries due to the defective bottles.
The supplier of the subject beer bottles was Anheuser-Busch In-Bev, specifically a bottle producing plant located at its Mexican based subsidiary. Beer drinkers may recall that the Corona brand was sold to Constellation in order for In-Bev to conform to regulatory restrictions for one of its product acquisitions.
To alleviate this type of problem in the future, Constellation additionally announced its intent to acquire from Anheuser-Bush InBev’s glass plant and associated warehouse facility that was associated with the prior recall. This bottle producing facility sits adjacent to the Corona brewery in Nava Mexico.. The company is investing the sum of $300 million in a vertical supply strategy to gain more control of quality conformance processes and to boost production. The deal further calls for a 50-50 joint venture ownership with Owens-Illinois to own and operate both the Mexican bottling facility and to source Owens-Illinois as a secondary glass bottle supplier.
According to the announcement, the glass plant currently has one operational glass furnace and plans are in-place to scale to four furnaces over the next four years at an additional cost of $300-$400 million, costs that are expected to be equally shared by Constellation and Owens-Illinois. When fully operational, the Nava Mexico bottle facility, operating under the leadership of Owens-Illinois is expected to supply more than 50 percent of the glass needs for Constellation’s U.S. beer business. Constellation also has a long-term bottle supply agreement with bottle supplier Vitro.
While we can all speculate that some of these plans were in the works leading up to the bottle recall, Constellation has indeed taken a bold step in assuring long-term bottle sourcing supply along with added assurance of quality conformance.
In a June 2014 Supply Chain Matters commentary, Automotive Component Supply Strategy Meets Sensitized Regulatory Environment, we called attention to a published Reuters report indicating that product recalls involving airbags supplied by Japan based Takata Corp. would expand and involve millions of affected motor vehicles and ensnarl many global brands.
That situation has become ever more visible in a multitude of cascading product recalls and urgent consumer advisories involving many auto brands from entry-level to upscale luxury.
Today, the National Highway Traffic Safety Administration (NHTSA) issued a high visibility consumer advisory, urging owners of over 4.7 million recalled vehicles to act immediately on recall notices and replace defective Takata airbags due to suspected defective air bag inflators. Brands involve BMW, General Motors, Honda, Mazda and Nissan and the vehicle models date back as far as 2000-2001. While this advisory notes specific urgency for certain U.S. states and regions featuring warm, humid climates that fact seems to be blurred by the blast of Monday news from general media. The other reality is that many vehicle owners may have ignored previous recall notices which could jeopardize the safety of occupants.
Aftermarket service and spare part networks are already stressed by a surge of product recalls issued from an abundance of caution to avoid punitive financial fines. This latest high profile consumer warning related to certain airbag deflator defects will add more stress to overly stressed networks that lack the tools to handle such volumes.
Automotive OEM’s have fostered component product innovation strategies among a key set of lower-tiered component system suppliers, and OEM’s leverage such innovation across multiple vehicle and brand platforms. These strategies were put in place to foster both faster product innovation cycles as well as to be able to leverage volume supply costs across multiple global platforms. The objective of leveraging lower component costs has never gone away, at least for certain OEM’s.
Earlier this month, The Wall Street Journal featured a report (paid subscription or free metered view) indicating that Honda, after a long supplier relationship, is re-evaluating that arrangement with Takada in light of a series of airbag inflator product defects. Reports indicate that defective air bags, some dating back to the early 2000’s, could send metal shrapnel flying upon air bag inflation, posing serious injury risk to drivers and/or passengers. According to reports, Takada utilizes a different propellant than other suppliers, one that is cheaper but more volatile. Rival air bag suppliers that could benefit from the current crisis include Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which is being acquired by German based ZF. The WSJ further reported that Toyota and Nissan are also concerned about Takata air bag systems in the light of the current circumstances. But, switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.
The WSJ report provides some in-depth perspective on how Takada has expanded its global just-in-time supplier footprint to accommodate individual OEM platform demand. The report alludes that the product quality problems may have stemmed from a period of rapid growth, testing communication and process discipline among far-flung regional plants. After two years of investigation, Honda and Takata joint quality teams discovered certain machine defects in a plant in Washington state and in process parameters in a Mexican plant. At times, poor record keeping hindered the ability to figure out which cars had defective inflators installed.
Whether Takada can recover from this ongoing and compounding product recall and branding crisis is certainly open to skepticism and speculation. However, Supply Chain Matters feels that automotive OEM’s face their-own realities related to product development and global product platform cycles. A global platform strategy supported by component supply agreements has to be balanced with supplier risk. Requiring suppliers to locate just-in-time production across far-flung global regions requires an assessment of rigid process control discipline and conformance. When such controls indicate cause for concern, two-way communication must be forthright and honest and procurement teams need to be proactive in assessing and communicating risk implications.
Today’s overly sensitized regulatory environment requires timely feedback and responsive risk mitigation.
The passenger safety, financial, and brand risks are far higher.
The Movement Toward Cheaper, Open Computing Compatible Servers Spells Opportunity for ODM and CMS Providers
Here is a Supply Chain Matters follow-up commentary that relates to the previous news on the pending split-up of Hewlett Packard along with our commentaries of several years ago, beginning in 2011/2012 commentaries and supplemented in a 2013 commentary) foretelling of original design manufacturing (ODM) and contract manufacturing systems (CMS) providers competing directly with their larger OEM customers.
A recently published Bloomberg article, Cheap Servers Are Bad News for HP and Dell, indicates that the contract manufacturers such as Quanta Computer that these OEM’s often depended upon are now producing generic, Open Compute Project compatible computer servers for hungry data center customers. These generic servers are reported to be one-third to two-thirds cheaper than the branded versions. According to the article, this has been a boon for server-hungry customers such as Amazon, Google and Facebook, but bad for established, branded hardware OEM’s. Further noted is that mega financial services firms such as Fidelity, have jumped-on the generic server bandwagon to reduce IT infrastructure costs.
What’s keeping branded OEM’s in the competitive game is their ability to provide extensive global customer service as well as global distribution scale. However, the current accelerating trend for matching generic server hardware customized to a specific software application compute resource need will only add to the momentum toward generic commodity servers.
In a Supply Chain Matters posted commentary in August, we called attention to continued railcar shortage concerns among U.S. Midwest grain farmers. Last winter, specialty rail car shortage problems stemmed from pileups among both the BNSF Railway and the Canadian Pacific Railway (CP) networks heavily burdened by surging crude oil transport demand and compounded by severe winter weather. 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 this year.
A published Bloomberg report in August reported that upwards of 10 to 15 percent of last year’s grain crop still remained 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 in August.
An expected high U.S. spring wheat crop began harvesting last month and must now be either stored or sent on bulk railcars to end-markets and export ports. Growers were concerned whether railroads would ever be able to catch-up with compounding backlogs.
There is now have another data point to consider. Last week, CP outlined a series of aggressive financial targets that included a doubling of earnings by 2018. One-third of the expected new revenues is expected to come from added crude-oil transport from both the Alberta and North Dakota Bakken region, While today, Bakken crude represents 60 percent of CP’s unit volume, plans call for shifting that percentage toward the Alberta region. According to industry reports, Alberta crude is less volatile in transport, and CP is obviously betting that Alberta crude will be in more demand for rail transport needs.
To accomplish these financial and operational objectives, CP has plans to increase crude shipments upwards of 60 percent in 2015 while expanding specialized crude terminals in the Alberta region.
From our lens, the above is not good news for U.S. and Canadian farmers.
Shifting an already overburdened CP rail network further north could well take more capacity away from U.S. Midwest use. If currently harvested grain and other crops become just as log-jammed as last year, the situation may get far uglier, especially considering that both U.S. and Canadian rail networks are now running under constricted speed requirements in transporting crude.
We would appreciate hearing the views of farmers and operators on the ground, dealing with the current bulk rail transportation challenges. Do you feel this planned network shift by CP will compound current logjams?
Either share your observations in the Comments area below this posting, or send us an email: info <at> supply-chain-matters <dot> com
Last week, commercial aerospace manufacturer Boeing announced an increase for its monthly production rate of 737 aircraft starting in 2018. The designated production rate will increase to 52 airplanes per month in order to sustain a production goal of 620 finished 737’s per year, the highest ever volume for this particular aircraft. This boost amounts to a near 24 percent increase from the current pace of producing 42 of the 737 aircraft per month. Boeing is providing an ample two year notice to its supply chain and ecosystem partners in ramping the 737 supply chain to sustain this level.
With a reported 4000 unfilled orders for both the named Next-Generation 737, and even more fuel-efficient 737 MAX models, Boeing has to crank-up the pace in order to satisfy customer operational and business timing needs. Once more, the global economic environment can change very quickly. We suppose our readers among other industries would relish a two-year window for planning.
Meanwhile, Boeing also announced its report of aircraft deliveries in Q3. Deliveries included 120 of the Next Generation 737 aircraft and 31 of the 787 Dreamliners, which reflect meeting current quarterly production goals. Year-to-date, Boeing has delivered 79 Dreamliners utilizing two final assembly sites with quite a ways to go in reducing the current backlog of that aircraft family.
In a sudden and startling announcement, GT Advanced Technologies Inc., a developing supplier for new, more durable sapphire glass applications for Apple’s product lineup, announced today that it had commenced a voluntary filing under Chapter 11 of the Bankruptcy Code as a best means to reorganize and protect that company and provide a path to future success. In the announcement, GT indicated that as of September 29, 2014, the company had approximately $85 million in cash, but there is no mention in the release of current outstanding liabilities.
In early August in its announcement for fiscal year second quarter results, the company indicated six month, year-to-date revenues of $80.5 million including $49.7 million attributed to sapphire equipment and materials. Non-GAPP operating expenses were reported as $76.3 million year-to-date and the supplier incurred a $139 million net loss from operations. GT reported ending its second quarter with $333 million of cash, cash equivalents and restricted cash, compared to a $509 million at the end of the company’s first quarter.
A statement from this supplier’s CEO states:
“GT has a strong and fundamentally sound underlying business. Today’s filing does not mean we are going out of business; rather, it provides us with the opportunity to continue to execute our business plan on a stronger footing, maintain operations of our diversified business, and improve our balance sheet.”
The company indicated that it expects to provide additional details with respect to the Chapter 11 filing as soon as they are available.
Readers may recall that in our previous commentaries related to Apple’s ongoing efforts in product innovation, that Apple provided a long-term strategic seed investment in GT, valued in excess of $500 million, to develop a stronger more durable alternative to the use of gorilla glass for displays in Apple’s forthcoming line-up of products. GT invested in a 1.4 million square foot production facility near Mesa Arizona to produce sapphire at high volumes at comparative cost. There was further speculation that GT was being positioned as the prime supplier of sapphire for the iPhone line-up and the now announced Apple wearable watch scheduled to ship early next year. The recent iPhone 6 new product announcements from Apple did not include sapphire glass as a feature, leading to speculation that GT could not initially ramp to Apple’s high volume production requirements for its newest model.
Suppliers with groundbreaking technology can often fall victim to a far larger and very influential customer with demanding requirements. What happened with GT Technologies will obviously unfold in the coming weeks including its current relationships with Apple.