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Airbus and Boeing Report Q2-2017 and First-Half Operational Performance- Supply Chain Vulnerabilities More Visible

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Supply Chain Matters provides our ongoing periodic commentary regarding both Airbus and Boeing operating performance in their respective commercial aircraft units. With the first-half numbers now being shared, it’s becoming clear that supply chain vulnerabilities, especially for Airbus, are becoming more visible, potentially threatening financial performance objectives.  737 MAX Wing Prod 300x214 Airbus and Boeing Report Q2 2017 and First Half Operational Performance  Supply Chain Vulnerabilities More Visible

Airbus

Airbus delivered a total of 171 aircraft to customers in Q2, with the breakdown consisting of 132 single-aisle, 18 A330, 18 A350, and 3 A380 aircraft. At the mid-year point, Airbus has delivered 307 aircraft. In 2016, Airbus delivered a total of 688 aircraft, thus supply chain and production efforts will need to re-doubled in the second-half in order to meet or exceed last year’s delivery performance.

Many industry and investors eyes were focused on the new A320neo aircraft which has proven to be a huge seller for customer bookings but continues to experience production challenges related to the supply of Pratt & Whitney’s new PW1100G geared-turbo-fan aircraft engines. In an operational review conducted in February 2015, Airbus made supply-chain wide plans to target a production rate of 50 A320’s per month by early 2017 but operational performance to-date for the single-aisle family does not reflect that current performance.

Airbus delivered 59 of the brand new neo version during the first-half, amid a target goal to deliver 200 of the new more fuel-efficient aircraft this year. The new engine option (neo) features an airline choice of two available, new fuel efficient aircraft engines, either the Pratt & Whitney geared turbofan (GTF) engines or the CFM International alliance of General Electric and Safran LEAP engines. The Pratt engine was added to production in Q3-2016 while the CFM International engine is now being supplied to designated customer shipments.

Customers are still experiencing a number of in-service operational issues specifically with the new Pratt GTF engine which has caused Pratt to modify its production shipping schedules because of operational and production fixes. In the first-half operational report, Airbus executives have become more candid reflecting that the 200-year-end goal is becoming more challenging. Airbus recently indicated to Aviation Week: “While Prat & Whitney has delivered some fixes, these have not yet come through on a reliable basis under normal service conditions.” Because of the in-service operating issues, Pratt has been compelled to allocate some finished engines to act as spares for in-service engines needing premature, off-wing maintenance. Reports however indicate that airlines operating the new Pratt engine are pleased with the engine’s fuel savings.

On a positive note, Airbus has made demonstrated improvements in delivery performance of the newer wide-body A350, with 30 of the aircraft delivered in the first-half, compared with a mere 12 in the year ago first-half. A series of supply chain challenges related to seat, lavatory and cabin fixtures manufacturing surrounded 2016 production performance. Airbus indicated to investors that supply chain bottlenecks for the A350 are improving.

In the area of booked customer orders, Airbus reported 248 net orders, the majority of which (212) were in the single aisle category. That included 92 net new orders for the A320neo family aircraft.

Boeing

Boeing reported a total of 183 aircraft delivered to customers in Q2, consisting of 123 737 models, 33 787 models, 21 777 models, three 767 models and three 747 models. The Q2 2017 number was lower than 199 reported in the year-ago quarter, but Boeing executives communicated to investors late last year that overall production levels in 2017 would be reduced. Having delivered a total of 352 commercial aircraft in the first-half, Boeing still expects to deliver 765 aircraft in 2017.

Similar to Airbus, airline customers have shown keen interest in the newer, more fuel efficient single aisle aircraft, and in the case of Boeing, it is the 737 MAX model. In May, days before the first scheduled customer delivery, Boeing had to suspend ongoing flight testing after being notified by the engine supplier of an engine component manufacturing problem. Engine provider CFM International indicated a “quality concern” related to the low-pressure turbine (LPT) discs installed within the new CFM LEAP-1B engines. A collection of five LPT discs with attached blades sit at the rear of this new, more fuel-efficient engine.  CFM has generated a lot of effort to correct the problem but Q2 featured the shipment of just five of the new aircraft. According to various industry reports, Boeing expects the MAX variant to make-up 10-15 percent of the more than 500 737 model aircraft to be delivered in 2017. Obviously, more work and supply chain attention will be focused on 737 MAX production in the second-half.

Ongoing delivery reductions in the older 777 have been pre-planned over the next two years in order to prepare for the transition to the new 777X family of aircraft currently scheduled for deliveries staring in the 2019-2020 period. Boeing sales teams have been successful in selling out the remaining 777 production slots.

Boeing reported a total of 212 net new orders in Q2, 57 percent of which were in the 737 series single aisle models. The single aisle total included 115 of the 737 MAX model, representing over 50 percent of net new orders in the category.

Boeing Supply Chain Insourcing

Earlier this month, Boeing CFO Greg Smith indicated to an investor conference that: “Business as usual isn’t going to cut it” referring to ongoing efforts by Boeing to insource some production previously provided by suppliers. Smith indicated: “We see a lot of runway ahead of us and there are inefficiencies across the board.” Further re-iterated was the somewhat contentious message that insourcing and ongoing supplier cost reduction efforts are a “win-win” for all of Boeing’s supply chain ecosystem. That is obviously great for Boeing shareholders in terms of top-line revenue growth needs, perhaps not so for existing aerospace supply chain suppliers.

In late July, the company announced that it was creating a new avionics and electronics unit as a component of its insourcing strategy.  This new Boeing Avionics business unit will focus on areas such as navigation and flight controls for future commercial aircraft models. The move follows prior announcements by Boeing to garner added revenues in after-market services and repair parts by creating a more independent Services business unit.

Q2 Operational Snapshot

Despite thousands of backlogged customer orders extending for years, the two most prominent commercial aircraft manufacturers approach production output from different perspectives. Each struggle with the most dependent yet vulnerable weak link in the supply chain, that being breakthrough designed new aircraft engines promising highly improved fuel efficiencies but newer designed materials as yet unproven for large volume production. In the specific case of Boeing, increasing pressures on supplier cost reductions and ongoing decisions to perform more supply chain insourcing, all for the sake of increased Boeing shareholder returns, are adding new tensions and dynamics to the broader aerospace supply chain ecosystem.

Bob Ferrari

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


Maersk’s Q2 Financial Performance Provides Two Important Signposts

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A.P. Moeller Maersk reported its second quarter financial performance this week, and the results included two important signposts for industry supply chains. One relates to validation of the current rise in ocean container transport rates in the current shipping environment. The other is a stark reminder of the potential monetary risks related to cybersecurity.  Maersk Con Ship 300x201 Maersks Q2 Financial Performance Provides Two Important Signposts

The transportation conglomerate’s financial performance headline included an overall $269 million second-quarter loss, fueled primarily by the write down of the firm’s tanker and port operating assets. Revenues reportedly increased 8 percent to $9.6 billion.

The operating unit Maersk Line, the leading ocean container line, performed with $6.1 billion in revenues, an increase of 21 percent and contributed a reported $327 million in profit. Both East-West and North-South segments were reported as profitable in the quarter, with demand outgrowing available capacity for the third consecutive quarter.

CEO Soren Skou indicated to the Financial Times: “We have the strongest fundamentals for container shipping since the financial crisis.”  That translated to an average 22 percent rise in freight rates in Q2, a trend that Supply Chain Matters alerted readers to in both May and June commentaries. Once more, Skou forecasted added industry consolidation observing that smaller lines would not be able to compete with the larger players which are now grouped among three operating alliances to pool capacity and port calls. Mr. Skou went on to observe that while three years ago, there were 20 global shipping lines, now there are 11, and his prediction that in the future, there will be five or six.

The above quantitative data, ladies and gentlemen, is once again the reinforcing signposts of ongoing industry consolidation that favors carriers over shippers. Industry supply chains have likely begun to experience increased ocean freight costs. With the peak shipping period still underway, those cost increases will likely impact operating budgets through the end of this year and into next year. The current industry alliance networks are now the means to leverage rates.

 

Quantified Impacts of Cyberattack

On June 27th, many European and global companies, Including A.P. Moeller Maersk were impacted by a NotPetya malware, which penetrated existing systems via a Ukraine tax system software application.  The shipping conglomerate’s Q2 performance included initial estimates of the impact, although the bulk of monetary impacts will be reflected in Q3 results.

The cyberattack specifically impacted the container related businesses of Maersk Line, APM Terminals and Damco. Cascading system shutdowns paralyzed at least three shipping terminals resulting in the use of manual work-around procedures. Reports at the time indicated that customer calls to terminals were not answered and shipping clerks had little if any capabilities to book or trace container shipments.  Emphasized was that no data breach or data loss to a third party occurred and that full control of vessels was maintained throughout the impacted period.

CEO Skou indicated that it was two weeks before business volumes could be returned to normal levels. He estimated that Maersk Line lost the opportunity towards shipping 70,000 40-foot containers during the first two weeks of July as shipping customers were forced to use other carriers. As a result, he estimates that the attack will cost his firm in the range of $200 million and $300 million, with the hit expected to be in Q3 reporting. He praised customers and suppliers for their collaboration and support during the disruption indicating that many customers took the view that such an incident could have well impacted their business.

Maersk is now in the process of continuing to strengthen its IT security and harden defenses including the ability to isolate cyber-attacks and recover systems and applications faster.

Supply Chain Matters submits a takeaway that with so many industry supply chains and supporting IT organizations being called upon for additional cost cuts, added efficiencies, or zero-based budgeting approaches, organizations can often lose the broader perspective of exposing or adding vulnerabilities to a cyberattack as well as the capability to quickly respond and restore mission critical operations.  Upgrading aging operations support systems and applications security is contrasted to in this specific case, hundreds of millions of dollars in potential impacts to the business. There is also building evidence that hackers understand the specific process vulnerabilities of manufacturing focused supply chains and are specifically targeting such vulnerabilities for ransom.

Many CFO’s when educated to such tradeoffs, would opt towards increasing systems security and business continuity response needs. One would certainly hope that was the case, but these are extraordinary times in business.

We value additional reader thoughts and perspectives.

Bob Ferrari

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

 


Major Power Outage Impacted Taiwan This Week

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A significant power disruption impacted Taiwan this week, one that likely reverberated across multiple consumer electronics supply chains including that of Apple.

Our readers who reside in high-tech and consumer electronics supply chain networks can well attest to how critical Taiwan has become as a prime epicenter of multi-tier high tech component and finished goods manufacturing. Some of the largest semiconductor fabs as well as LCD screen and memory manufacturers have major manufacturing presence on the island. Past incidents of major earthquakes, typhoons and associated floods have conditioned high-tech supply chain teams to keep a keen eye and open communication links to Taiwan based suppliers.

On Tuesday, Taiwan households and businesses encountered what was described as a massive electrical power disruption affecting upwards of 7 million households and many businesses. The disruption occurred on a very hot day prompting additional discontent. Taiwan Power Co, indicated that the blackout was the country’s most severe since a 1999 earthquake that struck the country.

According to published reports from Reuters as well as Bloomberg, the outage occurred through a combination of what was described as “structural problems” and human error originating from the island’s biggest state-owned gas-fired power generating facility. The disruption extended close to a 24-hour period, from Tuesday to Wednesday afternoon. Reuters indicates the outage resulted in about $3 million worth of losses for 151 companies in industrial parks and export processing zones on the island.

The Bloomberg report indicates that the combination of hot weather and infrastructure damage from previous typhoons has left the island barely able to supply sufficient electricity to users. Efforts were further underway to phase-out the prior reliance on nuclear-powered electricity generating plants.

The incident itself prompted a public apology from Taiwan President Tsai Ing-wen with government officials pledging to investigate root causes of the incident. One government official called for the need for outside investigators.

Both reports indicate that the impact to the island’s semiconductor production lines was minimal. Taiwan’s Hsinchu Science Park is noted as the “heart” of the semiconductor industry. TSMC indicated no impact to output, while contract manufacturer Pegatron also indicating minimal disruption, which should have provided a huge sigh of relief to Apple’s sales and operations planning(S&OP) teams who are smack in the production ramp-up phase for three planned new models of iPhones expected to be announced next month.

High-tech and Consumer electronics product management and supply chain teams likely dodged a huge bullet this week, but cannot afford to rest easy. From current accounts, Taiwan’s electrical power generation reliability appears fragile at-best and additional hot weather or surge power demands could trip another incident.

For supply chain disruption risk, Taiwan has likely reached a keen point of supplier monitoring and observation for many weeks to come.

 


President Trump Disbands Two Business CEO Advisory Councils Including Manufacturing Council

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The latest political firestorm surrounding the Trump presidency involves the aftermath of the rioting and act of domestic terrorism that occurred in Charlottesville Virginia this weekend, pitting white supremacists against counter-protesters.

Trump’s responses to the incident, including yesterday’s press conference is described by multiple U.S. media outlets as “Trump Unhinged.” In-essence, blaming both sides for rioting and not presenting the moral outrage expected from the leader of the free world is seen as untenable.

The President indicated today that he has decided to disband both the President’s American Manufacturing Council and the President’s Strategy and Policy Forum.

Taking to Twitter, the president tweeted:

Rather than putting pressure on the businesspeople of the Manufacturing Council & Strategy & Policy Forum, I am ending both. Thank you all!

Eight members of the American Manufacturing Council had already walked away in the wake of Trump’s repeated avowal that violence in Charlottesville was perpetrated by both sides. This council was formed to advise the President of U.S. manufacturing policies regarding global competitiveness as well as expanding American jobs in manufacturing and associated supply chains. The Council was a direct conduit and sounding board to the Administration’s efforts to enhance U.S. manufacturing competitiveness and to expand jobs in manufacturing.

The first to resign was Merck CEO Kenneth Frazier. Frazier indicated in a tweet:

As CEO of Merck and as a matter of personal conscience, I feel a responsibility to take a stand against intolerance and extremism

Other CEOs of several major corporations, policy and organized labor added to the resignations. Subsequent CEO resignations included:

Alliance for American Manufacturing

AFL-CIO

Campbell

Intel

Johnson and Johnson

Under Armour

3M

Manufacturing Council members who elected to remain, each issued strong statements condemning hatred, racism, and bigotry. However, as of today, their continued role is moot. The listing of what was to be remaining Manufacturing Council members had included:

Dow Chemical

General Electric

International Paper

Newell Brands

Nucor

Whirlpool

The second advisory group disbanded, the Strategic and Policy Forum, was led by Blackstone CEO Stephen Schwarzman. It included some of the biggest players in finance and business and was formed to advise the President on key strategic issues to include corporate tax reform. Among manufacturing and retail companies were the leaders of Boeing, General Motors, PepsiCo, and Wal-Mart.

On business network CNBC this afternoon, a program host shared a direct CEO quote:

There is such a firestorm, you don’t know what’s coming next, what he’s (The President) going to say or do next.”

A noted and distinguished management professor from Princeton University indicated that conversations he had with CEO’s all reflected immediate consultations with respective Board members to ascertain whether Presidential ties or advisory efforts would be in the best interests of each of these companies.

At this point, policy regarding U.S. manufacturing expansion, corporate tax or global trade reform are solely the purview of the President, his Cabinet members, and key advisors.  The voice of counsel and the reality checks of business leaders are now removed at a time when important business and trade initiatives such as NAFTA re-negotiation and initiatives to add more investments in U.S. manufacturing, supply chain and transportation support infrastructure are all percolating.

We indeed are experiencing a period of political turmoil and high uncertainty.

Industry supply chain teams need to continue to deal with the near and long-term challenges presented in their business settings. To believe that the this week’s events are not related to any industry supply chain mission would be very shortsighted.

High uncertainty is the new normal and businesses and associated supply chains of all forms need to be ready to plan, anticipate and deal with the effects.

Bob Ferrari

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

 


Upcoming Accenture Academy trendTalk- Managing Supply Chains in a Volatile Geopolitical Era

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This posting serves as a sidebar to our previous Supply Chain Matters blog commentary; The Beginning of NAFTA Renegotiation Talks- Monitor and Be Prepared.

We wanted to advise members of Accenture Academy that Founder and Executive Editor Bob Ferrari will be delivering an upcoming trendTalk web seminar fittingly titled: Managing Supply Chain in a Volatile Geopolitical Era. This exclusive trendTalk is scheduled for September 20 at 10 am Eastern time.

Every day we observe headlines that provide updates on the current wave of anti-globalization and anti-trade sentiments that are sweeping the geopolitical landscape. With heightened global tensions now turning toward anti-trade and possibly more protectionist rhetoric among developed nations, industry supply chains must be prepared to deal with potential near- and long-term implications that such policies will bring about.  MSC Ship 2 300x199 Upcoming Accenture Academy trendTalk  Managing Supply Chains in a Volatile Geopolitical Era

This trendTalk examines the current anti-trade and anti-globalization forces impacting various nations and considers the uncertainties they generate. The potential impacts to industry supply chains and the new opportunities brought about in such an environment will be explored. We’ll look at important tools that can be utilized and the steps your business and its supply chain organization can take to be prepared or to take advantage of these impacts.

Accenture Academy members should be able to view and register for this upcoming webcast in the upcoming events section of the member portal.

 

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


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