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The Saga of Supplier Takata Reaches a Sad Conclusion- What Has Been Learned?

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This week marks a sad milestone for an 80-year-old automobile components supplier with deep history.

Japan based Takata Corp., the company that has made unprecedented product recall headlines has filed for bankruptcy protection both in Japan and the United States. The move comes after the supplier faced reported claims and liabilities estimated to be in the billions of dollars owed to auto makers who were forced to shoulder the burden of unprecedented numbers of product recalls and associated costs.Airbag 300x168 The Saga of Supplier Takata Reaches a Sad Conclusion  What Has Been Learned?

Under the bankruptcy agreement, much of the supplier’s business interests will pass to rival Key Safety Systems for an estimated $1.6 billion. However, a reorganized Takata will have to assume liabilities not contracted in the bankruptcy sale, which includes continued production of replacement air bag inflators to complete outstanding repair parts requirements for many more months to come.

In January, a U.S. federal grand jury indicted three former Takata Corp. executives, overseeing air bag product management and engineering. charging them with conspiring to provide auto makers with misleading test reports on rupture-prone air bag inflators.  Takata separately pleaded guilty to criminal wire fraud and agreed to pay $1 billion to resolve a two-year long U.S. Justice Department probe of the supplier’s handling of rupture-prone air bags. Thus far, faulty air bag inflators from the supplier have been linked to 16 deaths and upwards of 180 injury reports globally.

According to estimates from The Wall Street Journal, there are currently 54 million defective air bags that still need replacement in the U.S. alone. These recalls affect roughly 16 percent of the 260 million vehicles still operating on U.S. roads, or roughly one in five vehicles. In some cases, replacement parts are required in lieu of other replacement parts. The supplier’s first and most trusted customer, Honda Motor, elected to drop the supplier in 2015, no longer willing to tolerate a supplier with such a track record of product design snafus and cover-ups.

As we opined in earlier Supply Chain Matters commentaries, replacement parts supply is expected to extend for several more years, making some vehicles even more susceptible to premature airbag inflation explosions that injure drivers and passengers. Auto makers thus remain dependent on a financially smaller and hobbled Takata to meet global demand of replacement inflators.

We noted in January that product and quality management incidents across the automotive industry have taken on more difficult dimensions that expose corporate cultures that favor cover-ups. In addition to Takata, there were the unprecedented numbers of Volkswagen diesel-powered vehicles that were secretly outfitted with emissions altering software. In a plea agreement, VW admitted that its supervisors and employees agreed to deceive regulators and customers regarding actual emissions. Estimates of VW’s ultimate liabilities range in the $15 -$20 billion range when the recall process completes itself over subsequent months. Fortunate for VW is that increased global vehicle sales and profits have helped to buffer the overall financial impact.

With each passing year, the scope and implications of product design and quality incidents have grown to unprecedented dimensions. Product and quality management professionals are placed in precarious roles to make problems go-way during intense pressures that business goals and performance bonuses are met. Doing the right thing for the ultimate customer seems to be a fading requirement. And now, corporations, executives and individuals are collectively being held criminally accountable for their specific actions.

The Learnings- If Any

If there is one of many takeaway learnings from these incidents is that in this digital age, product and process specifications and management actions are stored in digital files available for internal and external review. Transparency has new meaning along with resolve to do the right thing for customers and employees.

In many cases, employees often believe in doing the right things for customers, but sadly, management and business pressures overcome such zeal, and reward mechanisms value those who are creative in gaming the process. All of this, in the end, has a quantified cost, far exceeding the cost to have fixed a defect in the first place.

Bob Ferrari

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

 


The State of Logistics in 2016- Accelerating Into Uncertainty

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The Council of Supply Chain Management Professionals (CSCMP) with the collaboration of A.T. Kearney and Penske Logistics, published the 28th Annual State of Logistics Report©. As has been our annual custom, Supply Chain Matters provides our initial impressions and some takeaways relative to the report reporting on 2016 logistics industry activity.

The latest report headline reflects a U.S. and North America logistics industry “buffeted by crosswinds as the pace of change accelerates” as the authors term: “Accelerating into Uncertainty.” That contrasts with last year’s report theme- An Industry in Transition. Looking ahead, the report indicates that 2017 could be a pivotal year for the industry with the ongoing impacts of online altering industry economics, large-scale shifts in distribution flows and various other uncertainties pointing to “anything is possible.”   Container Term 300x200 The State of Logistics in 2016  Accelerating Into Uncertainty

That stated, the report indicates that U.S. logistics costs were somewhat down in 2016, to a value of 7.5 percent of GDP, compared to 7.8 percent reported for 2015. The was the first drop reported since 2009, but we should note that there has been a revision of how the data is compiled. The authors have included a redo of numbers previously reported from the last ten years with the revised calculation with the result being roughly a half-a-percentage point on average adjustment in the numbers.

In the important area of transportation costs, which represents the largest component of overall logistics cost calculation, that category fell by 0.7 percent in absolute. At the surface, that would be good news, with water, rail, full and LTL truckload costs all declining. Of course, it is important to keep in-mind the lower costs of diesel, LNG and other fuels that occurred last year, and continue at historically low rates.

One concerning aspect however was parcel transportation which was reported as a 10 percent increase in 2016, reflecting a five-year compounded annual growth rate of 6.4 percent, which far exceeds GDP growth. Parcel obviously relates to the ongoing explosive growth of online and Omni-channel commerce. Indications are very likely that this transportation area will continue to rise with the recent announcement from UPS on higher holiday parcel surge rates.

Another obviously important area is the category of inventory carrying costs, which were reported as declining by an overall 3.2 percent in 2016. Two important cost components are the financial costs (weighted average cost of capital multiplied by total business inventories) and overall warehouse and storage costs. Both categories are subject to increases this year, possibly significant.

As we noted last year, the average cost of capital has been influenced by the unprecedented low average cost of capital and consequent interest rates these past few years. With the U.S. Federal Reserve now gradually hiking interest rates, the financial costs of inventory are likely to rise. The second, and by our lens, far more concerning component is the cost of warehouse and storage space.  With the certain reality of increasingly retail sales stemming from online commerce, a structural cost burden shifts from the cost of operating physical stores, to an era that requires ever more expensive pick, pack, and parcel transportation costs. A recent CNBC Business Network report reflects the reality that the U.S. has too many shopping malls and not near enough warehouse space.  The investment firm Jeffries reports that Amazon’s needs for warehouse space has been growing at a 35 percent CAGR rate, and that is just one online retailer. Accordingly, Jeffries opines that if Internet retailers were to double their online sales, it would create the need for 600 million square feet of incremental warehouse space needs. With warehouse leasing or outfitting rates already reflecting double-digit cost growth increases, it is likely that the U.S. will experience certain increases in warehouse costs. We can well envision vacant shopping malls being converted to online distribution and fulfillment centers. Factor Amazon’s announced acquisition of Whole Foods, and the likelihood of physical grocery stores having annexed online customer fulfillment to assure one-hour or same-day delivery is very real.

A third area to comment on is the category of Other Costs (Carrier support and other administrative), which was reported down by 2 percent. Here again, there is the question of whether transportation providers and logistics services providers are investing adequately in new technologies to support industry supply chain needs for increased supply chain wide visibility and digitization of customer support processes. Last week, the Business Performance Innovation Network, a peer-driven thought leadership and professional networking organization, released a study indicating that the global maritime shipping industry still needs better data sharing, and that most respondents cite improved supply chain visibility as a requirement.  This report indicates that:

industry resistance to change, coupled with the industry’s aging and inflexible IT systems, are key impediments to improving visibility and collaboration. Some 54 percent of respondents said the industry being “slow to change” was one the biggest roadblocks to improving collaboration, while 49 percent cited the cost and complexity of legacy systems.”

We view the above as an indication that while the logistics industry has performed in keeping a lid on support costs, customers and shippers are growing restless in the reluctance to change and invest among various stakeholders. This has implications for pending change.

The report authors point to four potential scenarios for logistics in the coming years;

Plain sailing”

“Choppy waters”

“Stemming the tide”

“Industry doldrums

By our lens, the latter three are all pertinent. Business-as-usual or plain sailing, from a customer and industry disruption perspective, does not appear to be a reality given the faster-pace of continuing multi-industry changes.

Once again, Supply Chain Matters applauds CSCMP and A.T. Kearney for their increasing efforts in making the Annual State of Logistics Report more meaningful in presenting a balance for both logistics industry and customer perspectives related to U.S. logistics.

Our takeaway for readers is once again, is similar.  A current high level of economic uncertainties coupled with ongoing logistics industry challenges imply that last year’s optimistic viewpoints may not necessarily apply to a rapidly changing global and U.S. logistics landscape.

Bob Ferrari

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


More Definitive News on Pending Foxconn Investment in the United States

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In late January, we alerted our Supply Chain Matters blog readers of a published report from The Wall Street Journal indicating that global contract manufacturer Foxconn, (Hon Hai Precision Corp.) new parent of Sharp Corp. was evaluating a $7 billion in new LCD manufacturing facility in the United States. Our takeaway from this report was that if this investment did indeed occur, it would represent a significant milestone for the high-tech and consumer electronics supply chains. We believed that the plant investment would further have a linkage to Apple’s production needs.  Foxconn 300x201 More Definitive News on Pending Foxconn Investment in the United States

Since that time, there have been various reports indicating on and off again negotiations with individual U.S. states. Last week, the Associated Press, citing an informed source, indicated that Foxconn’s proposed U.S. factory might have a Wisconsin address and that active negotiations with state officials was occurring. The report indicated that the state of Michigan was also a possibility.

Today, the investment advisory site Seeking Alpha, Reuters and other news outlets are now indicating that a final decision is expected in July.

According to Seeking Alpha, the total investment is $10 billion across the United States, beginning with a $7 billion LCD factory. The July decision will likely determine whether Wisconsin or Michigan are the likely site for the factory.

Foxconn CEO Terry Gou has indicated that five other states are under consideration for Foxconn investments including Ohio, Pennsylvania, Illinois, Indiana, and Texas.

Reuters reports that Gau indicated to shareholders:

This time we go to America, it’s not just to build a factory, but to move our entire supply chain there.

Prior reports were indicating that Gau was playing hardball in his ongoing negotiations with individual states, in-essence threatening to continue the process until favorable terms to Foxconn were evident. In the latest Reuters report, Cau is now quoted as indicating he has been favorably impressed, beyond imagination, with the sincerity and confidence by individual state governors to attract investment.

If readers are noting a subtle political tone to these events, you are not alone. Many of the states noted under consideration, including the two finalists voted favorably for President Trump is the last election. The final announcement, when made, will resonate well with “Make America Great Again” voters.

Politics aside, make no mistake that this is a very big deal for high-tech and consumer electronics supply chains, specifically Apple’s supply chain, along with that of U.S. Based automotive brand owners that increasingly feature more high-tech electronics, autonomous driving features and visual displays in future automobile models.

A very big deal indeed.

 

Bob Ferrari

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


Ocean Container Transportation Trends Remain Dynamic

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Data emanating from the global ocean container transportation area again indicates important trend shifts that industry supply chain teams need to continue to monitor.

In our last transportation industry update published in mid-May, Supply Chain Matters observed that ocean container carriers now operating in a changed network model, one that is more closely controlled by carriers. The market forces of supply and demand are now subject to changed routings, nuances, and carrier network forces.  Maersk Con Ship 300x201 Ocean Container Transportation Trends Remain Dynamic

Since our last update, the revised three major ocean container carrier networks went into operational effect beginning in April, and service routings have now permeated across major global trade routes. Industry and business media have been homing in on both global volumes and specific U.S. West Coast and East Coast port data for May that is reflecting the impacts of the new carrier networks.

Data we have observed would indicate the overall container shipping volumes are up from a global basis. The benchmark Port of Singapore operating data reflects a 5 percent rise in first quarter container volumes, from the year earlier period. The demand for container transportation capacity has reportedly cut the percentage of idle ships to 3.5 percent in the first quarter, compared with double that amount in the fourth quarter of last year.

The Wall Street Journal and transportation industry media observe that the Ports of Los Angeles and Long Beach, which traditionally manage the largest volumes of container traffic, experienced a pullback in overall inbound container traffic in May. While the ports experienced volume increases of 26 percent in March and 12 percent surge in April, May was reported as a mere 2.5 percent increase.  In contrast, the two largest port operators on the East Coast reported import volume growth of 8.8 percent and 13.5 percent each in May.

The WSJ observes that the three consolidated networks are dispatching larger container vessels to the three major U.S. West Coast ports with fewer port calls. Cited is Drewry data indicating that megaship coverage on the Asia to U.S. West Coast routing has doubled since the beginning of the year. At the same time, the networks have scheduled similar larger vessels on the Asia to U.S. East Coast routing, via the Panama Canal, hence the building east coast volumes. Some of this shifting routing is obviously shipper motivated while some has to do with the new strategies being deployed by shipping lines.

The implication for industry supply chain teams is the existence of fewer sailings than prior scheduling, which implies less flexibility for shippers along with added exposure to inventory-in-transit. The larger megaships require added unloading and loading turnaround times, especially for ports that are not prepared for the larger megaships and their added logistics implications. That is going to present added challenges for time-sensitive transit of goods such as agricultural and food related products.

It is our Ferrari Research Group belief that the new network routing strategies are an effort by ocean carriers to capture more of the transportation cost dollars from shippers, avoiding the need for a U.S. surface trans-shipment. It further supports the strategic goal among carriers to expand into added third-party logistics services through broader control of container movements. Further, the industry as a whole is shifting away from shipping line and service differentiation towards network-centric scheduling and global leverage.

As we also noted in our prior commentary, freight rates continue to climb for shippers over previous very low rates dating back to 2015. One rate benchmark for May cited by the WSJ reflects a $1390 average TEU rate for Asia to the U.S. West Coast, and a $965 Asia to Europe rate for respective segments. This is despite a continued capacity imbalance where new megaships continue to enter service chasing single-digit capacity growth. The existing scrap rate for older, less efficient vessels lags the reality of global market demand.

With the scheduling under three global alliance networks now pooling capacity for over 90 percent of major global trade routes, influences for rate hikes have shifted toward a seller’s market.  That defies supply and demand logic, but then again, we are describing an industry that seems to defy logic. Most carriers are forecasting a return to profitability in the current year which implies the threat of continued rate hikes.

The takeaway for industry supply chain, logistics and transportation procurement teams remains one of diligence and constant market monitoring.  Business-as-usual assumptions related to ocean transport no longer hold credence with these dynamics occurring. If management of ocean transportation has been outsourced, make sure that your services provider is communicating an adequate stream of market strategy updates as well as plans to address such factors.

Insure that senior management as well as line-of-business teams understand that ocean container transportation trends are quickly changing with many market forces pulling in different directions. Added transportation cost savings, particularly in the upcoming and often far busier second-half of the year may not be a wise assumption. Service levels, flexibility and added inventory exposure are potential risk areas.

 

Bob Ferrari

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

 


Can Automotive Industry Supply Chain Strategy Undergo Disruption- Perhaps Yes?

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To state the obvious, this has been a week of significant industry developments mostly all pointing to implications for industry supply chain structural change. Having just published our initial commentary on the thunderbolt developments in traditional grocery retailing, we now add more evidence of building disruption, in this case, for automotive supply chains.

Tim Cook has finally publicly acknowledged that Apple has a formal development effort underway focused on Autonomous Driving Systems. In a published interview on Bloomberg Television, Cook indicated: “It’s a core technology that we view as very important.He likened the effort to “the mother of all AI projects,” saying it’s “probably one of the most difficult AI projects to work on.” Tesla Mod3 Sized 450 Can Automotive Industry Supply Chain Strategy Undergo Disruption  Perhaps Yes?

As Supply Chain Matters and other business focused social media outlets have all previously noted months ago, Apple’s efforts in either autonomous driving or electric vehicle manufacturing, under the umbrella of Project Titan, were an open secret. While the effort itself has had its share of fits, starts and scope changes, Cook’s public acknowledgement is an obvious indication of a purposeful and meaningful business initiative that could soon lead to further announcements. With all things related to Apple, timing of announcements is always a prelude to an evolving marketing or pre-planned corporate communications plan to boost brand and investor interest.

In its summary of the interview, Bloomberg notes that Apple has had upwards of a half-dozen vehicles testing autonomous technology on public roads in and around the San Francisco Bay area for at least a year, citing a source familiar with Project Titan. Of course, Apple itself declined to comment on how long the company has been conducting road tests.

Always having a focus on industry supply chain implications, this Editor searched for other opinion and commentary, and found just that.  In fact, we found an opinion commentary that provides powerful arguments for a pending disruption of automotive industry supply chain, and in notions of automotive and electronics contract manufacturing.

An opinion commentary penned by EnerTuition, and hosted on the Seeking Alpha financial investor platform addressed the question: Can Apple Disrupt Automotive Manufacturing?  Without fringing on content rights, the arguments presented for the affirmative are by our view, powerful and dead-on.

The content makes a strong case that there is little doubt that Apple will enter autonomous car manufacturing, with the primary reason being that Apple never considers itself as just an IP or software components company. There is always the full branding strategy of products and related services.

Further challenged is the conventional industry thinking that “the auto industry cannot be disrupted” because of the capital-intensive nature of this industry. While the statement has meaning for traditional automotive manufacturing that is hardware, metal and sheet metal intensive, the counter argument presented is that autonomous electric vehicles provide a far different product value supply chain profile. That includes batteries as the highest cost-of-goods sold (CAGS) component, followed by vehicle sensors and software systems. The assumption presented, although somewhat future focused by our view, is that there will be no need for human factors such as steering wheel placements and instruments, which opens consideration for a singular global product design and manufacturing process.

The most interesting and profound opportunity for disruption is within the core area of manufacturing.

The argument made is that with most of the value-added of electric powered cars consisting of electronics vs. sheet-metal, and with the change coming so rapidly, manufacturers or industry disruptors will have little choice but to adopt a contract manufacturing strategy. With such a strategy, EnerTuition argues that the supply chain dominants will become emerging automotive component sub-systems and electronics providers, augmented with existing high-tech electronics contract manufacturers. Names such as Foxconn, Flextronics and Jabil are argued to grow more share of contract automotive manufacturing.

The above, ladies and gents, is a rather strong argument to support how Apple can indeed move directly into automotive manufacturing, because of its intimate knowledge and proven capabilities to understand the tenets of supply chain strategy and utilization of contract manufacturing. And, if you tend to dismiss any parts of the above arguments, consider that Apple, with its obscene cash balance, could acquire an electric automobile manufacturer itself. Guess which one- it starts with a “T”.

The reason we are highlighting this Seeking Alpha commentary for our readers is because this Editor and independent supply chain management industry analyst has been observing new and emerging positioning and capability among contract manufacturers and the industry that points toward such technology-driven changes.  Recall that just recently, Ford Motor elected to undergo a CEO change because of the stated need to move faster in technology innovation and in development efforts in autonomous vehicles.

There is ample evidence that disruption is indeed on the horizon soon, and traditional auto manufacturers and their key suppliers may be the deer in headlights if they do not move fast enough with an integrated product development and supply chain support strategy

Bob Ferrari

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


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