In a previous Supply Chain Matters commentary in early July, we noted a rising tide of production sourcing investments in Mexico among global based automotive OEM’s. Automotive OEM’s BMW, Honda, Mazda,Volkswagen’s Audi Group, and a partnership among Nissan and Daimler had each announced Mexican production sourcing decisions that amounted to billions of dollars of investment. In our commentary, we pointed to significantly more attractive direct labor rates, tariff-free access to markets, foreign currency challenges and global logistics as all contributing to the attractiveness of Mexico as a prime product export center.
This week featured news of yet another global based automotive producer electing to source production in Mexico. South Korea based Kia Motors, an operating division of Hyundai Motor, announced its intention to also invest in a $1 billion automotive assembly plant in Mexico with capacity to produce upwards of 300,000 vehicles.
Obviously, such a trend implies that a global production strategy is at-play within these moves. Despite a large amount of excess production capacity across Europe, European automotive OEM’s elected to invest. We can now observe that Asia based OEM’s, are joining the sourcing tide for electing Mexico. Additionally, when a concentrated group of OEM’s make such significant investments in a particular geographic region, the supply chain supplier ecosystem follows, creating the basis of a self-contained value-chain ecosystem that further contributes to cost and supply chain efficiencies for the region.
As noted in July, with the current strategic sourcing attraction of Mexico, global automotive OEM’s gain even more flexibility in determining the most profitable supply chain sourcing and production paths to support global demand or offset currency fluctuations. Mexico itself has the opportunity to evolve as a major global hub of automotive exports beyond North America.
The obvious loser in this tide is expansion of U.S. based automotive production. While U.S. based OEM’s such as Ford and General Motors balance their production investments among the specific global region supporting a consumer market, they have not tended to position U.S. manufacturing capability as an export weapon. Global based OEM’s have attracted to the U.S. southern region where local governments and their political leaders have provided very attractive monetary incentives and promises of right-to-work laws that inhibit organized labor unions.
The current wave of announcements targeting Mexico is now a clear sign of a far broader wave of strategy unfolding, since such sourcing spans previous smaller, low-margin models and now includes a broader range of production sourcing that include mid-range and luxury models. Thus U.S. manufacturing resurgence concerning automotive production is tempered by the rising tide of Mexico which will become a far larger global production and export presence. Cudo’s to Mexico’s leaders in providing the incentives and infrastructure to fuel such attractiveness.
Do not misconstrue that in this commentary, our intent is to not advocate pro or con organized labor, or legislative incentives that lure automotive OEM’s to certain regions, but rather to point out how such considerations can and do motivate sourcing decisions.
There is obviously a lot of learning to be gained for U.S. and local state legislative leaders and perhaps that learning is too late when it comes to global automotive supply chain capability.
The adage: “where there is a will, there is way” is the headline for this week’s news coming from the leader of ocean container shipping. A combination of factors has led to an improved financial outlook for the industry leader in ocean container shipping.
This week, A.P. Moeller-Maersk, the parent of Maersk Line reported its Interim Report Q2-2014 reflecting current and expected financial results. That report indicates that Maersk Line made a profit of $547 million compared to $439 million a year earlier. These results were reportedly achieved by a 4.4 percent reduction in overall costs and a volume increase of 6.6 percent. At the half-year mark, average freight rate was reported as $2631 in the first six months compared with $2691 at the same point in 2013. Cash generated from operating activities in Q2 was $870 million.
The practice of slow steaming coupled with continued deliveries of larger, more fuel-efficient container vessels contributed to cost reductions. The average bunker fuel cost was noted as $580 at the half-way point, compared with $608 in 2013, a decrease of 4.6 percent. During Q2, Maersk Line took delivery of three new Triple E (54,000 TEU) container vessels. Idle capacity in Q2 was reported as the equivalent of 19,000 TEU (four vessels).
Some good news for the ocean container segment are indications from Maersk that the Asia to Europe traffic segment is showing some signs of positive uplift.
The parent group expects Maersk Line to earn “significantly” above 2013 results for the full fiscal year. There are also high expectations for the pending ten year 2M alliance with Mediterranean Shipping Company (MSC) which is expected to carry upwards of 35 percent of all goods moving from Asia to Europe. In reporting of parent results, the Wall Street Journal quotes Maersk CEO as indicating that he fully expects industry competitors to further seek inter-line capacity agreements similar to the 2M alliance. That remains consistent with our Supply Chain Matters 2014 prediction and we continue to believe that industry supply chain teams should anticipate continued consolidation activity for the industry in the coming months.
With Maersk’s Line’s latest results, the gap is starting to widen among the industry leader and other lower-tier industry players, and events should be even more dynamic in the coming months. Maersk Line’s Q2 report provides other interesting statistics on the state of overall capacity in the industry. It indicates that the global container fleet has grown 5 percent since Q2-2013 to a level of 17,794 million TEU’s. Scrapping’s were the equivalent of 49 vessels while 59 far larger newer vessels entered the global fleet. Competitiveness and profitability is now governed by the existence of more efficient vessels or increased shipping volumes.
Supply Chain Matters has featured previous commentaries reinforcing the critical dependence of product design and new product introduction (NPI) with supply chain network decision-making. We now have another real-world reminder of the challenge that many high tech and consumer products focused supply chains continually encounter in the constant dependency and alignment of NPI decisions with the external supply chain network.
Reuters, in an exclusive report, indicates that LCD suppliers for the pending Apple iPhone 6 product NPI launch have been scrambling to scale volume production, after a late product re-design disrupted supplier production plans. The Reuters report cites two supply chain sources as indicating that the backlight design of the LCD panel was supposed to feature a single layer instead of the standard two-layers of film. Apparently the new design was not bright enough to meet Apple’s product management expectations and was sent back to design to fit in the extra layer. That step is reported as “costing precious time and temporarily idling some screen assembly operations.”
While Reuters indicates that out is now back on track, suppliers Japan Display, LG Display and Sharp are working flat-out to make-up the lost time.
As noted in many prior reports, Apple is a task master in incorporating constant changes in product design up to the last minute. This culture stems from the passion of Steve Jobs and his relentless pursuit of product perfection. However, Apple’s value-chain ecosystem and production volume requirements are far larger in scope.
An engineering or product-driven culture can certainly be an important factor in delighting customers. However, when such design changes occur in a highly outsourced supplier network involved in the critical phase leading up to new product production ramp-up, information and assessment related to the implications of such product design changes is equally important. Apple has a unique culture, and the firm’s suppliers are well aware that the ability to scramble at the very last moment is an expected and required capability.
Dynamic tension among product design and supply chain teams is a normal occurrence. This latest takeaway for our community is that even one of the top-rated supply chains has its own challenges in synchronizing product design disruption in critical new product ramp-up phases. It is yet another reminder of the critical importance for taking a broader supply chain business network perspective in information integration, assessment and decision-making.
Tomorrow, this author will be joining a distinguished compliment of speakers at the 7th Annual Supply Chain Management Summit sponsored by Bryant University and Benneker Industries. This event is turning out to be one of few premiere New England regional conferences focused on current issues and learning in supply chain management. Last year’s event drew upwards of 250 attendees among many industry settings.
Since many of our readers are located across the globe, the purpose of this Supply Chain Matters commentary is to summarize the key messages and takeaways of my talk.
My presentation is titled: New Developments in Supply Chain Technology- What to Consider in Your Supply Chain Investment Plans. The key takeaway messages I’ll be delivering is that three converging mega-forces:
- Constantly shifting customer and business needs requiring sense and response, as well as more predictive business processes and decision-making capabilities.
- Supply chain process and IT technology convergence providing more cost affordable opportunities for integrating both physical as well as digital information and decision-making capabilities.
- Digitally enabled manufacturing enabled by the Internet of Things.
are aligning toward extraordinary opportunities for what has long been the Holy Grail of our community, namely, integrating information and decision making across physical and digital supply chain spectrums. The alignments of the above mega-forces are providing significant opportunities in management alignment and top management sponsorship which can be leveraged. New and emerging technologies, especially engineered systems, cloud computing, predictive and prescriptive analytics are becoming the technology catalysts. Besides touching upon the latest advances and significantly changed IT market dynamics surrounding supply chain technology, my primary goal in this talk will be to advise supply chain teams on the most important investments to focus upon in the coming months and years.
First and foremost, and without question, the most important initiative for any supply chain organization today is a concerted set of initiatives directed at Talent Management. The business benefits of advanced technology are marginal without people who have the necessary and required skills to be able to leverage and harness these technologies. Recruitment, retention and increased skill needs are constantly identified as the single biggest challenge across C-level, business, IT supply chain and manufacturing teams, and the challenge will continue as newer technologies make their presence among industry supply chains.
More than ever in the past, supply chain, procurement, customer fulfillment, product lifecycle management and service management teams must have active technology awareness and planning strategies. The umbrella and accountability of the supply chain now involves far broader dimensions of common information and related decision-making needs. The notion of the goal for pursuing Integrated Business Planning is not just IT vendor hype, but a necessary and required capability. An organization’s Sales and Operations Planning capability is thus the most critical to focus and improve upon. That stated, an important reminder for cross-functional and cross-business remains that final objective is not technology alone, but rather required business objectives and outcomes.
I’m also urging technology selection teams to broaden their context of their technology planning to include leveraging information and decision-making capabilities across an end-to-end, value-chain and B2B business network. With today’s pace of business change, supply chain planning or forecasting can no longer stand-alone as a capability, and must be augmented and synchronized with the sensing of actual events occurring across the supply chain network. The good news here is that the supply chain technology market has shifted its emphasis toward broader support capabilities in this area.
For those who plan on attending tomorrow’s Summit, I look forward to meeting and chatting with all of you regarding your organizational and personal objectives. For those unable to attend, be advised that next week we will post a PDF copy of the presentation in our Supply Chain Matters Research Center for complimentary reader downloading. Minimal registration information is all that is required.
As always, give as a call or contact us via email if you require further assistance or if this type of presentation can assist your organization or forum in setting its supply chain management objectives for the coming year. Our home page can be accessed at this web link.
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?