In our prior Supply Chain Matters commentary concerning Sharp Corporation, we reiterated the two sides of supplier based relationships involving the most recognized supply chain, that being Apple. On the one hand, being chosen as an Apple supplier can provide enormous scale, global reach and financial rewards. However, Apple is a demanding customer with unique and exacting processes that can test any supplier.
Apple further practices very active supplier risk mitigation, insuring that this global consumer electronics provider has at least two or more supplier agreements in-place for key components.
In a May commentary, Supply Chain Matters highlighted a report indicating that one of the key technology components within the Apple Watch had experienced reliability issues. The taptic engine component, which controls the sensation of tapping the watch while transmitting heart-rate data, was sourced among two key suppliers. Citing people familiar with the matter, The Wall Street Journal reported at the time that reliability testing has discovered that the taptic engines supplied by a China based supplier demonstrated reliability problems, with Apple electing to scrap some completed watches. Engines produced by Japan based Nidec Corp., the backup supplier, reportedly had not experienced the same problem. Apple subsequently moved all remaining sourcing of this component to Nidec.
Today’s WSJ report regarding Sharp also makes mention of the Apple Watch component issue in the context of how manufacturers can discard faulty products when design issues or production snafus are evident. The report again noted how Apple subsequently turned to Nidec for nearly all of its taptic engine production needs, but it took time for this other supplier to ramp-up its own production processes to be able to accommodate Apple’s overall production volumes. Thus, for our readers who were wondering what was causing the delay in the delivery of their new Apple Watch, now you know.
The obvious takeaway is that active supply risk mitigation is essential for key technological components, as well as the ability to lend a helping hand to suppliers in time of product or business crisis. Such risk mitigation is especially critical in new product ramp-up stages as volume production processes are tested for volume scale.
There are two-sides to supplier loyalty and management, and how they are practiced goes a long way in the determination of overall supply chain agility and responsiveness.
In November of last year, the WSJ stated in a report related specifically to Apple’s supply chain: “If you cut a deal with Apple, you better know what you’re getting into.” That statement continues to sum it all.
Supply Chain Matters has featured several prior commentaries specifically related to Sharp Corporation, one of three current liquid crystal display (LCD) screen suppliers in Apple’s supply chain.
Sharp has a track record of innovation in LCD technology but a rather rocky financial history as well. Our last commentary in early April, Perils of an Apple Supplier- Sharp Corporation, highlighted continuing reports of severe financial crisis surrounding Sharp. The Wall Street Journal reported at the time that various restructuring options were being considered but no final decision had been made. One reported option was that this supplier was moving to spin-off a portion of its LCD panel business unit with intent to seek a new capital injection from Innovation Network Corp. of Japan, a governmental entity overseen by Japan’s Ministry of Economic Trade and Industry. One of the tenets of Japan’s high tech industry is to rely on government funded agencies to bridge times of financial crisis. Since our April commentary, Sharp’s bankers agreed to provide an additional $1 billion plus lifeline, the second in three years, in exchange for restructuring measures that included a 10 percent workforce reduction. Also since that time, the market prices for LCD panels remain in significant decline as other suppliers turn more to China based smartphone manufacturers for revenue needs. The WSJ cites data stemming from market research firm IHS indicating that 5 inch HD smartphone panel components prices have dropped nearly 60 percent from Q1 2013 through the current quarter.
Today, the WSJ featured a report (paid subscription required) indicating that Sharp has warned that its survival could be at-stake, and that it is now pushing suppliers for deeper price cuts and that it further considering sourcing of display components from new China based suppliers rather than its former Japan based suppliers. At its annual meeting for shareholders held this week, sales directly attributed to Apple accounted for 20 percent of Sharp’s fiscal year revenues.
For the fiscal year that ended in March, Sharp racked up a loss reported to be $1.8 billion, due to write-downs of its LCD operations. Yet, this supplier maintains a public confidence that it can implement steps to maintain its ongoing viability, despite its share price haven fallen upwards of half over the past year.
LCD screens are highly strategic for Apple, and the consumer electronics juggernaut has elected to initiate strategic supply agreement among three different suppliers to insure both leading-edge technologies as well as the ability to scale to Apple’s flexible volume requirements.
All of which leads back to the perils of being an Apple supplier. In a recent Spend Matters sponsored webinar (no relation to this blog), chief research officer Pierre Mitchell observed that Apple imposes very strict contract terms among its supplier base, shifting considerable risk on the backs of suppliers while preserving major rights to product based intellectual rights. So much so that GT Advanced Technologies recently elected to seek voluntary bankruptcy in order to gain leverage with Apple over what was described as onerous contract terms.
The conundrum for Sharp and other Japan based high tech component suppliers is that bankruptcy is culturally looked upon as a major failure and embarrassment of senior management. So much so that the most optimistic financial forecasts are stubbornly held to up to just prior to the formal reporting of the bad news. On the other hand, firms such as Apple that practice active supply risk mitigation for key components will often have contingency options to buffer the shortfalls or stumbles of any one key supplier.
The financial challenges involving Sharp will most likely linger and through its ongoing re-structuring efforts, this supplier could introduce even more risk into its ability to deliver to customer needs.
The takeaway for the broader high-tech supplier community is to insure you understand all the terms and risk implications of your supply and technology agreements.
Commercial aircraft industry eyeballs were focused on this week’s Paris Air Show, a biannual event with enormous significance to major aircraft manufacturers and their respective supply chain partners. Each event is a competition as to which manufacturer walks away with bragging rights to the most landed customer orders or most buzz regarding a new aircraft model. Beyond the headline buzz as to whether Airbus or Boeing landed the most orders, the global supply chain takeaway is an additional $100 billion plus in customer orders and another obvious extension of multi-year backlogs. The overall pressures on aerospace focused supply chain have clearly and unquestionably turned toward fulfillment execution.
Reports indicate that Airbus booked $57 billion for 421 new aircraft orders at list prices while Boeing landed $50 billion worth of orders representing 331 new aircraft. Combined, it represents nearly another 6 to 9 months of customer order backlog at current monthly production volumes.
Aircraft engine providers also shared in the order bonanza with consortium based CFM International reporting a combined $19 billion in orders related to its LEAP family of engines, and other models, while General Electric Aerospace reported orders valued at $5.4 billion for its new GE9X engine. Interesting enough, as a literal follow-up to our previous Supply Chain Matters commentary related to CFM International, the CEO of that engine supplier publically warned the two major OEM’s not to request additional production volume beyond aircraft currently scheduled for delivery through 2020, and that the consortium is currently stretched to capacity in fulfilling what has already been booked in orders. Likewise, the President of Rolls Royce’s aircraft engine business indicated that supplier was booked out to 2021 and the current industry message is about production and supply chain ramp-up.
On the topic of engines, Airbus had previously planned to feature its new A320neo aircraft at this week’s show but a component problem within the new model Pratt and Whitney engine grounded the aircraft.
A further industry implication is that more and more of added industry orders are originating from new and up and coming discount based carriers. Indonesia based Garuda was reported to be one of the most active buyers this week, placing orders for both Airbus and Boeing aircraft. Many are opting for termed “power by the hour” or included service management contracts where manufacturers guarantee a specified level of operational up-time and assume annualized aircraft maintenance costs. The longer the industry backlog continues, the less likely that OEM’s and engine suppliers can take advantage and leverage these incremental recurring revenue streams.
On the product design front, the reported buzz centered on a potential new Boeing model termed “Mom”, billed as a likely replacement of current discontinued Boeing 757 fleets. The aircraft does not exist and is more in the pitching stage, but talk of the new model was enough to reportedly generate a lot of interest and a lot of differing views. Postings by Business Insider and Bloomberg provided added color to Boeing’s potential new model. Industry participants are quoted as indicating that Boeing has no choice but to pitch such an aircraft because of current functional advantages offered by arch rival Airbus with its new A320neo aircraft. According to these postings, Boeing is indicating a “clean sheet” design. However, the current realities of the current highly capacity constrained industry are already adding to the discussion as to the time-to-market timetable for such a new model. Once more, the current operational 757 fleet is noted as more than two decades old and will need replacement rather soon. This author alone is rather frustrated in having to fly coast-to-coast across the United States in aging and dull United Airlines 757’s. It is akin to driving a station wagon with 200,000 miles on the odometer with seats and upholstery worn out. The notion of “Mom” will undoubtedly place enormous pressure on Boeing’s design engineering and program management teams at a crucial time when other new aircraft need to meet delivery and volume milestones.
Obviously, the industry question centers on whether both Airbus and Boeing have learned from past supply chain snafu’s with prior models and can effectively instill added agility, cadence and responsiveness to global-based supply chains. Supplier resiliency and contingency planning will be crucial as will supply chain risk mitigation. Advanced technology is already playing a crucial role in areas of additive manufacturing, RFID, IoT and more extensive end-to-end supply chain visibility. Both OEM’s, along with key suppliers, would be wise to increase their investments in more predictive planning and supply chain wide business and operational intelligence.
As Supply Chain Matters has noted often, an industry with engineering based culture having upwards of a current ten year order fulfillment backlog while enviable, has unprecedented challenges and requires more innovative approaches by all its players. The focus is now flawless and synchronized execution.
Supply Chain Matters calls special attention to readers who are involved in either commercial aerospace or engineer-to-order focused internal and supply chain environments. Today’s printed edition of The Wall Street Journal features a front-page article, Airbus-Boeing Speed Race Increasingly Takes Place on the Ground. (Paid subscription or metered view) By our lens, this article should be mandatory reading.
The article itself is well written and very insightful in pointing out how two rival commercial aerospace OEM’s are learning important lessons in consistent manufacturing and supply chain execution.
We cite two opening excerpts:
“After years of racing to develop and market new models, both have clear product lines for the next decade. Their order backlogs stretch as long.”
“Now, the world’s two biggest jet makers are squaring off on execution. Each aims to grab market share by building its planes faster and more efficiently than the other—a gambit both have struggled with in the past.”
Specific examples are provided on how Airbus and Boeing have addressed inter-organizational and supplier cooperation, more streamlined and focused processes, and a reoriented focus towards how aircraft will be built vs. what they would look like. It is a focus toward design for manufacturability as well as supply chain. In the specific example of the new Airbus A350 program, insights are brought forward in organizational design, workforce selection and manufacturing process design.
Included is a powerful quote from Boeing Chief Executive Jim McNerney:
“It is not just about building more airplanes but also building them more efficiently, with higher first-time quality, greater component reliability and improved employee safety.”
Well stated and an important reference for both internal and supplier based teams.
In this Supply Chain Matters posting, we provide some background to our prior commentary noting that Airbus is in the process of evaluating a further ramp-up of the production cadence of its A320 aircraft. The most significant suppliers involved in these ramp-up decisions are often aircraft engine suppliers, fuselage and airframe components suppliers as well as the myriad of avionics and electronic component suppliers. A recent commentary from General Electric’s GE Reports, provides added perspective on how the prime aircraft engine provider for the new A320 NEO model is preparing. It further reflects on the challenges for ramping-up newer materials sourcing and production process technologies, including deployment of 3D printing techniques.
The new next generation A320 NEO aircraft will be offered with twin LEAP jet engines supplied by CFM International, a 50/50 joint venture between GE Aviation and Safran (Snecma). To date, CFM has recorded a backlog of more than 2500 orders for the LEAP-1A model that powers the new A320 NEO. Other versions of the LEAP power plant will be available as engine options for the newly designed Boeing 737 MAX as well as the Comac C919. Thus, with a total combined backlog of 8900 orders related to the LEAP engine, CFM is indeed a strategic linchpin for commercial aerospace supply chain output planning. The first operational LEAP engine is scheduled to enter service sometime next year.
The GE commentary reports that the newly designed LEAP engine will include 19 3D-printed components to include fit-to-print fuel nozzles and static turbine shrouds produced from super strong ceramic composite materials. There are currently 30 prototype LEAP engines supporting all OEM three manufacturers, going through final assembly or testing phases among global based facilities. The report provides a rather fascinating photo of the flying GE Aircraft test aircraft as the engines are tested for operational performance.
As noted in our prior A320 focused commentary, Airbus has already announced plans to increase its monthly A320 production rate to 50 aircraft by early 2017, but is now actively evaluating an even larger 60 per month cadence. As the LEAP engine moves through its initial prototype assembly and testing phases this year, and operational service in 2016, CFM must gear-up its own production volumes to match both Airbus and Boeing production volumes, while incorporating new leading-edge processes such as custom 3D printing.
It’s a tall order which obviously palaces CFM International as being one of the most key commercial aerospace suppliers to observe in the coming months and years. If further provides perspectives on how challenging such commercial aircraft output volumes will become.
Boeing’s web site indicates that the commercial aerospace producer has begun the prototype build of its first 737 MAX jetliner, a key milestone in upgrading the product family. The web site features an informative video indicating how the wing is assembled as well as this photo of the loaded 737 MAX wing skin panels and stringers within the new panel assembly line that uses automation to drill holes and install fasteners in the upper and lower wing panels.
The 737 model lineup is Boeing’s most important volume airliner in generating cash flow and profits and has been in continuous production since 1966. The 737 MAX was designed to incorporate the latest technology which includes CFM International LEAP-1B engines, advanced technology winglets and other improvements. The new single-aisle airplane is marketed as delivering 20 percent lower fuel use than the first Next-Generation 737s and the lowest operating costs in its class. To date, the 737 MAX has attracted 2,720 orders from 57 customers worldwide.
The GM of the 737 MAX program indicates that the wing assembly for the first test aircraft began production on May 29, as planned several years ago. The prototype aircraft is scheduled to undergo final assembly in September with its initial test flight planned in early 2016.
The announced launch customer is Southwest Airlines, which anticipates delivery in the third quarter of 2017.