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Apple is Once Again Practicing Supply Chain Segmentation and Risk Mitigation

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Supply Chain Matters has in the past provided our readers examples of supply chain segmentation and/or diversification strategies that are directed at providing enhanced customer fulfillment as well as the ability to support expected business outcomes. High tech and consumer manufacturers were the first to demonstrate such capabilities but other industry supply chains continue to adopt such practices.

One of the top-ranked supply chains, that being Apple, has an active and changing supply chain segmentation strategy directed at both customer fulfillment as well as mitigation of supply chain risk.  In 2012 and again in 2013, Supply Chain Matters called attention to reports of Apple augmenting its prime contract manufacturing supplier Foxconn with augmented contract manufacturers. As we have noted in many prior commentaries, the sheer output volume that Apple can command from suppliers can be both a blessing as well as a risk. Any stumble can be a cause for concern.

During 2012 and 2013, a response to the pending lower cost product offerings in both the iPhone as well as iPad product lineup prompted both diversification and segmentation efforts. With the addition of Pegatron and other contract manufacturer’s supplier, Apple had the ability to leverage a lower-cost manufacturing capability as well as mitigate dependency on any single supplier.

Now there is new news leaking from Apple’s supply chain universe.  Taiwan based Digitimes, citing sources, reported last week that Apple was expected to adjust its lower-tier supplier Q3 order volumes for both the iPhone 6 and the newly released Apple Watch to minimize the risk of too much volume dependency on any one single supplier, as well as to meet or maintain targeted gross-margin goals. Noted was that Apple had invited both Compal Electronics and Wistron, noted contract manufacturers in laptops and other consumer electronics, to join its supply chain as augmented suppliers. The report further indicates that Apple’s two major PCB partners, Zhen Ding Tech and Flexium would have their order rates adjusted while suppliers Largan Precision and Advanced Semiconductor Engineering, which reportedly have advantages in advanced technology, will benefit from increased orders. Earlier this week, the publication further cited a TechNews report indicating that AU Optronics will soon sign an agreement to supply LTPS In-cell screen panels for future models of the iPhone expected in 2016.

Since the Digitimes report, other Apple community blogs have amplified the report.  The Cult of Mac blog opined that the obvious reason for augmentation is that Apple does not run the risk of leaning too heavily on one supplier, as occurred with the bankruptcy of sapphire producer GT Advanced Technologies.

Regarding the newly launched Apple Watch, a recent posting appearing on Apple Insider cites KGI analyst and highly followed Apple observer Ming-Chi Kuo as indicating that existing production bottlenecks related to the watch’s haptic vibrator and advanced OLED display screen are restricting initial product rollout fulfillment. Kuo predicts that given current supply chain bottlenecks, output should reach 2.3 million units by the end of May with total shipment volumes expected to be between 15-20 million units in 2015. That is reportedly below current Wall Street expectations. Also disclosed is that LG Display is the Watch’s sole display supplier, an indication of Apple’s pattern for depending on a single supplier for market innovating technology, diversifying later when the technology reaches mature production volumes.

Fulfilling customer expectations, assuring customer retention and meeting expected financial outcomes is challenge shared by many industry supply chains.  In the specific case of Apple’s supply chain strategies, balancing supplier risk coupled with segmentation are exercised to manage both new product introduction and volume production phases.

Bob Ferrari

© 2015 The Ferrari Consulting Group and the Supply Chain Matters© blog. All rights reserved.

 


Supply Chain Matters Earth Day Commentary- 2015

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Today is Earth Day, the celebration of preserving our planet and its resources.

Any blog with a focus on the broad umbrella of manufacturing, supply chain and product management is compelled to acknowledge that supply chains and their actions have a lot to contribute to preserving our planet, its resources and its air. The good news, we feel, is that a lot has been accomplished in sustainability and green supply chain initiatives across multiple industry sectors. However, much more work remains, particularly in low-cost manufacturing regions such as Bangladesh, China, Cambodia, Vietnam and other countries.

Led by many multi-national manufacturers, sustainability efforts directed at reduced use of water, natural resources and packaging have both added creditability to brands as well as saved money for businesses. Likewise, food producers have invested in more organic and ethical supply chains. Producers such as Procter & Gamble, Nestle and Unilever and others are recognized for their wide reaching efforts for incorporating sustainability in business strategy. Consumers have in-turn, continued to actively support brands that demonstrate a commitment to sustainability and preserving our planet. Indeed consumers are the most important stakeholders in influencing the way in which corporations manage and respond to societal expectations. Our commentaries and observations of today’s consumer product goods industry reflect how consumer expectations are radically changing former processed foods business practices. Likewise, suppliers have an ever more important contribution to make in these efforts.

However, supply chains that have high consumption of water, chemicals, and resource intensive energy have far more work to do. Today they predominately reside in low-cost manufacturing regions where governments and businesses sometimes look the other way when it comes to active commitments to curb abuses to the environment. Recent reports indicate that China senior leaders are getting more serious about pollution and environmental abuses, which is long overdue.  We have read reports of gross pollution and waste in countries such as Bangladesh.  While multinationals such as Apple, Cisco, Hewlett Packard, H&M and others are actively establishing, monitoring and enforcing sustainability goals across their extended supply chains, too many others have turned a blind eye, perhaps far more concerned with lower costs. Supply Chain Matters recently highlighted National Resource Defense Council’s ongoing efforts in the greening of China’s textile and apparel producers, helping suppliers to cost justify more sustainable practices.

There is a lot more to do, and supply chain leaders and teams need to be actively supporting additional green and sustainability efforts. The good news is that our up and coming millennials, the leaders of tomorrow, are very tuned into sustainability of the earth’s resources as well as innovative ideas to make a difference.

These efforts are good for business as well as the environment.

We congratulate all that are demonstrating commitment and we urge others in our community to add their continued influence.

Bob Ferrari


First 3D Printed Commercial Jet Engine Part Certified for Operational Use

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This week featured a significant announcement from General Electric, namely that the U.S. Federal Aviation Administration (FAA) certified a 3D-printed manufactured part to operate within certain GE commercial jet engines.

A blog commentary featured on the GE Reports site indicates that a fist-sized piece of silver metal that houses the compressor inlet temperature sensor inside a jet engine, known as T25, is becoming a symbol of one of the biggest changes sweeping jet engine design. GE Aviation is currently working with Boeing to retrofit more than 400 GE90-94B jet engines with the 3D printed part. This family of engines power Boeing’s 777 commercial aircraft. High resolution photos of these parts are featured in the commentary.

The report further indicates that GE Aircraft has already initiated flight tests for the next-generation LEAP jet engine, produced in a 50-50 consortium with CFM   GE-CFM CFM56 LEAP engineInternational, which will include 19 3D-printed fuel nozzles. The LEAP engine will power Airbus’s newly designed A320neo and Boeing’s 737MAX aircraft models.

The planned GE9X engine will further be developed with 3D-printed fuel nozzles and other parts.

GE was one of the early adopter manufacturer’s that has embraced additive manufacturing methods for nearly a decade. According to GE, additive manufacturing allows design engineers to replace complex assemblies with single parts that are lighter. The use of 3D-printing methods accelerates design development and new product introduction times. Once more, GE is printing parts from materials such a cobalt-chrome alloy. In the case of the GE90 printed nozzle housing, the process from final design to FAA certification and service introduction spans what is described as six months.

In digesting this report, Supply Chain Matters further envisioned that the introduction of such 3D-printed aircraft engine components can significantly benefit both ongoing production as well as operational service parts needs. Instead of stocking global-wide manufacturing or service parts depot inventories, replenishment orders can trigger the printing of an additional part, with considerable inventory cost savings. In some cases, we would envision the part being printed directly at a regional repair and maintenance depot.

Next-generation additive manufacturing methods are indeed beginning to make a presence and the benefits described by global manufacturers such as GE, are indeed described as breakthrough technology.

Bob Ferrari

 


Airbus and Boeing Shipment and Orders Performance for the First Quarter

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Across commercial aerospace supply chains the quarterly shipment and order booking results for both Airbus and Boeing are of high interest. That is because they are a reflection on inbound customer demand and customer preferences, as well as the current supply chain volume output cadence for those suppliers supporting each of these global OEM’s. Among the aircraft OEM’s themselves comes certain bragging rights as to whom has the industry lead. Thus, Supply Chain Matters has been featuring summary commentary information related to quarterly operational performance.

 

Shipments

In the quarter ending in March, Airbus delivered a total of 134 aircraft, the majority of which were in the single aisle, A319, A320 model category. There were 4 deliveries of the jumbo A380 and the quarter included the first delivery of the brand new Airbus A350XB-900 XWB model.

Boeing reported the delivery of a total of 184 aircraft, the majority of which were in the single aisle, 737 family category. In addition to delivering 121 737 models, the quarter included delivery of 30 787 Dreamliners.  The former is a reflection that the average production rate of 10 787’s per month continues.

Airbus and Boeing both declared that they each exceeded operational shipment targets for 2014. Airbus reported shipping a total of 629 aircraft deliveries last year while Boeing reported shipping 723 aircraft.  Reflecting on the Q1 shipment numbers, it appears that Airbus needs to pick-up its pace in order to match or exceed 2014 volume.

New Orders

In the March ending quarter, Airbus reported net orders booked for 101 aircraft. The new engine option (neo) versions of the A320 and A321 accounted for 73 of the net total while the A330 family accounted for 25 orders. Of interest, 82 of Airbus’s new orders were booked in March. As of the end of March,

Airbus reported a total customer order backlog of 6353 aircraft, the majority of which (6231) were for new single aisle aircraft. Factoring Airbus’s 2014 actual shipment volume, the order backlog represents in in excess of 10 years of customer orders.

Boeing reported a net orders total of 110 aircraft which included 66 737’s and 34 787’s, among other models. The majority of orders came from what was described as unidentified customers.  Thus bragging rights for orders in Q1 leans toward Boeing.

Boeing additionally reported a total customer order backlog of 5715 aircraft, the majority of which (4244) were for new single aisle 737 models. Current 787 backlog was reported as 847 aircraft.  Factoring Boeing’s 2014 shipment volume, the total order backlog represents nearly 8 years of customer orders.

Bob Ferrari


Perils of an Apple Supplier- Sharp Corporation

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In our prior Supply Chain Matters commentary we touched upon the huge benefits for being a supplier of a strategic component for Apple’s products. In prior commentaries, we have also highlighted the drawbacks.  Such drawbacks include not being on the leading edge of technology or not flexible or agile enough to meet Apple’s constantly changing product development and time-to-market requirements.

One such supplier has been Sharp Corporation, one of three current LCD screen suppliers for Apple. LCD screens are highly strategic for Apple, and consumer electronics giant has elected to initiate strategic supply agreement among all three to insure both leading-edge technologies, the ability to scale to Apple’s flexible volume requirements and as a mitigation of supply risk.

Sharp has a track record of innovation in LCD technology but a rather rocky financial history as well. One such innovation was in early 2013 with the application of high resolution indium gallium zinc oxide screen technology (IGZO) that is thinner and less power consuming than conventional displays. In a March 2013 commentary we highlighted that Sharp ran into initial production ramp-up difficulties with this new technology, causing some drag to Apple’s supply chain momentum in Q4 of 2012.  A report in September indicated that a shortage of the new and larger LCD displays, and the lack of contribution from specific supplier Sharp, may have cost Apple a million or more in initial sales.

On the financial side, Sharp reached the precipice of imminent bankruptcy in early 2012 before a rescue came forward. In order to secure fresh working capital loans at the time, Sharp was compelled to mortgage most of its offices and factories in Japan, including the specific factory producing LCD displays for Apple’s iPhone and iPad. In late 2012, Qualcomm, whom produces communications microchips for Apple’s mobility products agreed to invest $120 million in Sharp that included ownership of up to 5 percent of Sharp stock.  The second progress payment of $53 million of that investment was held back by Qualcomm in March of 2013 because of reported non-performance. In March of 2013, we highlighted a report that Apple competitive rival Samsung would provide a $110 million lifeline investment, reportedly the first time Samsung had ever taken an equity investment in a Japanese based rival. That fueled speculation at that time from business media that Sharp could become a more strategic partner for Samsung. Reports now indicate that the soon to be released Samsung Galaxy S6 smartphone will feature a curved LCD screen being produced by LG Display, a rival to Sharp.

Earlier this week, The Wall Street Journal reported that Sharp was now 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. This funding unit previously invested in Japan Display, which was created from the remnants of three other Japan based LCD producers with declining output and troubled finances. However, a Sharp spokesperson indicated to the WSJ that various restructuring options for the LCD business are being explored and no final decision has been made. According to this report, banks currently hold in excess of $5 billion of Sharp debt. In February, Sharp indicated it would report a significant loss instead of a previously expected profit for its fiscal year that ended March 31. The WSJ report hints that with the involvement of Innovation Network Corp. LCD industrywide supply consolidation may yet occur.

Sharp is turning out to be yet another example of the risk and reward aspects for being a strategic supplier to Apple when being on the cusp of leading-edge product and manufacturing based technology clashes with the dynamics of supplier relationships. Eventually, lifelines can run the course.

Bob Ferrari


Report Indicating Samsung Electronics Will Supply Next Apple iPhone Processor Chip

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A published Bloomberg report citing sources with direct knowledge has disclosed that Samsung Electronics will produce the main processor chip related to Apple’s next iPhone model, replacing TSMC, the supplier of the iPhone 6 A8 processor chip.

According to the report, Samsung will start making the new processor chip at its Giheung South Korea plant, with additional orders going to Samsung’s production partner, Globalfoundaries Inc. Neither Apple nor Samsung were willing to confirm such news.

Make no mistake, the competition for being the prime source of Apple’s processor chips is a big deal with implications for billions in revenues. If this report turns out to be accurate, than the fact that Apple has returned to arch competitor Samsung for sourcing of its processor chips is a significant announcement. It is a further testimony of the high-stakes involved in being on the leader-edge of the latest chip fabrication technologies. The report quotes Gartner numbers indicating that Apple spent a whopping $25.8 billion on chip processors in 2014, accounting for nearly 8 percent of industry demand.

Further noted was that Samsung and TSMC both indicated intent to invest more in advanced production capabilities in order to attract Apple’s business. TSMC alone reportedly budgeted $12 billion for plant and equipment investments this year in order to compete with Samsung.

As we have noted in many of our high tech and consumer electronics focused supply chain commentaries, the purchasing influence of Apple looms very large for many industry suppliers.  The scale and sheer volume scale can make a break a supplier’s business plan, and that influence alone causes continued information leaks across the high tech supply chain ecosystem. It can further motivate fierce competitors to put differences aside when manufacturing technology and functionality are at stake.

 


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