subscribe: Posts | Comments | Email

Rockwell Collins Announced Acquisition of B/E Aerospace is About Supplier Leverage


This weekend featured some significant news directly focused towards aerospace and commercial aircraft supply chain dynamics. The first is the announced acquisition by Rockwell Collins to acquire B/E Aerospace, and the other was the announcement of another round of significant headcount reductions at Bombardier, which will be highlighted in a subsequent posting.


Rockwell Collins and B/E Aerospace, yesterday announced that they have entered a definitive agreement under which Rockwell Collins will acquire B/E Aerospace for approximately $6.4 billion in cash and stock, plus the assumption of $1.9 billion in net debt.

The announcement notes that this transaction combines Rockwell Collins’ capabilities in flight deck avionics, cabin electronics, mission communications, simulation and training, and information management systems with B/E Aerospace’s range of cabin interior products, which include seating, food and beverage preparation and storage equipment, lighting and oxygen systems, modular galley and lavatory systems for commercial airliners and business jets.   rockwell_collins_display

This cash and stock deal will obviously require approval from global regulators and represents a reported 22 percent premium to the closing price of B/E stock on Friday. From the lens of Supply Chain Matters, the deal further represents an evolving trend of key suppliers attempting to gain greater leverage in strategic product design and supply arrangements among global aircraft manufacturers.

In our ongoing multi-year coverage of commercial aircraft supply chain related developments, we have continually pointed out the extraordinary circumstances of an industry that has designed and manufactured a new generation of more technology laden, far more fuel efficient new aircraft. This has led to the enviable position of having order backlogs of upwards of $1.5 trillion that extend outwards of ten years. At the same time, an industry with a track record of prior challenges in its ability to more rapidly scale-up overall aircraft production levels are clashing with the industry dynamics of both Airbus and Boeing in their desire to deliver higher margins, profitability and more timely shareholder returns.  Smack in the middle of these dynamics are relationships among suppliers, who need to continue to invest in higher capacity and capability, but whom of-late have had to respond to key customer requirements for larger cost and productivity savings. Further at-stake are the opportunities for benefiting from multiple years of service parts and service focused revenues and margins related to ongoing aircraft operating maintenance needs along with desires to upgrade older aircraft with more Internet connected entertainment and business services.

Yesterday’s announcement indicates that this proposed acquisition significantly increases Rockwell Collins’ scale and diversifies its product portfolio, customer mix and geographic presence. Rockwell Collins CEO Kelly Ortberg indicated to The Wall Street Journal that the combination offered substantial cost synergies and the ability to cross-sell electronics and plane fittings, and positions the combined companies to lead in the development of “smart” aircraft. The latter can be interpreted to mean more connected aircraft in relation to passenger entertainment along with more predictive maintenance and services.

The proposed acquisition further provides more negotiating power and leverage. Readers may recall that in a Supply Chain Matters prior commentary, we highlighted a development in late July when Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments representing a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. We interpreted this development as a trend of more aggressiveness among key suppliers.

Similarly, our ongoing commentaries related to the industry have noted that current production shortfalls for new aircraft have come down to more timely availability of interior cabin components such as seats and lavatory outfitting components. This has become a more visible challenge to produce larger, dual aisle aircraft such as the Airbus A350 and Boeing 787.

The announcement points to the additional benefits of the cost synergies among the two companies, indicating the generation of run-rate cost synergies of approximately $160 million ($125 million after tax) over a six-year period.  More than likely, that will reflect elements of both companies’ manufacturing and supply chain related activities.

This latest aerospace and commercial aircraft industry acquisition announcement may, more than likely, motivate additional announcements. It further reinforces our prior advisory for product management, procurement and supply chain teams to best be prepared for the new consequences of added supplier influence and push back via enhanced strategic positioning. The days of one-sided or tops-down supplier management seem to be numbered, especially in industry settings where revenue and growth potential are significant.

A final note relates to smarter machines and service management revenue potential. While original equipment manufacturers are certainly focused on the new business models brought about by more connected machines.   Key component suppliers also understand such potential, and desire their portion of the incremental revenue and profitability benefits, and there lies the next frontier of collaboration and control.


Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Initial Learning from the Samsung Note 7 Sales and Production Suspension


More information continues to come forth regarding Samsung’s bold decision to permanently suspend production and sale of its newly announced Galaxy Note 7 smartphone. Thus far, the information points to both product design/management as well as supply chain related learning. While it is still rather early to be able to definitely conclude what led to this brand debacle, the one clear aspect is that the Samsung Note 7 incident will be of multi-industry discussion, thought exchange and study for many months to come.  samsung-galaxy-note-7-recall-fire-explosion-sized

Many industry, business and other media voices are already concluding that Samsung’s decision to terminate the Note 7 product represents a bold effort to protect its overall brand and creditability with customers. The more that the negative publicity continued regarding Samsung, the more the damage. New reports and social media commentary are surfacing that the manufacturer’s engineering teams were themselves challenged with determining the specific root cause(s) of the thermal runaway fires.

We initially call Supply Chain Matters reader attention to a recently published and rather insightful New York Times report: Why Samsung Abandoned Its Galaxy Note 7 Flagship Phone. This report indicates that within its process of overall response to reports of phones exploding and catching fire, Samsung’s engineers were unable to replicate the fire conditions. Further noted was that because of the tight deadlines and intense internal visibility to find root cause, engineering elected to conclude that the effect had to be associated with faulty batteries or battery design.

In August, the looking glass, as this blog speculated, quickly turned to battery supplier Samsung SDI. The Times citing documents from a South Korean product safety regulator as a source, indicates speculation that either the plates inside the battery were too close or the battery had defects in insulation or coating of electrodes. The early September product recall of 2.5 million phones was targeted to those Note 7’s that had Samsung SDI batteries. Both Samsung and the Korean regulatory agency turned to batteries supplied by alternative battery ATL to be those to be incorporated with the recall’s replacement phones. That decision reportedly backfired when reports of fires associated specifically to the replacement phones began to quickly surface.

No doubt, these efforts involving suspicions with battery design operation caused Samsung’s internal supply chain teams to scramble for a response plan.  We speculated in our prior blog commentary that the rest of smartphone and consumer electronics industry was obviously watching events very closely as well to ensure that a battery defect was not involved with other product supply chains. Samsung SDI itself is a supplier to many other branded smartphones including Apple’s iPhone.

The Times article goes on to cite a former director and battery expert at the Korea Electronics Technology Institute as indicating that blaming the batteries as the problem was too quick to judgement given the lack of definitive post-testing data. Instead this expert noted: “The problem seems to be far more complex”.

Other reports that we have reviewed thus far also point to engineers under the gun to quickly resolve the cause of fires with un-conclusive or definitive test data. In the end, concerns for the brand, and concerns for short and longer term revenues and profitability seemed to have taken hold. Equity analysts at Credit Suisse had recently estimated that the Note 7 recall could cost Samsung upwards of $19 billion in lost revenues. Research firm Strategy Analytics had earlier estimated more than $10 billion in financial losses. Samsung itself has indicated to shareholders that it anticipates A $5.3 billion loss during the next few quarters. The manufacturer has already downward adjusted its third-quarter profit forecast by $2.6 billion. Thus the financial implications of this incident can be substantial.

In today’s world of global business, events reverberate continuously at the speed of social and traditional media. Staying in-front of and in-control of such information flow, particularly when it involves brand crisis is a daunting challenge that requires expert resources.  Industries further exist in an overall business environment more inclined to lawsuits and litigation response to product recall incidents which often hampers open communication and timely response when lawyers become the filter for external and internal communications and investigation mechanisms. We have observed that theme consistently in these incidents as well as the supplier implications.

While information, discourse and industry implications related to the 2016 Samsung Note 7 product management events will continue to unfold, we offer one clear takeaway.  The business process, information, market intelligence and decision-making relationships among product design, management, procurement and broader supply chain strategy teams is ever more important and required in today’s global business environment. No company is immune, regardless of stature or brand identity. The supply and product value chain leadership and accountability umbrella is broad and ever more inter-dependent.

Supply Chain Matters advocates that Sales and Operations Planning and internal organizational management mechanisms include product design and management as an entity within integrated business and operations planning.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

Emissions Scandal: Volkswagen Agrees to Financial Settlement with U.S. Dealers


The ongoing brand crisis involving Volkswagen and specifically its customers and franchised dealers over the diesel engine emissions alteration admission scandal that occurred over a year ago continues as it ever so slowly moves toward action plans and financial compensation.

Earlier this month, VW agreed to pay as much as $1.2 billion to its over 600 U.S. based dealers to compensate for the costs of the emissions scandal. In mid-July, The Wall Street Journal reported that VW dealers across the U.S. were fuming regarding any receipt of specific guidance regarding the estimated 12,000 diesel powered autos that they are not allowed to sell. These unsold and currently prohibited stop-sale vehicles had been sitting in lots for months while VW and U.S. regulators traversed an elongated legal process for determining next steps. According to the July report, U.S. VW dealers had already been sitting on approximately 107 days of finished goods inventory of which 12 percent represent currently non-saleable models.

Not wanting unsellable inventory to be clearly visible, many dealers reverted to moving stop-sale inventory onto adjacent or off-site storage lots. While VW was compensating dealers for additional financing and needs for periodic servicing of this large amount of unsold inventory, dealers were not apparently making up the difference in new sales volume because of a lack of new saleable inventory. The long awaited family-sized sport-utility vehicle is not expected to be introduced in the U.S. until early 2017 while anew Alltrack small station wagon is due to be introduced in the next several months adding to dealer frustrations for more models to sell. Plans are very unclear as to whether the new family-sized SUV model will be offered with any diesel powered options as previously planned.

According to business media reports, the new settlement with U.S. dealers could result an average payout of nearly $1.8 million per dealer.  This is to compensate dealers for the financial hardships of lost sales, damaged reputations and declines in dealership value that has been precipitated by the emissions scandal.

VW had previously agreed to pay as much as $15 billion to owners of 2.0-liter diesel powered vehicles in a direct settlement with consumers. Attorneys representing this class of consumers indicate that upwards of 65 percent of U.S. based 2.0-liter diesel engine owners want to take advantage of their settlement. Owners have a choice of selling back their diesel powered vehicle or having it modified by a yet as to be determined emissions repair procedure. Regardless of either choice, affected vehicle owners are entitled to additional compensation that equates to 113 percent of the retail value of their vehicle before the scandal occurred in September 2015. Final approval for the consumer settlement is scheduled for court review next week.

Owners of the larger 3.0-liter vehicles that were impacted by the emissions alternation are still waiting terms of a settlement.

A detailed timeline regarding the proposed buyback and repair program across the U.S. is expected to extend through the end of 2018.  According to reports, a software fix would be made available for third-generation diesels by this month, followed by a combination hardware and software fix for first-generation diesels beginning in January 2017, and a software update for second-generation diesel powered vehicles in February 2017. VW further indicated that it expects to have a hardware fix ready for third-generation diesels by October 2017.

As noted in our previous blog commentaries, VW continues to experience painful lessons regarding its ongoing emissions scandal. A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers will learn some tough lessons as a result of this scandal. Further, the industry as a whole can adsorb some key learning regarding balancing the pressures to introduce market-leading innovative products on a timely basis with organizational tendencies to cover-up potential hardware or software design flaws.

The most important when all the dust settles, will be more sensitivity to customer, market and dealer network needs along with implications of being afoul to governmental emission standards.

Over a year ago we noted that the forthcoming weeks and months promise to provide Volkswagen with a leadership and response crisis with significant product development, product and service focused supply chain implications. Such challenges will continue to unfold for years to come, and represent critical learning for multi-industry supply chain and product management teams.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Report Indicating that Samsung has Temporarily Suspended Production of Galaxy Note 7 Smartphones

1 comment

Supply Chain Matters has previously posted commentaries regarding the ongoing brand, product and supply chain learning implications regarding the product recall surrounding the fairly newly announced Samsung Galaxy Note 7 and its manufacturer, Samsung Electronics.  Incidents of fires presumably caused by lithium ion battery thermal runaway remain a concern, as is the damage to the Samsung brand. The Note 7 represents the premium smartphone model offering in the Samsung product lineup and now upwards of 2.5 million of these devices have been recalled across 10 geographic markets.

The initial news of the recall prompted Samsung investors to punish the stock to a 13 percent decline, but the company’s stock quickly bounced back on news of the product recall efforts.

Since our last update at the end of September, there was a fire incident involving a phone belonging to a passenger flying on a Southwest Airlines flight traveling from Louisville Kentucky to Baltimore Maryland.  The fire incident caused the evacuation of that aircraft. The Galaxy Note 7 phone in that incident was a new replacement phone and battery, raising added concerns that the battery fire incidents may or may not be addressed in the prior product recall. Other incidents involving replacement phones are also being investigated by safety agencies and Samsung.

The Wall Street Journal, citing a source familiar with the matter is today reporting that Samsung has now temporarily halted production of the troubled Note 7. A statement by Samsung indicates that the manufacturer was “temporarily adjusting the Galaxy Note 7 production schedule in order to take further steps to ensure quality and safety matters.” Samsung is further offering a software update for customers in South Korea that limits the charging to only 60 percent of battery capacity.

In its reporting the WSJ opines that this latest production halt underscores the growing seriousness of how Samsung is dealing with its largest product recall to-date.  The publication also points to the global supply chain implications involved in the production of the product’s battery. Noted is that the smartphone battery cells are produced in both South Korea and China but the unit’s packaging is performed in Vietnam.

The manufacturer further indicated to the WSJ: “If we determine if a product-safety issue exists, Samsung will take immediate steps approved by the CPSC (U.S. Consumer Product Safety Commission) to resolve the situation.”

On the distribution front, AT&T, T-Mobile and Verizon Communications have now indicated that each would stop issuing new replacement Galaxy Note 7’s to replace recalled units, in essence forcing customers to select other Samsung model phones as replacements or to seek a refund.

Obviously this latest news adds many more dimensions to the ongoing Samsung product recall efforts involving the Galaxy Note 7 smartphones and perhaps to other smartphone manufacturers who may have a similar supply chain profile. Time, product and supply chain troubleshooting and degree of response are all key to this ongoing set of challenges that are impacting Samsung.

Consumer trust is all important and for current Galaxy Note 7 owners, such trust is growing quite thin.



Tesla Motors Reports Q3 Operational Performance and Some Progress is Evident


In July, innovative electric car manufacturer Tesla Motors announced its Q2 product and operational results.  In our July Supply Chain Matters blog posting related to Q2’s performance, we concluded that Tesla remained challenged with supply chain ramp-up issues as it strives to meet aggressive short and required longer-term production scale-up needs for existing as well as future model needs. Tesla ModelX_Live

Yesterday, Tesla reported its Q3 operating performance and it would appear that the auto maker is now responding to its short-term supply chain challenges.

According to a published report by The Wall Street Journal, CEO Elon Musk called for a strong third quarter to strengthen his equity raising case for scaling up the supply chain and production needs of the newly announced Model 3, along with massive lithium-ion battery facility, the termed gigafactory, near Sparks Nevada. It appears that operational teams indeed performed in Q3.

From an operational perspective, Tesla delivered approximately 24,500 vehicles across the globe in Q3, of which 15,800 were Model S and 8,700 were Model X. That level of output was nearly double that of the year-earlier quarter. The Model X production performance improvement stands out because of that vehicle’s previous production hiccups due to design-for-supply chain challenges causing some components such as the vehicle’s doors to be brought in-house. It further represented an increase of just over 70 percent from last quarter’s deliveries of 14,402. Quite impressive. In addition to Q3 deliveries, the manufacturer indicated about 5,500 vehicles were still in transit to customers at the end of the quarter and these will not be counted as deliveries until Q4. Tesla further reiterated its prior guidance of 50,000 vehicles being delivered for the second-half of 2016.

In late July, we posted a blog commentary reflecting on Tesla’s revised master plan as communicated by founder Elon Musk. After taking hundreds of thousands of advanced reservations and up-front financial deposits for the Model 3, Tesla’s initial answer to a mass-produced and more affordable electric vehicle, Tesla had to revise its longer term production plans to target total annual vehicle output of 500,000 vehicles two years earlier than originally planned, which is now planned to occur by 2018. Musk’s response has been to rally his engineering teams to now focus on what is termed: “designing the machine that makes the machine.” In essence, the effort reflects on turning Tesla’s supply chain and existing production facilities into an engineering design challenge in accelerating capacity, integrated design and tory automation. As readers are also aware, Tesla maintains its own global wide logistics and delivery network for finished vehicles, without the use of traditional dealers and finished automobile lot inventories. That adds to the challenge.

If Tesla indeed continues to perform and deliver its anticipated 50,000 vehicles in the second-half of this year, 2016 will close with a production rate of slightly over 83,000 vehicles. That will set the stage for 2017/2018 to ramp-up to the 500,000 volume target, a near tripling of existing capacity and value-chain ramp-up volumes.

While short-term performance indeed looks better, the longer-term challenges remain and it will obviously involve all of the best engineering, supply chain operational minds and advanced technology adoption that Tesla can muster. That is not to state that the goal is not achievable, but rather the effort will be one that will make-up business case stories for many years to come.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

« Previous Entries