On Sunday, this author flew to Nashville Tennessee to both attend and moderate a panel discussion at the annual Supply Chain World North America and Global Member Meeting 2014 conference sponsored by the Supply Chain Council. Supply Chain Matters will share highlights from that conference in an upcoming commentary. Flying provides the opportunity to catch-up on reading, and for this author, my prior unread issues of The Economist magazine. Two specific articles with a common theme captured my interest and I wanted to share such observations with you in this commentary.
At the many industry conferences I get the opportunity to attend, I often hear supply chain leaders speak to accelerated clock-speed of product innovation, and how that can add additional challenges and potential havoc for the end-to-end supply chain, particularly when that supply chain is significantly outsourced. For a supply chain that is primarily supporting product innovation, a major industry product shift has significant implications.
The April 5th edition of the The Economist featured the article: General Motors’ woes: What do you recall? (paid print and digital subscription) The article notes that automobile design has become far more complex with thousands of mechanical and electronic parts. If you have acquired a new vehicle in the past three years, you probably have experienced the availability of so many new electronic-based systems such as in-car navigation, satellite radio, in-car diagnostics, and powered operational components and, of course, prompted service reminders. Couple the increased product innovation with supply chain and manufacturing strategies that leverage common global platforms sharing common parts components, and the potential effects of a product recall can be significantly magnified. In the specific case of General Motors, the article states that what appeared at the surface to be a routine recall of 800,000 older models due to a faulty ignition switch has turned out to be anything but. As many of you have been reading in business and mass media, that initial product recall has increased to upwards of 26 million vehicles because the ignition design was shared within so many other models. The Economist authors opine that despite a growing list of reported crashes and human injury, a part that likely costs a few dollars at most now involves significant potential monetary expense for GM. Further stated: “A small part can do great harm if bad publicity leads to reputational corrosion, lost sales and litigation, which in America can include hefty punitive damages.” The article authors point out that carmakers need to spot trends in warranty repairs across global regions in far more timely manner and be able to more quickly respond to these indicators. While the terms of GM’s exit from bankruptcy provided immunity to lawsuits involving products produced prior to bankruptcy, GM will likely have to compensate injured parties to avoid a reputational impact to its product brands.
As noted in a previous Supply Chain Matters commentary related to the GM ignition switch recall, another industry backdrop concerns the Toyota agreement to pony-up a $1.2 billion criminal penalty settlement with the United States Justice Department after acknowledging that it misled consumers regarding unintended acceleration problems (SUA) that occurred from 2009 through 2011. That in the view of many will force automakers to be even quicker to declare a product recall for fear of punitive consequences.
A second article concerning a different industry provides yet another edge to product innovation and its impact on an industry supply chain. Many first-time global-wide smartphone consumers care less about brands and more about price. The Economist article titled: The rise of the cheap smartphone, points out that because the cost of making smartphones has declined so quickly, newer or existing market players can now acquires standardized processors and other components to offer smartphones priced below $80. Some of the brands mentioned are France based Wiko, Micromax and Karbonn in India and Symphony in Bangladesh. The article cites an analyst at IDC indicating that shipments of smartphones priced below $80 more than quintupled, and devices priced under $100 make up one-sixth of the current market. “Two years ago, while the median price of a smartphone was $325. Last year it was $250. This year it may be $200.”
With Apple and Samsung are noted as the only market providers making money, the implication is how long will this continue. Then, there has to consideration to last weekend’s announcement from Amazon indicating that it will enter the market with its own branded competitively priced smartphone. That has set-off additional industry tremors.
If your supply chain exists in this segment, these quickly changing dynamics have implications for supply chain strategy, specifically how the supply chain will be called upon to either differentiate the brand, or drive even more scale and volume efficiencies.
The reading of both of these timely articles reinforced for this author that the linkages from product design and management directly to the manufacturing floor and the broader multi-tiered B2B value-chain network have got to be stronger than ever because the clock speed of industry change requires less information latency and more responsiveness. Stay tuned for an upcoming announcement regarding my participation in a webinar addressing this area in more detail.
General and business media has provided much amplification of the latest product recall troubles involving General Motors. In the past few weeks GM has recalled upwards of 6.3 million vehicles globally for quality issues related to faulty ignition switches, a sudden loss of electric power-steering assistance and other issues. The incidents have once again raised issues as to why certain automotive manufacturers allow quality conformance issues regarding products to fester until consumers experience the results of such non-conformance, or in some cases suffer personal injury or death. The GM crisis has been billed as the first test of the leadership of newly appointed CEO Mary Barra, who just happens to have a supply chain, product and operations management career background prior to assuming her new top leadership role. Indeed this latest crisis might have been the legacy handed over from previous GM CEO’s. Given Ms. Barra’s background, Supply Chain Matters has confidence that this CEO will eventually insure that GM identifies the root causes that have led to these issues, including product design flaws, organizational culture, supplier related quality conformance, conflicting performance metrics or just plain bureaucracy and overhead.
But alas, GM is not the only automotive OEM that will be skewered by general and social media. Today, Toyota announced that it was recalling upwards of 6.4 million vehicles consisting of five different product recalls. The recalls involve 27 globally based vehicle models and are reportedly prompted by defects involving seat rails, air bag cable connections, engine starters, steering column brackets and windshield wiper motors. Did we mention a repair parts crisis as well?
The latest recalls appear just a few weeks after Toyota agreed to pony-up a $1.2 billion criminal penalty settlement with the United States Justice Department after acknowledging that it misled consumers regarding unintended acceleration problems (SUA) that occurred from 2009 through 2011. In 2012, Toyota had to take a $1.1 billion charge after reaching agreements with customers over liability lawsuits related to the prior SUA incidents.
But the track record of Toyota product recalls continued after the SUA debacle. In October of 2012 Toyota announced the global recall of 7.43 million vehicles, the equivalent number involved in the SUA incidents, this time related to a master power window switch defect. At the time, The Washington Post was quick to note that this flaw “raises questions about whether Toyota Motor Corp. has solved quality and safety issues that embarrassed the company in 2009 and 2010.” Also at the time, The Financial Times indicated in its reporting that Toyota was aware of the master window switch problem as far back as four years prior. It further indicated that Toyota did not respond sooner because it was unable to replicate the root cause. Somewhat of a familiar theme to the current GM ignition switch saga.
Supply Chain Matters readers will further recall that Toyota announced a series of major organizational changes to insure that accountability for quality among its vehicles was more transparent, including the empowerment of geographic based Chief Quality Officers that had the power to investigate and correct any quality issues. Our Supply Chain Matters commentary in January 2013 called into question the cost of Toyota’s anointment as global automotive industry leader. In a Financial Times interview in 2013, Toyota Motor USA CEO Jim Lentz indicated that the company had strengthened its customer care functions and had much greater ability to analyze data related to emerging quality problems. Lentz noted Toyota CEO Akio Toyoda as urging: “Make sure that we still are built on a solid foundation of quality, reliability and value because that is the hallmark of the company.” In essence, that was the declaration of the core business value of the company.
Which of these two different OEM incidents is the more significant indicator of a systemic process issue?
From our lens, a comparison of GM’s current quality crisis pales in comparison to that of Toyota, since the global industry leader has had more time and singular senior management attention to correct systemic process issues involving product quality, whether they involved the supply chain, or Toyota’s own product design or quality conformance.
Since both of these OEM’s remain in the race for global volume leadership, the price to the brand and of consumer brand loyalty we posed in 2013 is again an open question. Each of their supply chain ecosystems will again be forced to rally and respond to crisis and disruption to insure new and revised parts are made available to dealers, distributors and assembly lines.
The race to the top invariably comes with a price, and at least two automotive supply chain ecosystems will continue to feel the effects of the vortex.
Time for our readers to weigh in: by your view, which of these two ongoing automotive OEM quality crisis developments are the most troublesome for the industry? Share your view in either the Comments area associated to this posting, or if you prefer, email them to info <at> supply-chain-matters <dot> com.
The Wall Street Journal is citing familiar sources (paid subscription) as indicating that Globalfoundaries Inc. has emerged as the leading candidate to potentially acquire IBM’s semiconductor production operations unit. The WSJ reports that other interested candidates were Intel and TSMC, but the latter has apparently dropped out of ongoing talks because its primary interest was in IBM’s semiconductor R&D capabilities. The publication further reports that a deal is not imminent because it involves thorny issues including total asking price as well as intellectual property (IP) protection and long-term supply agreements with IBM for future semiconductor needs.
For the supply chain and B2B community, this move, if consummated, obviously represents a significant strategic shift for IBM. After the now pending sale of its low-end x86 server based operations to Lenovo, a sale of the semiconductor operations would position IBM in essentially a totally outsourced supply chain footprint while retaining product design. That may afford IBM greater flexibilities in sourcing of supply agreements or in accelerating product innovation across global market segments. Then again, it may springboard IBM’s ongoing shift into broader information technology , cloud computing and services segments.
This will be an interesting ongoing development worthy of community observation.
Boeing has announced the results of new commercial aircraft delivered in the first quarter, declaring the deliveries rose 18 percent from year earlier results. That headline seems to be somewhat of a misnomer.
First quarter 2014 deliveries included 161 commercial aircraft compared with 137 in Q1 of 2013. The misnomer is that all operational and in production 787 aircraft were in a grounded condition a year ago pending FAA investigation of suspected lithium ion battery fires, thus a comparison to last year’s Q1 has little meaning. Boeing re-started 787 deliveries in early May of last year.
Boeing delivered 18 new 787’s in Q1, a shortfall of the company’s planned 10 aircraft per month goal. That compares to 25 new 787’s delivered in Q4 and a continued sign of production and other supply-chain problems associated with the Dreamliner. On the positive side, Boeing delivered an incredible 115 new Next Generation 737 aircraft in Q1.
Supply chain glitches or issues involving the 787 have been ongoing. In early March, there were reports that inspections were being conducted for suspected hairline cracks on 43 yet to be delivered Dreamliner’s because of potential flaws in a manufacturing process concerning supplier Mitsubishi Heavy Industries. In late March, the FAA issued its fourth airworthiness directive involving the 787-8 model, ordering an immediate fix to aircraft containing certain General Electric power plants where a suspected software glitch could cause the engine to lose thrust when close to landing. There have been other reports indicating that Boeing has experienced some difficulties in ramping-up overall production volumes at its Charleston South Carolina final assembly facility, prompting a hiring surge to augment the existing workforce there.
Currently operational 787’s with GE engines are cautioned not to fly through severe thunderstorms after reports of some ice build-up incidents. In early February there was a report that Boeing was continuing to pressure suppliers for cost concessions and one major supplier, Sprit Aero Systems reported significant pretax charges for the final three months of 2013, including $385 million directly related to work performed on the 787.
Boeing’s stated goal for 2014 is to deliver 110 long overdue Dreamliner’s to airline and leasing companies, roughly 27-28 per quarter. Q1 was obviously not what the 787 supply chain ecosystem wanted in performance and bar has risen for Q2 and the remainder of the year.
In an era of high customer expectations and pay for operational performance, Boeing needs to quickly shift its 787 supply chain objectives from cost control to achieving and maintaining reliable delivery and operational performance for airline customers.
In October of 2013 Supply Chain Matters introduced our readers to the first signs of advances in item-tracking technology that being a stand-alone sensor in printed electronics. We called attention to Norwegian based Thinfilm Electronics ASA which announced that it had successfully demonstrated a fully functional stand-alone, Smart Sensor label built from printed and organic electronics with low power. We further noted that the announcement pointed to the ability to track and monitor temperature and environment for logistical needs in pharmaceutical supply chains as well as the ability of retailers to have insight on both the temperature, shelf-life and food safety of perishable products.
We have now received word of two other strategic partnership announcements involving Thinfilm’ s product development plans. One announcement outlines a partnership with Temptime, a significant provider of cold-chain related, time-temperature indicators to the healthcare and pharmaceutical industry. Currently, Temptime claims to produce the only temperature sensor for item-level vaccine monitoring that is approved by the World Health Organization (WHO) and the United Nations Children’s Fund (UNICEF). According to the announcement, both companies will collaborate to develop indicators featuring electronic technology that will alert people through digital display if medical or pharmaceutical products have been exposed to potentially damaging temperatures. Terms of this deal include a development-related investment from Temptime and commercial pre-orders for samples that can be shared with customers. While the press release notes that the timing is still to be determined, we believe that samples may well be developed in months.
Another announcement calls for a distribution agreement with PakSense, Inc. in the development of intelligent sensing products specifically designed to monitor perishable goods. PakSense currently provides numerous major food retailers and suppliers with solutions to help monitor the condition of perishable goods. Terms of this agreement authorize PakSense to distribute Thinfilm Smart Labels™ to food suppliers and retailers of produce, meat and seafood in North and South America. In addition, PakSense has submitted pre-orders for the labels, which are targeted for delivery to lead customers in early 2015. The Thinfilm printed electronic labels will indicate if certain temperature ranges have been exceeded, allowing added visibility into temperature variations that may exist within a shipment and will complement PakSense time and temperature monitors. Further indicated is that the ultra-low cost associated with the printed electronics process will now make it possible for PakSense customers to use multiple Thinfilm labels in a shipment at the “item” and “pallet” level. In addition to ThinFilm technology, key components of these smart labels will be provided by several other partners including PST and Acreo.
One of our predictions for 2014 was that the “Internet of Things” will accelerate in momentum, particularly in applications related to broader supply chain visibility. Smart, item-level labels that alert to environmental and other real-time conditions certainly falls under this category and the above announcements point to some exciting potentials in the not too distant future.
Two of the most strategic markets for global automotive supply chains are that of China and the United States. That is especially pertinent in the premium model segment.
Thus, it was rather noteworthy that last week, German premium auto maker BMW AG announced plans to invest a $1 billion dollars to expand its existing sports utility production facility located near Spartanburg South Carolina. This plant currently produces all of BMW’s X3, X4, X5, and X6 sports utility models for global market needs and serves as the global competency center for BMW SUV’s. BMW had previously invested upwards of $900 million in Spartanburg.
When completed by 2016, this additional investment will make the U.S. based Spartanburg facility, BMW’s only manufacturing presence in the United States, the largest manufacturing plant for BMW globally, a significant milestone for a German based OEM. The added investment calls for increasing the production capacity of this facility by 50 percent to 450,000 vehicles. This expansion is further expected to add several hundred new jobs, making this facility one of the largest auto plants in the United States. The Wall Street Journal cites familiar sources as indicating that plans call for construction of a third body shop that would help produce the new X7 sport utility vehicle.
According to a published Bloomberg report, Audi, BMW and Mercedes-Benz are each planning at least a fourth consecutive record of volume deliveries in China and the U.S. as the European market continues to be weak. Demand for SUV’s continues to outpace other models.
Separately, Daimler AG, the parent of Mercedes-Benz announced plans to invest upwards of $1 billion to double capacity at its Beijing production facility, to increase capacity to 200,00 units by 2015. Mercedes currently produces SUV’s at its plant in Tuscaloosa, Alabama with plans to incorporate production of it C-Class sedan in June of this year. Mercedes CEO Dieter Zetsche further indicated that his company may set-up a new plant in North America to add more capacity.
Audi, a division of Volkswagen, is constructing a $1.3 billion factory in San Jose Chiapa, Mexico that includes plans to produce the Audi Q5 SUV in 2016.
One of our Predictions for 2014 (available for complimentary download in our Research Center), called for continued momentum in the resurgence of U.S. and North America based manufacturing. In the case of the premium automobile market, a favorable exchange rate, a lower-cost labor environment and a more productive workforce are all favorable trends that adding to these significant new investments.