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Report That Ford is Planning to Double Production Capacity in Mexico- The Political Dimensions Become More Prominent

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In August of 2014, we initially alerted our Supply Chain Matters readers to the growing attractiveness of Mexico as a North America based Manufacturing and export hub for the global automotive industry. At the time, automotive OEM’s BMW, Honda, Kia Motors, 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. That process has continued. Today, The Wall Street Journal reported that Ford Motor Co. has plans to more than double its Mexico based production capacity by 2018. The decision, if confirmed, has many further implications from many dimensions, including the political dimension.

As we observed in 2014, Mexico’s attraction stems from two strategic considerations.  The first is to serve as an alternative global manufacturing region in the context of lower direct labor costs as well as to offset global currency impacts. The second is serving as a hub of automotive exports to serve both North America and other global markets because of the former considerations.

Citing informed sources, today’s WSJ report indicates that Ford will build an entirely new assembly plant in Mexico as well as expand capacity of a current facility. The new assembly complex is expected to be built in San Luis Potosi with an annual capacity for as many as 350,000 vehicles per year. A separate expansion is being planned for Ford’s Cuautitlan production facility near Mexico City, which will reportedly augment production capacity for an additional 150,000 vehicles annually. Total invested cost is noted as $1 billion, on top of the $2.5 billion in investment that Ford announced last year concerning a new engine and transmission production facility.

As for models being considered for Mexico production sourcing, the WSJ indicates the current Ford Focus is scheduled to transfer production from a U.S. facility in Michigan within the next two years to make room for more profitable truck based vehicles. Two other new models are being planned for Mexico, one being termed as an all new hybrid car designed to compete with Toyota’s Prius hybrid. Ford already produces two other midsized sedans in Mexico. The WSJ views Ford’s product strategy as having higher margin product models such as SUV’s and pick-up trucks sourced in U.S. plants under labor union contracts, with lower margin models sourced in Mexico and other foreign countries.

The WSJ report’s editorial reflects that Ford’s latest moves are indicators of a strategy to offset the signing of a new labor agreement among its U.S. unionized work force, which raises direct labor costs to nearly $30 per hour in the coming years. Mexico’s direct labor rates are indicated as being one-fifth that of unionized workers in the U.S.

Ford itself refused to comment on both the WSJ report as well as its editorial related to offsetting direct labor costs.

Speculation that Ford was considering an increased manufacturing presence in Mexico has been cited among certain candidates in the U.S. Presidential election cycle, and not in a positive manner. The politics of such a decision are ripe given that certain U.S. states with unionized workers will vote in presidential primaries over the remainder of this year, and states like Michigan, Ohio and Illinois have influence in delegate and Electoral College voting. Presidential Republican candidates such as Donald Trump while democratic candidates Bernie Sanders and Hillary Clinton echo the fears of more jobs being lost to Mexico and other countries. Then there is the rhetoric in Republican ranks of building higher walls on the U.S. and Mexico borders to stem illegal immigration and protecting jobs.

As our Supply Chain Matters readership is well aware, major production sourcing decisions have broader implications, the need for many dependent suppliers to also increase their sourcing presence to supply production in Mexico.   This is especially important in automotive supply chains that are mostly driven from just-in-time production and inventory movement methodologies. The greater the investment presence in a single country, the more value-chain presence occurs, adding to more investment.

The Trans Pacific Partnership Agreement when and if ratified, will provide even more implications to multi-industry global sourcing strategies, especially automotive. No doubt it well heightens more political discourse on job creation or job loss among North America countries. Mexico itself threw a monkey wrench in ongoing talks hoping to preserve the current automotive sourcing investment wave and to protect its interests in the definition of “rules of origin” and what would be classified as duty-free imports to the U.S.  Under the North America Free Trade Agreement (NAFTA), 62.5 percent of component sourcing must come from within the NAFTA free-trade area to qualify as duty-free.

Mexico recently overtook Japan to become the second-largest exporter of vehicles to the U.S. The WSJ report cites data from LMC Automotive indicating that auto factories in Mexico produced 3.4 million vehicles in 2015, about one-fight of all North America production.

U.S. and other global-wide political leaders, whether current or aspiring, should be concerned with such global supply chain strategic sourcing decisions. This latest WSJ report cites Mexico’s economy minister as indicating that there will be several other significant automotive industry investments announced in the not too distant future.

The obvious takeaway is that in the current period of trending reflecting global manufacturing recession and consequent heightened concerns for global trade and local economies, strategic sourcing decisions will take on heightened political dimensions, and such an environment transcends quantitative data such as direct labor and landed costs. Beyond analytics, quantification and spreadsheets are the politics of jobs and economic security, which are taking on far more concern.

Bob Ferrari

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


IBM Closes its Most Important and Far Reaching Acquisition- The Weather Company

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If you have had the opportunity to view this author’s prior conference presentations on future technology trends in supply chain management you might have recalled my references to the technology-enabled data analytics services related to The Weather Company and its implications as to how industry supply chains can literally predict future product demand needs by region.

Last October, IBM announced its intention to acquire most of this data analytics provider.  While IBM would not disclose financial terms, The Wall Street Journal speculated the value was over $2 billion. Many in the tech world wondered what this was all about, and why did it fetch such value.

Last week, IBM announced that it has closed its acquisition of The Weather Company’s B2B mobile and Cloud-based properties including weather.com, Weather Underground, The Weather Company brand and WSI, the global B2B brand. According to IBM, the combination of these platforms will serve as a foundation to the evolving cognitive computing IBM Watson IoT Cloud which begins to reveal the why- becoming a far deeper business related data analytics company.

The Weather Company was spawned from what we all easily identify as The Weather Channel. Executives of this weather sciences broadcaster understood the future relationships of weather to consumer buying patterns.  For instance, in the summer months, beer consumption in Chicago incrementally increases after three consecutive days of below-average temperatures. In Atlanta, during the months of fall, beer sales rise after during periods of above-average temperatures and below-average rainfall. During the winter months in Boston, sales of healthy snacks increase after three consecutive days of below-average temperatures and above-average precipitation such as winter snow storms.

Having amassed enormous amounts of weather data from literally thousands of micro-climate geographic locations, weather scientists began to explore the direct correlation of weather to sales of consumer goods. Having found many direct correlations, The Weather Company was spawned as a big-data analytics provider that could aide various consumer goods producers to better predict or promote product sales by specific region. At the same time, industry customers subscribed to weather data to better manage their services and equipment. In a published 2013 article, The Wall Street Journal reported that the new analytics and data science company had the potential to be far more lucrative than the broadcasting arm.

IBM’s plans for The Weather Company now take on a more Internet of Things (IoT) strategy focus. According to its latest announcement, IBM plans to collect a larger variety and higher velocity of data sets from billions of IoT sensors around the world while providing real-time information and insights to tens of millions of users worldwide. As part of the acquisition, IBM inherits The Weather Company’s customers in the aviation, energy, and insurance industries, as well as others. IBM is dedicating more than 2500 developers to help clients and partners collect, analyze and act upon entirely new forms of IoT data resulting from the proliferation of automobile and airplane telematics, building and environmental sensors, wearable devices, medical implants, weather stations, smartphones, social media, manufacturing lines and supply chains, among others.

IBM indicates that its customers will now be able to link all of their business and sensor data from their connected devices with weather data using IBM Watson. Controlling what is described as 2.2 billion weather forecast locations and marrying other physical sensors originating from supply chain activities can literally open up far broader dimensions of predictive analytics and decision-making beyond consumer product demand. How products are planned, how transportation is routed and controlled and how risk is managed across the physical supply chain are all possibilities.

Industry supply chains should keep their eye on efforts in this area.  While IBM has exhibited a prior track record of rather elongated execution on the potential benefits of its acquisitions, Watson and its renewed focus on industrial IoT tied to predictive analytics is an area that will be, from our lens, crucial to long-term growth and future IBM revenue streams.

At the same time, the dimensions of data analytics that literally marry physical, environmental and digital applications information to decisions in product management, supply chain planning, manufacturing and service lifecycle management focused processes are capabilities with enormous benefits.

The open question moves from not in my career but rather to perhaps within the not too distant future.

Bob Ferrari

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

 


General Electric Declares a Pivotal Year and a Look into its Future

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General Electric recently announced its fourth quarter and full 2015 financial results and made it a point to call attention to its new GE Digital business unit. It did so because GE’s bold goal is to be a top 10 software company by 2020. In its press and media outreach, GE declared that GE Digital accomplished $5 billion in 2015 revenues with anticipation of far more growth in the coming years.

This relatively new GE Digital business segment was formally launched in November after a series of internal re-alignments. The unit brings together all of GE’s digitally focused and Industrial Internet capabilities under a single business focus. This includes GE’s Software Center, the company’s global IT and commercial software teams along with cyber security teams.

The underlying mission of this business is to make intelligent machines and connected industrial equipment as an emerging reality. GE is of the belief that the Industrial Internet could add $10 to $15 trillion to the global economy over the next 20 years. This includes aircraft engines that can self-diagnose operating performance, alert to pending operating maintenance needs and automatically order required repair components.  Railroad locomotives that can communicate onboard diagnostics, train operating conditions and train rail car composition. Data can be analyzed across fleets of similar equipment providing design engineers timely performance information while fleet owners have the ability to optimize operating assets.

GE executives are quick to differentiate Smart Machines and Industrial Internet from Internet of Things (IoT). The latter GE views as more consumer market focused. The Head of GE Digital, Bill Ruh, states in a recent blog post: “There’s a difference between running a smart thermostat in your house and controlling a power plant. We work in mission critical environments.”

Some in today’s broader tech world of IoT may take issue with GE’s succinct differentiation of consumer vs. industrial facing connected devices. Suffice to point out that the opportunities are indeed enormous for both dimensions. However, by our lens, it is rather important to differentiate the different scale, scope and function of needs for both, especially in the data security and scalability dimensions of industrial applications.

GE has indeed been a pathfinder in the notion of connected machines and is now beginning to harvest the financial and market benefits for being an early innovator.  From its longstanding industrial roots, the company can surely grasp the notions of what is required for mission critical operating environments.

Other industrial manufacturing and enterprise software providers will surely escalate their commitment to intelligent machines and by 2020, there may well be a different software provider landscape with competitive dynamics. What we term IoT today become more differentiated and more succinct in application. As with all prior tech revolution, there will be winners, laggards and market casualties.

The good news, however, is that bringing the physical and digital aspects of supply chain information and decision-making together are no longer a distant vision, but within the realm of a five-year goal.


The Role of Sustainability in the Modern Supply Chain

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Last week this author attended Oracle’s Modern Supply Chain Experience conference held in San Jose California. This conference is hosted annually by Oracle, and provides a singular focus on broad supply chain related technology and business process topics.  Attendance this year was impressive, upwards of 2000 attendees from multiple industry settings.

I had the opportunity to participate in two different panel discussions.  One was the role of sustainability in the modern supply chain.  Our panel was moderated by Rich Kroes, Director, and Sustainability Strategy at Oracle and included two other panelists besides myself: Jon Chorley, Chief Sustainability Officer and Group Vice President, SCM Product Strategy at Oracle and James Ayoub, a student at Penn State University.    Oracle_MSCE_Jan_16

To its credit, Oracle sponsored the attendance of nearly 80 students from various supply chain management programs both in the local area and across the country. These students were afforded the opportunity to attend general sessions, a dedicated set of student focused session tracks as well as participate in a panel discussion, including our sustainability panel. Our sincere thanks and shout-out to Oracle for their generous outreach and support, was of the first that this author has witnessed from a specific technology company.

Our sustainability panel touched upon various topics regarding how sustainability is manifesting itself across industry supply chains.

On Supply Chain Matters, we have highlighted industry supply chain efforts dating back to at least our founding in 2008.  While some initiatives have stemmed from regulatory directives and requirements such as REACH across chemical focused supply chains, RoHS within high tech, or Conflict Materials, others have been spawned from aggressive and committed corporate sustainability goal setting. Many global corporations have declared carbon reduction and sustainability goals mapped to specific timelines and much of the facilitation or enablement of such goals originates specifically within supply chains because product value-chains are responsible for a considerable portion of carbon and greenhouse gas emissions. Consider the carbon emissions footprint of transportation and logistics, manufacturing or agricultural production for example.

Many Consumer Products and Food producers such as Procter & Gamble, Nestle and Unilever and others are recognized for their wide reaching efforts for incorporating sustainability in business strategy. Beverage companies such as Coca Cola, PepsiCo and SAB recognize that large consumption of water is a critical component of a sustainability strategy.  They have each appointed senior managers responsible for water conservation and sustainability initiatives that insure supplies of water are continuous.

High profile manufacturers in the high tech and consumer electronics sector such as Apple, Dell, Hewlett Packard and others have always been on the forefront of sustainability initiatives.  Across various other industries, innovators have been openly active and committed to sustainability efforts because it drives benefits.

Consumers and customers have in-turn, continued to actively support brands that demonstrate a commitment to sustainability and preserving our planet. James Ayoub was very articulate in expressing how consumers of his millennial generation care about their environment and factor buying and loyalty decisions based on the reputation of the brand in active sustainability efforts.  James further shared highlights of internship efforts in supporting corporate initiatives in this area as well as how Penn State’s supply chain management programs and academic instructors weave sustainability into the curriculum.

Jon Chorley noted the dual role of Oracle in the area of sustainability, first as a corporate citizen and in providing technology that supports the management and tracking of such efforts.  Having inherited a high tech manufacturing supply chain from the past acquisition of Sun Microsystems, Oracle inherited a high tech manufacturing value-chain with many opportunities for continued efforts in sustainability.  As Chorley exclaimed to the audience, it makes good business sense to have sustainability weaved into business strategy in four impactful dimensions:

  • Innovation- both product and process focused and in supply and value-chains that become self-sustainable
  • Enhancing the Brand– Consumers and customers making their buying decisions not only on product form and function but on the brand’s commitment to sustainability and combating climate change.
  • Strategy and Stockholder Value– Sustainability efforts insure strategic continuity of supply of commodities, raw materials and natural resources. They insure that a firm has plans and strategies that can support long-term competitiveness and industry leadership.
  • Cost– in carbon and missions reductions that save our planet and in the monetary costs of materials, processes, product packaging and movement of goods.

I also had the opportunity to share with our audience my perceptions of the potential industry supply chain impacts from the recent Paris climate agreement. In December, 195 nations became parties to the Paris Climate Agreement (COP21) that commits to holding the increase in global average temperature below 2 degrees Centigrade (3.6 degrees F) above pre-industrial levels and to pursue efforts to limit temperature increase to no more than 1.5 Celsius above pre-industrial levels.

Whereas the prior Doha Agreement among 37 nations, the new Paris Agreement addresses climate change challenges after 2020. The Paris Agreement further represents the first time that such a large portion of the global countries have explicitly declared that the existence of climate change and heighted greenhouse emissions provides global risk.

From the accounts that I have read, the implication of this Agreement  reflect clear messages that much of the globe’s remaining reserves of coal, oil and gas must stay in the ground.  Reduction of deforestation must become global-wide priority.

The implications of such goals are yet to be fully understood by industry and supply chain audiences. One European based research firm declared that supply chain mitigation initiatives will be the Number 2 most effective strategy for achieving COP21 commitments.

Our panel concluded with thoughts that under COP21, industry supply chain involvement in sustainability has little choice but to move into a mandatory stage. Think of all the ships, railways, trucks and equipment that make-up the global movement of goods. Think about current manufacturing, assembly and farming processes primarily powered by fossil fuels and you begin to get a sense of the seriousness of this next stage.  Businesses and their associated supply chains must take on a more implicit responsibility to act in ways never before, in with innovation of a large scale.

Thus, vision and leadership among both public and private sectors is now a must and critical for alignment of efforts in joint investment, in policy, in rewards and in penalties.  Because supply chains are intrinsically global in scope, there will be requirements for far broader collaboration within and across industries, suppliers and service provider communities to overcome these new challenges.

I very much enjoyed discussing such an important topic with my fellow panelists and I thank Oracle for the opportunity as well as the commitment to the topic of sustainability.

Bob Ferrari

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


Boeing Transmits a Supply Chain Shock Wave

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Last week, commercial aircraft provider Boeing transmitted a supply chain shock wave by forecasting that the manufacturer would deliver less commercial aircraft in 2016 than actual deliveries in 2015. The news itself triggered a sell-off in aerospace related stock and raised somewhat more uncertainty across aerospace industry supply chains.

Whereas Boeing delivered a total of 762 aircraft in 2015 while declaring a year of outstanding operational performance, the current forecast is a range from 740-745 commercial aircraft produced in 2016.

Boeing executives indicated that the change involves a revised focus on the provider’s most profitable aircraft as well as the effects of the transition to new aircraft programs such as the 737 MAX program where deliveries begin to occur in 2017.

The revised forecast surprised equity analysts and literally rippled across the industry sending shares of major suppliers also tumbling.

As Supply Chain Matters has noted in our specific aerospace industry commentaries, building multi-year backlogs among both Boeing as well as Airbus are both good news, not-so-good news scenarios.  Programs such as Boeing’s 787 Dreamliner need to considerably ramp-up deliveries in order to meet breakeven program profitability milestones, while newer, more fuel efficient aircraft such as the 737 MAX and the Airbus A320neo were marketed to airlines during a time of much higher jet fuel prices. Meanwhile, various global airline carriers particularly those in the Middle East and Asia want to rapidly expand service routes to take advantage of perceived increases in air travelers.  Today’s cycle of economic uncertainty brought upon by lower oil and plunging commodity prices, coupled with increasing global tensions have possibly changed near-term demand for air travel.

Only time will determine how industry dynamics shakeout. In the meantime, commercial aerospace supply chain suppliers must now perform a balancing act of adjusting to changing and concerning signals from at least one dominant OEM.


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