Throughout 2014, Supply Chain Matters called attention to the automotive sector and the unprecedented levels of product recalls that continued to stress auto aftermarket service supply chains and supplier relationships to their limits. From a tactical lens, we observed that the colliding forces of regulatory, political, supplier management and capacity-restrained automotive replacement spare parts networks may well continue for many more months, and that appears to be exactly what continues to unfold. Once more, Supply Chain Matters predicted that when the dust settles, the automotive industry and its supply chain ecosystem partners need to take a hard look at lessons learned.
While automotive OEM’s and their associated brands have taken the bulk of the consumer and regulatory heat around product recalls, quality defects have more often resided within either OEM product designs or parts suppliers and their associated product design or manufacturing processes.
The most significant culprits for the continuous litany of product recalls has been the ignition switch defects involving multiple General Motors vehicles and the alleged defective airbag inflators produced by Japan based supplier Takata Corp for multiple OEM producers. After undergoing continuous ongoing scrutiny from U.S. regulators these past months, Takata refused to broaden the scope of the defective inflators recall beyond a select number of U.S. States with high humidity concerns because the supplier supposedly could not determine the exact cause of defects. That is up to now.
This week provides yet another, but far-reaching significant milestone, namely what is being described as the largest automotive recall in U.S. history, and involving the same potentially defective air bag inflators originating from Takata. Bowing to intense pressure and scrutiny from regulators, Takata has now, for the first time acknowledged that there are defects in its air bag inflators, yet root causes remain unanswered. This week’s announced product recall will be conducted by 11 different automakers and now doubles the number of vehicles subject to recall. Business media now reports the overall vehicle recall as involving nearly 34 million existing automobiles in the United States. Six deaths and upwards of 100 injuries have been linked to the defective airbag inflator problem thus far.
In announcing the current expanded recall, U.S. Transportation Secretary Anthony Foxx indicated: “It’s fair to say that this is probably the most complex consumer safety recall in U.S. history.” Depending on which math is being referenced, the scope of the overall recall amounts to roughly 14 percent of the total vehicles now operating on U.S. roads. Add to that the scope of the 2 million plus vehicles included in the GM product recalls, along with other product related recalls and the picture of a large number of existing vehicles awaiting repair attention becomes a dominant picture. Needless to state, the implications of the continued litany of product recalls involving the industry are far reaching, for both OEM’s, their suppliers, and their service networks.
Logistically, as we and others have noted in our prior commentaries, it will take months and perhaps years for dealer and service parts networks to complete repairs on all recalled vehicles. That will cause additional safety concerns and added frustration among consumers. There are concerns that previous air bag deflator repairs to vehicles may have been completed with defective parts requiring the need for yet another repair. As noted, the root-causes of the air bag deflator’s defects have yet to be determined by either Takata or a consortium of 10 automotive OEM’s. The shear volumes of cumulative open recalls are testing existing processes and supporting systems, perhaps to their breaking point. As we have pointed out, alternative suppliers have been recruited to augment supplies for both existing new production as well as repair parts needs.
From a political perspective, legislators and regulatory agencies continue to react to the concerns and frustrations of automotive consumers who wonder aloud if automakers really care about the quality of the vehicles they are producing as well as their attentiveness and timely response to vehicle safety. That leads to a continued sensitized regulatory and judicial perspective.
From a financial perspective, the bulk of the costs related to a litany of past product recalls have been on the shoulders of the OEM’s. However, some automakers such as GM, have managed to shield themselves from expensive lawsuits from prior legislative actions dating back to a previous bankruptcy filing. That will change with the current scope and visibility brought to bear of the latest Takata related recalls. In its reporting, The Wall Street Journal cites one estimate indicating that Takata alone could face recall-related charges in the range of $4-$5 billion, far outpacing an original estimate of $1.6 billion. Yesterday, Takata’s stock fell 10 percent on the Tokyo Exchange as its investors adsorbed the implications. On a broader perspective, the issue of which party bears the bulk of the financial liability for component quality will again be up for discussion.
To be candid and blunt, product quality perceptions have become an overall mess, and it could not come at a worse time. There was a feeling that automakers had come a long way in overall vehicle reliability but that perception belies the current picture of numerous vehicles now with open recalls. Once more, consumers clamor for the latest technology advances in vehicle safety, comfort and convenience including all notions of the connected car. Many of these innovations stem from component and sub-system suppliers within an industry that has a track record of mostly marginal supplier relationship building. In its recent annual supplier poll conducted by Planning Perspectives, for the 14th straight year, suppliers continued to rank Toyota and Honda as best customers. Noted is the diametrically opposite goals of an adversarial relationship where OEM’s often seek a supplier’s best technology at the lowest possible price. Compounding the problem are activist investors and private equity firms investing in various tiers of automotive supply chains clamoring for more short-term returns for shareholders.
From our lens, the global automotive industry, and in-particular U.S. based OEM’s need to have rock solid quality focused product design and more responsive early warning quality mechanisms as a top industry priority. Industry executives need to seriously look beyond any perceptions of the panacea of a current super sensitive regulatory environment that will run its course. The notions of an industry solely being driven by lower product margin goals and placing the bulk of that burden on suppliers has to change. Component, systems and overall vehicle reliability is not the purview of a marketing campaign but rather a systemic process that spans end-to-end product and aftermarket service centered supply chains. Component and systems quality must be a living fabric of supplier relationship management and suppliers need to be fairly compensated for assuring high standards in product design and process innovation, especially considering current product strategies leveraging common brand and/or vehicle model platforms. The stakes are even higher when considering that the electronic and software content of vehicles continues to rise implying more sophisticated reliability and systems focused hardware and software related engineering. In the analogy of carrot and stick agreements, the carrot is longer-term, more collaborative based product design and supply chain focused relationships and the stick is the shared responsibility and liability for warranty and/or product recall costs attributed to vehicle sub-systems such as vehicle safety.
Finally, you may have noticed that lately, not a day goes by without a barrage of targeted online or traditional media ads urging we as consumers to buy or lease that new car with latest technological features. From our lens, the industry will be better served by re-allocating existing marketing and sales budgets towards investments in more robust early-warning mechanisms related to component quality and to current overburdened and perhaps collapsing aftermarket service networks that are the first line of intelligence for quality and vehicle safety.
© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Supply Chain Matters has featured a number of previous commentaries related to Bombardier and its global supply chain challenges in development and launch of its new C-Series single aisle aircraft. The commercial aircraft provider has placed a huge strategic bet on the market success of the C-Series in filling an under served need within the single-aisle aircraft market. The effects of cumulative delays concerning the C-Series program have had recognized financial and market implications for Canada’s commercial aerospace producer and its supply chain ecosystem. This week provides news involving a broader implication.
Bombardier indicated yesterday that it will spin off a portion of its rail business, Bombardier Transportation in in independent offering of stock. According to business media reports, the IPO is being planned for the latter part of this year and the shares will be listed in Germany to attract transportation existing industry investor interest where rail equipment providers Siemens and Alstom are listed. According to a published report by The Wall Street Journal, other strategic moves remain on the table for the rail unit.
Of added interest is a previous published report indicating that China state-owned locomotive and rail equipment producers CSR Corp. and CNR Corp., who are in the process of merging their businesses, are possibly eyeing a controlling stake in Bombardier Transportation after completion of their merger. If that were to occur, it would have significant implications for the global wide passenger rail industry including high-speed rail equipment.
Bombardier CEO Alain Bellemare further indicated to the company’s annual meeting that the company was keeping all possible options open for its aerospace operations in the light of continued profitability challenges.
Bombardier’s business strategy has been designed to have its commercial aerospace and rail business’s serve as a cyclical balance, namely those in good economic times, commercial aircraft sales thrive, but struggle during broad economic slowdowns. Rail equipment, on the other hand, tends to sustain itself during hard economic times. With the increasing financial challenges brought about by the C-Series and other commercial aircraft program delays, the company is navigating a tightrope to raise additional capital while sustaining its prior business strategy. What has obviously changed are the global wide industry dynamics among both of these industries. Both Airbus and Boeing have managed to attract the bulk of airline buyer interest in new, technologically advanced single-aisle aircraft while China’s state rail players are making their thrust towards broader global market penetration to compete with Siemens, Alstom as a lower-cost producer.
This will be an important multi industry dynamic for Bombardier’s supply chain ecosystem to monitor in the coming months.
We are once again in the high point of this spring’s industry conference season and this author finds himself mostly mobile, attending and checking-in on the major important conferences that we believe have context to the broad supply chain management, manufacturing and product management community that represents Supply Chain Matters. Since we are quickly getting backlogged on content, we are going to provide our readers brief summary impressions and takeaways from such conferences to be followed by more detailed and retrospective observations and commentaries in the coming weeks.
We have previous highlighted our impressions of the JDA Software FOCUS 2015 conference held last week in Orlando. This week, SAP is conducting its annual Sapphire and ASUG customer conference in Orlando and next week, Gartner will be hosting its annual SCM Executive Conference in Phoenix. We are planning to provide commentary related to each.
The Internet of Things is becoming a very hot topic, and this week, we were invited to attend the LiveWorx 2015 conference in Boston, sponsored by PLM, SLM and IoT technology provider PTC. If you have been following our Supply Chain Matters coverage of PTC, this vendor has been on an acquisition spree directed at gaining market influence in both the Service Lifecycle Management (SLM) and Internet-of-Things (IoT) technology enablement segments. In the latter, PTC previously invested a collective sum of $300 million by acquiring providers ThingWorx and Axeda.
LiveWorx 2015 was PTC’s effort in bringing a conference together that had a sole focus on its IoT market strategies moving forward. The topic and the interest levels are high, and PTC managed to attract over 2000 attendees, having to add an additional meeting venue.
LiveWorx 2015 in one respect, reminded this author of the very early days of the vast hype associated with the introduction of RFID technology incorporated within various industry supply chains. My observations at that time, which seem so long ago, reflected on vendor and systems integrators in hyper-ventilation mode, thinking about the vast amounts of money to be made in implementing IoT. And so it seemed with LiveWorx sponsors, presenters and attendees among this community. Also in attendance were companies and service providers trying to figure out what business processes could most benefit from IoT and whether they should consider adoption, but they seemed to be overwhelmed by mostly partner attendees.
Regardless, the takeaway from LiveWorx was the added profound context that was provided in the potential game-changing implications related to industry, product and value-chain competitiveness. That was articulated by Professor Michael Porter of the Harvard Business School who in his address, demonstrated a perceptive understanding of the impacts IoT will have on many firm’s value-chains, and indeed, how they will compete in the technology wave. Porter’s message was that it is not a question of whether firms evaluate the impact of IoT on their industry, but rather how long does one wait before the industry is disrupted by those who exploit these strategies.
Returning to our analogy, while RFID had tactical business process connotations, IoT has far broader business related connotations. While RFID vendors and service providers tended to not want to openly talk about needs for industry standards, bullet-proof security and organizational change management connotations, the IoT community assembled this week in Boston seemed to be willing to be more up-front and proactive in acknowledging such concerns and beginning dialogues and efforts. History has indeed provided important learning, as we noted in our most recent commentary related to RFID.
There were a number of important announcements made in conjunction with LiveWork15. PTC signed a definitive agreement to acquire ColdLight, a termed big data machine learning and predictive analytics technology provider, for approximately $105 million. According to the announcement, the acquisition of Cold Light’s Neuron automated predictive analytics platform will enrich PTC’s IoT technology portfolio. This author had the opportunity to sit in on a presentation delivered by ColdLight’s CEO regarding its capabilities and it certainly has interesting possibilities when applied to IoT.
Another important announcement was ThingWorx Converge™ an application that leverages the ThingWorx® platform for connectivity, device management and rapid application development. This application supports pre-built capabilities for companies who create, operate and service manufactured products as well as application developers and system integrators who deliver solutions. It serves as evidence that PTC wants to be the tools provider, providing its rapidly evolving partner network a more streamlined tool to develop a mass of industry specific applications.
As noted, Supply Chain Matters will feature additional observations related to PTC ThingWorx in the days to come.
This has been a highly visible week for Apple and its supply chain ecosystem. Included was Apple’s announcement of obscene earnings for its latest fiscal quarter and perhaps too much visibility to supply chain related information related to the newly introduced Apple Watch.
On Monday, Apple reported operating results for the March-ending quarter reporting a 27 percent increase in revenues and a startling 33 percent increase in profits. Gross margin climbed to 40.8 percent above previous Wall Street estimates of 38.5 – 39.5 percent. The overall business media headline was that Apple’s iPhone line-up is gaining market-share while commanding higher prices. The average selling price of an iPhone has risen to $659, up $60 in the last year, while iPhone shipments were up 40 percent from the year earlier period to 61.2 million units. Emerging market demand, in particular China, Hong Kong and Taiwan is reportedly fueling this latest iPad sales volume increases. Revenues associated with the Mac personal computer lineup trended positively, up 10 percent in the latest quarter, bucking an overall industry trend of declining PC sales. Apple closed its latest quarter with over $193 billion in cash, up $15 billion from December.
However, there are some warning signs. Sales for the iPad declined by 23 percent in the latest quarter, an indication of a further sales decline trend.
Yesterday, The Wall Street Journal reported (paid subscription or free metered view) that one of the key technology components within the Apple Watch has 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 WSJ report indicates that reliability testing has discovered that the taptic engines supplied by AAC Technologies Holdings of Shenzhen China, have demonstrated reliability problems, with Apple electing to scrap some completed watches. Engines produced by Japan based Nidec Corp. have reportedly not experienced the same problem, with Apple reportedly moving all remaining sourcing of this component to Nidec. However, it may take more time for the new prime supplier Nidec to increase production volumes.
Although the WSJ indicates that it is unclear whether the tactic engine reliability has contributed to short supply, by our lens, this may explain why existing orders for Apple Watches have been in a backlog condition since product launch. On Monday, Apple CEO Tim Cook confirmed that “demand is greater than supply” for the Watch.
The WSJ further indicates that Apple has now communicated to other watch component suppliers to slow delivery volumes until June, without explaining why, which has surprised suppliers who were in full blown ramp-up. Neither AAC Technologies nor Nidec elected to respond to the WSJ in a request to comment.
The WSJ cites additional sources as now indicating that Apple is further considering the addition of a second final assembly contract manufacturer to supplement Taiwan based Quanta Computer. That second CMS is rumored to be none other than Foxconn, Apple’s principal go-to contract manufacturer when supply chain volume output challenges occur. However, even if Foxconn is brought online, it will be several months before the CMS can make its contribution to boosting output. The WSJ sources indicated late 2015 as an estimate.
As Supply Chain Matters has frequently pointed out, Apple practices dual-sourcing of key technology components as part of its supply chain risk mitigation strategy. This is especially prevalent in new product introduction and ramp-up phases. There are currently three prime suppliers for Apple’s existing iPhone LCD screens with reports indicating the introduction of another for the next model iteration of iPhone. In the case of the tactic engine report, the dual-sourcing strategy has obviously proven effective.
Finally, today’s Wall Street Journal calls attention to IHS Technology’s recent teardown analysis of a 38-millimeter Apple Watch Sport, the entry level model for the product line-up. (Paid subscription or free metered view) The IHS teardown analysis indicates that overall costs of component materials and manufacturing labor cost amount to $83.70 contrasted to a retail selling price of $349. That according to IHS equates to a 24 percent ratio for parts and manufacturing cost, lower than the average 29-45 percent equivalent cost for Apple’s other product lines. This is an indication that the Watch is a product line with even higher profitability potential. The taptic engine component noted above has an estimated cost of $16.50, the second most expensive component. The touchscreen and display module was estimated to cost $20.50, the most expensive component.
In two weeks, analyst firm Gartner will again unveil its annual ranking of the Top 25 Supply Chains. Apple has consistently commanded the number one ranking for many years, and with these latest operating results, we suspect that the Apple supply chain will again command the top spot. Financial performance alone is compelling and when considering supply chain risk mitigation and segmentation strategy, the result is obvious.
In prior Supply Chain Matters commentaries related to today’s aerospace supply chains challenges, we and business media have identified the sensitive dynamics concerning multi-year backlogged customer orders, with the voices of customers growing ever louder. One would optimistically believe that having upwards of 7-10 years of booked orders would be an enviable position, and perhaps it may in certain other industries. But such a situation provides added dynamics for managing and fulfilling customer demand as well as insuring long-term supply and capacity in strategic supply areas.
Last week, news concerning Boeing provided added evidence of the ongoing dynamics. In the course of a week, two major U.S. airlines exercised changes in existing orders. American Airlines announced that it would delay delivery of five previously ordered 787 Dreamliner aircraft in response to slower growth in international routes. Earlier in the week, United Airlines engineered a deal with Boeing that swapped 10 existing orders for 787’s for larger 777-300ER aircraft. In the case of United, it managed to leverage an opportunity that resulted in Boeing needing to fill open product capacity slots in the 2017 time period, before the next generation 777X begins its market entry. Thus in just a week, orders for 15 new 787’s experienced changes.
As noted in our prior commentaries, both the business and economic climate can change dramatically over a 10 year horizon. United apparently elected to take advantage of current dramatically lower fuel prices to expand its capacity for international routes. Some industry observers have noted that over time, the technological leap of 787 can become minimized by other factors, including competing models that are more discounted by sales teams. Global airlines themselves are examples of savvy customers who constantly monitor industry dynamics and are not shy to exercise customer influence.
Certainly, events in one week do not make a long-term trend. However, they are yet another reminder to commercial aerospace supply chains that even with a cushion of multiple years of order backlog, change is a constant. It is a far different business climate.
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.
© 2015 The Ferrari Consulting Group and the Supply Chain Matters© blog. All rights reserved.