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The Samsung Smartphone Product Recall Crisis Bears Important Similarities and Learning

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We previously alerted our Supply Chain Matters readers to the stunning and somewhat embarrassing news that Samsung initiated on its own, a global recall of its newly announced Galaxy Note 7® smartphones due to reports of battery fires. It is now becoming much more evident that Samsung has created additional customer creditability and market perception challenges by attempting to manage its ongoing faulty battery issues on its own, without timely notification to product safety regulators. Yet, once again, there exists other multi-industry supply chain learning regarding needs to closely coordinate potential product or equipment safety issues with governmental regulatory agencies. Learning that other manufacturers and their respective suppliers have painfully encountered.  Recalled Samsung Galaxy Note 7

As of this week, Samsung has received 92 reports of the batteries overheating in the U.S., including 26 reports of burns and 55 reports of property damage, including fires in cars and a garage. And that is just for the U.S. The consumer electronics provider itself has been reluctant to share details relative to which supplier batteries are suspected (there are multiple battery suppliers) and why the uncontrollable thermal events are occurring. We came across a well written analysis commentary penned by Brian Morin on Seeking Alpha that points to overheating of a battery cell as a result of anode-to-cathode shorting caused by flawed separators as a potential cause. This analysis raises speculation that the problem may not just concern Samsung but other smartphone manufacturers as well, depending on the specific supplier involved. Again, Samsung has yet to identify the specific battery supplier involved in the recall, or whether the battery performance issue extends to other models.

Samsung launched the top-of-the line Galaxy Note 7 on August 17 in an effort to announce the new model prior to Apple’s expected iPhone 7 product launch. Approximately two weeks later, reports surfaced as to occurrences of faulty batteries that were exploding during the recharging process. Now as the hubris of Apple’s iPhone 7 permeates media channels, Samsung must deal with effects and visuals of battery fires among its smartphones.

Today, a published report by The Wall Street Journal, coupled with other business media reports all seem to conclude that Samsung has fumbled this recall because of attempts to singularly investigate and respond to the occurrences of faulty lithium-ion batteries that were causing unexpected explosions and fires. Global wide telecommunications carriers as the principle distributors of the Note 7 were caught in the middle of this situation, receiving conflicting information from the manufacturer and from consumers, while unable to act without a formal product recall notice.  It still remains unclear as to whether the problem can be corrected by a different battery, and when supplies of that different battery are made available. Meanwhile, individual consumers and business customers are reluctant to suspend using their new smartphones without having a replacement in-hand.

This week. The United States Consumer Product Safety Commission (CPSC) was obligated to take direct control of the ongoing issues with the occurrence of some overheating batteries by issuing a formal and immediate product recall notice. The notice urges consumers to “immediately stop using and power down the recalled Galaxy Note 7 devices purchased before September 15, 2016.”  They are further instructed “to contact the wireless carrier, retail outlet or Samsung.com where they purchased the device to receive free of charge a new smartphone with a different battery, a refund, or a new replacement device.” The latter statement is of course what will obviously lead to other confusion but the timing and the urgency left little choice.

According to U.S. law, the CPSC must be notified within 24 hours after a product safety risk has been identified.  The agency did not issue a statement until a week after Samsung’s initial announcement. The chairman of the CPSC indicated to the WSJ that for a company to go out on its own is not a recipe for a successful product recall, and in other media interviews, was somewhat blunter in his remarks.

This 24-hour notification was initiated as a result of the aftereffects of the prior sudden unattended vehicle acceleration and other perceived vehicle safety issues that impacted Toyota during the period from 2009-2010. Three years later, Toyota was still dealing with the after effects and U.S. legislators collectively called for stricter controls related to product safety. Today the automotive industry as a whole continues to deal with the challenges of faulty air bag inflators and other product safety related recalls that have now exceeded all previous records for total number of recalled automobiles.  The 24-hour threshold coupled with the potential for significant financial and litigation implications related to the mere potential of product safety concerns has led automotive producers to err on the side of caution and engage regulators much earlier in the process and issue a product recall. Currently it seems that not a week can go by without news of some major recall involving an automotive brand.

Samsung’s faulty battery issues further have some parallels to the 2013 challenges that impacted Boeing’s 787 Dreamliner aircraft as a result of unexplained lithium ion battery fires affecting the aircraft’s own power systems. A series of unexplained battery compartment fire incidents triggered a subsequent six-month grounding of all existing operational 787 aircraft while government safety agencies and Boeing searched for the cause.  The aircraft was later approved for service after Boeing reluctantly initiated a complete redesign of the battery housing unit containing lithium-ion batteries. The incident was very costly or Boeing from both a financial as well as brand reputation basis. Airline flyers began to question the overall safety of the 787.

Boeing’s initial reaction was to push-back on government regulators. An NTSB investigative report later concluded that the probable cause was an internal short circuit within a battery cell which led to a condition of thermal runway. The report also pointed to cell manufacturing defects and oversight of cell manufacturing processes involving the battery manufacturer. Today, there are little incidents of battery issues for operational 787’s but there will also be some concerns on the part of airline travelers as more and more lithium ion battery related fires come to the forefront.  U.S. and other airline safety regulators are considering outright bans on allowing bulk quantities of the batteries to fly in aircraft cargo compartments.

Hence the learning is again that product defects often involve the supply chain, not just your organization, but others as well.  In this specific Galaxy Note 7 issue, Samsung SDI is a supplier, along with other battery suppliers. The open question is whether Samsung was somehow trying to control the broader industry fallout of its battery manufacturing process. We will not likely know the answer to that until later in the investigative process.

Like others, Samsung will eventually garner important learning regarding the control or management of consumer focused product performance data and in trying to control the fallout.  On the one-hand, today’s social media based channels, whether good, or not so good, provide instantaneous feedback and perceptions related to consumer experiences and product performance.  A belief that the fallout can be controlled or buffered by internal control processes has passed. Like any other challenge involving major supply chain disruption or business continuity, there must always exist a set of response plans that include important decision criteria as to what needs to occur at any point. Lawyers, corporate risk and other senior managers will often have their own viewpoints but they must understand that this new world of always-on media and instantaneous information requires the most-timely responses, often with a supply chain purview.

The lesson for all is to look to multi-industry learning from past events and not let internal or external perceptual concerns cloud regulatory requirements, regardless of how your organization views such requirements. In the minds of consumers and customers, product and supply chain component safety trumps all other concerns.

Bob Ferrari

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


OpenText Announces Intent to Acquire EMC’s Enterprise Content Business

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Enterprise Information Management technology provider OpenText continued with its track record of growth by acquisition, this week announcing a definitive agreement of intent to acquire the former enterprise content division of newly merged Dell and EMC, including the addition of Documentum. The announcement comes shortly after Dell and EMC completed their substantial merger to form Dell Technologies.

The all-cash deal is valued at $1.6 billion, and is roughly 2.7 times ECD FY15 revenue of $599M. The agreement further calls for the software, associated services, and employees of ECD to be integrated into OpenText. Management expects the acquisition to clear in 90-120 days, subject to regulatory approvals and customary closing conditions.

The acquisition is expected to deepen OpenText’s EIM offering with a substantial portfolio focused on Enterprise Content Management (ECM) and Information Life Cycle Management. It further includes the acquisition of Dell EMC’s ECD offerings from the Documentum, InfoArchive, and LEAP product families. According to company statements, when combined with existing OpenText products, these offerings will enable customers to manage content across the enterprise securely and compliantly, decommission legacy apps to make information more available for complete analysis and insight, and create new ways to work across any device.

OpenText further declared that the newly acquired technology will be available as on-premise, cloud, or hybrid architectures.

No doubt, this EIM technology provider continues to make substantial investments in acquisitions of related technology, sometimes taking advantage of existing business opportunities. In the fourth fiscal quarter ending in June, other noted acquisitions included:

  • Definitive agreement to acquire Customer Communications Management assets from HP Inc.
  • Definitive agreement to acquire Recommind, Inc.
  • Definitive agreement to acquire and close acquisition of ANXe Business Corporation
  • Definitive agreement to acquire, and close acquisition of certain customer experience software and services assets and liabilities from HP Inc.

At the close of FY16 in June, OpenText’s long-term debt was recorded as $2.1 billion while total revenues were $1.8 billion. The task at-hand is the integration of all of this collective technology within OpenText’s new Cloud-based suite of EIM support.

 

 

 


Chipotle’s Ongoing Brand and Food Safety Crisis Continues to Hinder Return of Former Patrons

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Supply Chain Matters provides an update on the ongoing brand and supply chain related challenges that have impacted Chipotle Mexican Grill, specifically a past series of food related illnesses including E-coli and salmonella tied to the chain. Subsequent government investigations could not determine any specific causes of prior multiple outbreaks, which presented a challenge in-itself. Last week, Chipotle reported its latest quarterly financial results and there remains evidence that consumers seek more definitive evidence of food safety responsiveness before they return.  Chipotle logo

In a previous February commentary, we observed that the restaurant chain had entered what we believed was a new critical phase, one focused in rebuilding its brand integrity along with assuring that food safety practices were re-addressed across the supply chain and within its individual restaurants. In a mid-March commentary, we highlighted reports that seemed to put a different twist to the ongoing crisis. At the time, The Wall Street Journal citing informed sources reported that the restaurant chain considered stepping back from the food safety changes touted back in February. Rather than conduct high-resolution DNA testing on a multiple of inbound supply ingredients, the plan was apparently to test only certain foods. Further reported was that the chain’s beef and produce supplies would be pre-cooked in centralized kitchen facilities to insure that E.coli was eliminated, and then packaged in vacuum-sealed bags and shipped to local outlets where the product could be marinated and grilled. That decision was apparently subsequently changed. In April, we highlighted the financial impacts of the ongoing crisis affecting bottom line results and management attention.

At the core of this ongoing crisis is the time-tested tenet that consumer trust is hard won, and hard to get back when consumers believe that trust has been violated. If there is any question of a lack of food safety practices at any point along the food supply chain, efforts need to be re-doubled to explore and address any and all such issues.

Readers may have sensed frustration in that our perception was the Chipotle senior management was placing too much emphasis in addressing the ongoing crisis as that of a sales and marketing challenge, one of providing consumers economic incentives to return, while taking what we perceived as a more lean expense towards food safety integrity across the supply chain. The chain embarked on new loyalty and incentive programs offering free burritos and chips to lure back previous customers.

Last week, the “food with integrity” chain reported its latest quarterly financial performance for the June-ending quarter that mostly invoked mixed Wall Street expectations. Although the restaurant chain has returned to some profitability, it has not managed to recover a significant portion of its prior loyal customers. Same store sales were reported as down 24 percent.  According to a report published by The Wall Street Journal, equity analyst firm JP Morgan cited a recent survey indicating that about 25 percent of the chain’s customers have stopped visiting, or are not visiting as frequently. These same analysts, according to this report, now indicate that a full recovery for Chipotle could take years.

Further disclosed was that full testing for any food pathogens in central kitchens, such as bell peppers, was changed because doing so resulted in lower perceived quality from restaurant patrons. The new food safety expert brought in to address food safety needs has reportedly developed other interventions to identify and eliminate pathogens such as now blanching bell peppers and lettuce at the local restaurant.

For the current year thus far, the decline in the value of the restaurant chain stock is approaching 40 percent. Last week executives indicated that upwards of 30 percent of transactions are now tied to the new customer loyalty program which by our lens may be just as troubling since a new culture of visit dependence can be increasingly tied to availability of monetary promotions as opposed to prior loyalty tenets of food taste, integrity and quality of food.

Last week Chipotle executives stressed that revised marketing efforts will now shift to providing wider visibility on food safety and the chain’s supplier traceability program. We do not know how much monetary and staff resources have been allocated to marketing initiatives as contrasted with supply chain food safety. Perhaps that will be forthcoming. Suffice to state here that this may well be another case of opportunity lost.

What seems to be so prevalent in today’s food industry is this notion that consumers have short memories, and that customer retention equates to smart and innovative brand marketing. Often this is driven by Wall Street’s relentless pressures for near-term stockholder monetary rewards vs. long-term brand integrity. Call us old-fashioned, but we remain in the belief that supply chain wide quality, oversight and responsiveness to consumer needs, particularly when any of these tenets is challenged, matter much more in the allocation of management and organizational-wide attention.

As for our personal household, we remain as previous loyal customers who have suspended our visits to Chipotle pending more definite data on overall food safety and integrity. When any company turns to short-term crisis management and stock recovery vs. systemic root cause, it should be a flag of caution. Convince and prove to consumers that supply chain wide measures have been definitively addressed. While consumer tastes are certainly personal in-nature, speaking individually, this author is willing to trade-off some taste for assurances of safety and quality.

Bob Ferrari

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


Reports that U.S. Volkswagen Dealers are Growing Restless Regarding the Ongoing Diesel Emissions Scandal Fixes

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The ongoing brand crisis involving Volkswagen and specifically its customers and dealers over the diesel engine emissions alteration admission continues to take on new dimensions.

Last week, The Wall Street Journal reported that VW dealers across the U.S. are fuming regarding the 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 have been sitting in lots for over 10 months while VW and U.S. regulators traverse a legal process for determining next steps. According to this report, U.S. VW dealers are now 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 have reverted to moving stop-sale inventory onto adjacent or off-site storage lots. While VW is currently compensating dealers for additional financing and needs for periodic servicing of this large amount of unsold and un-positioned inventory, dealers are 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.

Last week, California regulators rejected a proposed VW fix for cars with the larger 3.0 liter diesel power plant. VW executives indicate that they have a fix related to the 2.0 liter diesel engines but regulators also need to approve this process as well.

In its report, the WSJ quotes one specific VW dealer executive as indicating that the scandal, compounded by the current glut of unsaleable inventory has soured his view of VW senior management. This executive further indicates that VW should take the unsold diesel vehicles back to Germany or some other location in the world where they can comply with emission standards.

On Friday, VW U.S. executives met with 150 Northeast U.S. dealers to review what was termed as a TDI Settlement Program, and pledged  additional compensation to dealers. While the details of such restitution still are not known it was the first time that VW indicated that the dealers themselves will receive direct compensation.

A detailed timeline was reportedly outlined regarding the proposed buyback and repair program across the U.S., one that is expected to extend through the end of 2018.  According to a subsequent report from the WSJ, a software fix would be made available for third-generation diesels by October, 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.

This overall timeline, if approved by U.S. regulators will affect the nearly 500,000 existing diesel powered vehicles now on U.S. roads in addition to the unsold inventory of 12,000 vehicles.  Thus, it is more than likely that U.S. VW dealer service teams will be very, very busy over the coming months and years. However, VW continues to decline media outlets regarding any specifics related to overall time lines or specific restitution for its dealers. The WSJ report also indicates that for consumers electing to sell their vehicles back to VW, a “third-party settlement specialist” would be inserted to act as an intermediary and direct communicator with dealers.

There is little doubt that U.S. VW dealers face a service management crisis, one that will tax both aftermarket and pre-sales service business segments.

As noted in previous 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. 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.

Once again, all of these challenges in the months to come demand that VW executives move decision-making beyond the halls of Wolfsburg with more emphasis on major geographic based leadership such as VW U.S. The supply chain implications alone place a major emphasis on service management and responsiveness or risk even more erosion to the brand and to customer loyalty. VW needs to think more boldly and more creatively to address fixing the current challenges with non-conforming diesel powered vehicles including the need for augmented resources.

Bob Ferrari

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


Volkswagen’s Initial Settlement with U.S. Regulators- More Challenges Remain

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Today marks the initial formal settlement by Volkswagen with U.S. based regulators regarding approximately 500,000 U.S. vehicle owners of two liter diesel engines as a result of the emissions cheating scandal. The financial settlement amounting to more than $15 billion, ranks as one of the highest ever incurred on an automotive manufacturer, a new industry milestone. It further represents what could be one of the largest vehicle buyback offers in U.S. history, one that we believe will test reverse supply chain processes.

Today’s settlement adds additional challenges for VW in its efforts to move beyond this emissions scandal. They include continued damage to brands because some consumers feel deceived and continued heartburn for existing VW dealers and retailers in selling what remains of existing gasoline powered vehicles.

Of the $15 billion total, a little over $10 billion is set aside in a civil settlement to offer vehicle buybacks and additional cash settlements to owners of existing vehicles that were implicated in the software manipulation of diesel powered emissions while $5 billion in allocated to offset excess diesel emissions and eventually boost efforts for new green energy and zero emissions vehicles by VW.

Yet remaining to be eventually settled is the issue of 85,000 4.0 liter diesel powered vehicles involving other primarily Audi and Porsche brands.

According to various published reports, existing owners of 2009-2015 affected vehicles will receive direct compensation of at least $5000 along with the estimated cash value of the impacted vehicles. Prior owners are expected to receive half the compensation of current owners while leased vehicles will also be included in some form of financial settlement. Buybacks are not expected to begin until October at the earliest, pending final judicial approvals of the settlements.

The company faces other fines involving governmental or civil settlements both in the U.S. and other countries as a result of the incident. According to Reuters, regulators will not immediately approve fixes for all three generations of polluting 2009-2015 vehicles. There are still open questions as to whether these vehicles can be economically and logistically repaired.  That opens the potential for a significant reverse supply chain challenge to move such vehicles to recycling or environmentally safe disposal channels.

As noted in our Supply Chain Matters commentary last September, Volkswagen runs the risk of losing the trust and loyalty of its U.S. and global customers if this crisis is not proactively managed. Thus far, it would seem that VW management is trying to move forward in settlements and in executive leadership changes but much more work remains. Many other ongoing supply chain and product related challenges remain as well.

One relates to the inventory of unsold diesel cars that now have had their U.S. and European sales suspended. That adds to the recycling and reverse supply chain challenges. If VW elects to repair or refit some of the diesel powered fleet, there are challenges related to who performs these services, how will compensation be administers and where the refits will be performed.

It is no secret that Volkswagen has struggled with its vehicle line-up for the U.S. market, including a market competitive and fuel efficient mid-sized SUV which was initially promised for 2016 market entry. That model availability problem has become much more complicated and may force VW to reach out to other manufacturers to fill-in holes in the model line-up.

VW continues to learn financially 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. The most important when all the dust settles, will be more sensitivity to customer and market needs along with implications of being afoul to governmental emission standards. Now, more than ever in the company’s history, VW needs to take an industry leadership role in alternative powered and green energy powered vehicles.

All of these present a difficult set of challenges in the months to come, when that demands that VW executives move beyond the halls of Wolfsburg.

Bob Ferrari

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

 


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