Over these past days, business and general media has produced high visibility reports of expired meat products being served among global restaurant chains operating within China. The news of the expired meat originated on China’s Dragon TV Network. By now, many of our readers, particularly within consumer products and food service environments have read of these ongoing developments, along with consumer, regulatory and industry reactions.
Well-known brands such as McDonald’s, Yum Brands (operators of Kentucky Fried Chicken, Pizza Hut) and Burger King were named by both media and Chinese food regulatory agencies for offering such expired meat products to customers. The expired chicken and beef meat products were traced by restaurant operators to food supplier Shanghai Husi Food Company, which is affiliated with U.S. based OSI Group, a $6 billion producer of food products. OSI itself has garnered what is reported to be a solid reputation as a quality focused food supplier.
According to published reports, the Chinese based distributor Shanghai Husiallegedly re-labeled the meat products with new expiration dates after the original date had passed. Chinese authorities quickly detained five people as a result of these incidents. The Shanghai Food and Drug Administration later concluded that the violations were not the result of an individual but rather the result of an organized effort by the Chinese distributor, which is a serious charge. However, reports seem to indicate that the practice may have been limited to a single Shanghai Husi processing facility.
The CEO of OSI Group was quick to issue a public apology for the actions of its China based subsidiary. That statement begins: “What happened at Husi Shanghai is completely unacceptable. I will not try and defend it or explain it. It was terribly wrong, and I am appalled that it ever happened in the company that I own.” The distributor further pointed out that Chinese authorities inspected other facilities across China and found no issues. The supplier further dispatched a team of its own global experts to ensure that the problem is addressed and corrected.
Yum Brands took quick action by terminating OSI as its supplier in China Australia and the U.S… Burger King suspended all orders from the Chinese distributor. But something different is occurring with McDonalds.
Initially, McDonalds CEO issued a statement indicating that the chain was misled by its Chinese supplier and cut its ties with that supplier. But on Friday, the Wall Street Journal published an article (paid subscription or free metered view) indicating that the chain would stand by OSI Group, its loyal supplier for over 59 years. According to the WSJ, the supply agreement dates back to 1955 when founder Ray Kroc was looking to expand across the United States and now supplies up to 85 percent of McDonald’s global locations. OSI has been instrumental in supporting McDonald’s global expansion and reportedly helping the chain to maintain consistent quality standards. As noted, OSI is not just a supplier to McDonalds but to many other global customers. In 2011, this supplier was cited in a quality award by McDonalds for supply activities both in the U.S. and Asia. According to the WSJ, in 2013 food distributor Sysco cited the supplier with its “Gold Supplier” award.
By Thursday of last week, McDonalds decided to retain OSI as its global supplier, utilizing other OSI owned factories within China. A statement issued to the WSJ stated: “We will not walk away from the issue but we are committed to resolving it.”
Supply Chain Matters has a two-fold reaction to these events. First and foremost, any food supplier that resorts to illegal product classification practices deserves the consequences of such actions. On the other hand, a supplier that has garnered years of experience as a quality focused and rock solid supplier deserves the opportunity for the facts to come out and to take action to totally correct any deficiencies.
In this era of instantaneous response and 7 by 24 news cycles, it becomes all too convenient to throw a supplier “under the bus” of negative publicity. Loyalty to a long-standing business relationship seems to be a fleeting principle. Of course, a global restaurant services provider with such a dependency on a single supplier will often find it difficult to quickly source alternative suppliers. One could argue that that might have led to the McDonald’s response.
However, kudos to McDonald’s management for taking a step back and giving its long-time supplier the benefit of the doubt with the opportunity to get to the facts and resolve the issue (s). A long history as trusted supplier deserves some consideration.
In our previous published commentary, we reflected on the recently held Farnborough Air Show and the new order activity generated for aerospace industry supply chains by this trade show.
One other report from this trade show caught our attention. Boeing indicated that the reliability to-date of the more than 160 787 Dreamliners that are operating among global carriers is averaging about 98 percent. The OEM’s chief 787 test pilot flatly indicated: “that number is not where we would like it to be, we were expecting it to increase.” The industry sets reliability benchmarks for aircraft, particularly newly introduce models that must meet higher customer expectations. According to reporting from the Wall Street Journal, Boeing pegs reliability of new aircraft to that of the previous generation 777 fleet at comparable times of product rollout and fleet operating time. The “triple seven” has been widely recognized as one of the most reliable.
Thus far, 787’s have logged more than 490,000 hours of service, but a series of various ongoing snafu’s or malfunctions have caused some setbacks with both production volumes of new aircraft as well as operation of existing aircraft. However, Boeing officials report that the situation is improving. With its latest new “dash nine” variant of the 787, Boeing has further taken on more design management to insure overall reliability of system components.
The report itself provides yet another reminder of the very high overall reliability standards that today’s more advanced and technology laden aircraft must meet. It is also a reinforcement to the overall criticality of integration of product design with physical and software performance. Not many industries with such a complex hardware, software and bill-of-materials complexity can meet the standards of 98 percent reliability let alone even higher levels.
Across the United States, besides the U.S. team’s accomplishments in the World Cup competition, another dominant traditional and social media based news headline reflects of the incredible number of automobiles and trucks being subject to product recall.
The primary story focuses on General Motors, which after intense scrutiny from U.S. regulators and legislators regarding faulty ignition switches among multiple models, is recalling all sorts of models that are believed to have been exposed to a component design problem, faulty ignition or otherwise. Thus far in 2014, GM has announced 44 product recalls involving nearly 18 million previously sold vehicles. Today’s social and business media buzz blares that the vehicles been recalled thus far is more than the total number sold in the U.S. in 2013.
In a previous Supply Chain Matters commentary, we called attention to product recalls involving airbags supplied by Japan based Takata Corp. that were expected to expand and involve millions of affected vehicles. Today, both Honda and Nissan recalled close to an additional 3 million vehicles worldwide to repair the subject airbag problem, bringing the total number involved with the airbag defect to roughly 5 million vehicles.
An article syndicated by the Washington Post News Service features the headline: More than 1 in every 10 vehicles on the road has been recalled since January. That articles notes that the defects range from rather serious (faulty ignition switches, overheating exhaust parts, power steering problems) to other problems where automakers are now highly sensitized to any potential liability problem. This article goes on to note that in the spirit of crisis bringing opportunity, that there may be an upside of this extraordinary situation: “ … meaning that dealers get to have their old customers back in the showroom. There, they can show off the new models and, at minimum, be in a position to sell drivers on some repairs they previously were not considering.”
This author, for one, was completely floored by the above statement. Are you kidding me! One in every ten vehicle owners being inconvenienced to have to make a service appointment and bring their vehicles for service, and dealers have the “blank” to try an upsell these consumers?
Beyond the lunacy of such statements, there is a parallel and very critical challenge about to happen.
Automotive service focused supply chains are going to be exercised to their biggest stress test, ever. All of the subject recalled vehicles will require some form of a repair part, one that has hopefully, been correctly modified to remediate a suspected problem. The sheer numbers imply that some inventory will have to be re-allocated from those destined to support ongoing production schedules for newer vehicles. In some cases, necessary repair parts will not be able to meet overall demand, and dealers will have to be very careful in scheduling service appointments and setting customer expectations. During Toyota’s past product recall crisis process involving unattended sudden acceleration, Toyota worked directly with its dealer network to coordinate extended service hours for consumers, including nights and weekends. Coordinated round-the-clock efforts among certain component suppliers and respective dealers were directed at insuring repair parts were adequately distributed and vehicles were scheduled for repair based on availability of necessary parts.
In short, the folks that do necessarily receive all the hero badges, those directly supporting service focused supply chains will be called upon in the coming weeks to literally save brand focused reputations.
Last week, Supply Chain Matters was invited to attend the PTC Live Global 2014 customer conference held in Boston. One of PTC’s product suites is technology focused on Service Lifecycle Management (SLM) which has been amassed from previous acquisitions of vendors such as Servigistics, MCA, Kaidera, Xelus and others. In one of the sessions, PTC executives noted that expectations have never been higher on the customer and business side of service management. Yet, service management tends to suffer from immature business processes, not from a lack of dedication and effort, but rather a lack of broader understanding to the importance of service management. Mingling in the hallways and networking sessions, we once again had an immediate sense of how dedicated these people are, and also how unappreciated and frustrating their efforts can sometimes be.
Across automotive, the service focused supply chain will be put to its largest and most expansive stress test from the scope of sheer numbers of vehicles and information required to coordinate service scheduling needs. Some will rise to the task at hand. Some will not.
One fact is very clear- auto dealers are advised to take-off their sales hats and concentrate on service and customer satisfaction efforts, in all dimensions. That includes a very close, almost intimate relationship with those dedicated professionals who plan, manage and fulfill service parts planning and order fulfillment. Forget for the time being, the algorithms and calculations related to mean time between part failures. It is going to be “all hands on-deck” augmented by information coordination and supply chain intelligence that separates the best in class performers.
Have you ever considered a supply scenario where a key supplier to multiple industry brands encounters a significant or troubling quality problem?
Could that scenario be greatly magnified with a highly sensitized regulatory environment?
That scenario is currently playing out across certain automotive supply chains and reflects that even the smallest part or component failure has far greater brand implications.
According to an exclusive published report from Reuters, product recalls involving airbags supplied by Japan based Takata Corp. will expand and involve millions of affected vehicles. According to the Reuters report, this week, Toyota recalled an additional 1.6 million previously recalled vehicles outside of Japan, as well as 650,000 within Japan because of a believed Takada manufactured airbag defect that has the potential to cause personal injury due to faulty inflators within these airbags. The additional recalled vehicles brought the total number of Toyota branded vehicles subject to airbag recall to more than 7 million over the last five years.
Reuters further reports that Honda is considering a recall involving more than one million additional vehicles with potentially defective air bags, citing a source familiar with the matter. Last year Honda recalled over a million vehicles because of airbag inflation concerns. The Honda announcement could come by the end of June pending further information from Takata regarding specific inflator component information. The report additionally indicates that U.S. auto industry regulator, the National Highway Traffic Safety Administration (NHTSA) has this week opened a probe involving an estimated one million vehicles made by Nissan, Mazda and Fiat, in addition to Toyota and Honda. That probe is focused on six reported incidents of airbags not deploying properly in Florida and Puerto Rico.
This news comes in the wake of the increasing high visibility being placed on General Motors and its associated brands due a series of prior product defect awareness and recall snafu’s involving certain ignition switches. The initial GM incident has prompted additional product recalls involving a multitude of components and millions of vehicles. The entire industry is now highly sensitive to increased regulatory sensitivity with significant potential monetary fines if known consumer safety issues are not reported on a timely basis. The result has been an explosion of product recall announcements because of such increased scrutiny and regulatory concern with industry supply chains scrambling to provide necessary modified repair parts.
Automotive OEM’s have fostered component product innovation strategies among a key set of lower-tiered component system suppliers, and OEM’s leverage such innovation across multiple vehicle and brand platforms. As an example, prior Toyota airbag related product recalls involved both the Toyota and luxury Lexus brand. GM’s current wave of product recalls involve many of its brands including Cadillac.
These strategies were put in place to foster both faster product innovation cycles as well as to be able to leverage volume supply costs across multiple global platforms. The objective of leveraging lower component costs has never gone away, at least for certain OEM’s.
According to the Takata web site, the firm serves as a supplier of automotive safety systems and products including airbags, seat belts, restraint systems and other safety related components. This supplier operates 56 plants among 20 countries and is obviously a key supplier for many brands in many production geographies.
From our lens, the current mix of developments at play across multiple automotive brand supply chains provides keen reminders for the needs for more early warning awareness related to component failure trends, the ability to sense and share such information across and among both functional and product design teams with the ability to more adequately identify and trace specific components with their production lots.
Certainly within the automotive industry, supplier management and early warning is no longer the sole purview of procurement teams. It is fast become a cross-functional, cross-business responsibility led by procurement with the active support and involvement of product design and management. When all the dust settles concerning GM’s ongoing investigations and response plan, much of this learning will be evident. While automotive has its unique challenges, other industry value-chain teams can also apply similar learning. The product focused and post-sale service focused supply chain are additionally now highly information dependent.
Worst case scenarios involving a product brand and perceptions of quality and safety are not out of the realm of possibility. Speak to procurement, supply chain and product management team members in automotive and you will probably get a clear sense of how distributed product innovation is highly dependent on higher levels of information awareness and product quality measures.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog.
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Join the Upcoming Webinar: The Importance for Tightly Integrating Product and Supply Chain Management
Because of rapid advances in product innovation and advanced technology, products have become more sophisticated and incorporate broader combinations of physical hardware, software and associated services. This invariable adds more challenges for product design and management teams, especially when key aspects of a product’s value-chain are part of a predominately outsourced supply chain. In a Supply Chain Matters commentary published in mid-April, we brought forward current day evidence that the linkages from product design and management directly to the manufacturing floor, and the broader multi-tiered value-chain network have got to be stronger than ever because the clock speed of industry change requires less information latency and more responsiveness.
This author will be the primary speaker in an upcoming webinar sponsored by Serus on Wednesday, May 28 at 11:00am PDT. The title of my presentation is: The Increasing Importance for Tightly Integrating Product Design and Supply Chain Management. This presentation will address converging trends in business, supply chain and manufacturing, as well as IT and will address the new opportunities to leverage product management and timely new product introduction practices on an end-to-end B2B platform.
Questions I will address in this interactive webinar presentation will include:
• What exactly are the converging forces in Product Design and Supply Chain Management for today’s manufacturers?
• What learnings can be derived from the recent Boeing, Toyota, and GM product recalls?
• How should a product brand owner harness today’s converging trends to it’s obtain industry competitive advantage?
There is time allowed for webinar viewers to ask additional questions. Join us in the complimentary no-cost webinar by registering at this designated Serus webinar link.
Bob Ferrari, Founder and Executive Editor
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.