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Product and Quality Management Take on More Difficult Dimensions

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Our ongoing Supply Chain Matters commentaries regarding certain product design flaws, quality conformance shortfalls and subsequent efforts at covering-up such flaws have drawn similar takeaways, but it now appears that the stakes are growing far higher.

In the case of the diesel engine emissions manipulation scandal involving Volkswagen, the financial, legal and brand impact implications remain ongoing. A company noted for a somewhat tops-down management style and an engineering-driven culture and among one of the two top global producers is learning some tough lessons because of this scandal. Financially, the global tally is now exceeding $20 billion in product recall, legal settlement, and other costs with potentially more remaining.

Last week, in response to U.S. Justice Department investigative efforts, VW admitted guilt in the manipulation of auto emissions standards along with efforts to cover-up such activities. Six individual VW executives were criminally indicted because of the emissions cheating case. One was once responsible for ensuring that vehicles complied with U.S. emissions standards. Five others had senior leadership roles in the product development organization in Germany.

In its plea agreement, VW admitted that its supervisors and employees agreed to deceive regulators and customers regarding the actual emissions performance of engines. According to published reports, the indictment states that some of the supervisors encouraged employees to create software to evade emissions standards.

A published report by both the New York Times, Reuters, and global business network CNBC, cites content taken directly from the U.S. Justice Department indictment. Noted is man identified as “Supervisor B,” who overruled nervous subordinates and allegedly instructed them to develop the overriding software program to defeat emissions readings. According to the court documents, this supervisor instructed the subordinates to not get caught.

Further noted in this report is a statement from the federal indictment indicating: “In 2012, for example, senior executives rebuffed a group of Volkswagen engineers who had discovered the illegal software. The engineers were told to destroy the documents they had prepared showing how the software worked.”

The whole affair represents the first time that the U.S. Justice Department has elected to pursue responsible individual employees as well as companies themselves in such criminal investigation cases and the admission of guilt.

Also last week, a U.S federal grand jury indicted three former Takata Corp. executives, charging them with conspiring to provide auto makers with misleading test reports on rupture-prone air bag inflators at the center of unprecedented products recalls involving upwards of 42 million vehicles involving multiple brands. These executives held senior positions overseeing air bag product management and engineering at the Japan based supplier. Takata itself separately pleaded guilty to criminal wire fraud and agreed to pay $1 billion to resolve a two-year long U.S. Justice Department probe of the supplier’s handling of air bags that risk rupturing and spraying shrapnel in vehicle cabins. The safety problem is linked to 11 deaths and 184 injuries in the U.S. alone. According to court documents, a senior Takata executive at one point directed a junior engineer to remove data showing ruptures during testing from a report later given to an auto maker

Product and quality management professionals with on-the-job experience in regulated industry environments have likely encountered certain situations of organizational tendencies to cover-up potential product, process, or software design flaws. Such tendencies can sometimes come from verbal directives from above to “make the problem go-away.” Often, pressures to make operational and financial performance milestones can motivate such actions.

Yet, with each passing year, the scope and implications of such actions have grown to unprecedented dimensions. And now, these latest actions point to executives and individuals collectively being held criminally accountable for their specific actions.

We need to be clear, we are not at-all dismissing any of these actions and behavior.

Instead, we observe that product and quality management professionals have now been placed in a more precarious role.

Accommodate pressures to make problems go away so that business goals and performance bonuses are met, or stand on principled legal grounds to do the right thing for customers, corporate and individual legal protections. The challenge becomes ever more magnified as increasingly specifications, process performance activities and management actions are stored in digital files and available for internal or external review.

Such actions represent a slippery slope, one that probably does not get adequate attention in employee and management leadership training, but surely will in the coming months.

The notions of “make the problem go-away’ needs to be supplanted by “we all need to do the right thing” for customers and employees. It starts with corporate leadership, culture, ethics and resolve.

Unfortunately, in today’s global business climate of intense pressures for results, the challenge appears to be more elusive, and individual careers and reputations may well suffer the consequences.

Bob Ferrari

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

 


Volkswagen Reaches Additional U.S. Emissions Settlement with Another Painful Learning

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Supply Chain Matters provides a further reader update regarding the financial and other effects of the ongoing Volkswagen brand crisis concerning the diesel engine emissions alteration admission scandal that occurred over a year ago.

In late October, the global auto maker was granted final court approval to a $14.7 billion settlement with U.S. based consumers, dealers and government agencies specifically related to two-liter diesel engines that did not meet emissions standards. This week, in a U.S. Federal Court hearing, the global automaker agreed to pay an additional $1 billion to repurchase or fix upwards of 83,000 affected three-liter diesel powered vehicles.

The agreement calls for VW of offer a buyback program that covers 20,000 Audi, Porsche and VW branded vehicles while coming up with a plan to repair the remaining 63,000 vehicles to restore emission conformance. If VW cannot come up with a fix approved by U.S. regulators, the automaker would offer to buy back these vehicles as well. Further included in this added $1 billion settlement is a $225 million to be channeled toward environmental remediation efforts and $25 million to support the use of zero-emissions vehicles in California.

Everything told, the financial cost of ill-advised product design management decision is nearing $16 billion for the U.S. market. That does not count any other subsequent lawsuits that may come from U.S. vehicle owners who feel disgruntled by the existing settlements. Criminal investigations remain ongoing in both the U.S. and in Germany. There are additional logistics and handling costs that will stretch out over the coming months to manage the buyback and disposition of unsold and non-conforming vehicles.

As the New York Times reported in August, Volkswagen owners in the United States will receive an average $20,000 per car as compensation for the company’s diesel deception. VW owners in Europe, however, at most get a software update and a short length of plastic tubing to adjust emissions. That is because European laws shield corporations from class-action suits brought by unhappy consumers. A group of online legal start-ups has been working to change the status quo and has been supporting a campaign to recruit clients en masse and attempt to get around the usual restrictions for consumer lawsuits. If they are successful, the cost to Volkswagen will dwarf the company’s $16 billion settlement in the United States.

This whole affair raises an even more provocative learning regarding a product design management decision.  Consider what $16 billion in investment could have created in an alternative energy powered automobile, be that diesel, electric or hybrid in design.

Instead, difficult financial decisions are being made to offset these unplanned expenses, and thousands of VW focused employees may suffer the consequences in job losses. The damage to VW brand and perhaps customer loyalty, is even more troublesome. Now the global automaker must scramble to develop new models of more fuel-efficient vehicles to remain competitive in the industry.

As noted in our prior blog commentaries, a company noted for a somewhat tops-down management style, an engineering-driven culture and among one of the two top global producers continues to absorb some tough lessons because of this scandal. Further, the industry will adsorb some key learning regarding the need for balancing the pressures to introduce market-leading innovative products on a timely basis with organizational tendencies to cover-up potential hardware or software design flaws. This is quite an expensive lesson.

Bob Ferrari

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


India Regulators Cite 200 Drug Makers for High Risk in Compliance Standards

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Here is some rather troubling news for pharmaceutical and life sciences supply chains.

FDA News and other India news outlets report that 200 drug manufacturers have been now cited by India’s national drug regulator for noncompliance and “high risk” for quality control lapses as part of an initial effort to crackdown on the country’s pharmaceutical sector.  At face value, that represents a troubling portion of domestic capacity.

According to the report, The Central Drugs Standard Control Organization joined forces with state regulators to inspect upwards of 135 drug production facilities across India. Regulators initiated these steps to follow U.S. Federal Drug Administration (FDA) enforcement model guidelines and to address what was described as rampart quality control problems in the country’s drug market.

Apparently, none of the cited drug makers have been publicly named.

A Times of India report published in June indicated that the 200 drug manufacturers were scheduled for risk-based inspections based on an analysis of regulatory data recorded over the prior 5 years.

Global based pharmaceutical and life sciences companies that are currently outsourcing API or drug manufacturing within India should obviously take notice of this development.


New Supply Chain Developments Involving Apple

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These past few days, Supply Chain Matters has been updating our readers regarding ongoing supply chain management developments involving specific companies. That includes Airbus, Boeing, Chipotle Mexican Grill, Pratt and Whitney and others. We have been somewhat remiss in not updating on developments involving one of global business’s most visible supply chain, that being Apple.

There are two somewhat significant developments to share.

Potential U.S. Manufacturing Presence

To begin, multiple published reports now indicate that prime contract manufacturer Foxconn, has confirmed that the CMS is in preliminary discussions to make investments to in-essence expand Apple’s manufacturing operations presence in the United States. One report indicates that this activity is underway despite the objections and wisdom of Foxconn chairman Terry Gau. A Bloomberg published report observes that the disclosure came hours after a joint announcement by U.S. President-elect Donald Trump and SoftBank Group Corp. to invest $50 billion in the U.S. and create 50,000 jobs.

As we have noted in prior commentary, during the heated U.S. Presidential campaign, Donald Trump specifically cited Apple for its tendencies to source thousands of manufacturing jobs in China while reaping the benefits of higher profits. As of now, Foxconn has provided little additional details to business media, no-doubt not wanting to steal Apple’s thunder in such an announcement. Other reports indicate that Apple has been approaching certain other suppliers to consider moving supply chain component manufacturing from China to the U.S.

In the past two weeks, President-elect Trump has publicly confronted Carrier, a Division of United Technologies and this week, Boeing over the projected costs of a new replacement for the Air Force One presidential aircraft.

For multiple years, this blog has challenged Apple to consider expanding some of volume manufacturing volume presence in the U.S. over and above the manufacture of certain Mac computer models. Being a rather savvy and public relations astute company, it may well be that Apple has quickly read a sea-change in the political discourse of the United States and now needs to be prepared to stay on the good side of the incoming administration.

We shall all see what headlines develop in the coming weeks.

 

iPhone Battery Failure Issues

Turning to the product front, Apple has publicly confirmed that a problem involving some batteries in the manufacturer’s iPhone 6S model is apparently become more widespread than initially revealed. The issue has become known from China’s product safety agency, and Apple reportedly quietly acknowledged the situation on a Chinese web site. China now represents one of the largest installed base markets for the iPhone 6S. The Chinese regulatory agency claims that the battery issue involves older iPhone models as well, including the iPhone6 and iPhone5S but Apple thus far is only acknowledging the small batch of iPhone 6S units.

Apple has stressed that the battery issue poses no safety risk for customers.

The problem manifests itself with the phone prematurely and unexpectedly shutting down to protect its electronic circuitry. Indications are that the cause may be a component within the battery that was contaminated by ambient air. The contamination was initially disclosed to involve phones sold in September and October 2015, but other reports indicate that the situation may be more widespread than just this production interval. Apple has instructed Chinese users to bring their phones to authorized repair centers or to an Apple store for a battery swap. The manufacturer further indicates that it will add a new diagnostic in its forthcoming IoS software update in hopes to mitigate any future problem by a software modification.

This iPhone battery issue is garnering wider visibility after Samsung’s recent crisis involving exploding batteries in the new Galaxy Note 7. Samsung obviously had a clumsy response to its battery issues, which were far more severe, including not informing or involving product safety regulatory agencies early in the process of discovery.

Apple is obviously a more brand marketing savvy customer and has been rather careful in the widespread sharing of the occurrence of product quality issues among its smartphone products. However, one similarity shared with Samsung would seem to be the suspected manufacturing defects involving batteries. Apple also shares a similar battery supplier, that being a component division of Samsung.

 

Two new developments, each with different connotations related to the brand, and directly involving the supply chain. Even the perceived best in class supply chain is not immune to externally focused developments.

 

Bob Ferrari

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

 


Yet Another Setback Concerning a Noted Mexican Restaurant Chain

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This Supply Chain Matters posting serves as another update on our now streaming commentaries related to the ongoing business and supply chain challenges involving Chipotle Mexican Grill.  Specifically, we refer to the past series of food related illnesses including E-coli, salmonella, and norovirus that date back to 2015. This week there has been a new development, one that makes us wonder aloud if senior management really grasps the extent of the chain’s continuing challenges.  Chipotle logo

Our last update commentary in late October reflected on the restaurant chain’s September-ending financial performance. Management appeared to reflect an upbeat perspective and announced several new initiatives directed at broadening menu options and fulfilling online orders including mobile ordering technology, along with consideration for airing more television commercials. To further efforts in improving food safety in restaurants and the supply chain, the chain’s CFO pointed to an establishing an independent Food Safety Advisory Council made up of some of the country’s foremost experts in food safety and food microbiology.  There were indications that the chain was expanding regional executive leadership to help improve staff training and the individual guest experience. Our take was one that management may now have grasped that you do not manage a brand crisis solely via sales and marketing tactics to bring previous loyal patrons back. The elephant in the room has been consumer perceptions of ongoing food safety and whether this chain had taken all necessary measures to ensure that the series of incidents that occurred in 2015 would not be repeated, at least by controlled, network-wide management and quality focused practices.

This week, investors once again punished Chipotle stock after the firm’s co-CEO Steve Ells indicated at an investor’s conference that he was not at all satisfied with the rate of recovery and specifically: “I’m particularly not satisfied with the quality of the experience in some of our restaurants.” At face value, that might have been a positive statement by a senior leader in the early stages of addressing a quality crisis.

Mr. Ells apparently went on to declare that slow customer service threatens to turn off people if they come back to restaurants and that the current service experience is not perfect. In its reporting, The Wall Street Journal pointed out that employee turnover rates among Chipotle outlets, according to the firm’s CFO, was averaging 130 percent in July. An equity analyst was quoted as noting that workers were leaving for higher wage rates at other establishments.

In somewhat of a conflicting goal situation, declining sales, volumes and ultimately margins take away from the ability to pay higher wages and demand higher standards in food preparation and service. Now this week, a chain-wide hiring freeze has been imposed.

In one of our earlier Chipotle focused commentaries, we noted that a review of SEC documents indicated that compensation bonus performance payouts for the firm’s executives were solely based on meeting future higher stock price milestones. We questioned why operational performance milestones related to quality and service did not appear to be weighted as high. A few weeks ago, business media reported that a small group of activist investors were now pressuring management for change in board leadership and for greater value for the company’s stock.

Thus, the management vice impacting Chipotle tightens. Sales and stock growth comes from increased consumer loyalty, based on a fundamental tenant that the quality of the food and the overall experience is suburb. Restoring integrity in the quality and safety of food requires certain investment and remediation, and more importantly, continued training, audits, oversight and periodic testing.

Efforts directed at improved employee training and higher consciousness towards food safety likely has been for naught when high numbers of recently trained employees up and leave. The same holds true for local management. The long-term efforts of the Food Safety Advisory Council are now pressured by senior leadership concerns related to slower service. It could be that slower service comes from understaffed and under-compensated employees.

There are obviously many take-away learnings that can be derived from what is occurring at Chipotle but the chapters are still ongoing.

The questions raised are what comes next?

Bob Ferrari

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


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