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A Tour of Healthcare Supply Chain Innovation in Action

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According to a 2015 survey of hospital executives commissioned by Cardinal Health, services reimbursement followed closely by the increasingly higher costs of supplies are two of the biggest challenges facing these executives. Financial issues, drug shortages and efficiency of the overall organization follow as major concerns.

One can notice a common theme among hospital executives that are often directly related to lack of supply chain efficiencies.

A 2015 white paper, 10 Barriers to Effective Inventory Management, points to the continued need for addressing barriers to effective supply chain and inventory management in hospital settings.  This is especially important in operating room or cardiac catheterization settings where medical devices are expensive and inventory management policies often stem from individual physician or surgeon relationships with individual device manufacturers. Cardinal’s white paper cites one report as indicating that supply chain inefficiency, waste and lack of visibility result in a $5 billion in inefficiencies each year in the implantable device market alone.

In operating room settings, surgeons, scrub technicians, resource nurses or operating room managers assume responsibility for maintaining relationships with manufacturers of implantable devices. They do so to insure access to the latest technology and patient safety innovations as well as surgeon preferences for certain devices. In emergency surgery situations, adequate inventory takes on an all-important life and death dimension, one that must be supported by accurate data related to demand incidence.

These complex relationships often extend to rendering orders and managing inventory. The result can often lead to lack of visibility of existing inventory in terms of expired, obsolete or recalled devices. There are also miscommunications and emotion among clinicians and hospital procurement professionals as to inventory exposure and cost. This is an area that has long been fertile for improvements in inventory management, particularly in advanced methods of item-level tracking.

As a major healthcare products distributor for hospitals and health care providers, Cardinal Health is working with hospitals in availability of more innovative inventory management practices in this area.

In November, this author had the opportunity to visit the Cardinal Health Healthcare Supply Chain Innovation Lab located in Concord Massachusetts.  This is essentially an R&D facility dedicated to reducing waste in the health care supply chain for implantable devices utilizing an Internet of Things (IoT) item-level technology approach. The lab serves as a hub to explore innovative technology approaches such as smart sensors and near-field communications (NFC) in addressing healthcare supply chain product demand and supply inefficiencies.

At the conclusion of the tour and a comprehensive briefing from Jean-Claude Saghbini, Cardinal Vice President and GM for Inventory Management Solutions, this author was impressed.

My impressions stemmed not only from the leveraging of advanced technology to challenging healthcare focused inventory management process needs, but in the notion that healthcare supply chains as a whole, and we as healthcare consumers, can greatly benefit from the application of such technology.

Cardinal’s approach to inventory management is described as product agnostic and can include devices not distributed by Cardinal.  The initial focus on medical, orthopedic and implantable device inventory is obvious, in that this inventory is expensive and as noted above, there has been a long history of process inefficiency. While surgeons strive to be up-to-date with the latest in medical technology, their concerns should not be inventory and supply chain management.  That is the purview of hospital administration.

We observed RFID enabled storage cabinets where inventory is RFID tagged by either suppliers or hospital teams. Storage cabinets constantly monitor item-level inventory including serialized devices.  An operating room nurse or physician removes an item from the cabinet and inventory status is immediately adjusted. Within the OR setting, a nurse scans a bar code affixed to the patient and the inventory transaction is  RFID Smart Cabinets for Hospitals automatically updated to include association with a patient.  If the item withdrawn is not accompanied by a patient scan, an inventory alert is generated.

Cabinets monitor and report inventory balances at prescribed intervals and can automatically generate replenishment orders when inventories drop to prescribed levels. If one particular hospital does not have a particular implantable device on-hand, a quick search of other networked cabinets quickly indicates which nearby or healthcare network hospitals have the specific device. The process works similarly for consignment inventory placed adjacent to operating rooms, helping hospital administration to control premium inventory costs.

Analytics associated with this automated process that are available to hospital administrators include open and completed inventory withdrawals, device consumption patterns to calculate replenishment thresholds, inventory nearing shelf-life expiration, inventory subject to product recall, or data needed to ascertain opportunities for specific device standardization.   RFID tag 250-87

Physicians and care givers can also take advantage of embedded analytics in searching for specific devices implanted in patients by serial number, or in queries related to historic procedures, or proper item stocking levels based on actual consumption data.

The value-proposition of Cardinal’s approach is that technology allows care givers more opportunities to better concentrate on patient care and patient outcomes, removing the administrative burden of inventory management. Hospital administrators and procurement team’s in-turn gain valuable efficiencies and inventory knowledge to help in improving overall efficiencies.

This author remains convinced that healthcare product suppliers, product distributors, hospitals and caregivers must continue to come together to collaboratively address the chronic inefficiencies of today’s healthcare supply chains. The visit to Cardinal’s Healthcare Supply Chain Innovation Lab and the exchange of ideas with staff convinces me that today’s advanced supply chain item-level and IoT focused technology can and will provide significant strides in overcoming such inefficiencies.

As our blog nameplate connotes, supply chains do matter in many industry settings and in healthcare supply chains, the opportunities for increased efficiencies and process innovation are vast.

Bob Ferrari


BMW Incurs $40 Million Fine for Safety Lapses

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Within our 2016 Predictions for Industry and Global Supply Chains, Prediction Five called out specific industry challenges in the New Year, which included automotive supply chains. An unprecedented level of regulative scrutiny has precipitated a large amount of product recalls that are taxing service focused and repair parts supply chains.

On Monday of this week, U.S. auto safety regulators fined luxury automaker BMW $10 million, part of a $40 million civil settlement over the German automaker’s safety lapses. The fine is the second paid by BMW since 2012 and the latest in a series of civil penalties imposed on major automakers by the National Highway Traffic Safety Administration (NHTSA).

Under the settlement, BMW admitted it did not comply with minimum crash protection standards, failed to notify owners of recalls in a timely fashion and failed to provide accurate information about its recalls to NHTSA.

According to a syndicated published report by Reuters, this settlement ends a NHTSA investigation into whether the company failed to issue a recall within five days of learning that it’s 2014 and 2015 Mini Cooper models failed to meet regulatory minimums for side-impact crash protection.

The $40 million settlement includes a $10 million fine, a requirement that the company spend at least $10 million meeting the order’s performance obligations, and $20 million in deferred penalties if the company fails to comply with the order or commits other safety violations.

BMW agreed to hire a government-approved independent safety consultant and disclose updated procedures to NHTSA. The agency has required a number of automakers to agree to independent monitors or retain outside consultants to improve safety procedures as part of settlements.

Of course, the most visible development in this area will be how government regulators ultimately deal with Volkswagen and its admission of circumventing air pollution standards in the U.S. and other countries.

Earlier this month, the agency fined Fiat Chrysler Automobiles $70 million for failing to disclose vehicle crash death and injury reports. That automaker was obligated to pay $70 million in July to resolve allegations it mishandled nearly two dozen recall campaigns covering more than 11 million vehicles. In January, Honda paid $70 million in fines for failing to disclose death and injury reports.

Hundreds of millions of dollars in fines may well be better invested in advanced technology that mines vehicle performance and repair incidents and more proactively alert regulators to issues. Then again, some dis-investment may be required to impress upon senior management that the implications for not conforming to timely regulatory reporting is a reduced performance bonus equivalent to the company’s cost of fines incurred.

 


Supply Chain Matters 2016 Predictions for Industry and Global Supply Chains in Detail- Part Three

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We continue with our Supply Chain Matters series outlining in more detail, 2016 Predictions for Industry and Global Supply Chains. These predictions are provided in the spirit of assisting industry supply chain teams in setting management objectives for the year ahead as well as helping our readers and clients to prepare supply chain Supply Chain Matters Blogmanagement and line-of-business teams in establishing meaningful programs, initiatives and educational agendas.

The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and service management.

Our predictions series includes a re-look at all that occurred in the current year, a reflection of future implications, and soliciting input from clients and other supply chain and blogosphere observers. Unlike others, we incorporate a lot of thought and perspective into our annual predictions and take the time to actually scorecard our annual predictions at the end of the year.

Readers are welcomed to review our complete listing of all ten 2016 predictions for industry and global supply chains.

In our Part One posting, we dived into Prediction One that addressed what industry supply chains should anticipate in global chain activity and Prediction Two, what to expect for inbound commodity and component costs as well as unique challenges for sourcing and procurement teams in the coming year.

Part Two of our in-detail predictions explored Prediction Three, turbulence and continued change in global transportation / logistics, and Prediction Four, the growing supply chain talent and skills gap requiring organizations to be more innovative and resourceful.

In this posting, we explore certain industry-specific challenges occurring in 2016.

2016 Prediction Five: Our Noted Supply Chain Industry-Specific Challenges

Each year when we publish our annual predictions, we include a specific prediction addressing what we feel will be industry-specific challenges dominating business and media headlines in the coming year.  In 2016, challenges will remain in B2C Online Retail, Commercial Aerospace, Consumer Product Goods (CPG) and Automotive industry sectors.  We have added a further 2016 industry challenge, that being current efforts to deploy more sustainable and health conscious agriculture and food based supply chains.

B2C and Online Retail

In 2015, global retailers continued to be challenged in emerging and traditional markets and in permanent shifts in consumer shopping behaviors. Industry CEO’s continue to openly admit that this is one of the most challenging eras for the retail industry. The byproduct of the late 2014 U.S. West Coast port disruption was retailers having a discernable overhang in inventories entering the 2015 fulfillment surge quarter.

While penning these predictions, the final online tally for 2015 is yet to be determined, but at the close of the 2015 Black Friday and Cyber Monday weekend, trending clearly points to a permanent shift in consumer sentiment towards online buying preferences in the order of double-digit shifts.  By mid-December 2015, reports began to reinforce that online orders were far more than originally anticipated with major parcel transportation provider FedEx and UPS networks falling behind in delivery commitments. Once again-finger-pointing among carriers and online retailers broke out as to which party exhibited accuracy of forecasting.

We predict more challenges for the retail industry in the coming year, unfortunately to include some high visibility bankruptcies. We also suspect that strategies to predominately route online orders to centralized customer fulfillment warehouses may have contributed to carrier network congestion because of the locations of these centers.

We believe that more integrated Omni-channel fulfillment capabilities will trump customer engagement Initiatives in 2016 in the ability to synchronize fulfillment execution with network-wide inventory policy and management with logistics and transportation cost implications.

Commercial Aerospace

Industry dominants Airbus and Boeing are both entering an unprecedented phase of ramping-up each of their individual global-based supply chains and ecosystems to make a dent in multi-year order backlogs over the next 3-4 years among new aircraft programs.

The implication for the commercial aerospace ecosystem is the ability to support a production cadence of nearly 100 per month or 1200 completed aircraft per year by 2019 with very little tolerance for disruptions or system component delays. That is a tall order for an engineered to order, high tolerance and quality centric industry eco system. The cracks were already showing in 2015 and there will be more in 2016. In June of 2015, key suppliers for both Boeing and Airbus were communicating their concerns about supply chain ramp-up plans and were urging the OEM’s to proceed cautiously.

We foresee a rather fragile commercial aerospace supply chain in 2016-17 with many increased risks and concerns. We expect the smaller industry OEM’s to be the primary victims of any supply disruptions.

Automotive Industry

Despite an improved economy and more optimistic consumers, the automotive industry continues to have its own unique set of challenges that will obviously extend into 2016.  An unprecedented level of industry-wide product recalls has taxed service management and repair parts supply chains which will overflow into 2016.  In 2015, the most visible driver was the ongoing series of recalls related to defective airbag inflators produced by supplier Takata that involved a multitude of global brands in 2016. The headline will shift to Volkswagen and its needs to address thousands of diesel-powered vehicles with illegal air pollution monitoring devices and software, which continues to impact the reputation of its brand.

Another concern for 2016 will center on China’s automotive sector where significant overcapacity amidst declining domestic demand will likely force more global exports.  GM is expected to import its first totally Chinese manufactured vehicle, a small SUV, into the U.S. market in 2016.

In 2015, initial buzz on the possibility of Apple getting the automobile business persisted. We concur with Fortune Magazine’s published prediction in November that Apple will likely buy Tesla to springboard entry into the industry as well as acquisition of a fully operating, vertically integrated supply chain.  If this occurs, it will be game-changing in the notion of a software company producing automobiles.  Google (Alphabet) is likely another potential player.

The bottom-line for the automobile industry in 2016 will be innovation in quality assurance, combined software and hardware innovation, alternative energy and Internet-of Things technologies. Automakers again run the risk of complacency in the current environment of unprecedented low prices of gasoline and diesel fuel, opting to promote higher margin trucks and luxury vehicles over those of more increased fuel efficiency and range. The theme for 2016 is which automakers spur more innovation and which focus on short-term profitability needs.

Consumer Packaged Food and Beverage Goods

Since 2014, we have included CPG in our industry-specific challenges for the coming year amid permanent changes in consumer tastes.  The year 2016 we be no exception, but this time, the stakes and the pain levels are far higher.

Consumers continue to shift their food shopping preferences away from traditional processed foods staples in favor of niche food providers that offer more perceived healthy foods containing natural and sustainable ingredients. This trend has become quite discernable and is reflected in financial results and negative growth now being experienced among many large and termed “Big-Food” global producers with iconic food brands. CPG firms continue to work frantically to create alternate choices either through acquisitions of up and coming natural foods providers, by developing new internal product creations, or both.

Declining profits and meager sales growth continues to spawn activist equity investors to influence certain CPG, food and beverage firms to consolidate.  We predict further M&A announcements in 2016, possibly involving blockbuster global brands. As a consequence, the industry is now consumed by zero-based budgeting and significant supply chain focused cost-cutting techniques.  Industry leaders and past veterans point to experiencing one of the most dynamic, challenging and disruptive periods ever seen in the industry.

In 2016, the winners or survivors will be those who can lead in product and process innovation and gut-wrenching transformation satisfy consumer preferences more healthy foods, while dealing with the significant distractions and de-moralization brought about by ZBB or other wide-ranging cost cutting initiatives. We further predict the food quality will suffer and there will be yet another uptick in highly visible food related product recalls in the coming year.

The True Organic, Green and Sustainable Food Supply Chain

We are adding this industry sector to our unique industry challenges in 2016.  Today’s consumers demand healthier food choices and more natural ingredients, are more interested in knowing where their food originated, the ingredients within food and how food is produced with sustainable methods. They are clearly holding well-known iconic food and restaurant brands accountable for increased commitment to this effort.

Throughout 2015, well known producers, food service providers and suppliers were compelled to respond. Brands such as Costco, Hershey, Kellogg, McDonalds, Nestle, Tyson Foods, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers. Yet, do consumers and providers realistically understand the significant challenges and timetables for these efforts?

There are clear realities to the challenges of this ongoing transition.  In April of 2015, The Wall Street Journal noted that the increasing need among consumers for more organic foods is literally: “hampering the growth of one of the hottest categories of the U.S. food industry.” Farmers, dairies and ranchers face significant costs and risks in attempting to convert from conventional to organic farming or animal production techniques. “While organic produce or livestock can command prices as high as three to four times that of conventional food, farmers generally have to sell their food at conventional prices during the transition.”

In other words, the entire food industry and respective shareholders need to come together in concerted efforts in 2016 and beyond to address realistic timetables and consumer expectations as to when true organic, green, sustainable and socially responsible foods will be available in adequate supply and at more affordable prices.  Providers and originators of meat, grocery and produce products will require financial incentives and economic resources to make such transitions over reasonable time periods.  The other obvious concern is food safety.  When massive scale methods are removed that focus on the use of harmful drugs, genetically modified methods of farming or raising animals in quicker time periods, what will be the near-term impact on food safety?

Thus in 2016 and beyond, all of the stakeholders associated with food supply chains need to move beyond press releases, marketing and rhetoric, and address a comprehensive set of plans, expectations, incentives and realistic timetables for when fully green, sustainable food supply chains will provide supply in the volume required to meet global needs, and in adhering to all required food safety standards.  We believe and anticipate that this will be an effort suited for global bodies and regulators such as the United Nations, World Health Organization or industry consortiums.  More overt actions and incentives need to come forward or these long-term commitments will slip even further.

Keep your browser pointed to Supply Chain Matters as we continue dive into each of the above 2016 predictions in more detail. In our Part Two posting we will explore Prediction Three- continued turbulence in global transportation and logistics, and Prediction Four- the widening of supply chain talent and skills gaps.

 

In the meantime, share your own predictions over and above those that we have outlined. Utilize the Comments section associated with this posting or email us directly with your predictions at: feedback <at> supply-chain-matters <dot> com.  We will share all contributed predictions in a final predictions of this 2016 series.

Bob Ferrari, Founder and Executive Editor

 ©2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog.

Content appearing on Supply Chain Matters® may not be used by any third party without written permission of the author and our parent, The Ferrari Consulting and Research Group.

 


How Events Can Change in a Matter of Months- Time for Chipotle to Openly Demonstrate Resolve

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In a January 2015 Supply Chain Matters commentary, we praised Mexican food restaurant chain Chipotle for adherence to established food quality standards and taking decisive action when a regional supplier of pork was not adhering to humane animal standards. According to Chipotle at that time, a routine audit discovered that Chipotle logothis regional supplier violated declared humane-based standards for the housing of pigs with access to the outdoors.  The chain suspended its Carnitas menu offering in upwards of one-third of its 1700 establishments until a substitute supplier adhering to Chipotle quality standards could provide new supply.

At the time, business and general media were quick to feature headlines of this chain’s decisive action. The chain would stand behind its stated Mission as: Serving Food with Integrity. A spokesperson indicated to media outlets: “This is fundamentally an animal welfare decision, and is rooted in our unwillingness to compromise our standards where animal welfare is concerned.”

We at Supply Chain Matters  stated at the time: “One has to admire a company that is willing to adhere to its supply standards in spite of the consequences, especially in the light of the realities of mass food production and of Wall Street’s short-term focus on profits.”

Supply Chain Matters is not of this admiration at this time.

Most readers are probably now well aware, the restaurant chain is struggling with its worse crisis ever involving food safety and quality which has resulted in hundreds of sickened people who all ate at a Chipotle establishments across various U.S. states.

Initial reported incidents began in August when 80 customers and 13 employees were sickened as a result of eating at the company’s restaurant in Simi California. The illness was determined to be norovirus.

In October and November, upwards of 80 people took seriously ill after eating in establishments in Oregon and Washington State.  That was determined to be E.coli infection, a very  serious illness. Government agencies broadened the outbreak to include establishments in eight other U.S. states.

Earlier this month, upwards of 150 people were sickened after eating at Chipotle in Boston’s Brookline district.  That illness was confirmed as the presence of Norovirus, likely spread from a sick person serving food. The Wall Street Journal recently indicated that since July, there have been five outbreaks involving either norovirus, salmonella or E.coli illnesses.

Which each incident, Chipotle’s PR team attempted to place a positive spin to each incident assuring consumers of the chain’s concerns.

Chipotle itself was compelled to warn investors that the current episodes of illness outbreak could negatively impact its quarterly earnings by as much as eleven percent in the fourth quarter.  That was before the Boston incident, and the company’s stock has suffered free-fall with every announcement of a temporary closing of a restaurant. This is an obvious crisis of confidence from many dimensions.

Last week, the chain’s Founder, Chairman and Co-CEO Steve Ellis traveled to Boston and appeared on the nationally televised NBC News Today show to publically apologize to customers. That by our lens, was far too late in this ongoing crisis. That persona, presence and commitment to action would have been far more meaningful during the suspected E.coli incidents.

The firm’s web site includes a Commitment to Food Safety page. It states in-part:

In the wake of recent food safety-related incidents at a number of Chipotle restaurants, we have taken aggressive actions to implement pioneering food safety practices. We have carefully examined our operations—from the farms that produce our ingredients, to the partners that deliver them to our restaurants, to the cooking techniques used by our restaurant crews—and determined the steps necessary to make the food served at Chipotle as safe as possible.”

Directly concerning food supply, the statement goes on to declare:

To accomplish this goal, we have partnered with Seattle-based IEH Laboratories and Consulting Group, a preeminent food safety testing and consulting company. Led by company founder and CEO Dr. Mansour Samadpour, IEH is working directly with Chipotle’s Supply Chain and Operations departments to implement a set of industry-leading practices, including some changes to our previous protocols.”

Further outlined are actions related to food handling and preparation at restaurants, crew education and training and audits and assessments. In essence, Chipotle has decided to reverse a prior practice of preparing raw vegetables and produce at local restaurants. Instead, the chain will revert back to a centralized produce preparation process where washing, preparation and more sophisticated pathogen inspection will be performed, prior to shipping produce to local establishments. Stricter quality standards further imply that the chain’s mission to source locally grown produce will have to change since some local farmers will not be able to adhere to stricter and far more expensive standards.

These are all worthy actions but they in-aggregate will take weeks and months to fully take effect. Newly outlined food preparation and handling practices for local restaurants call into question why were these standards not originally adhered to in a restaurant chain that has a mission statement of high quality food with integrity. The revised audits and assessment section begs the question of frequency and resources dedicated to that effort. All the safeguards of the food supply chain can be neutered by improper food handling and lax supervision at the point of serving. In other words, food with integrity does not end at the receiving door.

What is fairly obvious is that Chipotle needs to rebuild trust and consumer confidence. That includes an admission that a locally sourced food supply chain that can meet strict and consistent quality standards will take time to implement, especially considering the nationwide size of this chain. The boldness and commitment displayed in January needs to be openly demonstrated NOW.

Why not a temporary nationwide suspension of all outlets to perform top to bottom cleaning and rigorous employee training at each and every Chipotle outlet?

What about a moratorium on the opening of any new restaurants until the existing and planned future food supply chain can meet stricter quality standards?

What about an objective  third-party firm being engaged to conduct audits and assessments in the first year of this program to assure consumers of added trust?

Inform all of your patrons, this author and his family included, where exactly Chipotle sources each of produce supply.

By our lens, Chipotle needs to get in front of this crisis and demonstrate to all consumers, this author included, that its mission is not to satisfy Wall Street and bottom-line short-term interests but rather to preserve its reputation as serving food with upmost quality and integrity. Fresh should not equate to expanded risk and expansion should not outpace the ability of the supply chain to meet high standards of food safety in fresh natural or organic food.

Bob Ferrari

 


Report Card for Supply Chain Matters 2015 Annual Predictions for Industry and Global Supply Chains- Part Five

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While industry supply chain teams wrap-up their various 2015 strategic, tactical, and operational line-of-business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.  Supply Chain Matters Blog

Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008.  Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year.  After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.

As has been our custom, our scoring process will be based on a four point scale.  Four will be the highest score, an indicator that we totally nailed the prediction.  One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.

In the initial posting of this Predictions Score Card series, we looked back at both Prediction One– global supply chain activity during the year, and Prediction Two– trends in overall commodity and supply chain inbound costs.

In our Part Two posting, we revisited Prediction Three– the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four– wide multi-industry interest in Internet of Things.

In our Part Three posting, we revisited our supply chain industry-specific predictions.

In Part Four, we revisited our prediction on smarter data and predictive analytics and our prediction of a turbulent year in global transportation.

In this final scorecard commentary, we revisit our final two predictions.

2015 Prediction Eight: Industry Supply Chains Step-up Efforts Towards Supply Chain Vertical Integration and Modular Platform Strategies

Self-Rating:  3.0 (Max Score 4.0)

Our prediction was a belief that industry or company specific vertical integration and modular product platform strategies would accelerate in 2015. Our reasoning was that as manufacturers pursue a need for more agile and flexible global manufacturing sourcing strategies, that modularity in product and supporting process platforms will become more prominent.  This strategy further supports needed flexibilities in geographical and individual customer fulfillment for various market channels. Such strategies have been well demonstrated in high-tech, consumer electronics and in automotive environments, and our prediction was that these efforts would expand both in these industries and in others as well.

Our belief was that vertical integration strategy shifts would impact contract manufacturing models in the latter-half of this year, and indeed there are signs of this occurring.  In a Supply Chain Matters commentary in late August, we provided evidence of a changing contract manufacturing model within the high-tech industry. CMS firms such as Foxconn and Flex are steadily executing vertical integration and product modularity strategies. Foxconn is believed to be finalizing plans for investing in a massive electronic display manufacturing facility in China that would serve display needs for smartphones, consumer electronics and other industry needs. The leading CMS is also involved in a number of other strategies that integrate the high tech component supply chain. Flex itself is remaking itself to be a leading manufacturer of Internet of Things (IoT) enabled connected products that feature common components. That strategy has provided Flex with entry into other industrial verticals including medical devices and home appliances.

In the automotive sector, Tier One suppliers such as Johnson Controls and others are actively pursuing strategies to be one-stop suppliers for major motor vehicle functionality such as safety systems, on-board electronics, or alternative energy propulsion and regenerative systems.

We believe that these are two meaningful examples of more vertical integration as well as common platform that will evolve across other industries as manufacturers continue to revisit their contracted arrangements with contract manufacturers, suppliers and owned manufacturing.  While the timing related to our prediction may arguably be challenged, the evidence of strategy remains.

 

2015 Prediction Ten: Service Supply Chains Garner Increased Attention and New Investment Interest.

Self-Rating:  3.8 (Max Score 4.0)

This final prediction was somewhat obvious as-well. The prediction was that because of two primary motivations, multiple equipment manufacturers and services providers will place added emphasis in evaluating their service focused supply chains. That included after-market business process services, parts, service delivery, supply and demand networks.

One motivation was the increasing incidents and broader occurrence of product recalls brought about by tighter global regulation. Manufacturers have no choice but to protect the brand and customer retention.  The most obvious example was reflective in the automotive industry where a massive volume of high-visibility product recalls remain even as we pen our scorecard.  GM’s faulty ignition switch and other component problems, the multiple ongoing vehicle recalls among multiple global brands involving defective Takata airbag inflators continue to stress service supply chains. Even Tesla is not immune, having just recently recalled its entire on-the-road vehicle fleet to repair faulty seat belt connectors. The unpredicted bombshell in 2015 was Volkswagen’s alleged tampering with emissions from its small and mid-range diesel engines that is currently providing major challenges to its brand.  Yet to play out is the timetable for how all of the current effected vehicles on-the-road will be repaired or retro-fitted. In commercial aerospace, a continued aging fleet of aircraft operating around the clock adds more exposure to timely service and parts needs.   Where airlines have discovered more cost-effective models for outsourcing service needs, service providers themselves, whether independent or OEM, continue to experience the need for investment in processes and systems.

The other driver we predicted was building interest in IoT and connected networks which present new business models where equipment serves as the demand signal for maintenance, repair or consumable parts. Throughout 2015, there was high interest in this area, and General Electric was again the benchmark for how money can be made with a connected equipment business model.  Moving into 2016, we anticipate that interest will turn toward more discernable deployment of integrated product and service platforms.

 

This concludes our series of looking back on 2015 to assess how our Supply Chain Matters Predictions fared.  Once again, we trust our readers were able to gain benefits from following our series.  Again, feel free to share your own observations regarding our predictions, along with other important key supply chain, procurement and B2B developments that were meaningful in 2015.

As we move toward the latter stages of December, keep your browser pointed to Supply Chain Matters as we will shift our attention toward unveiling our 2016 annual predictions for industry and global supply chains.

Bob Ferrari

©2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

 

 


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