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The Challenges Surrounding Volkswagen


There is an expression that is often cited in business and military situations: “We are so, so screwed

That expression likely describes current conversations among the halls and facilities of Volkswagen.

The U.S. Justice Department has begun a wide ranging investigation into alleged use of software installed in nearly a half-million diesel powered cars that make these vehicles appear to have cleaner air emissions than they actually do in operation. The auto producer has now acknowledged that the vehicle software installed in some U.S. diesel powered passenger cars make it appear that the vehicles conform to U.S. emissions standards.

According to various media reports, the German automaker could be subject to fines and penalties amount to $18 billion. That of course, does not include the costs involved in mitigating and correcting the problem of non-conforming vehicles currently being driven by U.S. consumers.’

The Wall Street Journal reports that Volkswagen stock has declined nearly 35 percent since Friday, when word began to spread that the U.S. Environmental Protection Agency (EPA) would accuse the company of cheating.  The publication is further reporting this evening that CEO Martin Winterkorn is literally fighting for his job. Today, Volkswagen indicated that it would take a $7.2 billion charge to earnings and cut its full-year outlook, with an indication that as much as 11 million vehicles could be affected by this development.

While business media continues to dive into the implications and consequences to Volkswagen, this blog commentary briefly dwells on the implications from our product design and supply chain management lens.

First and foremost, Volkswagen has 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 seems that Volkswagen senior management has been candid and forthcoming in issuing a public apology for violating consumer trust. That cannot be said about other automakers recently involved in government investigations alleging wrongdoing.

Beyond words, the automaker has to now expediciously develop a set of action plans to address several supply chain challenges. One relates to a growing inventory of unsold diesel cars that now have their U.S. sales suspended. The auto maker has made great strides in overcoming prior U.S. consumer pre-conceived impressions that diesel powered cars were noisy and dirty. About a year ago, this author test drove a new diesel powered Passat and I was impressed. Now, all of that market education effort could be compromised if proactive management of this crisis does not occur.

Another challenge relates to all of the sold vehicles currently in-service, that are probably now deemed as violating air emissions standards. Both a mechanical and software fix, if one can be economically developed, must be engineered and expeditiously deployed.

In past cases involving vehicles that do not meet air emissions standards, U.S. regulators have either ordered them off the roads or imposed stiff daily fines. The clock is now ticking.

It is no secret that Volkswagen has struggled with its vehicle line-up for the U.S. market. As noted, the U.S. designed Passat is an impressive vehicle but has failed to capture wider interest among buyers.  Competitive models are laden with more on-board electronics and entertainment features. The automaker has further lacked any competitive mid-sized SUV model which is essential for competing in the U.S. market. In 2014, the automaker committed to produce a competitive 7 passenger SUV model by 2016 along with a $600 million investment in a new vehicle design research center. The design included fuel-efficient diesel powered models.

The coming weeks and months promise to provide Volkswagen with a leadership and response crisis with significant product development, product and service focused supply chain implications. These are significant challenges requiring proactive actions.

Similar to past consumer trust incidents involving Toyota and sudden unintended acceleration, we all get to observe and learn how a global automotive leader responds to brand, product design and consequent supply chain response crisis.

Bob Ferrari

Xerox Launches New Application of Potentially More Cost Affordable Smart Labeling Technology


Supply Chain Matters continues with our market education series, in particular, citing next generation technology involving smart item-level labeling technology that can open the door to further integration of physical and digital information needs.  Evolving next-generation labeling utilizes printed electronics and near-field communications (NFC-enabled) smart labels to track products and their various states.

Today, Xerox announced the availability of two printed electronic labels that can collect and store information about either the authenticity or condition of products flowing across the supply chain. From our lens, the availability of such advanced labeling technology will foster new, more affordable dimensions of item level tracking, security and authenticity specifically related to products. This author would add that this is the dawning of the application of item-level technology that industry supply chain teams have versioned for quite some time.

Xerox Printed Memory is label that is printed on a thin, flexible substrate (see photo) upon which 36 bits of data can be added, stored, or re-written to non-volatile memory. Xerox product teams describe this product as a low cost method for adding intelligence to objects.    The label can be manufactured with tamper-evident adhesives and available in a number of physical formats.  Data affixed to the label can be pre or post Xerox Printed Memory labelprogrammed, depending on business process or product need.

The label licenses printed labeling technology developed by Thin Film Electronics ASA, which Supply Chain Matters has previously brought to the attention of readers in various other application areas. Thin Film and Xerox have been collaborating on joint product research for the past few years, and we were alerted earlier this year of a pending product release.

We had the opportunity to speak with Xerox product management and learned that initial application of this labeling technology can apply to needs to authenticate refill of products such as dispensing machines with consumable products. Think of air or water filters, pharmaceutical products or ink jet print cartridges. A further and most interesting application area is product authentication where label based memory can store product identification or distribution codes while supporting needs for controlling product authentication, tracking and monitoring across the entire physical supply chain. The label is thus utilized to verify if the product is genuine and can track handling during distribution.

The Xerox label passes through a two-part verification, one being the reading of physical memory on the label, and one being a hand-held or smartphone based reading device utilized to authenticate the product.

Consider for a moment prior commentaries where sophisticated counterfeiters were able to accurately replicate product labels and distribute counterfeit goods.

Xerox Printed Memory with Cryptographic Security adds a unique, encrypted code developed by the Xerox Palo Alto Research Center (PARC). Essentially a manufacturer can pre-print a QR type item level identification that conforms to GS1 standard serialization or product tracking standards at time of printing along with encrypted metadata with a unique cryptographic “seed” value that is authenticated by designated authorized parties with the proprietary algorithm. An inspector with a secure smartphone reader can capture the encrypted authentication code, along with the QR code, compares the two values and generate a further proprietary authentication code. The reader can optionally add additional time/location or intended destination information that can be fed to a track and trace application.

The attractive part of Xerox’s approach is that verification by reader or smartphone device can be accomplished both online of offline. In the case of offline, the authentication occurs and later can be uploaded when connected to the Internet. Another added feature is that new codes can be re-written to the memory label as the product transcends the value-chain.

Xerox is initially targeting this smart labeling technology for brand protection, anti-counterfeiting or tax or duty stamp conformance needs. Products could include expensive pharmaceuticals, liquor, tobacco or high fashion branded products. A potential use can be the use of rewriteable data within each label to identify if the product is authorized, a shipping tax has been paid, or whether the product passed through an authorized supply chain node.

Previous advanced item tracking technology utilizing RFID enabled technologies proved expensive to implement on a wide scale basis. Xerox believes that its new smart labeling technology can provide high security as well more attractive cost affordability.

Xerox plans to produce these new labels in volume at its Webster New York facility.

As noted in our prior market education commentaries, this is the dawning of a new era for item-level tracking. It is one that will harness the potential of the Internet of Things as well as the abilities to bring together the physical and digital aspects of supply chain information integration applied to important product and business challenges and opportunities.

Bob Ferrari

NLRB Ruling Has Significant Industry Supply Chain Implications


Yesterday, the National Labor Relations Board (NLRB) in the U.S. handed down a ruling that will present significant implications for supply chain logistics, warehousing and customer fulfillment services providers.

In a narrow, 3-2 decision, the NLRB revised the “joint employer” standard for determining when one company shares responsibility for employees hired by another.  This ruling applies to the use of contract workers and temporary employees where a hiring agency assumes responsibility for recruiting temporary employees, and those same employees are managed by another firm.

Business media headlines have been quick to cite the impact to fast-food, construction, and service industries but the ruling, if upheld, will have similar dramatic effect across industry supply chains.

The nature of supply chain activity is its constant operational ebbs and flows timed to either end-of-month, end-of-quarter or seasonal fulfillment activities.  Large customer fulfillment centers managed by the likes of Amazon, Wal-Mart and others, include significant numbers of temporary workers brought in to support volume surges, especially in the October thru December holiday fulfillment period.  Similarly, warehousing, transportation and third-party logistics (3PL) firms utilize temporary workers. It has been a means to leverage a flex workforce to manage overall costs. Companies generally share decision-making on employment, hiring and dismissal. But, in some cases, policies for the use of temporary workers have broached into other dimensions.

As one example, during the U.S. West Coast port disruption that severely impacted so many industry supply chains last year, independent truckers servicing these ports, who were compensated by number of loads completed, were especially vocal in expressing grievances for not being adequately compensated for the enormous amount idle time spent in long queues entering West Coast ports. Similarly, while West Coast Longshoremen were able to negotiate a new five-year contract, independent truckers remain with the same grievances and have conducted wildcat work stoppages.

The NLRB is now more concerned on the meaningful impacts to workers concerning working conditions, and worker rights to bargain with all responsible parties that determine working conditions and benefits. According to business media reports, the NLRB, with its latest ruling, will now consider whether a business exercises control through an intermediary or has the right to do so.

The ruling has triggered new concerns and emotions by businesses that the NLRB is making it easier for temporary workers to organize and join labor unions.

Industry groups are already urging the U.S. Congress to overrule the labor board ruling, and with the U.S. Presidential nomination season underway, what transpires is anyone’s guess.

Whether you agree or disagree with this ruling, the implication, if upheld, is especially significant and will change the labor cost and work policy scenarios related to temporary and flex workforce needs, an essential for many industry supply chains.

Paris Air Show Adds New Impetus for Supply Chain Execution Across Aerospace Supply Chains

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Commercial aircraft industry eyeballs were focused on this week’s Paris Air Show, a biannual event with enormous significance to major aircraft manufacturers and their respective supply chain partners.  Each event is a competition as to which manufacturer walks away with bragging rights to the most landed Airbus A320neocustomer orders or most buzz regarding a new aircraft model. Beyond the headline buzz as to whether Airbus or Boeing landed the most orders, the global supply chain takeaway is an additional $100 billion plus in customer orders and another obvious extension of multi-year backlogs. The overall pressures on aerospace focused supply chain have clearly and unquestionably turned toward fulfillment execution.

Reports indicate that Airbus booked $57 billion for 421 new aircraft orders at list prices while Boeing landed $50 billion worth of orders representing 331 new aircraft.  Combined, it represents nearly another 6 to 9 months of customer order backlog at current monthly production volumes.

Aircraft engine providers also shared in the order bonanza with consortium based CFM International reporting a combined $19 billion in orders related to its LEAP family of engines, and other models, while General Electric Aerospace reported orders valued at $5.4 billion for its new GE9X engine. Interesting enough, as a literal follow-up to our previous Supply Chain Matters commentary related to CFM International, the CEO of that engine supplier publically warned the two major OEM’s not to request additional production volume beyond aircraft currently scheduled for delivery through 2020, and that the consortium is currently stretched to capacity in fulfilling what has already been booked in orders. Likewise, the President of Rolls Royce’s aircraft engine business indicated that supplier was booked out to 2021 and the current industry message is about production and supply chain ramp-up.

On the topic of engines, Airbus had previously planned to feature its new A320neo aircraft at this week’s show but a component problem within the new model Pratt and Whitney engine grounded the aircraft.

A further industry implication is that more and more of added industry orders are originating from new and up and coming discount based carriers. Indonesia based Garuda was reported to be one of the most active buyers this week, placing orders for both Airbus and Boeing aircraft. Many are opting for termed “power by the hour” or included service management contracts where manufacturers guarantee a specified level of operational up-time and assume annualized aircraft maintenance costs. The longer the industry backlog continues, the less likely that OEM’s and engine suppliers can take advantage and leverage these incremental recurring revenue streams.

On the product design front, the reported buzz centered on a potential new Boeing model termed “Mom”, billed as a likely replacement of current discontinued Boeing 757 fleets. The aircraft does not exist and is more in the pitching stage, but talk of the new model was enough to reportedly generate a lot of interest and a lot of differing views. Postings by Business Insider and Bloomberg provided added color to Boeing’s potential new model.  Industry participants are quoted as indicating that Boeing has no choice but to pitch such an aircraft because of current functional advantages offered by arch rival Airbus with its new A320neo aircraft. According to these postings, Boeing is indicating a “clean sheet” design. However, the current realities of the current highly capacity constrained industry are already adding to the discussion as to the time-to-market timetable for such a new model. Once more, the current operational 757 fleet is noted as more than two decades old and will need replacement rather soon. This author alone is rather frustrated in having to fly coast-to-coast across the United States in aging and dull United Airlines 757’s. It is akin to driving a station wagon with 200,000 miles on the odometer with seats and upholstery worn out. The notion of “Mom” will undoubtedly place enormous pressure on Boeing’s design engineering and program management teams at a crucial time when other new aircraft need to meet delivery and volume milestones.

Obviously, the industry question centers on whether both Airbus and Boeing have learned from past supply chain snafu’s with prior models and can effectively instill added agility, cadence and responsiveness to global-based supply chains. Supplier resiliency and contingency planning will be crucial as will supply chain risk mitigation.  Advanced technology is already playing a crucial role in areas of additive manufacturing, RFID, IoT and more extensive end-to-end supply chain visibility. Both OEM’s, along with key suppliers, would be wise to increase their investments in more predictive planning and supply chain wide business and operational intelligence.

As Supply Chain Matters has noted often, an industry with engineering based culture having upwards of a current ten year order fulfillment backlog while enviable, has unprecedented challenges and requires more innovative approaches by all its players. The focus is now flawless and synchronized execution.

Bob Ferrari

Report of a Building Glut of Scrap and Recycled Materials in the United States

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Of late, Supply Chain Matters has highlighted new industry supply chain challenges related the current high value of the U.S. dollar in relation to other foreign currencies. That challenge now extends to the flow of recycled materials emanating from the United States to other geographic regions.

The Wall Street Journal reports that for sellers of scrap metal, used paperboard and other recycled waste, headwinds are more described as a hurricane resulting in a current glut of scrap materials. (paid subscription required). The WSJ cites data from a unit of McGraw Financial indicating that prices of shredded scrap steel have plunged 18 percent thus far this year, and our down an overall 41 percent since 2012. Likewise, the price of used corrugated cardboard has fallen 27 percent this year. Noted is that Turkey, whose steel mills had been a able buyer of U.S. based scrap, have been buying more from Russia and other sources. China’s demand is also reported as having slowed dramatically. One beneficiary of the current slump is reported to be U.S. based Nucor, which makes most of its steel from melted scrap.  Tht could provide Nucor the opportunity to move up the supply chain into scrap processing.

Recycled materials shipped from the U.S. to other regions were able to take advantage of available surplus capacity on container ships. With the current economics fueled by the higher value of the dollar, scrap materials inventories are building across U.S. distributors. Further, the cost of municipal waste collection contracts are often offset by the value of the scrap and recycled materials that are sold.  The economics of that waste stream are now subject to disruption and potentially added costs for U.S. cities and towns.

A Significant New Milestone Involving the Quality Perception Crisis Among Automotive Supply Chains

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Throughout 2014, Supply Chain Matters called attention to the automotive sector and the unprecedented levels of product recalls that continued to stress auto aftermarket service supply chains and supplier relationships to their limits. From a tactical lens, we observed that the colliding forces of regulatory, political, supplier management and capacity-restrained automotive replacement spare parts networks may well continue for many more months, and that appears to be exactly what continues to unfold. Once more, Supply Chain Matters predicted that when the dust settles, the automotive industry and its supply chain ecosystem partners need to take a hard look at lessons learned.

While automotive OEM’s and their associated brands have taken the bulk of the consumer and regulatory heat around product recalls, quality defects have more often resided within either OEM product designs or parts suppliers and their associated product design or manufacturing processes.

The most significant culprits for the continuous litany of product recalls has been the ignition switch defects involving multiple General Motors vehicles and the alleged defective airbag inflators produced by Japan based supplier Takata Corp for multiple OEM producers. After undergoing continuous ongoing scrutiny from U.S. regulators these past months, Takata refused to broaden the scope of the defective inflators recall beyond a select number of U.S. States with high humidity concerns because the supplier supposedly could not determine the exact cause of defects. That is up to now.

This week provides yet another, but far-reaching significant milestone, namely what is being described as the largest automotive recall in U.S. history, and involving the same potentially defective air bag inflators originating from Takata. Bowing to intense pressure and scrutiny from regulators, Takata has now, for the first time acknowledged that there are defects in its air bag inflators, yet root causes remain unanswered. This week’s announced product recall will be conducted by 11 different automakers and now doubles the number of vehicles subject to recall. Business media now reports the overall vehicle recall as involving nearly 34 million existing automobiles in the United States. Six deaths and upwards of 100 injuries have been linked to the defective airbag inflator problem thus far.

In announcing the current expanded recall, U.S. Transportation Secretary Anthony Foxx indicated: “It’s fair to say that this is probably the most complex consumer safety recall in U.S. history.” Depending on which math is being referenced, the scope of the overall recall amounts to roughly 14 percent of the total vehicles now operating on U.S. roads. Add to that the scope of the 2 million plus vehicles included in the GM product recalls, along with other product related recalls and the picture of a large number of existing vehicles awaiting repair attention becomes a dominant picture. Needless to state, the implications of the continued litany of product recalls involving the industry are far reaching, for both OEM’s, their suppliers, and their service networks.

Logistically, as we and others have noted in our prior commentaries, it will take months and perhaps years for dealer and service parts networks to complete repairs on all recalled vehicles. That will cause additional safety concerns and added frustration among consumers. There are concerns that previous air bag deflator repairs to vehicles may have been completed with defective parts requiring the need for yet another repair.  As noted, the root-causes of the air bag deflator’s defects have yet to be determined by either Takata or a consortium of 10 automotive OEM’s. The shear volumes of cumulative open recalls are testing existing processes and supporting systems, perhaps to their breaking point. As we have pointed out, alternative suppliers have been recruited to augment supplies for both existing new production as well as repair parts needs.

From a political perspective, legislators and regulatory agencies continue to react to the concerns and frustrations of automotive consumers who wonder aloud if automakers really care about the quality of the vehicles they are producing as well as their attentiveness and timely response to vehicle safety. That leads to a continued sensitized regulatory and judicial perspective.

From a financial perspective, the bulk of the costs related to a litany of past product recalls have been on the shoulders of the OEM’s.  However, some automakers such as GM, have managed to shield themselves from expensive lawsuits from prior legislative actions dating back to a previous bankruptcy filing. That will change with the current scope and visibility brought to bear of the latest Takata related recalls. In its reporting, The Wall Street Journal cites one estimate indicating that Takata alone could face recall-related charges in the range of $4-$5 billion, far outpacing an original estimate of $1.6 billion. Yesterday, Takata’s stock fell 10 percent on the Tokyo Exchange as its investors adsorbed the implications. On a broader perspective, the issue of which party bears the bulk of the financial liability for component quality will again be up for discussion.

To be candid and blunt, product quality perceptions have become an overall mess, and it could not come at a worse time.  There was a feeling that automakers had come a long way in overall vehicle reliability but that perception belies the current picture of numerous vehicles now with open recalls.  Once more, consumers clamor for the latest technology advances in vehicle safety, comfort and convenience including all notions of the connected car. Many of these innovations stem from component and sub-system suppliers within an industry that has a track record of mostly marginal supplier relationship building. In its recent annual supplier poll conducted by Planning Perspectives, for the 14th straight year, suppliers continued to rank Toyota and Honda as best customers. Noted is the diametrically opposite goals of an adversarial relationship where OEM’s often seek a supplier’s best technology at the lowest possible price. Compounding the problem are activist investors and private equity firms investing in various tiers of automotive supply chains clamoring for more short-term returns for shareholders.

From our lens, the global automotive industry, and in-particular U.S. based OEM’s need to have rock solid quality focused product design and more responsive early warning quality mechanisms as a top industry priority. Industry executives need to seriously look beyond any perceptions of the panacea of a current super sensitive regulatory environment that will run its course. The notions of an industry solely being driven by lower product margin goals and placing the bulk of that burden on suppliers has to change.  Component, systems and overall vehicle reliability is not the purview of a marketing campaign but rather a systemic process that spans end-to-end product and aftermarket service centered supply chains. Component and systems quality must be a living fabric of supplier relationship management and suppliers need to be fairly compensated for assuring high standards in product design and process innovation, especially considering current product strategies leveraging common brand and/or vehicle model platforms. The stakes are even higher when considering that the electronic and software content of vehicles continues to rise implying more sophisticated reliability and systems focused hardware and software related engineering. In the analogy of carrot and stick agreements, the carrot is longer-term, more collaborative based product design and supply chain focused relationships and the stick is the shared responsibility and liability for warranty and/or product recall costs attributed to vehicle sub-systems such as vehicle safety.

Finally, you may have noticed that lately, not a day goes by without a barrage of targeted online or traditional media ads urging we as consumers to buy or lease that new car with latest technological features.  From our lens, the industry will be better served by re-allocating existing marketing and sales budgets towards investments in more robust early-warning mechanisms related to component quality and to current overburdened and perhaps collapsing aftermarket service networks that are the first line of intelligence for quality and vehicle safety.

Bob Ferrari

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

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