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Automotive Service Supply Chains Undergo Even More Stress

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In a published Supply Chain Matters commentary in June, Service Supply Chains Put to the Ultimate Stress Test in the Automotive Industry, we focused on General Motors, which Automotive Industry Airbag Inflator Product Recallafter intense scrutiny from U.S. regulators and legislators regarding faulty ignition switches among multiple models, had recalled thousands of vehicles. At that time, GM had announced a cumulative 44 product recalls involving nearly 18 million previously sold vehicles not only for faulty ignition switches but for various other lingering quality problems.

Other Automotive OEM’s have also found themselves under intense regulatory scrutiny, and many elected to err on the side of caution and declare product recalls if there were any concerns regarding vehicle or occupant safety. The result led to a Washington Post headline indicating that one out of every ten vehicles on the road had been subject to a recall notice. That amounts to a lot of motor vehicles.

Beyond the challenge of potential damage to brands and subsequent consumer brand loyalty, our primary concern in June was that automotive service and aftermarket supply chains were about to face their biggest stress test ever. The sheer numbers implied that required replacement part inventories were not going to be able to match expected demand and that inventory would have to be re-allocated or alternate suppliers would have to be sourced.  Dealers and authorized repair facilities had to be very careful in scheduling service appointments and setting customer expectations regarding replacement part availability and concerns for vehicle safety. 

Also included in our June commentary, was reference to reports that product recalls related to defective airbag inflators produced by supplier Takata Corp. were expected to increase after a series of investigations.

Flash forward to today, and now the sheer scope and impact of the unfolding product recalls involving defective Takata airbag inflators is approaching millions of additional vehicles and multiple other brands. U.S. regulatory agencies have raised alarms for the safety of occupants with calls for immediate attention.  Web sites are swapped with consumers seeking the status of their vehicles. Business and general media have not taken the time to get the facts sorted out regarding the largest concern being potential defective airbag inflators operating in warm and humid climates. Instead, consumers from across the U.S. are forced to seek answers and demand attention as to whether their vehicle is safe to operate.

By our lens, automotive aftermarket service and parts networks have now been literally thrown under the proverbial bus. 

It wasn’t their fault.

The events did not allow the planning for adequate replacement parts or analysis to the required capacity of service repair and replacement resources. The problem was thrown over the wall because quality monitoring mechanisms stalled and time had run out for planned response. Organizational interplays and CYA were probably at-play as well.

Already, OEM’s such as Toyota are trying to proactively respond to this defective air bag inflator crisis in the most realistic manner.  Reports indicate that Toyota dealers are being requested to disable the potential defective airbag mechanisms of recalled vehicles and instruct vehicle owners to return when replacement parts are made available.  They are doing so because of the reality of backlogged replacement parts which are substantial. In the meantime, temporary labels affixed on vehicles warn occupants of a safety hazard of not having operating airbags.

How comforting is that?

But, without adequate replacement part inventories, there are little options right now.

Service supply networks will invariably come-up with means to prioritize the most important and time sensitive parts requirements and then move on to the various other replacement part requirements to get through this crisis.

The takeaway from these ongoing unprecedented set of automotive industry product recall events is that if the business situation requires much more responsive, supply-chain wide  quality monitoring  mechanisms and more informed service and aftermarket spare parts networks, than provide the necessary tools and resources required to get the job done.

No doubt, there will be considerable repercussions and learning that come from these events. There will invariable be far more attention paid toward vehicle safety, regulatory safety and reporting and supply chain wide quality adherence.

In the meantime, as automotive consumers, we need to allow the time and patience for the dedicated professionals who plan and fulfill aftermarket parts and service event requirements to adequately respond to the crisis at-hand while more attention is directed toward more responsive quality management.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.


UPS’s Latest Survey of Healthcare Supply Chains- Some Interesting Conflicts and Needs for Broader Perspectives

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This week, UPS announced the results of its seventh annual “Pain in the (Supply) Chain survey involving pharmaceutical and healthcare supply chains. According to the authors, the survey was conducted from phone interviews with 536 senior supply chain management decision-makers within the healthcare industry.  Global coverage for this survey is noted as Asia, Canada, Latin America, the United States and Western Europe.

For the third consecutive year, the survey points to regulatory compliance as the top supply chain pain point, cited by 60 percent of the 2014 respondents, indicating that this trend alone is driving current business and supply chain changes.  From our Supply Chain Matters lens, that finding is not a surprise since so many pharmaceutical and healthcare supply chain are indeed regulated, but more importantly, they are now globally extended for both supply and service demand needs.

The next largest concern was noted as product protection challenges, with 46 percent of respondents citing product security, and 40 percent citing product damage and spoilage as top concerns. Again no surprise, given the ongoing challenge of counterfeit drugs and global extensions of transportation and logistics networks.

However, what was surprising, at least for us, was that a mere 26 percent of these supply chain leaders cite contingency planning as a top supply chain concern. Perhaps this is an area that these supply chain leaders feel is being adequately addressed. Yet, 34 percent of those surveyed in Asia and 22 percent of those residing in Latin America indicated their firm’s supply chain was impacted by an unplanned event in the past 3-5 years. Cited reasons that were noted were:

  • Events being too unlikely or infrequent
  • Back-up infrastructure too expensive to deploy
  • Little or no prioritization being given to this area vs. other challenges

For an industry that is required to spend so much on product development, brand value and patient trust, it is surprising to once again note such viewpoints. The industry need only look to the previous supply chain disruptions that occurred at Johnson & Johnson to ascertain how about contingency planning has become.

Deeper in the UPS news release perhaps finds a rather important assumption related to the above concerns in compliance, product protection and contingency planning.  Many healthcare supply chains are not viewing production, distribution, logistics and transportation as a core capability and have thus outsourced these activities. According to this latest UPS survey, 62 percent of decision makers cited increased reliance on third-party logistics providers as a strategy into the foreseeable future. (3-5 years) Therefore business partners have become an important enabler in helping to overcome stated supply chain challenges.

In a previous Supply Chain Matters commentary, we called for a broader technology vision among supply chain execution partners, specifically 3PL’s. As more and more industry supply chains opt to outsource logistics, transportation and customer fulfillment to logistics and transportation partners, leveraging the potential benefits of newer technologies in item-level tracking, Internet of Things (IoT) and supply chain control towers become a de-facto capability requirement to overcome business challenges and deliver required business outcomes. Too often today, the outsourced 3PL decision has been driven solely by cost control vs. broader requirements for supply chain resiliency and responsiveness. While UPS and FedEx have embraced advanced technology, other 3PL’s have relied on customers to fund such investments, and there remains the conundrum. For us, these latest UPS survey findings concerning healthcare focused supply chains have special meaning to the new reliance on supply chain execution partners for joint goal enablement. Beyond logistics, globally dispersed contract manufacturers have an important enabling and support role as well.

The report’s executive survey indicates that healthcare supply chain leaders are themselves eyeing technology investments in two specific areas of the supply chain, namely front-end order fulfillment and overall product protection in the form of serialization and item-tracking.  Supply Chain Matters advises these leaders to also consider the all-important supporting element for connecting the front and back-end of the extended healthcare supply chain. That would be a cohesive supply chain business network that synchronizes planning, execution and early-warning intelligence to unplanned events.

Bob Ferrari

 


SAP Announces Intent to Acquire Concur- An Expensive Business Network Play

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This posting is an obvious follow-on to our prior commentary about this September turning out to be a noteworthy month for technology related announcements.  Ariba an SAP Company

Yesterday, SAP announced its intent to acquire Concur Technologies, a provider of cloud-based travel and expense management software.  SAP was willing to shell out a whopping $8.3 billion in one of this enterprise technology provider’s largest acquisition deals to date, surpassing the prior acquisition database technology provider Sybase for $7.1 billion in 2010.  It is also one of the most significant moves under the leadership under the now singular CEO leadership of Bill McDermott.

After pondering the announcement, the SAP user community should wonder whether SAP is again taking precious financial resources away from its mission of supporting manufacturing and service industry core business process support needs. Instead, this enterprise software provider has an apparent focus on being a multi-purpose business network company in the definition of SAP.

According to business media reports, Concur reported revenues of $546 million and an operating loss of a little over $24 million in its latest fiscal year which ended a year ago in September 2013.  In its announcement, SAP indicates that Concur has a revenue run rate of more than $700 million in its current fiscal year, implying a revenue growth rate in the mid-twenty range. That is not all that spectacular for hot, cloud-based tech providers.

SAP was willing to invest half the Concur amount, namely $4.5 billion in its acquisition of cloud-based sourcing and procurement provider Ariba, which is now an SAP operating company and is being positioned as a longer-term cloud-based strategic platform for B2B supply chain sourcing, planning and procurement in direct and indirect materials support areas. SAP has since acquired Fieldglass, a cloud-based provider of contingent labor and services management technology to augment Ariba network capability. But as SAP procurement and supply chain customers have noted, the product roadmap for broader diversified business network potential benefits currently span a long, multi-year window, with multiple moving parts involving other SAP technology and applications areas. One can certainly speculate that Ariba as a stand-alone entity would execute at a far faster pace.

SAP is thus willing to pay in excess of a 10x multiple, no small change, to secure long-term strategic potential in an indirect procurement services category. Granted, travel makes-up a considerable expense for any company, but for larger enterprises, the product value-chain is of higher importance to bottom-line results. The business travel services field is a very crowded one, providing competition challenges with other noteworthy existing players, which will surely get more dynamic with this news.

Readers should note that in their announcements related to business network moves, enterprise vendors emphasize the value of transactions within the network.  In the specific case of this Concur announcement, the number communicated is $600 billion in transaction volume.  That is the clue toward the real intent, that being incremental revenue growth from transaction fees. However, customers and their procurement teams have become more savvy in this game, and are not reluctant to trade one business network for another if transaction costs exceed budget goals. 

At first blush, this Concur deal appears to this author to be more about feeding SAP’s sales teams with added deal volume.  That impression is reinforced by statements indicating that the majority of SAP customers do not currently run Concur.  Giving the benefit of doubt, we certainly do not have privy to the full picture, thus we along with SAP customer and partner universe will have to await more articulation regarding yet another elongated business network player and roadmap.

Stay tuned.

Bob Ferrari


A Report Profiling Apple’s First Responder EFFA Program

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In the week that Apple staged its massive media event announcing two of its newest iPhone models, BloombergBusinessweek featured an intriguing article titled: Apple’s iPhone 6 First Responders. The report serves as a very timely reminder of the critical importance for harvesting product performance and service reliability information very early in the product launch stages.

The Apple program outlined is termed early field failure analysis (EFFA). The Bloomberg authors had a novel spin as to the purpose, one that may well resonate with our reader audience: “ As customers line up to buy the device (iPhone) around the world, Apple employees will show up at work to learn how they screwed up- and fix it.

Humor aside, the Apple program was conceived to resolve problems before they become far larger in-scope, when they are far more expensive to resolve across an outsourced supply chain. Bloomberg cites former Apple employee sources as indicating that EFFA testing is most stringent during the device’s first weeks of consumer sales, but can continue longer as problems arise. Therefore, the EFFA program for the iPhone 6 models is most likely underway as we pen this commentary. Once more, the report confirms that defective Apple devices returned at Apple retail outlets are directly airfreighted to Cupertino where the phone is physically examined and where manufacturing history can be traced to individual workers on an assembly line. There are some rather fascinating examples of how previous problems were found and resolved before they became a thorn.

The report is worthy of a read since it provides further evidence of the importance of connecting the service management business process with the product supply chain. It further provides evidence of how Apple’s product management and supply chain teams harness early feedback information related to specific products to avoid more costly issues and to protect the image of the brand. I suppose we could add that it also avoids the wrath of CEO Tim Cook when consumers feedback any displeasure in an Apple product.

Bob Ferrari

 


Breaking News: CMA-CGM Announces Ocean Three Service Sharing Alliance

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At the beginning of this year, a 2014 Supply Chain Matters prediction and consul was that industry supply chain teams should anticipate continued consolidation activity for the ocean container industry.  That indeed has been unfolding. The failed attempt among the top three global ocean container carriers to form the P3 Network was quickly followed by the announcement of the 2M Alliance and the Hapag-LloydMSC merger. Now comes the next iteration.  Container_Term

Today features the announcement from French container shipping group CMA CGM that the service carrier has entered into service-sharing alliance with China Shipping Container Lines (CSCL) and United Arab Shipping (UASC).  According to the announcement, the alliance will be termed Ocean Three, and will extend among Asia-Europe, Asia-Mediterranean, Transpacific and Asia- United States East Coast transit routes. The agreements will reportedly cover vessel sharing, slot exchange and slot charter agreements among the three carriers. Routes will be utilizing transshipment hubs common to the three partners. Rather noteworthy is that this alliance covers container shipments originating from the Middle East, Indian sub-continent and West Africa.

This new alliance requires the approval from the U.S. Federal Maritime Commission before it can go into effect.

Readers will recall that CMA CGM was one of the lines originally included in the former P3 Network alliance proposal, and was not included in the 2M Network alliance announcement among industry leader Maersk Lines and Mediterranean Shipping Company (MSC). If approved the Ocean Three alliance will also compete with the announced merger of Hapag-Lloyd and Chile based CSAV, an effort to create the fourth largest global container shipping line by consolidation. That merger is still subject to approval from European Union maritime officials.

Industry supply chain teams and transportation and logistics service providers should anticipate further announcements related to consolidation as the industry domino effect continues. While the various ocean container carriers continue to point out the benefits of increased efficiencies, schedule frequency and overall capacity utilization from these consolidation moves, the smoking gun remains as to the impacts to future tariff rates.

Bob Ferrari


The U.S. Postal Service Suddenly Changes the Dynamics of Parcel Shipping and Online Commerce

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This week, the U.S. Postal Service (USPS) suddenly changed the dynamics related to shipping costs in B2C/B2B online commerce and the beneficiaries may well be online customers and mass retailers. The agency aggressively cut shipping prices involving small packages in what the Wall Street Journal described as: “..aiming to steal business from both FedEx Corp. and United Parcel Service Inc.,”

In effect, the Postal Service is acknowledging that its parcel rates were not competitive with its market competitors and it wants to do something about that.  The steepest rate cuts are targeted to large volume shippers with packages of less than 5 pounds, with cuts involving other package weights and volumes. In its reporting, the Wall Street Journal (paid subscription or free metered view) cites an industry observer as indicating that a number of E-commerce shippers are either considering or have elected to now utilize the USPS as a result of this rate price change. In its article, WSJ further features a table that contrasts carrier shipping costs for 5-10-20 pound packages which clearly depicts more competitive USPS rates, especially when shippers factor the added fuel and other surcharges incurred by both FedEx and UPS. The USPS does not apply surcharges and has been the last-mile delivery mechanism for many rural addresses in the United States.

In previous Supply Chain Matters commentaries, we raised awareness that planned dimensional-based rate increases initially announced by FedEx and subsequently UPS  would have definite impacts to E-commerce shipments in 2015. These rate hikes especially involved low weight but high bulk item shipments such as a case of toilet paper or paper towels.

Both FedEx and UPS were not at all pleased by the latest USPS pricing move and have each logged formal protests and claiming foul. No doubt, certain members of the U.S. Congress may be receiving protest calls.  Then again, the cry concerning the USPS was to stop hemorrhaging money and this may well be a bold step in that direction. Officials at the USPS indicate that they will make money with these more competitive rates.

The USPS has made other important moves including partnering with online retailers Amazonfor Sunday deliveries, This week provided an additional announcement that Amazon, specifically its Amazon Fresh unit, and the USPS will partner in a trail to shuttle insulated containers of food products and groceries to residences in San Francisco, and perhaps other urban markets as well.

In the view of Supply Chain Matters, this latest move sets-up a whole different dynamic for B2C/B2B online customer fulfillment in the forthcoming holiday buying peak period.  Online retailers who want to maintain attractive free shipping options now have a potential new alternative to control costs of such programs.  Both FedEx and UPS will have to deal with a different competitive landscape in terms of rates.

Readers will recall that during the 2013 holiday surge period, the prime headline was the blame game directed at package delivery carriers carrier’s UPS, and to some extent FedEx, inability to handle the last-minute online fulfillment volumes that swamped logistics networks in the two days prior to the Christmas holiday. Both carriers have since invested in added logistics capabilities and have alerted online retailers that there may be a premium cost involved in supporting last-minute or time-sensitive shipments. Amazon for one has also been working on developing its own parcel delivery network.

The USPS has in all likelihood, added itself to this dynamic in the upcoming period. Reducing rates is one strategy, but delivering on-time at the height of crunch periods when all networks are tapped is the other test of competitiveness. We will all have to wait and observe.

In the meantime, we extend a Supply Chain Matters thumbs-up to the USPS for finally making bold moves.

 

You and I as online consumers, and many online retailers and businesses stand to benefit with these latest USPS moves.

Bob Ferrari


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