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The Saga of Supplier Takata Reaches a Sad Conclusion- What Has Been Learned?

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This week marks a sad milestone for an 80-year-old automobile components supplier with deep history.

Japan based Takata Corp., the company that has made unprecedented product recall headlines has filed for bankruptcy protection both in Japan and the United States. The move comes after the supplier faced reported claims and liabilities estimated to be in the billions of dollars owed to auto makers who were forced to shoulder the burden of unprecedented numbers of product recalls and associated costs.Airbag 300x168 The Saga of Supplier Takata Reaches a Sad Conclusion  What Has Been Learned?

Under the bankruptcy agreement, much of the supplier’s business interests will pass to rival Key Safety Systems for an estimated $1.6 billion. However, a reorganized Takata will have to assume liabilities not contracted in the bankruptcy sale, which includes continued production of replacement air bag inflators to complete outstanding repair parts requirements for many more months to come.

In January, a U.S. federal grand jury indicted three former Takata Corp. executives, overseeing air bag product management and engineering. charging them with conspiring to provide auto makers with misleading test reports on rupture-prone air bag inflators.  Takata 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 rupture-prone air bags. Thus far, faulty air bag inflators from the supplier have been linked to 16 deaths and upwards of 180 injury reports globally.

According to estimates from The Wall Street Journal, there are currently 54 million defective air bags that still need replacement in the U.S. alone. These recalls affect roughly 16 percent of the 260 million vehicles still operating on U.S. roads, or roughly one in five vehicles. In some cases, replacement parts are required in lieu of other replacement parts. The supplier’s first and most trusted customer, Honda Motor, elected to drop the supplier in 2015, no longer willing to tolerate a supplier with such a track record of product design snafus and cover-ups.

As we opined in earlier Supply Chain Matters commentaries, replacement parts supply is expected to extend for several more years, making some vehicles even more susceptible to premature airbag inflation explosions that injure drivers and passengers. Auto makers thus remain dependent on a financially smaller and hobbled Takata to meet global demand of replacement inflators.

We noted in January that product and quality management incidents across the automotive industry have taken on more difficult dimensions that expose corporate cultures that favor cover-ups. In addition to Takata, there were the unprecedented numbers of Volkswagen diesel-powered vehicles that were secretly outfitted with emissions altering software. In a plea agreement, VW admitted that its supervisors and employees agreed to deceive regulators and customers regarding actual emissions. Estimates of VW’s ultimate liabilities range in the $15 -$20 billion range when the recall process completes itself over subsequent months. Fortunate for VW is that increased global vehicle sales and profits have helped to buffer the overall financial impact.

With each passing year, the scope and implications of product design and quality incidents have grown to unprecedented dimensions. Product and quality management professionals are placed in precarious roles to make problems go-way during intense pressures that business goals and performance bonuses are met. Doing the right thing for the ultimate customer seems to be a fading requirement. And now, corporations, executives and individuals are collectively being held criminally accountable for their specific actions.

The Learnings- If Any

If there is one of many takeaway learnings from these incidents is that in this digital age, product and process specifications and management actions are stored in digital files available for internal and external review. Transparency has new meaning along with resolve to do the right thing for customers and employees.

In many cases, employees often believe in doing the right things for customers, but sadly, management and business pressures overcome such zeal, and reward mechanisms value those who are creative in gaming the process. All of this, in the end, has a quantified cost, far exceeding the cost to have fixed a defect in the first place.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


This Week’s Paris Air Show- More About Product Development and Supplier Tensions

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The Paris Air Show is being held this week representing an important sales and marketing event for aerospace and commercial aircraft manufacturers and supply chain participants. Thus far, two dominant themes appear; one being efforts by Boeing to premiere or hint of new aircraft as well as added services, the other by aircraft engine producers and key suppliers, exercising influence as the critical link in commercial aircraft supply chains.

Boeing has focused this week’s event as the formal market launch of the newest version of the 737-aircraft family, that being the 737 Max 10. This latest model of the 737 can seat upwards of 230 passengers and has a reported list price of upwards of $125 million, but customers more than often acquire aircraft at discounted price levels. Industry watchers position the 737-10 as a market response to Airbus’s rather popular A320 neo series Boeing began the week by announcing 135 new orders for the aircraft, and thus far, visibility to individual airline or aircraft leasing companies have come forth, including a United Airlines order for 100 of the aircraft. The aircraft manufacturer expects to book orders of upwards of 240-250 aircraft. The 737-10 is expected to enter operational service in the 2020 timeframe.  Boeing 737Max Tail 300x200 This Weeks Paris Air Show  More About Product Development and Supplier Tensions

The president of Boeing Commercial Airplanes indicated to attending press that customers wanted the aircraft producer to build the single-aisle 737 bigger, and with more operating range.  From our lens, that is reflection of airlines being primarily-driven by financial metrics vs. customer comfort factors.  Anyone who has had to endure a 5-6-hour flight on a packed 737 with few amenities including lavatories likely know what we mean by customer comfort.  Welcome to the new world of airline travel, where efficiency trumps any sense of overall customer experience. But, we digress.

From a product development perspective, because of existing iterations of the 737, incremental product development and manufacturing costs for the larger model are relatively modest by comparison, boosting product margins for Boeing.  The supply chain is already in-place and ramping-up production of all models of the 737 family.

Industry media including Aviation Week report that airlines in general have a mixed view of the 737-10, mostly because of market timing and overall claimed capabilities. Boeing is therefore taking the opportunity to leverage this week’s event as a sounding board for the development of a new, smaller twin-aisle “middle-of-the-market’ aircraft with the designated name of the 797 series.

The conceptual 797 would by some accounts, be positioned between the 737, and the 787 Dreamliner, providing airlines more options in operating U.S. coast-to-coast or transatlantic flights airlines. Many in the industry view this model as a successor to the very popular 757 series.

For Boeing, the 797 series would be a test of quicker-time-to-market since by some accounts, airlines have expressed enthusiastic response to initial paper designs. A further critical design decision would be the selection of the aircraft’s available engines. Thus far, we have read indications that existing 737 MAX and A320 neo engine providers CFM International and Pratt & Whitney would be potential suppliers as well as Rolls Royce, which has up to this point, concentrated its product strategy on the larger twin-aisle segment. However, we read one show report indicating that executives from General Electric and CFM International have no interest in sharing a supplier arrangement with Boeing’s 797 series. Instead that are bidding to be the sole engine provider to assure a timely market introduction.

On the subject of aircraft engines, this week’s event has manufacturers in this segment touting their new engine orders. As an example, GE and CFM expect to book $15 billion in new business, both in hardware and services. GE Aviation indicated that its engine order backlog now exceeds $150 billion.

Beyond the marketing, as we have noted in our most recent Supply Chain Matters commentaries focused on commercial aircraft supply chains, engine manufacturers are currently the critical weak-link in the supply chains for both the A320 neo and the 787-MAX.  Pratt continues to deal with initial engine component design and manufacturing deficiencies related to its new geared turbo-fan (GTF) engines requiring the planning of whole engine spares to keep existing operational aircraft flying to schedule.  Engine supplier CFM International, the joint venture of GE Aerospace and Safran, producers of the new LEAP series engines experienced an initial quality problem in a turbine disc within operating engines of the first 737-MAX. At this week’s event, CFM International management indicated confidence in discovering root cause of the turbine disc flaw and expressed further confidence in meeting the targeted delivery of 500 LEAP engines by the end of this year.

Finally, industry and business press is highlighting the July start-up of Boeing’s newly announced Global Services Business Unit.  This week, Boeing management indicated expectations to garner much more of the estimated 8 percent of business services existing Boeing operational aircraft representing billions of dollars in potential added revenues and profits. The goal is to double annual services revenues to $50 billion in five years. Boeing management acknowledged the potential of a “healthy tension” with major suppliers, including engine producers, since many key suppliers rely on services revenues to boost their financial performance. Some engine producers are currently threatening to invest less in product innovation if Boeing insists on taking more market-share in services. That threat includes the currently contemplated 797 aircraft.  For Boeing to accomplish its business goals for services growth, it will need to convince major suppliers to give-up intellectual property as well as spare parts distribution rights. That is a tall order that is bound to lead to added supplier tensions. A further battleground will be the area of Internet-of-Things enabled service models where both aircraft manufacturers and suppliers are expected to clash on whom owns and controls customer-focused operational and services data. This is an area that bears quite a lot of observation in the months to come.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Breaking: Amazon to Acquire Whole Foods- An Obvious Industry Inflection Point

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In the history of any industry, along with its associated supporting supply chains, there comes a seminal series of events that ultimately point to a major inflection point, one that clearly indicates that business-as-usual is no longer an option. For the food and grocery industry, and all of its supply chain stakeholders, the year 2017, in the second week of June, two thunderbolt events ignited a seminal industry change.

As we pen this Supply Chain Matters posting, business and general media are broadcasting the headline announcement that Amazon intends to acquire Whole Foods Market for $42 per share, or more than $13 billion, a clear and obvious effort to directly penetrate the retail grocery landscape. This is Amazon’s largest acquisition to-date, and no doubt, there were likely multiple choices. In the press release announcing the acquisition, Amazon CEO Jeff Bezos indicated that the attraction to Whole Foods was the wide offering of natural organic foods.   FBA sized Breaking: Amazon to Acquire Whole Foods  An Obvious Industry Inflection Point

By our lens, healthy margins, a loyal brand, and future methods to leverage online and in-store shopping were an obvious consideration, Whole Foods has also been under intense pressure from private-equity firm Jana Partners. Whole Foods CEO John Mackey has been quoted as characterizing Jana as greedy. (Actually, he utilized a more direct term)

According to the release, Whole Foods will continue to operate under its current branding, and CEO Jim Mackey will stay-on as CEO.

News and social media reports further indicate that if the grocer receives a better acquisition offer, Whole Foods would be obligated to pay a $400 million termination fee to Amazon.

The other industry shockwave this week came from Kroger Company, one of the largest retail supermarket chains in the U.S., who issued unexpected lowered earnings forecast for the year. The aftermath of this news caused the chain’s stock to drop by 19 percent, the steepest one-day drop for the company’s stock in more than 17 years.

Kroger CEO Rodney McMullen is noted as sting the following in an interview:

The change right now in what the customer wants has never been faster.”

Business and general media reports are citing Nielsen and other retail sales data all indicating that consumers are both more price conscious in their food shopping, continue to seek out healthier food and beverage choices, and are increasingly turning to online channels for food and grocery needs. Nielsen data indicates that online grocery orders have risen 6.8 percent while visits to deep-discount chains are up 2.9 percent.

Other grocery retail chains are also feeling the effects of quickly changing  grocery shopping trends and the words, industry consolidation, are now coming to the forefront.

At the same time, discount grocery chains Aldi and Lidl are making a major expansion within the U.S. to take advantage of the current shopping trends, which will add to increased industry competition at the retail level.

What is now occurring in the retail channel will continue to cascade across consumer product goods, food and beverage supply chains in the form of tougher price negotiations and demands for increased product innovation addressing healthier food choices. The industry has already experienced the pressures from both Amazon and Wal-Mart as to which will receive the most attractive supply pricing deals.

As noted in our Supply Chain Matters industry commentary published in May, the industry winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.

CPG suppliers are also subject to the influences of private equity, specifically 3G Capital, and no doubt, there will likely continue to be influences for additional M&A among major suppliers and food producers.

Consumer packed foods and associated industry supply chain teams need to pay very close attention to industry developments and associated implications. The notions of single-channel product demand forecasting or other business-as-usual supply chain planning and distribution methods no longer apply during now permanent industry shift. Agility, resilience, and a predictive understanding of consumer needs in food and food buying preferences are table stakes.

Be it noted that in June 2017, two industry shockwave developments became the catalyst for structural packaged and fresh food industry change.

Supply Chain Matters will continue to monitor industry supply chain developments and share insights. We predicted significant industry changes at the start of the year, and the clock speed has accelerated.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


A Path Towards Internet of Things Enabled Service Management- Service Parts Planning Realities

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This blog posting represents the second of a four-part market education series, in collaboration with supply chain planning and service parts technology provider ToolsGroup.

 In our initial posting in this series, we declared that one of the most promising line-of-business areas that will benefit from Internet of Things (IoT) enabled technologies applied to supply chain management will be equipment services management, especially service and spare parts management.  Planning 3 shutterstock 394279114 300x184 A Path Towards Internet of Things Enabled Service Management  Service Parts Planning Realities

A longstanding challenge in service or replenishment parts planning and management has always been the ability to forecast item-level demand when such demand is sporadic or sudden.  Now consider the opportunities to have demand-driven or predictive failure data and information emanating directly from the physical equipment.

But with any major business transformation, there are always foundational capabilities that come first. In the specific area of IoT enabled equipment and services management, a foundational capability is usually the need for a robust, responsive, and analytically-driven service parts planning (SPP) capability.

Yet an unfortunate reality is that many manufacturing and services organizations with lower levels of process maturity have not recognized the differing process and decision-making needs required for responsive and effective SPP.  Considering a leap to an IoT enabled service management business model will likely expose this weakness.

 

What Makes Service Parts Planning Different?

Three fundamental differences often found in SPP are the following:

  • Contracted service levels and customer contracts determine the overall parts distribution and required service response network. When there is either equipment downtime, caused by a failing part, or when equipment consumables are suddenly out-of-stock, equipment is no longer generating value for end-customers. There is very little tolerance for inventory back-orders since non-performing equipment results in downtime costs that can far outweigh the cost of the replacement part.

 

  • Service parts component demand is often manifested in intermittent or lumpy demand signals, caused by actual equipment operational conditions or changes in operating environment. That means planning in an environment of long-tail demand, parts that exhibit larger numbers of variability, lumpy or seasonality focused demand patterns. Traditional forecasting or demand planning techniques are often ineffective in planning parts demand in such environments. That’s because SPP is far more concentrated in individual item-level planning as contrasted to product family or aggregated planning techniques. SPP planning models feature higher stock keeping unit (SKU) counts and associated long-tail demand planning computations than traditional supply chain planning models. Algorithms that capture actual parts demand, or plan for future demand need to be far more sophisticated in item level and shipping location mathematical modeling.

 

  • Service parts networks require the need for multi-echelon and multi-tiered inventory stocking strategies tied to more predictive parts demand. Long-tail demand can be best managed by planning that factors item level and shipping location simultaneously. SPP must therefore be able to effectively manage and optimize inventory within such multi-echelon stocking environments.

 

A Path to the Future

Three to five years from today, even more equipment will be acquired by “services by the hour” payment methods, saving on front-end capital equipment costs for equipment operators. Physical objects such as complex equipment, engines, motor vehicles and other forms of equipment will be communicating operational performance and service needs via IoT enabled data and information flows. For equipment manufacturers, the opportunities are new lines-of-business and incremental multi-year top-line revenues flowing from such models.

The good news for IoT enabled service management processes is that the equipment itself can provide more proactive or prescriptive indications of when a part is scheduled to fail, as well as actual maintenance data related to parts failure. Such capabilities will provide added intelligence and more accurate parts demand information that will provide additional service uptime and operational cost savings for customers and service parts providers. In addition, the ability to link the physical equipment and operational data related to equipment with a robust SPP environment adds important benefits in the ability to capture and plan more accurate, and more predictive information related to service parts or consumable parts needs and requirements across a service management network.

However, the savviest businesses recognize that the end-goal is not IoT per-se, but in building the foundational people, process and technology capabilities that can best leverage the digitization of supply chain management and decision-making processes. An IoT front end isn’t much good without an equally responsive back end planning system.

Businesses that recognized the critical differences in more effective service parts management and made the initial foundational investment in more responsive SPP process capabilities will be far better positioned to harvest the benefits of smarter and more efficient network wide inventory levels, more timely decision-making and most important of all, more responsive service and satisfaction levels for equipment customers.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Wal-Mart Conducts an Optimistic Annual Meeting but Industry Realities Remain

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Global retailer Wal-Mart held its annual meeting of stockholders last week and declared that the world’s largest retailer has  “started to invent the future of shopping again.” CEO Doug McMillon declared: “we are going to make shopping with us faster, easier and more enjoyable.”  Wal Mart 300x199 Wal Mart Conducts an Optimistic Annual Meeting but Industry Realities Remain

We would quickly add that this is a tall and expensive order in today’s turbulent retail industry environment.

In prior commentaries, Supply Chain Matters has praised Wal-Mart’s emphasis on leveraging the retailer’s vast brick and mortar presence as a more effective extension of an overall omni—channel business strategy. What seems clear from the strategy that continues to unfold is that Wal-Mart will indeed leverage its significant physical presence as an extension of an online shopping experience. In that vein, the retailer is currently testing the deployment of automated online order pickup stations in stores, actual pick-up stations in select store parking lots, and what the retailer’s terms as “Jet Fresh” delivery, which provides deliveries of household groceries one 1-2 days. Regarding the latter, company management indicated that the service is currently available to about half of U.S. households.

Stockholders were updated on the retailer’s continued commitment to source $250 billion in products within the United States along with meeting a goal to source $20 billion of products from women-owned businesses. Further mentioned were initiatives to source more local and sustainable products and to reduce greenhouse gas emissions across the supply chain by 1 giga ton by 2030.

CEO McMillon boldly declared: “We will compete with technology, but win with people”, adding that workers should not fear increasing automation that will change the work involved in retail.  He added: “We will be people-led and tech-empowered” indicating: “I don’t think we should be afraid of changes.  Instead, I think we should recognize that we’ll be able to learn, grow and change together.”  He went on to state that associates need to be lifelong learners and: “The secret of our success will always be our people.”

Uplifting and motivating statements indeed, but from our Supply Chain Matters lens, there are still brute realities to the current Wal-Mart strategies.

The first and obvious was a realization that prior attempts to build a competitive online presence met with very mixed results. That ultimately led to the bombshell acquisition of Jet.com for a sum of over $3 billion. Since that time, Jet.com founder Marc Lore has been given total license to revamp and improve the retailer’s online presence and associated capabilities. That includes more widespread utilization of Jet.com’s price optimization algorithms, as well as lower prices for merchandise that is ordered online and picked-up at a local Wal-mart store.

As many retailers are now fully aware, investing in online fulfillment capabilities is not a cheap proposition, and many of the touted online initiatives already deployed and talked about are examples of these efforts.

And then there are realities of a changed, people and technology-driven business model that CEO McMillon touched upon. He acknowledged the needs to create new jobs in data science, machine-learning, systems engineering and mobile app development. At the store Associates level, being tech-driven brings new realities as well in terms of added training and personal skills development to be able to be an extension of an extensive omni-channel customer fulfillment environment.

Other open questions come to mind.

The first is a building compensation gap from top to bottom. Business media has disclosed that online czar Marc Lore was compensated in $237 million last year, nearly ten times more than CEO McMillon’s $22 million in compensation. Thus the compensation gap from CEO to store associate grows significantly wider and profound.

It remains widely believed that Wal-Mart has staffed its retail stores with a predominance of part-time vs. full-time staffing.  While starting salaries were recently boosted to a minimum of $10 per hour for retail associates, that level does not provide the financial means to invest in more individual technical skills.  Those possessing such skills will likely be able to find jobs that provide far higher compensation levels. Part-timers need to find other jobs to financially make ends meet, again leaving little time for personal skills development.

Another reality is that the online world remains highly competitive, especially when it comes to Amazon. We have previously highlighted that Amazon and Wal-Mart have been in head-to-head negotiations with major suppliers for lowest priced supply of inventory.

On the very week of Wal-Mart Annual Meeting, Amazon announced a lower Prime membership fee for low-income shoppers which are Wal-Mart core customer group. Lowest income shoppers, those currently obtaining government assistance will likely be eligible for $5.99 monthly Prime membership that includes free shipping. Likewise, Amazon announced an Amazon Cash program earlier this year that allows customers to add cash to their account balances at more than 10,000 locations across the U.S. The online giant continues to step-up its merchandise offerings in lower-cost apparel and in a wider variety of household groceries and local food and grocery outlets.

 

The good news is that at least one large retailer, Wal-Mart, can portray an optimistic strategy of future omni-channel capabilities. On the other hand, there remains an ongoing learning that former methods, practices, and corporate culture are all subject to change in the new world of retail and in retail supply chains.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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