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McDonalds Sticking with Supplier Under Fire

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Over these past days, business and general media has produced high visibility reports of expired meat products being served among global restaurant chains operating within China. The news of the expired meat originated on China’s Dragon TV Network. By now, many of our readers, particularly within consumer products and food service environments have read of these ongoing developments, along with consumer, regulatory and industry reactions.

Well-known brands such as McDonald’s, Yum Brands (operators of Kentucky Fried Chicken, Pizza Hut) and Burger King were named by both media and Chinese food regulatory agencies for offering such expired meat products to customers. The expired chicken and beef meat products were traced by restaurant operators to food supplier Shanghai Husi Food Company, which is affiliated with U.S. based OSI Group, a $6 billion producer of food products. OSI itself has garnered what is reported to be a solid reputation as a quality focused food supplier.

According to published reports, the Chinese based distributor Shanghai Husiallegedly re-labeled the meat products with new expiration dates after the original date had passed. Chinese authorities quickly detained five people as a result of these incidents. The Shanghai Food and Drug Administration later concluded that the violations were not the result of an individual but rather the result of an organized effort by the Chinese distributor, which is a serious charge. However, reports seem to indicate that the practice may have been limited to a single Shanghai Husi processing facility.

The CEO of OSI Group was quick to issue a public apology for the actions of its China based subsidiary. That statement begins: “What happened at Husi Shanghai is completely unacceptable. I will not try and defend it or explain it. It was terribly wrong, and I am appalled that it ever happened in the company that I own.” The distributor further pointed out that Chinese authorities inspected other facilities across China and found no issues. The supplier further dispatched a team of its own global experts to ensure that the problem is addressed and corrected.

Yum Brands took quick action by terminating OSI as its supplier in China Australia and the U.S… Burger King suspended all orders from the Chinese distributor. But something different is occurring with McDonalds.

Initially, McDonalds CEO issued a statement indicating that the chain was misled by its Chinese supplier and cut its ties with that supplier. But on Friday, the Wall Street Journal published an article (paid subscription or free metered view) indicating that the chain would stand by OSI Group, its loyal supplier for over 59 years. According to the WSJ, the supply agreement dates back to 1955 when founder Ray Kroc was looking to expand across the United States and now supplies up to 85 percent of McDonald’s global locations. OSI has been instrumental in supporting McDonald’s global expansion and reportedly helping the chain to maintain consistent quality standards. As noted, OSI is not just a supplier to McDonalds but to many other global customers. In 2011, this supplier was cited in a quality award by McDonalds for supply activities both in the U.S. and Asia. According to the WSJ, in 2013 food distributor Sysco cited the supplier with its “Gold Supplier” award.

By Thursday of last week, McDonalds decided to retain OSI as its global supplier, utilizing other OSI owned factories within China.  A statement issued to the WSJ stated: “We will not walk away from the issue but we are committed to resolving it.

Supply Chain Matters has a two-fold reaction to these events.  First and foremost, any food supplier that resorts to illegal product classification practices deserves the consequences of such actions.  On the other hand, a supplier that has garnered years of experience as a quality focused and rock solid supplier deserves the opportunity for the facts to come out and to take action to totally correct any deficiencies. 

In this era of instantaneous response and 7 by 24 news cycles, it becomes all too convenient to throw a supplier “under the bus” of negative publicity. Loyalty to a long-standing business relationship seems to be a fleeting principle.  Of course, a global restaurant services provider with such a dependency on a single supplier will often find it difficult to quickly source alternative suppliers.  One could argue that that might have led to the McDonald’s response.

However, kudos to McDonald’s management for taking a step back and giving its long-time supplier the benefit of the doubt with the opportunity to get to the facts and resolve the issue (s). A long history as trusted supplier deserves some consideration.

Bob Ferrari

 


Supply Chain Matters News Capsule for July 25- Zara, Pratt & Whitney, Hershey, Mars

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It’s the end of the calendar work and this commentary is our running news capsule of developments related to previous Supply Chain Matters posted commentaries or news developments.

In this capsule commentary, we include the following topics: Zara Implementing RFID Tagging System; Hershey and Other Candy Providers Raise Prices to Compensate for Higher Commodity and Production Costs; Pratt and Whitney and IBM Embark on Predictive Analytics Initiative; U.S. Government Announces New Rules Pertaining to Rail Shipments of Crude Oil

 

Zara Implementing RFID Tagging System

Reports indicate that Zara, a known icon in world class logistics and supply chain management, is implementing a microprocessor-based RFID tagging system to facilitate item-level tracking from factory to point-of-sale. This initiative was revealed at Zara’s parent company, Inditex SA, annual stockholder meeting earlier this month.

The tracking system embeds chips inside of the plastic alarms attached to various garments and supports real-time inventory tracking.  The retailer indicated that the system is already installed in 700 of its retail stores with a further rollout expected to be 500 stores per year.  That would imply that a full rollout to all 6300 Inditex controlled stores would entail a ten year rollout plan.  No financial figures have been shared regarding the cost aspects of this plan.

 

Hershey and Other Candy Providers Raise Prices to Compensate for Higher Commodity and Production Costs

One of our predictions for 2014 (available for complimentary download from Research Center above) called for stable commodity and supplier prices with certain exceptions.  One of those exceptions is turning out to be both the cost of cocoa and transportation.

Citing current and expected higher commodity, packaging, utility and transportation costs, Hershey announced last week an increase in wholesale prices by a weighted average of 8 percent, which is rather significant. That was followed by an announcement from Mars Chocolate North America this week that it will institute price hikes amounting to seven percent. A Mars statement issued to the Wall Street Journal indicated that it has been three years since the last announced price hike and that Mars have experienced a dramatic increase in the costs of doing business.

According to the WSJ, cocoa grindings, a key gauge for chocolate product demand, has surged over 5 percent across Asia and 4.5 percent in North America.

By our lens, the next move will more than likely come from Mondalez International.

For consumers, indulging in Hershey Kisses, M&M’s and Snickers will be more expensive.

 

Pratt and Whitney and IBM Embark on Predictive Analytics Initiative

Another of our 2014 predictions called for increased technology investments in predictive analytics.  One indication of that trend was an announcement indicating that aircraft engine provider Pratt & Whitney is partnering with IBM to compile and analyze data from upwards of 4000 commercial aircraft engines currently in service.  This effort is directed at developing more predictive indications of potential engine maintenance needs.  According to the announcement, each aircraft engine can generate up to a half terabyte of operational performance data per flight. According to an IBM statement: “By applying real time analytics to structured and unstructured data streams generated by aircraft engines, we can find insights and enable proactive communication and guidance to Pratt & Whitney’s services network and customers.

Previously, Accenture announced a partner effort with General Electric’s Aviation business to apply predictive analytics in areas of fuel-efficient flight paths.

 

U.S. Government Announces New Rules Pertaining to Rail Shipments of Crude Oil

As a response to heightened calls for increased safety of trains carrying crude oil across the United States, the U.S. Department of Transportation announced this week a set of comprehensive new rules for the transportation of crude oil and other flammable materials such as ethanol. The move follows similar efforts announced by a Canadian transportation regulatory agency.

The new rules call for enhanced tank car standards along with new operational requirements for defined high hazard flammable trains that include braking controls and speed restrictions. The new rule proposes the phase-out of the thousands of older and deemed unsafe DOT 111 tank cars within two years. Rail carriers would be required to conduct a rail routing risk assessment that considers 27 safety and security factors and trains containing one million gallons of Bakken crude oil must notify individual U.S. state entities about the operation of such trains.  Trains that haul tank cars not meeting enhanced tank car standards are restricted to 40 miles-per-hour while trains carrying enhanced tank cars would be limited to a 50 miles-per-hour speed restriction. Further under the proposed new rules, the ethanol industry will have up to 2018 to improve or replace tank cars that carry that fuel.

The proposed new rules are now open for industry and public comment over the next 60 days and are expected to go into effect early in 2015. According to various business media reports, there are upwards of 80,000 DOT-111 rail cars currently transporting crude and ethanol shipments.  When the new U.S. and Canadian rules take effect, there is likely to be a boon period for railcar producers and retro-fitters.

 


Dassault’s Acquisition of Quintiq- Broader Simulation and Decision Support in Product Lifecycle Management

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Today Dassault Systemes announced the signing of a definitive share purchase agreement to acquire supply chain and operations planning software provider Quintiq for approximately €250 million ($338 million). Supply Chain Matters was somewhat surprised with this announcement, not with the fact that Quintiq was an attractive candidate for acquisition, but rather why other enterprise and ERP vendors had not pulled the trigger. Then again, the premium paid may account for this move.

Netherlands based Quintiq has dramatically increased its brand profile globally and specifically in the U.S. market. The company’s on premise and cloud-based software offerings include highly customized applications supporting operations, scheduling and supply chain planning, optimization and decision support. This provider boasts of over 500 implementations across 80 countries with many involving rather complex operations and supply chain planning needs.  Many of its applications have been highly customized to support rather unique business, operations and optimization needs.  It is one of very few planning support vendors having an installed base profile in areas such as air traffic control, airline and fleet scheduling, complex process and discrete industry scheduling needs. Co-Founder and CEO Dr. Victor Alles, an experienced computer scientist prides his company in solving planning puzzles that no one else can solve, hence Quitiq’s vertical industry coverage is extraordinary. Supply Chain Matters can attest to that passion after speaking directly with Dr. Allis in November.

With the tag line of the 3D Experience Company, France based Dassault Systemes provides technology to support product design, engineering, CAD modeling, simulation, data and process management process areas.  The current product portfolio is extensive and includes over 190,000 customers within 140 countries. Support for manufacturing industries includes aerospace and defense, engineering and construction, complex manufacturing, medical equipment and other areas.  The firms most high profile customer is Airbus but also includes names such as Medtronic, NASA, Rolls Royce and others.

According to the announcement, Quintiq is being positioned to expand Dassault’s DELMIA suite of offerings which is the product area focused on PLM Digital Manufacturing. This suite includes simulation software capabilities supporting product design, design creation, planning, monitoring and controlling of production processes. Thus, this is one of Dassault’s prime product focus area in supporting new areas of what The Economist coined as the “Third Industrial Revolution, which includes manufacturers leverage of the Internet of Things and Digitally Enabled Manufacturing. Dassault further provides a large services complement in areas of consulting, technology delivery, engineering and other services.  Thus it would appear that this acquisitions positions Quintiq as being strategically positioned to support customized planning and decision-support needs across the broad spectrum of product design production ramp-up, services and product end-of-life.

Of further interest is that this acquisition announcement comes a day after arch rival PTC announced another one of its IoT related acquisitions. Thus, by our view, both announcements are indicators that the PLM technology segment has aggressive intentions to be a player in the new wave of Digitally Enabled Manufacturing.  While each is taking different strategic approaches, the goal seems rather apparent, namely beat other enterprise and ERP focused vendors in depth of support in this new area of product centric decision-support that integrates physical and digital information elements. 

For Dassault specifically, the challenge will be to allow Quintiq to integrate with broader simulation and decision-support needs without being swallowed by complex corporate overhead and complexity.

The takeaway is an emerging new dawning of capabilities that allow manufacturers to integrate and simulate information and make more informed decisions that span the entire product lifecycle.

Bob Ferrari

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


Another PTC Bold Move in Acquisition of Axeda to Ehance Internet of Things Technology Offerings

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In yet another reinforcement of the market potential and increased interest in the echnology support of the Internet of Things (IoT),  product and service lifecycle management technology provider PTC made another strategic investment to expand its product portfolio.

The company announced a definitive agreement to acquire privately held Axeda, an IoT cloud-based technology provider offering technology that connects machines and sensors to the cloud, for a reported $170 million in cash. According to an SEC filing, the merger agreement has been approved by the boards of both PTC and Axeda, and upon closing, Axeda will become a wholly-owned subsidiary of PTC. To finance this acquisition, PTC expects to borrow the full acquisition price.

The announcement follows the prior acquisition of IoT applications provider ThingWorx in December, which was the other strategic move into this new area of IoT and its relationships with both product and service lifecycle management.

Foxboro Massachusetts based Axeda is a privately-held company with majority ownership from JMI Equity which dominates its Board. The core of Axeda technology is the ability to establish secure cloud-based connectivity and management across a wide range of machines, sensors and devices. The Axeda IoT platform is described as a “complete M2M and IoT data integration and applications development platform” that includes connectivity, data management, and device and asset management support services. Axeda Connected Machine Management Applications provide support in the monitoring, remote access, content distribution, configuration and dashboard reporting of various M2M applications.

Support of business needs include technicians remotely diagnosing and servicing ATM’s, medical devices and industrial equipment. The company’s web site cites installed base customers in Industrial manufacturing such as Sealed Air and Tyco, high tech manufacturers such as EMC and NetApp, among others, and a fairly long listing of medical device manufacturers that include Medtronic, Phillips, Siemens and Waters. Strategic partners are AT&T, Microsoft, SAP, and WiPro, among others. In June of last year, WiPro invested an undisclosed amount in the company to secure premium partner access to technology resources along with the ability to test further and deploy M2M technology applications from the WiPro M2MCenter of Excellence in Bangalore.

Of further interest, Axeda CEO Todd DeSisto’s background is cited as “service as a senior executive for multiple venture and private equity companies with successful exits.”

According to PTC, the prime motivation for this acquisition was to complement the ThingWorx rapid application development environment by addressing customer needs for connectivity and security.  In the briefing with equity analysts, PTC management boasted about the current strong growth already encountered in ThinWorx related bookings which were described as the equivalent of $4 million in equivalent license revenues during the past quarter. President and CEO James Heppelmann described the Axeda acquisition as “the best deal we’ve done in a long time”.  He further noted that much of the current IoT interest for embarking on IoT initiatives is coming directly from C-level executives who are pondering the potential to reconfigure existing product value-chains.

Supply Chain Matters attended the recent PTC Live Global customer conference in June where many customer presentations addressed the IoT scenarios for connecting product and service management business process needs directly with information on physical devices. Our sense was that these new forms of applications are clearly in early stages of development yet attendees were drawn to some of the sessions, including those that addressed the linkage of machine sensing with service management processes.

PTC has made yet another bold move to lock-up a promising technology platform.  Supply Chain Matters reiterates our impressions communicated with the prior ThingWorx acquisition. namely that this move adds another arrow in PTC’s ongoing efforts to compete with far larger enterprise software vendors in supporting a rather broad and extensive product and service management product suite that has the potential to leverage the new era of digital based manufacturing.

Bob Ferrari

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


Boeing Shares Current Reliability Performance of 787 Dreamliners

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In our previous published commentary, we reflected on the recently held Farnborough Air Show and the new order activity generated for aerospace industry supply chains by this trade show.  Boeing 787-9

One other report from this trade show caught our attention. Boeing indicated that the reliability to-date of the more than 160 787 Dreamliners that are operating among global carriers is averaging about 98 percent. The OEM’s chief 787 test pilot flatly indicated: “that number is not where we would like it to be, we were expecting it to increase.” The industry sets reliability benchmarks for aircraft, particularly newly introduce models that must meet higher customer expectations. According to reporting from the Wall Street Journal, Boeing pegs reliability of new aircraft to that of the previous generation 777 fleet at comparable times of product rollout and fleet operating time. The “triple seven” has been widely recognized as one of the most reliable.

Thus far, 787’s have logged more than 490,000 hours of service, but a series of various ongoing snafu’s or malfunctions have caused some setbacks with both production volumes of new aircraft as well as operation of existing aircraft. However, Boeing officials report that the situation is improving. With its latest new “dash nine” variant of the 787, Boeing has further taken on more design management to insure overall reliability of system components. 

The report itself provides yet another reminder of the very high overall reliability standards that today’s more advanced and technology laden aircraft must meet.  It is also a reinforcement to the overall criticality of integration of product design with physical and software performance. Not many industries with such a complex hardware, software and bill-of-materials complexity can meet the standards of 98 percent reliability let alone even higher levels.

Bob Ferrari


Government IT: A One Billion ERP and Logistics Systems Failure Still in the Light and Has Anything Been Learned?

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In December of 2012, Supply Chain Matters featured a commentary: A Billion Dollar Failed-Software Implementation-Why?.  Our commentary at the time was a response to a published New York Times article describing the failed attempts of the United States Air Force to implement a new and long overdue modernized logistics system.  The system was named Expeditionary Combat Support System (ECSS) and was targeted to implement commercial off-the-shelf ERP software. The Air Force eventually cancelled its six year long effort to implement the new software system after spending more than $1 billion dollars of taxpayer money and determining that it would take an additional billion to implement a workable system. At the time of our commentary, we were very frustrated at the news since the situation described was one of a classic systems failure.

Earlier this week, the United States Senate finally got around to completing its investigation of the Air Force system effort and issued a report that lambastes the U.S. Air Force for poorly managing the acquisition and attempted implementation of the ERP logistics management system. The Senate report, which can be easily downloaded, classifies the system failure “As a waste of $1.1 billion in taxpayer money, a loss of eight years of effort, the same old inadequate logistics system far inferior to the promise of ECSS, and a major setback to the Air Force’s attempt to transform how it does business.

The comedy and/or tragedy of this week’s Senate report is that it took roughly 18 months for the Senate to get to the investigation and set of recommendations. Its investigation places majority of blame on the Air Force without addressing in-depth, a government systems acquisition environment or an overall organizational culture that might have contributed to the failure. That alone is a testament to the bureaucracy and inefficiency of federal agencies when it comes to IT systems implementation. The high visibility of the initial failures of healthcare.gov is yet another testament to an inherent problem.

With Internet based information discovery being what is today, a simple Google search yields a lot more learning and perspectives relative to the specific ECSS debacle.

Here is a sample:

Sanjiv Karani in a commentary on the Cincom ERP site outlined the full scope of the effort:

The scope of the ECSS ERP project included: advanced planning and scheduling; material management, contracting and logistics finance; configuration and bill of material; repair and maintenance; product lifecycle management; customer relationship management; order management; distribution and transportation; decision support; facilities management; quality control; document management and budgeting.  ECSS would have replaced the capability of approximately 400 or so legacy IT logistics systems with Oracle’s integrated IT suite of modules comprised of product support & engineering, supply chain management, expeditionary logistics C2, and maintenance, repair and overhaul.”

Obviously, the systems scope was rather large.

The Federal Times web site provides a download of the ECSS Acquisition Incident Review Team Final Report. This comprehensive report outlines the background and contributing causes to the systems failure. Key highlights include:

The Air Force’s strategy was to acquire commercial off-the-shelf ERP software with a provision for “bolt-on” applications. A systems integrator was to be tasked with both implementations of standard ERP and bolt-on applications, along with the other program implementation needs. In late 2005, Oracle E-Business suite was elected along with two bolt-ons: Click Commerce for planning and Industrial and Financial Systems for maintenance process support. In 2009, a major restructuring of the program addressed the need for product lifecycle management and logistics financials. The Oracle contract was modified to include an Oracle only footprint including PLM and other needs. A restructured systems integrator contract with CSC outlined four releases with six pilots.

The planned first release dragged on into late 2010 prompting the Department of Defense to conduct a technical risk assessment. Both Air Force teams and CSC attempted to implement a “recovery plan” but the report indicates that it became apparent the plan was failing to meet its objectives. A series of Air Force leadership “deep dives” concluded that significant shortcomings in program progress had not been remedied.  A side note- we take that to mean that Air Force leadership was not getting what it perceived it wanted. Eventually by 2012, the Air Force recommended cancellation of the program when discovering that Release 1 was pushed back to fiscal year 2017.

The Air Force Incident Review Team described contributing causes to the failure as follows:

  • Governance- described as confusing and, at times, ineffectual governance structure evident throughout the program. Noted in the report: “There lacked coherent leadership guidance and coordination from process ‘owners” on how to seamlessly mesh and implement the intermingled methodologies , thereby driving needless delay, frustration, uncertainty, and labor burden on the program office.”  The above statement should resonate with our IT and systems consulting readers since active governance this is a fundamental tenant for success.

Other contributing factors were described as;

  • The lack of effective change management made worse with a lack of successful implementation progress, in effect, signaling that “the program was not worth supporting.”
  • Program leadership management churn that included six program manager changes in eight years along with five program executive officers over six years.
  • A lack of understanding by the Air Force of all of its data along with the “as-is’ or “to be” architectures, coupled with a transition plan for resolving differences between the two states. Even though the Air Force determined that no single, stand-alone commercial system could satisfy its needs, there was apparently no singular specific articulation of the “to-be” state.  The report notes that this was compounded by the addition of multiple subject matter experts with no single vision as to how a transition would occur.
  • An unrealistic development environment, one that did not mirror the reality of the required operational environments.

As noted in our prior 2012 Supply Chain Matters commentary, more disturbing is that multiple U.S. military and government agencies are in need of modern logistics processes and yet the track record for software and change management implementation efforts is marginal at best. The latest reports of the Senate investigation makes mention of an additional Defense Enterprise Accounting and Management System that is in a similar mess, upwards of $1.7 billion over budget and considerably behind schedule. Another report makes mention of the Air Force’s F-35 Joint Strike Fighter aircraft program, an aircraft that requires 24 million lines of code to operate which has experienced multiple development setbacks.

Private industry has garnered its share of previous painful learning regarding multi-million dollar big-bang software implementation projects that ultimately failed to see the light of original scope or intent. Some brought businesses to their knees, with painful consequences. Yet, the technology successes of Amazon, Google, Facebook, and Linked-In, to mention but a few, are testaments that technology is no longer the sole obstacle. That learning is available to any implementation team today, including U.S. government agencies.

We seriously doubt that the watered down recommendations from the Senate and other agencies will get to the heart of badly needed the government IT modernization efforts.  It is clearly time for U.S. government to seriously consider the adoption of business transformation practices of private industry that include:

  • Establishing clear vision of future state needs that are not, business as usual which favors continued existence of added complexity and bureaucracy?
  • Avoiding huge-scope big-bang systems efforts in favor of incremental steps of manageable projects
  • Senior agency leadership singularly accountable and responsible for program success.
  • The recruitment of IT and CIO leadership with proven private industry track records provided with the organizational clout and support to get things done.

Finally, the Congressional toxic political environment being what it is today, requires that political leaders stop thinking in the context of blame and retribution, especially when the process drags on for years.  The federal government needs both visionary agency leaders and legislators who can think outside the box of bureaucracy.

Whether any of this happens in our lifetimes is certainly food for thought and constructive debate.

 Bob Ferrari


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