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.
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 programmed, 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.
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 customer 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.
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.
© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
This is additional supplement to our previous Supply Chain Matters commentary highlighting FedEx’s latest fiscal third quarter earnings.
In mid- December of 2014, Supply Chain Matters called attention to the FedEx announced acquisition of GENCO, billed as one of the largest 3PL’s in North America operating more than 130 warehouse and distribution facilities. At the time, we also called attention to FedEx’s acquisition of Bongo International, an e-commerce platform that facilitates international customers purchasing items from domestic websites
Based in Pittsburgh Pennsylvania with reported revenues of $1.6 billion, GENCO provides a rather diverse collection of forward and reverse logistics services including distribution, contract packaging, customer returns processing product refurbishment, disposition and recycling. FedEx executives positioned this acquisition as significantly expanding FedEx services to further include returns, test, repair and remarketing of products.
In late January, FedEx reported that it had closed on the acquisition and that GENCO would operate as a subsidiary led by Todd R. Peters, GENCO’s Chief Executive Officer with future revenues reported under the FedEx Ground business segment.
Today, in a short news brief, The Wall Street Journal indicated that according to its recent quarterly report with the U.S. Securities and Exchange Commission (SEC), that the price paid by FedEx for GENCO was $1.4 billion. FedEx reportedly funded the acquisition using a portion of proceeds from a January debt issuance.
This is rather interesting news since it indicates that FedEx paid less than current GENCO’s existing earnings. It is perhaps an indication of further factors or monetary considerations or that the close relationship among the two companies was indeed close.
Additionally, FedEx disclosed it paid $42 million in cash from operations for the acquisition of Bongo International LLC.
We are often reminded that one of the most common traits of industry disruptors is that they think differently. They challenge the notions of industry norms, current practices and business processes or the leveraged use of technology in product and service delivery.
Over the coming weeks, Supply Chain Matters will feature a series commentaries focused on industry disruptors and their implications to existing customer fulfillment.
Fast becoming one of the icons of disruptive thinking approaches is Elon Musk with his current ventures in the automotive and space exploration and aerospace sectors. The two companies he leads, Tesla Motors and Space Exploration Technologies have each challenged legacy industry practices.
Supply Chain Matters has featured a number of prior commentaries specifically focused on Tesla and how this automotive producer has challenged existing norms in is driving re- thinking in supply chain vertical integration, advanced manufacturing practices, service and distribution strategy. Tesla’s fundamental approach is that an automobile serves as a transportation device that is primarily powered by computer intelligence and the user experience. There is little need for intermediaries or after-market providers.
This week, Tesla has invigorated both social and business media on the news of its latest series of software upgrades planned for the Tesla Model S. At a recent automotive industry conference, Musk declared that it will soon become illegal for humans to take the wheel once the technology of self-driving cars have proven themselves. If you sit in a Tesla vehicle, it’s visually striking that the huge 17 inch LCD screen takes-up more driver attention than a traditional automobile dashboard. It was designed as such.
Last October, IHS reported on its initial analysis of a teardown of the components of the Tesla Model S with the headline: Is it a Car or an iPad? The article is impressive and worth a read.
What is extraordinarily impressive is that Tesla’s software upgrades are delivered wirelessly to individual owned consumer vehicles in the truest form of cloud delivery. There is no need for the traditional automotive industry dealer visit. Musk views such upgrades in the same context as updating a laptop computer or a smartphone. He further categories autonomous driving as a “solved-problem”. Last year, Tesla began equipping its Model S with on-board cameras and sensors to be powered by a sophisticated system termed “autopilot”.
Over the coming weeks and months planned upgrades will include functionality that completely puts the driver at-ease regarding the existing range of the car’s battery power. The software analyzes the current driving route, road conditions, topography and location of available battery charging stations. If the car is going to exceed the range and distance to the nearest charging station, a real-time warning is issued along with GPS coordinates to the charging facility. According to Musk, “it makes it almost impossible to run out unless you do it intentionally.”
In an upcoming release 7.0, a new user interface will provide the ability of the car to operate with complete autonomy on highways when the driver lets go of the steering wheel.
In the context of the consumer experience, like Apple, Tesla delivers on design elegance and the interactive user experience. The car you may have purchased one or two years ago, has newer functionality and user experience features delivered by the cloud than when you purchased that vehicle.
For the remainder of automotive related industry, a disruptor such as Tesla will elicit more accelerated innovation in applied technology and the driver experience. Suppliers are already working on more sophisticated processors, sensors, embedded systems and driving aides.
Is it any wonder that when news broke that Apple was working on its own secret development of an electric vehicle, that social media lit-up like fireworks and the automotive industry shuttered.
In today’s industries, change is constant and the termed clock speeds of product innovation are indeed accelerating. Supply chain teams will invariably be either on-board facilitators or unfortunate obstacles to these changes.
Note: This author is not a current owner of a Tesla automobile nor a stockholder, rather an observer and enthusiast of automobiles.