Prediction Ten of our 2015 Predictions for Industry and Global Supply Chains declares that service focused supply chains will garner increased attention and new investment interest. We noted two prime motivations, protecting the brand especially in the light of continuing massive amounts of product recall activity as well as taking advantage of the new opportunities brought forward with connected devices.
This week, in conjunction with the annual North American International Auto Show being held in Detroit, The Wall Street Journal featured an article, Massive Recalls Force Part Makers to Track Defects (Paid subscription of free metered view). The article observes that auto parts makers such as air bag inflator supplier Daicel are investing millions of dollars to improve tracing and lot identifiers of component parts. There are mentions of parts suppliers Aisin Selkl, and Jtekt Corp. significantly investing in parts traceability. Observed is while automotive OEM’s and their associated brands take the bulk of the consumer and regulatory heat around product recalls, quality defects more often reside within parts suppliers. OEM’s are now influencing parts suppliers to amp-up quality measures including easier means to identify production lots and trace parts history. The CEO of NHK Spring, who is also the chairmen of Japan Auto Parts Industries Association is quoted: “Now that supplier names are being mentioned widely, the range of responsibilities that we face is expanding. Not only do we need to face auto makers but also consumers.” In other words, brand risk has taken on new dimensions in the lower tier of automotive supply chains.
It struck us that such efforts focused on supply practices need to be further complimented by increased capabilities by OEM’s to analyze such quality tracking and tracing data at a far more timely pace. Providing more prescriptive tagging to such data is a further consideration.
The takeaway is that indeed, service supply chains are indeed ripe for investment, but require coordinated efforts to leverage input, output and prescriptive information insights that insure more timely identification and response to parts quality or design defects.
Prediction Ten of our Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains calls for increased attention and new investment interest for service focused supply chains in the coming year. This includes after-market business process services, service parts and service delivery supply and demand business processes.
The obvious reasons are the unprecedented increases in occurrence of product recalls that add large amounts of consumer negativity towards a brand, especially in the U.S. automotive sector. Too often, there has been a “throw it over the wall” mentality involving service beyond product sale and thus the after-market service supply chain has lagged in process modernization and investment.
Yesterday, the New York Times published an article, Auto Industry Galvanized After Record Recall Year (paid subscription but complimentary metered view with sign-up). This article reminds readers that about 700 individual recall announcements involving more than 60 million motor vehicles occurred in 2014 across the United States, double the previous record logged in 2004. The rate of recalls was the equivalent of one in five vehicles currently in the road. Many of our readers can probably attest to the current situation.
Auto manufacturers have been forced to clean-up years of defects that were either undetected or ignored amidst heightened regulatory scrutiny.
The result is obvious, service supply chains swamped with requirements for numerous replacement parts and service networks buffeted by consumer rage as to why their perceived unsafe vehicles cannot be immediately repaired. In the care of the massive recalls involving airbag inflators sourced from supplier Takata, product recalls are prioritized for warm region sensitivity along with broader U.S. wide needs.
The Times article observes that sending out notification letters does not suffice, requiring more direct interaction with consumers. That, by our lens, implies more timely information and visibility as to the prioritization of repair campaigns and availability of required repair parts for specific regions. The article further hints to underreporting of potential product defects or failures.
OEM’s such as Toyota are overhauling safety and product recall practices as well as processes incorporated within its service networks. Supply Chain Matters has previously highlighted General Motors new brand survival emphasis on up-front product quality and more responsive tracking and detection of potential product problems. Social media will play a very important role in these new methods including the transmission of product recall information directly to consumers and their individual vehicles. Legislators continue utilizing the big-stick of criminal prosecution of executives and a means to motivate automotive OEM’s to be more responsive to product quality and overall vehicle safety.
Crisis often brings opportunity, and in the case of service networks, the opportunity is the ability to leverage today’s more advanced technologies related to vehicle sensors, predictive analytics, advanced simulation and scheduling, demand sensing and item-level B2B business network wide visibility among service focused supply chains.
The forces are indeed in motion for greater attention to service supply chain capabilities in the New Year.
Just before the start of the New Year, the Ferrari Consulting and Research Group and the Supply Chain Matters Blog share our annual ten predictions concerning industry and global supply chains for the coming year. We have maintained this tradition since the founding of this blog in 2008 and it continues to be quite popular with our readers and clients.
These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, as well as helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas. Predictions are sourced from synthesizing developments and trends that are occurring in supply chain business, process and technology dimensions, researching various economic, industry and other forecasting data, along with input from clients, thought leaders and global supply chain observers.
We take predictions seriously and align our research and blog commentaries to focus on specific prediction areas throughout the coming year. Supply Chain Matters will revisit each of our annual predictions at the end of the year to ascertain how close or how far each fared.
Part One of this posting series outlined our first five predictions for 2015. In this Part Two posting, we share our remaining five predictions.
2015 Prediction Six: A Stalling of Big Data and Predictive Analytics in Favor of Alternative Application Focused Strategies
We anticipate that the promise of Big Data and Predictive Analytics technology in enabling more insightful and predictive decision-making stalls in 2015 because of certain technology and organizational constraints. The promises in capabilities to analyze terabyte streams of enterprise structured and unstructured data related to customers, products, suppliers and equipment are dependent on software and database capabilities that can accommodate large data streams and simultaneous user inquiries. The term Big Data itself is a symptom of a far more perplexing problem, namely that enterprises, organizations and industry supply chains are currently overwhelmed by collecting too much extraneous data. The challenge at-hand is collecting and harvesting “smarter data”.
Database applications such as Hardoop provide the promise of smarter data, but for the time being, such applications need to be designed with more focused managed scope needs and requirements.
On the organizational side, one of the highest in-demand skills is that of a data scientist and the forces of demand far outpacing current supply has made these specialists quite expensive. Once more, what companies seek is more than just data analysis and interpretation skills but knowledge of customers, markets and business processes. That implies leveraging, building or training such skills among existing experienced teams, those with intimate understanding of the firms end-to-end supply chain. A further organizational challenge is addressing inherent concerns focused on security and governance of the mission critical sensitive data inherent in managing business operations.
Because of the above noted constraints, in 2015, IT leaders will influence line of business and supply chain functional teams to narrow the scope of these initiatives within certain supply chain process areas. For technology support, look for more supply chain, procurement and S&OP focused applications to be augmented with embedded predictive analytics and machine learning capabilities. Supply chain planning applications that include predictive analytics and/or augmented simulation will continue to lead in this effort. Expect similar efforts for cloud-based B2B supply chain network application and services. This will accommodate line-of-business needs for shorter-term, narrowed scope initiatives for smarter data and more predictive or prescriptive capabilities to respond to specific supply chain related business challenges.. We anticipate that best-of-breed technology vendors will lead with innovation in these areas while larger ERP and enterprise services providers will continue to communicate longer timetables for such functionality.
Narrowing current smarter data and predictive analytics within supply chain focused applications provides more likelihood for timelier benefits and will be a likely continuing trend in 2015 as broader streaming data efforts are re-focused and organizational challenges are resolved.
2015 Prediction Seven: A Turbulent Year in Global Transportation
Expect a turbulent 2015 involving competitive market, regulatory and business realities impacting global transportation, railroads and contracted logistics services.
These include the continuing shake-out of excess capacity among ocean container shipping lines and the re-sizing of global transportation and airfreight fleets. The reality of more super-sized container ships calling on ports not equipped for timely unloading and loading has made its presence. The “perfect storm” of dysfunction among U.S. west coast ports in the latter half of 2014 will have implications in how shippers, exporters and retailers route future shipments destined for the United States and global markets. Canada’s west coast ports will likely benefit along with U.S. Gulf and east coast ports. More importantly, the issues uncovered in labor contract negotiations, independent trucking’s driver contracts, the leasing and 3rd party deployment of tractor-trailer carriages to transport containers must be addressed by transportation industry and labor union players to avoid a repeat of what occurred in 2014. As we noted in our previous predictions in 2014, the desire for carriers or logistics providers to be asset light invariably leads to implications for having assets and equipment positioned for shipper vs. industry benefits.
Canada and U.S. based railroads will likewise encounter turbulence in industry shipping needs for accommodating higher volumes of crude-oil shipments under existing regulatory speed and safety constants while resolving additional multi-country regulatory requirements for upgrading thousands of tank cars to new safety standards. The Railway Supply Institute, a railcar industry trade group has argued that there is not enough tank car retrofit existing capacity to meet proposed regulatory deadlines for upgrading nearly 17,000 tank cars to new safety standards. This will lead to more industry and regulatory dynamics in 2015. Agricultural and bulk commodity shippers are caught in the middle of this dynamic as service levels continue to erode, leading to additional pressures by regulators on railroads to accommodate this important economic segment. Already, the share of Canadian based wheat exports to the U.S. has reached a six year low because of these dynamics. This balancing act is likely to spur higher rates and added transport dynamics in 2015.
The plunging cost of crude oil prices which is forecasted to continue in 2015 will add to turbulence involving existing fuel surcharges affixed to transport rate structures. Carriers and parcel shipment firms will likely attempt to drag out the suspension of fuel surcharges to protect or sustain ongoing margins. Carriers with a strong reliance on fuel surcharges for margins may find themselves in financial difficulty.
Finally, the implications of omni-channel commerce in B2C and B2B markets will face a number of important tests. Carriers FedEx and UPS implementation of dimensional pricing rates in 2015, causing the transportation rates of bulky but lower value shipments to be far higher will likely motivate consumers and procurement teams to revise shopping practices and place additional pressures on online providers to adsorb such costs. Amazon and Google have been positioning to control broader aspects of logistics and parcel delivery, and 2015 could well feature additional acquisition announcements from either or both players. Amidst further global-wide governmental and legislative pushback, ride-sharing services firm Uber may well alter its business strategy to focus more on priority package delivery vs. people.
The added complexities and service needs for omni-channel and industry-specific logistics needs continue to spur more service and technology requirements by customers on third-party logistics providers (3PL’s). Individual 3Pl’s must therefore invest in broader technological and systems capabilities and scale, or risk losing business to larger more versatile providers. The acquisition announcement by FedEx of GENCO this month portends this dynamic in the coming months.
2015 Prediction Eight: Sales and Operations Planning transitions to broader scope information management connectivity augmented by what-if and simulation capabilities
In order to more proactively respond to today’s constantly changing and complex business requirements, we predict that select industry sales and operations planning (S&OP) processes will begin efforts to transition toward inclusion of broader aspects of internal and external business planning, response management and predictive decision-making capabilities. This will most likely include deeper, cross-application information connections to product demand pipelines, augmented with traditional and social media based demand sensing. We further anticipate more-timely information connections with external or outsourced suppliers along with key customers, leveraging cloud-based planning and fulfillment synchronization networks. In those industries with more rapid new product introduction (NPI) cycles such as high tech, telecommunications, consumer products and electronics, the two-way flow of new product introduction (NPI), product management and program milestone information will be a consideration as well.
Because of these needs, expect B2B supply chain business network providers, including ERP players, to deepen their support for broader integrated business planning needs by leveraging cloud-based platforms or networks. Again, best-of-breed vendors have the ability to lead in this innovation. ERP provider SAP has already declared its intent to enhance its existing S&OP focused application towards more external integrated business planning elements.
Existing supply chain planning providers will have to deepen their connectivity to external cloud-based networks or risk being displaced by broader cloud-based network capabilities that synchronize planning, collaboration as well as execution information. In that light, we anticipate additional M&A or strategic alliance activity among best-of-breed planning and cloud-based platform providers in 2015. Similarly, 2015 entrants to the supply chain and enterprise technology arena will leverage Salesforce.com and other cloud-based platforms to broaden end-to-end supply chain visibility, deeper collaboration and more informed decision-making. One particular ERP player will have to make some major moves in this space.
2015 Prediction Nine: Industry supply chain step-up efforts towards supply chain vertical integration and modular product platform strategies with impacts on contract manufacturing sourcing models.
For the past three years, we have observed and highlighted on Supply Chain Matters, a number of manufacturing focused supply chains moving more towards various forms of supply vertical integration. The automotive industry has clearly been on this path while some high-tech manufacturers have embarked on initiatives as well. The newer, more technology laden versions of new models Airbus and Being commercial aircraft are demonstrating these strategies. The models varied by industry setting but the shift was discerning. This year, after reviewing data within SCM World’s published Chief Supply Chain Officer Report 2014 , we became even more convinced that industry or company specific vertical integration and modular product platform strategies would begin to accelerate in 2015. This movement comes from the realization that more and more products share common parts and components and that modular manufacturing design and deployment strategies make sense because they can facilitate more flexibility in geographical and individual customer fulfillment as well as product differentiation for various market channels while providing added protections for risk.
This strategy shift will begin to have impacts on contract manufacturing models in the latter-half of 2015, or even 2016, since these strategies involve a good portion of manufacturing value-added moving back to internal manufacturing. Since contract manufacturing arrangements for the most part stem from multi-year contracts, the impacts will be felt at contract renewal time. Many contract manufacturers currently operate on very slim product margins and symptoms of the evidence of these shifts will be reflected in even more deteriorating margins. We expect some contract manufacturers such as Foxconn, continuing to move upstream or downstream in an industry value chain to leverage the ability to either be considered a more strategic component player or eventually manufacture individually branded end-products. Likewise, key retailers and 3PL’s will asked to implement more production focused final assembly of finished goods postponement strategies at time of customer fulfillment.
Because of these strategy shifts, or perhaps anticipating such shifts, we would not all be surprised by active M&A activity among the impacted industry players noted above.
2015 Prediction Ten: Service supply chains garner increased attention and new investment interest.
We predict that in 2015 multiple equipment manufacturers and services providers will place added emphasis in evaluating their service focused supply chains. This includes after-market business process services, service parts, service delivery supply and demand networks. There will be two distinct motivations for increased investment and we anticipate that lines-of-business will be the prime investment leaders.
In the light of increasing incidents and broader occurrence of product recalls brought about by tighter global regulation, manufacturers have no choice but to protect the brand and customer retention. Service focused supply chains are the response mechanism that provide timely resolution to product quality or malfunction issues while root-cause defect areas are traced and investigated across the extended supply chain. Too often, there has been a “throw it over the wall” mentality involving service beyond product sale and thus the after-market service supply chain has lagged in process modernization and investment. Automotive industry services focused supply chains are the obvious prospect in 2015 along with industrial and medical equipment providers.
As noted in Prediction Four, IoT coupled to connectivity networks has the potential to drive new, more innovative, predictive focused product as a service platforms where connected machines and equipment serve as the demand sensing signal for maintenance, repair or consumable parts. Thus, the other investment motivator for service networks is enabling newer augmented line-of-business service revenue models that leverage IoT networks. We expect firms such as General Electric and Tesla Motors to serve as a benchmark in this area, but others will follow in the coming year.
This concludes the unveiling of Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains.
How did we fare? Have these Predictions resonated for you and your organization? Did we miss an important prediction for the coming year?
Let us know either via Comments to this series or email feedback: info@supply-chain-matters <dot> com .
In early January, the complete listing of 2015 Predictions will be made available in a research report available for complimentary downloading.
Once extend we extend best wishes for the holiday season and the upcoming New Year.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved
Automotive Service Networks Response to Crisis: Update Three- Expanded Recall Involving Suspected Defective Air Bag Inflators
Supply Chain Matters provides another update to the ongoing crisis involving the automotive industry as unprecedented levels of product recalls continue to stress auto aftermarket service supply chains to their limits. In our last commentary, we noted the colliding forces of regulatory, political, 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, when the dust settles, we believe that the industry needs to take a hard look at lessons learned.
This week, there were further significant developments related to recalls of alleged defective airbag inflators produced by Japan based supplier Takata. After undergoing additional scrutiny from U.S. regulators, Takata refused to broaden the scope of the defective inflators recall beyond a select number of U.S. States with high humidity concerns. That action forced OEM Honda, to expand its U.S. recall of suspected defective airbag inflators to all 50 U.S. states. Once more, Honda further indicated to U.S. regulators that the company is in discussions with other air bag suppliers to add augmented capacity of replacement parts. According to published reports, Honda is in discussion with suppliers AutoLiv and Daicel Corp. for supplementing supplies of required repair parts. In testimony this week, a Honda executive confirmed what Supply Chain Matters indicated several weeks ago, that the shortage of repair replacement parts would continue for quite some time.
U.S. regulators continue to pressure OEM’s BMW, Chrysler, Ford and Mazda to expand their driver-side air bag recall campaigns to include all 50 states. These actions have been prompted by additional information disclosed this week by the U.S. National Highway Traffic Safety Administration (NHTSA) indicating that prior incidents of premature exploding airbags are not just occurring in high-humidity areas. That is new information not brought forward previously. If these other OEM’s expand their campaigns to include all U.S. states, that will of-course add even more concerns to the ultimate availability of replacement parts.
According to a published report by The Wall Street Journal, earlier in the week Takata issued a letter to the NHTSA challenging the authority of that agency to compel a parts supplier to initiate a recall, arguing that the U.S. regulator authority is limited only to actual OEM’s that produce automobiles. From the lens of Supply Chain Matters, that argument is tantamount to a supplier throwing its major automotive OEM customers under the proverbial bus.
There should be little doubt among automotive line of business and supply chain leaders that these past few years of unprecedented product recalls are cause to revisit product quality imperatives. There has been a lengthy industry debate as to whether the quest for volume and profitability growth sacrifices quality conformance across the end-to-end supply chain. On the positive side, Hyundai recently scaled-back its volume growth plans when indicators of slipping quality motivated senior leadership to cut-back growth plans and endorse added quality measures. The fact that Honda, which has prided itself in the quality image of its products is now front and center in the media is a symptom. In contrast, reports in business media of late question whether Toyota or General Motors have been chasing volume and profitability growth with quality and brand image as a casualty.
Evidence of common defective parts among multiple OEM brands and models point to shortfalls in quality monitors and component sourcing strategies that balance quality conformance risks. At the surface, these developments are perhaps a further indication that teams are not collecting or monitoring correct data as to component failure trends along with predictive indicators of broader manufacturing or material issues. The industry needs to take a hard look at supply-chain-wide quality conformance and feedback mechanisms.
In our ongoing observations of global business developments and the linkages to the areas where supply chains do matter, this editor has been amused as to how equity analysts and business media now hone-in on a company’s supply chain information leaks to uncover information on a particular firm. To cite an example, Apple’s supply chain across Asia has had numerous information leaks regarding potential new products or supply chain glitches related to Apple.
Supply Chain Matters readers have most likely been following our ongoing commentaries relative to the current crisis that has impacted aftermarket service supply chains within the automotive industry. An explosion of various automotive model recalls has cascaded to unprecedented levels. Beyond the current air bag deflator issues surrounding supplier Takada, lest we forget the incidents of faulty ignition switches leading to a multitude of product recalls involving multiple models of General Motors vehicles.
In what we can best described as “oh crap” news, The Wall Street Journal disclosed this past weekend (paid subscription required) that GM placed an order for a half-million replacement ignition switches almost two months before alerting U.S. safety regulators. The publication cites its source as emails viewed between a GM contract worker and supplier Delphi Automotive, and where the supplier was asked to develop an aggressive plan of action to produce and ship these replacement parts. The article further cites communication among a GM contract worker at Menlo Worldwide Logistics in-turn, seeking a plan from Delphi regarding the build and ship plan for the replacement switches. The report further indicates that it took Delphi about a month to outline a parts shipping plan.
The publication notes that the timing “is sure to give fodder to lawyers suing GM and looking to poke holes in a timetable the auto maker gave for its recall of 2.5 million vehicles. Readers can certainly review the entire WSJ published article which addresses a multitude of implications. However, we feel compelled to add a supply chain planning perspective.
Supporting a product recall of such magnitude requires the coordinated planning of a rather complex spare parts and service management network. Automotive manufacturers know all too well that proper up-front planning and synchronization of parts and dealer servicing resources is required as much as possible, before notifying consumers of the product recall. However, regulatory reporting requirements can foil attempts for proper planning.
Consumers expect to have specific information as to the defective part and when their vehicle will be repaired. A product recall of the size of 2 million or more vehicles requires urgency to planning and it seems rather plausible that GM would issue such a spare parts order with requirements for aggressive production. It also places supplier Delphi in a rather difficult situation in having to coordinate revised product design specifications within existing production, allocate supplemental resources and generate volumes of parts over and above prior planned spare or production parts schedules.
The sum total of this commentary is perhaps two-fold. First, supply chain information leaks and security is an obvious growing problem. The utilization of emails or spreadsheets to plan or initiate supplier orders adds to the potential of information leaks.
Second, manufacturers often overlook the critical aspects of their service management supply networks, which can often support higher margins than product management value-chains. Just as product supply chains have to manage in the new normal of supply chin complexity while being more responsive to constantly changing events, service supply chains have even more complex challenges. They often represent the most current touch point and customer perception of your brand.
Supply Chain Matters provides another update to the ongoing crisis involving aftermarket spare parts and service management supply chains within the Automotive sector as unprecedented levels of product recalls stress the system to its limits. U.S. automakers alone have recalled more than 30 million vehicles this year as a result of a heightened regulatory environment that has prompted auto makers to issue a recall out of an Abundance of caution and legal protection.
Regarding the product recalls related to the airbag inflators produced by Takata Corrp., this has been a rather busy week of finger-pointing and consternation.
Last week, U.S. regulators nearly doubled the estimate of vehicles subject to recall. Reports have come to light that auto makers and regulators were aware of Takata air bag inflator problems for several years. The Manhattan U.S. attorney’s office that led the investigation and $1.2 billion fine on Toyota to settle a previous incident related to unintended acceleration of vehicles is now reported to have launched a preliminary investigation of the ongoing Takata inflator incident. On the political front, Congressional leaders in Washington are threatening more probes of the National Highway Safety and Traffic Administration (NHSTA) for its handling on the ongoing air bag inflator incidents, a sure sign of more political pressures and maneuvering.
On Tuesday, the CEO of AutoNation, the largest auto retailer in the U.S. indicated that he has instructed his dealerships to halt the sales of 400 used cars that are subject to the airbag inflator recall. He further urged regulators to get control of an “incoherent response”.
Yesterday, NHSTA gave inflator supplier Takata a deadline of December 1 to supply added documents and respond under oath to additional questions.
From a service supply chain perspective, NHTSA released details of industry meetings indicating that it will take several months before there are enough spare parts to support the current inflator recall. It appears that most automotive manufacturers are prioritizing the limited supply of replacement inflators to warm and humid regions, which has been identified as the most probable risk for failure and subsequent injury. Reports indicate that BMW, Ford and Mazda are limiting spare replacements to the few identified high-humidity southern U.S. states, Puerto Rico and the U.S. Virgin Islands. Indeed, NHTSA had issued guidelines supporting prioritization of replacement parts to these most at-risk regions, but automobile owners remain confused and frustrated as to what to do. That continues to add more pressure to automobile dealers and their associated services businesses to be able to respond to consumer fears for driving an unsafe vehicle. In our conversation with various people this week we have already heard stories from those impacted by recall or service campaign notices.
The colliding forces of regulatory, political, and automotive replacement spare parts networks continue and may well continue for many more months.