In a published Supply Chain Matters commentary in June, Service Supply Chains Put to the Ultimate Stress Test in the Automotive Industry, we focused on General Motors, which after intense scrutiny from U.S. regulators and legislators regarding faulty ignition switches among multiple models, had recalled thousands of vehicles. At that time, GM had announced a cumulative 44 product recalls involving nearly 18 million previously sold vehicles not only for faulty ignition switches but for various other lingering quality problems.
Other Automotive OEM’s have also found themselves under intense regulatory scrutiny, and many elected to err on the side of caution and declare product recalls if there were any concerns regarding vehicle or occupant safety. The result led to a Washington Post headline indicating that one out of every ten vehicles on the road had been subject to a recall notice. That amounts to a lot of motor vehicles.
Beyond the challenge of potential damage to brands and subsequent consumer brand loyalty, our primary concern in June was that automotive service and aftermarket supply chains were about to face their biggest stress test ever. The sheer numbers implied that required replacement part inventories were not going to be able to match expected demand and that inventory would have to be re-allocated or alternate suppliers would have to be sourced. Dealers and authorized repair facilities had to be very careful in scheduling service appointments and setting customer expectations regarding replacement part availability and concerns for vehicle safety.
Also included in our June commentary, was reference to reports that product recalls related to defective airbag inflators produced by supplier Takata Corp. were expected to increase after a series of investigations.
Flash forward to today, and now the sheer scope and impact of the unfolding product recalls involving defective Takata airbag inflators is approaching millions of additional vehicles and multiple other brands. U.S. regulatory agencies have raised alarms for the safety of occupants with calls for immediate attention. Web sites are swapped with consumers seeking the status of their vehicles. Business and general media have not taken the time to get the facts sorted out regarding the largest concern being potential defective airbag inflators operating in warm and humid climates. Instead, consumers from across the U.S. are forced to seek answers and demand attention as to whether their vehicle is safe to operate.
By our lens, automotive aftermarket service and parts networks have now been literally thrown under the proverbial bus.
It wasn’t their fault.
The events did not allow the planning for adequate replacement parts or analysis to the required capacity of service repair and replacement resources. The problem was thrown over the wall because quality monitoring mechanisms stalled and time had run out for planned response. Organizational interplays and CYA were probably at-play as well.
Already, OEM’s such as Toyota are trying to proactively respond to this defective air bag inflator crisis in the most realistic manner. Reports indicate that Toyota dealers are being requested to disable the potential defective airbag mechanisms of recalled vehicles and instruct vehicle owners to return when replacement parts are made available. They are doing so because of the reality of backlogged replacement parts which are substantial. In the meantime, temporary labels affixed on vehicles warn occupants of a safety hazard of not having operating airbags.
How comforting is that?
But, without adequate replacement part inventories, there are little options right now.
Service supply networks will invariably come-up with means to prioritize the most important and time sensitive parts requirements and then move on to the various other replacement part requirements to get through this crisis.
The takeaway from these ongoing unprecedented set of automotive industry product recall events is that if the business situation requires much more responsive, supply-chain wide quality monitoring mechanisms and more informed service and aftermarket spare parts networks, than provide the necessary tools and resources required to get the job done.
No doubt, there will be considerable repercussions and learning that come from these events. There will invariable be far more attention paid toward vehicle safety, regulatory safety and reporting and supply chain wide quality adherence.
In the meantime, as automotive consumers, we need to allow the time and patience for the dedicated professionals who plan and fulfill aftermarket parts and service event requirements to adequately respond to the crisis at-hand while more attention is directed toward more responsive quality management.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
In a June 2014 Supply Chain Matters commentary, Automotive Component Supply Strategy Meets Sensitized Regulatory Environment, we called attention to a published Reuters report indicating that product recalls involving airbags supplied by Japan based Takata Corp. would expand and involve millions of affected motor vehicles and ensnarl many global brands.
That situation has become ever more visible in a multitude of cascading product recalls and urgent consumer advisories involving many auto brands from entry-level to upscale luxury.
Today, the National Highway Traffic Safety Administration (NHTSA) issued a high visibility consumer advisory, urging owners of over 4.7 million recalled vehicles to act immediately on recall notices and replace defective Takata airbags due to suspected defective air bag inflators. Brands involve BMW, General Motors, Honda, Mazda and Nissan and the vehicle models date back as far as 2000-2001. While this advisory notes specific urgency for certain U.S. states and regions featuring warm, humid climates that fact seems to be blurred by the blast of Monday news from general media. The other reality is that many vehicle owners may have ignored previous recall notices which could jeopardize the safety of occupants.
Aftermarket service and spare part networks are already stressed by a surge of product recalls issued from an abundance of caution to avoid punitive financial fines. This latest high profile consumer warning related to certain airbag deflator defects will add more stress to overly stressed networks that lack the tools to handle such volumes.
Automotive OEM’s have fostered component product innovation strategies among a key set of lower-tiered component system suppliers, and OEM’s leverage such innovation across multiple vehicle and brand platforms. These strategies were put in place to foster both faster product innovation cycles as well as to be able to leverage volume supply costs across multiple global platforms. The objective of leveraging lower component costs has never gone away, at least for certain OEM’s.
Earlier this month, The Wall Street Journal featured a report (paid subscription or free metered view) indicating that Honda, after a long supplier relationship, is re-evaluating that arrangement with Takada in light of a series of airbag inflator product defects. Reports indicate that defective air bags, some dating back to the early 2000’s, could send metal shrapnel flying upon air bag inflation, posing serious injury risk to drivers and/or passengers. According to reports, Takada utilizes a different propellant than other suppliers, one that is cheaper but more volatile. Rival air bag suppliers that could benefit from the current crisis include Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which is being acquired by German based ZF. The WSJ further reported that Toyota and Nissan are also concerned about Takata air bag systems in the light of the current circumstances. But, switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.
The WSJ report provides some in-depth perspective on how Takada has expanded its global just-in-time supplier footprint to accommodate individual OEM platform demand. The report alludes that the product quality problems may have stemmed from a period of rapid growth, testing communication and process discipline among far-flung regional plants. After two years of investigation, Honda and Takata joint quality teams discovered certain machine defects in a plant in Washington state and in process parameters in a Mexican plant. At times, poor record keeping hindered the ability to figure out which cars had defective inflators installed.
Whether Takada can recover from this ongoing and compounding product recall and branding crisis is certainly open to skepticism and speculation. However, Supply Chain Matters feels that automotive OEM’s face their-own realities related to product development and global product platform cycles. A global platform strategy supported by component supply agreements has to be balanced with supplier risk. Requiring suppliers to locate just-in-time production across far-flung global regions requires an assessment of rigid process control discipline and conformance. When such controls indicate cause for concern, two-way communication must be forthright and honest and procurement teams need to be proactive in assessing and communicating risk implications.
Today’s overly sensitized regulatory environment requires timely feedback and responsive risk mitigation.
The passenger safety, financial, and brand risks are far higher.
In the week that Apple staged its massive media event announcing two of its newest iPhone models, BloombergBusinessweek featured an intriguing article titled: Apple’s iPhone 6 First Responders. The report serves as a very timely reminder of the critical importance for harvesting product performance and service reliability information very early in the product launch stages.
The Apple program outlined is termed early field failure analysis (EFFA). The Bloomberg authors had a novel spin as to the purpose, one that may well resonate with our reader audience: “ As customers line up to buy the device (iPhone) around the world, Apple employees will show up at work to learn how they screwed up- and fix it.”
Humor aside, the Apple program was conceived to resolve problems before they become far larger in-scope, when they are far more expensive to resolve across an outsourced supply chain. Bloomberg cites former Apple employee sources as indicating that EFFA testing is most stringent during the device’s first weeks of consumer sales, but can continue longer as problems arise. Therefore, the EFFA program for the iPhone 6 models is most likely underway as we pen this commentary. Once more, the report confirms that defective Apple devices returned at Apple retail outlets are directly airfreighted to Cupertino where the phone is physically examined and where manufacturing history can be traced to individual workers on an assembly line. There are some rather fascinating examples of how previous problems were found and resolved before they became a thorn.
The report is worthy of a read since it provides further evidence of the importance of connecting the service management business process with the product supply chain. It further provides evidence of how Apple’s product management and supply chain teams harness early feedback information related to specific products to avoid more costly issues and to protect the image of the brand. I suppose we could add that it also avoids the wrath of CEO Tim Cook when consumers feedback any displeasure in an Apple product.
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.
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.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
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.
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.