Equipment and capital goods manufacturers have increasingly re-discovered new and growing revenue opportunities that reside in added services and service parts sectors related to in-service equipment. Such opportunities are especially pertinent across commercial or defense focused aircraft which have operational service that spans many years of service. However, when an industry dominant such as Boeing decides that it wants to take more control as well as revenue cut of all service parts, the financial implications and subsequent impacts will reverberate among all key suppliers.
Today’s edition of The Wall Street Journal reports such an implication as Boeing elects to secure a new source of revenue beyond building aircraft. (Paid subscription required) The report indicates that whereas in the past, Boeing’s largest suppliers such as Spirit AeroSystems or Rockwell Collins could sell respective manufactured parts directly to airline and aircraft operators for in-service service replacement needs, the OEM elected in late February to prohibit suppliers from directly selling proprietary service parts, along with suspending licenses to suppliers to sell any such proprietary parts to its customers. The WSJ characterizes this development:
“It is the most aggressive move to-date in Boeing’s year-long effort to assert control over distribution-and the resulting revenue- of parts.”
According to the report, Boeing is looking to nearly triple revenues associated with commercial and defense aviation parts and services business by 2025.
Supply chain teams in these sectors know all too well that margins on service parts can far exceed those for original equipment production needs. According to the WSJ, it can be upwards of 4X more than what Boeing pays for the part to support initial production. Suppliers will often forego margins on supply contracts to a customer such as Boeing with the expectation that multi-year margins can be garnered in service parts needs over the operating life of an aircraft model.
In a highly regulated industry such as commercial or defense focused aircraft, certain structural or key operating parts have designated service-life provisions which must be adhered to, thus assuring ongoing component stocking and service part demand needs.
The WSJ report further links these moves to Boeing’s ongoing Partnering for Success initiative addressing added cost control opportunities among existing suppliers. According to the report:
“Boeing also prohibited some suppliers from being given new work or withheld regulatory approvals for parts until revised (supply) contracts were complete.”
The report cites a Credit Suisse aerospace industry analyst as indicating:
“The economics of being a Boeing supplier could be facing their greatest challenge yet.”
While airlines themselves have become increasingly concerned by the rising prices of service parts charged by suppliers, by our Supply Chain Matters lens, this revised strategy by Boeing does not necessarily address nor mitigate that trend. It obviously takes away profitability opportunities for suppliers while adding yet another intermediary in the service parts supply chain.
One of the most promising service management opportunities related to commercial and defense focused aircraft resides in the leveraging of Internet of Things (IoT) focused technologies that would allow operating equipment the ability to communicate service and replacement needs based on operating environmental conditions. Rather that static, fixed maintenance schedules, the opportunity is for the equipment itself to self-diagnose its parts replacement needs.
Many original equipment manufacturers are thus positioning to take advantage of such technologies in new service focused business models. That includes aircraft engine producers such as General Electric and CFM International. With this latest move by Boeing, a new participant is added to the overall business model, a participant that must share the same technology tenets being promoted in automated performance monitoring and service dispatch. Add the notion of IoT platform providers positing for their portion of the overall business model via platform adoption and subsequent dominance, and the picture begins to turn to one we have witnessed before with breakthrough technology. Every participant attempting to position for leveraged control of a promising new business model while target customers have to determine what all of this implies for added efficiencies or cost savings.
The dilemma of commercial aircraft supply chains that presented multi-year order backlogs and insatiable demand for more fuel-efficient technology-laden new aircraft has met the reality of more educated and aggressive airline customers, coupled with rapidly changing economic times. These forces are inserting their influence on aircraft pricing, delivery expectations and operating service needs.
Boeing is now responding to these needs by aggressive supply chain cost and headcount reductions, and now, demanding its proportional cut of service parts revenues. In essence, like too many supply chain dominants, the picture is again moving the need of cost reduction or added revenue needs down the supply chain.
More and more, the notion of we are all in this to share industry growth opportunities together reverts back to the supply chain dominant as the ultimate long-term benefactor.
Respective suppliers will obviously have to determine their own response strategies. Larger suppliers will be able to find means to remain resilient to such changes while smaller suppliers may feel the bulk of the pain. In the long-run, the party that ultimately controls the customer relationship along with product and process design ends up to be the eventual winner.
For service facing and aftermarket automotive related supply chains, news developments this week have undoubtedly bordered on the surreal or even bizarre.
The ongoing product recall crisis involving airbag inflators’ producer by Takata took on even broader dimensions. The National Highway Traffic Safety Administration (NHTSA) indicated this week that as many as 85 million potentially defective airbag inflators are still inside cars and trucks now being driven across the United States. That number is supposedly in addition to the nearly 29 million inflators that have already been designated for replacement in the ongoing massive product recall campaign. Reports indicate that thus far, at least 11 people have died and over 400 have been injured by defective airbag inflators.
There are many facets compounding this overall logistical challenge. NHTSA itself indicates that because of inadequate reporting information from automotive producers, the agency does not exactly know how many vehicles are exposed to potentially defective airbag inflators that were produced by Takata. There are also multiple inflators installed in every vehicle. Add to this, that previous replaced inflators were not properly designed, causing a second recall.
As Supply Chain Matters has noted in our previous commentaries regarding this industry recall challenge, the problem of premature explosion of the inflators has been linked to long-term exposure to high humidity. Thus the failure profile can be linked to specific U.S. states whose climate matches such humidity, such as Florida and the U.S. Gulf Coast states. One potential fix to the problem has been the addition of dessicant drying agent material to the inflator to lessen the moisture caused by high humidity. That obviously implies a separate part identity.
The far broader problem is the sheer scope of the potential campaign. The government is not even sure it has the authority to mandate a recall of such volume and with such monetary implications. With a potential of over 100 million inflators having to be eventually replaced, the recall campaign would obviously exceed current capacity for producing replacement parts, implying multiple years of effort. The sheer volume is of the magnitude of supporting the redesign of multiple new models of automobiles and trucks and would have to involve many more airbag inflator suppliers. As Supply Chain Matters noted earlier week, suppliers such as Autoliv have already benefited from the crisis, and with such massive numbers, other suppliers will benefit as well. And then there is the biggest question of all, who will pay for all of the replacement parts and installation costs.
The Donald Trump analogy of: “This is a HUGE problem” is an appropriate descriptor.
This saga and its implications will obviously test the limits of automotive service supply chains and dealers for many months to come.
Then the industry has the diesel engine emissions crisis involving certain Volkswagen produced models. Since our prior commentaries in late 2015, we have refrained from other updates because of the sheer kaleidoscope of bizarre actions by Volkswagen. First there was the sacking of senior corporate product design and quality executives. Then came the sacking of the top U.S. executive Michael Horn, who was revered by U.S. dealers, after Horn supposedly proposed monetary gestures to affected vehicle owners.
While the global auto maker has initiated a product recall plan for affected vehicles in Europe, the deadline for a plan to address polluting vehicles in the U.S. has come and gone and remains somewhat a work-in-progress. According to industry reports, VW continues to face upwards of $20 billion in potential fines as well as class-action lawsuits, not to mention a rather tense ongoing relationships with U.S. regulators and legislative bodies as well as its U.S. dealers.
Meanwhile VW senior executives had the shear nerve to position themselves for management bonuses. That had drawn the ire of executives of the IG Metall trade union who are influential members of the company’s Supervisory Board. The news this week is that executive bonuses have now been squashed by that board. Details related to future actions that VW will take related to a recall plan for the U.S. are not expected until VW’s board of directors meets later this month to review various investigative reports related to the U.S. emissions scandal.
The VW service management supply chain remains with lots of pending challenges and unknowns. Thousands of in-service diesel-powered vehicles may be subject to costly vehicle hardware and software fixes that potentially will involve significant labor hours per vehicle. Unsold diesel-powered vehicles remain in dealer lots awaiting a disposition as well. If a vehicle recall is initiated, individual owners are likely to very intolerant to repair times that extend over many, many months. Then again, what-if VW elects to buy-back certain models? That’s a reverse supply chain challenge in the making.
Overall, automotive service management supply chains remain stressed and face unprecedented process and execution challenges in the coming months and years. There is obvious learning that will come from this ongoing multi-brand crisis, involving product-design, supplier quality and supplier management dimensions. Many consumers will be impacted and will get first-hand knowledge of the effects.
As far back as 2014, Supply Chain Matters provided commentaries relative to the defective air bag inflator crisis that was impacting multiple global automotive brands. Even then, the product recalls involving airbag inflators supplied by Takata Corp. of Japan were estimated to be in the millions.
In an October 2014 posting, Supply Chain Matters echoed business media reports that brands such as Honda, were undertaking steps to seek out alternative suppliers, not only to provide augmented supplies of air bag inflators required to retrofit millions of recalled vehicles, but also to become a replacement supplier for current and future production needs. We noted that rival air bag suppliers that could benefit from the ongoing crisis included Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which at the time was being acquired by German based ZF Friedrichshafen. We further pointed out that switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.
Flash forward to today and specifically a recent Bloomberg Businessweek report titled: The Company That Came out on Top After Takata’s Air Bag Mess. The report indicates that largest automotive-safety parts company in the world has successfully been able to step in and respond to the Takata focused crisis. This supplier actually began supplying air bags as far back as 1980. Amid the current wave of product recalls, Autoliv produced inflators are noted as emerging relatively unscathed in the crisis.
The overall scope of the defective air bag inflators is massive, with upwards of 60 million recalled vehicles on a worldwide basis. Noted is that about 28 million Takata air bag inflators have been recalled in the U.S. alone.
Autoliv expects to produce 20 million replacement inflators since alternate production began in 2015, and extends through 2017. Once more, the supplier indicated to Bloomberg that it had won about half of all frontal air bag orders for newer cars last year. This supplier is forecasting sales growth of 7 percent annually, a fairly healthy rate for a lower-tiered automotive supplier.
Once more, Bloomberg points to Autoliv’s newer focus on the supply of more sophisticated safety components for autonomous vehicles such as radar, vision sensors and other crash avoidance safety systems ranging from standard sedans to luxury vehicles. According to a recent Boston Consulting Group study, within the next decade, one in eight cars sold around the world will have autonomous features. Bloomberg reports that Autoliv components are contributing to autonomy features in cars like Daimler’s new Mercedes-Benz E-Class, which can steer itself in auto-pilot mode, brake in emergencies and evade obstructions. The company is also reportedly partnering with Volvo AB in a project called Drive Me that aims to have 100 self-driving cars on the roads in Gothenburg, Sweden next year.
In essence, this alternative supplier is not only benefitting from its abilities to step-up and respond to an immediate industry defective component crisis, but indeed, positioning from a product design strategy perspective to be a preferred supplier for future safety systems in multiple branded global vehicle platforms.
We have called reader attention to the ongoing Autoliv case study because it provides an ongoing example of how a major supply crisis and safety snafu can indeed lead to another supplier’s opportunistic gain. More importantly, thinking beyond the tactical crisis window at-hand with a focus on what will be the alternative technology.
This is turning out to be a not so memorable if not brutal week for those in IBM’s workforce, especially in the United States.
Numerous social and business media reports are indicating that massive workforce layoffs are underway and according to published reports from Information Week, as well as IEEE Spectrum, could impact up to a third of IBM’s U.S. workforce. Many of these reports indicate that the bulk of the current layoffs are impacting IBM’s Technology Services groups which are essentially the consulting arm of Big Blue, but other groups may be involved as well.
We ourselves had been hearing speculation that workforce re-balancing was coming very soon for IBM and thus the news is not surprising given IBM’s recent financial performance and lackluster growth. Multiple quarters of disappointing revenue growth, earnings and growth momentum are wearing thin on investors. IBM is instead aggressively moving toward what it believes are higher growth segments such as analytics and cognitive computing. Supply Chain Matters recently highlighted IBM’s most important and far-reaching acquisition, that of the Weather Company.
A published report from Bloomberg indicates that the current re-balancing is a strategy to shift the workforce towards more cloud computing and artificial intelligence operations, while a commentary published by Business Insider indicates that IBM hired and fired in equal numbers last year, as much as 70,000 people. According to this commentary, the “Watching IBM.” Facebook page maintained by Lee Conrad indicates the big difference with the current layoffs is that IBM has severely cut severance pay to one month total, no matter how many years of service the employee worked.
To no surprise, IBM’s public relations and HR teams are declining to acknowledge any specific workforce layoff numbers, rather inserting their own spin on events with indications that there are currently more than 25,000 open positions. Thus the churn continues. Reports from business and social media that we have read indicate that the open positions are more than likely in other global geographies such as China and India.
Since ours is a blog focused on the broad umbrella of supply chain management business process and technology support, we will confine our commentary to our observations of IBM’s efforts in this area. After many strategic acquisitions and nearly $3 billion invested, Big Blue’s overall execution of broad based supply chain process support spanning Buy-Sell-Plan- Service never seemed to gel. Acquisitions such as Emptoris, Sterling Commerce, ILOG or DemandTec have not come together as a suite of integrated capabilities. One component of ILOG, LogicTools, was recently sold. There was, from our observation, too many layers of redundant management and decision-making with little execution and time-to-market.
The supply chain technology market continues to move on, and the notions of more predictive analytics and the potential for integrating the physical and digital aspects of industry supply chains via Internet of Things (IoT) technology is near. IBM is from our lens, not keeping pace with the current clock-speed of market change because of organizational inertia. Meanwhile, supply chain best-of-breed, and even select ERP and enterprise software providers such as Infor, Oracle, PTC and QAD are, by our lens, keeping pace.
We know our words are not going to be of comfort to the thousands of IBM employees currently impacted and for that, we openly and sincerely, apologize.
This author having been himself been directly involved in tech company layoffs can readily recall the anguish of efforts to accomplish a mission and a program plan, only to be stymied by unnecessary organizational complexity and inertia.
We trust that IBM will learn from its past mistakes and instead focus on not just the grand vision, but the execution mentality and structure of a growing start-up. Paranoia sometimes adds to resolve, as does team empowerment.
© 2016 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
If you have had the opportunity to view this author’s prior conference presentations on future technology trends in supply chain management you might have recalled my references to the technology-enabled data analytics services related to The Weather Company and its implications as to how industry supply chains can literally predict future product demand needs by region.
Last October, IBM announced its intention to acquire most of this data analytics provider. While IBM would not disclose financial terms, The Wall Street Journal speculated the value was over $2 billion. Many in the tech world wondered what this was all about, and why did it fetch such value.
Last week, IBM announced that it has closed its acquisition of The Weather Company’s B2B mobile and Cloud-based properties including weather.com, Weather Underground, The Weather Company brand and WSI, the global B2B brand. According to IBM, the combination of these platforms will serve as a foundation to the evolving cognitive computing IBM Watson IoT Cloud which begins to reveal the why- becoming a far deeper business related data analytics company.
The Weather Company was spawned from what we all easily identify as The Weather Channel. Executives of this weather sciences broadcaster understood the future relationships of weather to consumer buying patterns. For instance, in the summer months, beer consumption in Chicago incrementally increases after three consecutive days of below-average temperatures. In Atlanta, during the months of fall, beer sales rise after during periods of above-average temperatures and below-average rainfall. During the winter months in Boston, sales of healthy snacks increase after three consecutive days of below-average temperatures and above-average precipitation such as winter snow storms.
Having amassed enormous amounts of weather data from literally thousands of micro-climate geographic locations, weather scientists began to explore the direct correlation of weather to sales of consumer goods. Having found many direct correlations, The Weather Company was spawned as a big-data analytics provider that could aide various consumer goods producers to better predict or promote product sales by specific region. At the same time, industry customers subscribed to weather data to better manage their services and equipment. In a published 2013 article, The Wall Street Journal reported that the new analytics and data science company had the potential to be far more lucrative than the broadcasting arm.
IBM’s plans for The Weather Company now take on a more Internet of Things (IoT) strategy focus. According to its latest announcement, IBM plans to collect a larger variety and higher velocity of data sets from billions of IoT sensors around the world while providing real-time information and insights to tens of millions of users worldwide. As part of the acquisition, IBM inherits The Weather Company’s customers in the aviation, energy, and insurance industries, as well as others. IBM is dedicating more than 2500 developers to help clients and partners collect, analyze and act upon entirely new forms of IoT data resulting from the proliferation of automobile and airplane telematics, building and environmental sensors, wearable devices, medical implants, weather stations, smartphones, social media, manufacturing lines and supply chains, among others.
IBM indicates that its customers will now be able to link all of their business and sensor data from their connected devices with weather data using IBM Watson. Controlling what is described as 2.2 billion weather forecast locations and marrying other physical sensors originating from supply chain activities can literally open up far broader dimensions of predictive analytics and decision-making beyond consumer product demand. How products are planned, how transportation is routed and controlled and how risk is managed across the physical supply chain are all possibilities.
Industry supply chains should keep their eye on efforts in this area. While IBM has exhibited a prior track record of rather elongated execution on the potential benefits of its acquisitions, Watson and its renewed focus on industrial IoT tied to predictive analytics is an area that will be, from our lens, crucial to long-term growth and future IBM revenue streams.
At the same time, the dimensions of data analytics that literally marry physical, environmental and digital applications information to decisions in product management, supply chain planning, manufacturing and service lifecycle management focused processes are capabilities with enormous benefits.
The open question moves from not in my career but rather to perhaps within the not too distant future.
© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.