The following posting can also be viewed and commented upon on the Kinaxis supply chain Expert Community web site.

Every now and then, it is important to take a step back from our everyday supply chain and procurement activities and reflect on the big-picture.  Such reflection could well uncover a brewing crisis before it becomes unwieldy, or worse, before it becomes a significant setback to business.

As I analyze various trends in cross-industry supply chain and financial performance, I have been reflecting upon why this post-recession recovery transition period has been demonstrating so many conflicting trends.  Large global manufacturing firms, for the most part, have generated rather impressive profitability results in the face of unprecedented business conditions.  Many months of cost-cutting in direct labor, overhead and supply-related costs have provided a far lower threshold to profitability, but a far leaner and vulnerable supply chain.  Some firms have taken a further step to attack any fixed cost associated with their supply chains, outsourcing the bulk of activities to contract manufacturers or key suppliers.

The end result is that many of these global manufacturing firms are amassing large amounts of cash.  The most recent analysis pegs that cumulative cash balance number in excess of $8 trillion, and Wall Street analysts are salivating on the potential for an upcoming period of increased acquisitions.  Others speculate why additional hiring has not begun.  However you view this situation, there are more fundamental stakes in play, and they directly concern supply chains.

This week, the Financial Times published an article , Industrial’s success squeezes suppliers (free preview account may be required), which perhaps gets more to the big-picture, namely that while the larger firms have been practicing financial engineering, they may well have done so at the financial risk to their smaller suppliers.

During the darkest days of the recession and continuing into this current transitionary period, smaller suppliers were forced by supply chain dominants to dramatically cut back on costs and capacity. In many cases, suppliers were mandated to absorb longer payment cycles on their accounts receivable.  Some suppliers have survived the crisis, others have not.

Now, continued uncertainty relative to the longer-term direction of the global economy has caused many of the survivors to be extra cautious before investing in added resources and/or capacity.  Those suppliers who are experiencing significant increases in demand are finding it rather difficult to borrow money to fund expansion.  The Financial Times reported last month that U.S. small businesses are having to pay more relative to the Federal Reserve’s benchmark borrowing rate then at any time in the last 25 years.

In essence, large firms have placed more strategic and tactical importance on supplier capabilities, yet still demand the same upside and downside agility as if they still owned these capabilities in-house.  In the FT article, the CFO of Caterpillar notes that this year, some Caterpillar facilities have ramped from near zero to as much as 70 percent with very little notice being provided to suppliers.  Japanese manufacturing firms who had previously built “kiretsu” partnerships with suppliers that included joint-financing assistance, are now aggressively outsourcing large portions of manufacturing to contract manufacturers.  In its article, FT concludes that “big manufacturers may well take the lesson that careful stewardship of the supply chain is important at all stages of the cycle.”

Perhaps we should not call all big manufacturing firms to task for transferring the bulk of supply chain capability to smaller suppliers without some strategic assistance.  Some firms have indeed reached out, but I suspect that the numbers are small.  What is becoming clearer, however, is that dependency on suppliers, whether large or small, is the ‘new normal’ and larger firms have higher stakes in the long-term success of these suppliers.  Perhaps some of the key parts shortages being experienced in the high tech and other industries may have root cause to the current conditions.  In any case, there is, at least in my mind, some basis for the effectiveness of “kirestsu” types of supplier partnerships.  The ‘big-picture’ is that some new form of partnership model is required, one that requires the involvement of business, financial and/or other parties.

The months of severe recession and cumulative cost cutting has shifted the supply chain risk profile.  Today’s volatile and uncertain global economy requires capabilities in supply chain agility. While technology can help with agility, strategic and partnership strategies related to suppliers may be a missing component in today’s environment.

Is your organization actively addressing this situation?

Bob Ferrari

Its going to continue to be difficult for consumers to instantly get their hands on the latest iPhone, iPad, Droid or other mobile device, and if you do have one, be patient with the service levels of your wireless carrier.

The reason is fairly obvious to many supply chain planners residing in the high tech, telecom or consumer electronics sectors, namely that a shortage of key supply components continues. Supply Chain Matters has noted in many previous commentaries how quickly suppliers back-flushed major supply streams starting in mid-2009, and we noted our projections for 2010, how supply component ramp-ups would stall in certain industries.  Cost cutting has taken a heavy toll in supply chain resources with considerable cutbacks in production, capacity, inventory and people. Whereas many supply chains were actively incorporating aspects of lean in operations, the past 18 months of severe cost pressures have made global supply chains even more constrained, with limited capability to be able to respond to any significant increase in product or industry demand. That situation is now very much playing out in the telecom and mobile device sectors.

The latest reinforcement of this situation comes in today’s Wall Street Journal article, Telecom Supply Strained (paid subscription may be required).  The article notes that equipment supply constraints have delayed AT&T Inc.’s ability to improve its wireless network upgrade, as well as Alcatel’s ability to produce needed wireless base stations, routers and switches.  Shortages of LCD screens produced at Samsung Electronics Company are impacting sales of the Droid mobile device, and Apple continues to catch-up with backlogs related to overwhelming demand of its newly introduced iPad.  OEM’s are searching other sources or securing new back-up suppliers, while increasing safety stocks for the critical components they have.

The article notes interviews with supply executives at suppliers Alcatel, Fairchild Semiconductor International Inc, and Texas Instruments Inc. which provide key insights for other planning and procurement professionals.  The senior vice president of Fairchild noted; “We have very clear prioritization for our top-tier customers and we reserve capacity for them. When we have constrained capacity we will produce more of the higher-value stuff and take fewer orders for the lower-value stuff.”

The lessons drawn are clear.  Take care of your suppliers and they will take care of you. Taking care of your suppliers connotes paying on-time, working to help solve problems vs. finger-pointing, and rallying support when crisis occurs. 

Too often, organizations seem to lose this perspective, particularly when financial-driven cost reduction goals override all others.  We are now witnessing the after-effects of that strategy.  Some companies will overcome current supply shortages and gain market share, while others may not. 

The question is do short-term financial performance goals trump long-term business?

 What do you think?

Bob Ferrari

Needless to say, Toyota has managed to capture the complete interest of its customers, and the stakes are extremely high for the company, and potentially its supply chain partners.  I refer to the ongoing unintended acceleration problem relative to certain Toyota vehicles.

Existing Toyota owners are justifiably concerned about their safety in driving such vehicles, and very typical of these types of incidents, clear answers are not yet evident. If one attempts to sort through all of the information that may be related to the specific problem at hand, it becomes rather confusing.  Initially, this alleged problem was attributed to floor mats that were jamming the accelerator pedal.  Now it seems that the root-cause investigation has widened to other potential causes.

My commentary is going to focus on the global supply chain risk implications stemming from this ongoing incident.  In my view, what makes this particular situation so difficult is that Toyota is dealing with a problem that seems to have a lack of clarity in terms of root-cause, and significant implications if not managed smartly. 

Supply Chain Matters has not been alone in making observations over these past months on perceptions that Toyota may have stretched its resources a bit too thin, and that quality was slipping. In my commentary in early December I observed that a multitude of major product recall incidents have tarnished the company’s previous stellar reputation as a producer of reliable vehicles.  The effects of nearly two years of global recession, coupled with some business missteps, has also had a severe impact on Toyota’s sales growth and lack of profitability. Since that time, I, along with other Toyota owners have become increasingly concerned about the reported incidents of unintended sudden acceleration of select Toyota models.

On Monday evening, when I received email alerts related to the announcement that Toyota had suspended all new vehicle U.S. sales of models subject to the ongoing latest recalls, I immediately knew that this event was going to be unprecedented in terms of scope.  As I pen this post it seems that the entire Internet and international media are running with all sorts of articles, reports and commentaries.  Vehicles subject to recall have now been extended to Europe and China.

The clearest explanations as to the potential causes I’ve found thus far come from an AP story published on msnbc.com.  This article notes that Toyota is telling governmental agencies that it thinks that a friction problem in its accelerator pedal mechanisms may be to blame.  CTS Corporation of Elkhart Indiana, the supplier that produces the accelerator assemblies for Toyota states in a press release issued on its web site that the friction problem accounts for just a few cases of stuck accelerators. The vendor notes that its products are not implicated by the November 2009 Toyota recall, but further states “that CTS has been actively working with Toyota for awhile to develop a new pedal to meet tougher specifications from Toyota.” 

Other experts express other various opinions ranging from complicated electronic sensors to a multiplicity of different factors.  Separately, Ford Motor Company has halted production of its full-sized commercial vehicles manufactured by its joint partner in China, Jiangling Motors Co., after discovering that the accelerator pedals it uses came from CTS Corporation.  Ford CEO Alan Mullaly noted in an interview on CNBC that while Ford had not noted any incidents of unintended acceleration, it was erring on the side of caution.

CTS supplies similar accelerator parts for Honda, Nissan and Mitsubishi Motors, but it appears that these three other automakers have received no complaints about the operation of accelerator pedals.

All of these issues should have been mitigated long before visibility reached global proportions. Why haven’t Toyota engineers been able to definitively correlate repair, warranty and customer feedback incidents for so any months? Why is CTS actively working on a tougher specification if the accelerator problem is termed limited in nature?  Without definitive explanations of root-cause or solid action plans, customers are left with massive doubt and lingering negative perceptions. 

In short, Toyota ‘s dilemma spanning dimensions of quality, safety, profitability, supplier loyalty and risk mitigation all rolled together in one very visible looking glass.

If there were any doubts about how important supply chain risk has become, stay tuned to this evolving story involving an icon of quality and dependability.

Bob Ferrari

Note: This posting can also be viewed on the Kinaxis Supply Chain Expert Community web site.

In the past, it was not very often that we would have the opportunity to view on the front page of the Wall Street Journal an article that directly concerns developments in global supply chain strategy  That was before the onslaught of the global recession. Now we find supply chain related stories often on the front page.

Today’s U.S. edition of the Journal has the front-page headline, “‘Bullwhip’ Hits Firms As Growth Snaps Back.”  (paid subscription required) The article cites events occurring within the supply chain of global heavy equipment manufacturer Caterpillar Inc. as a reflection of a large inventory replenishment cycle currently underway and the inherent risks it can cause.  It also raises two important and rather pertinent questions. Will the current inventory replenishment cycle cause the “bullwhip effect” to again amplify through the various tiers of the supply chain?  Will suppliers have the ability to scale-up activities to meet this new demand given the rather fragile financial and operational state that suppliers currently find themselves?

This article is a must-read for our supply chain community, and cudos to WSJ reporter Tomothy Aeppel for a well written article.

I’ve often commented on this blog that the overall level of inventories is at unprecedented low levels across the globe.  The WSJ article cites the overall reduction as $207 billion since the financial crisis began, and further notes that the pendulum began to swing in October and November, when total inventories began to grow. This data adds further quantifiable evidence that an inventory replenishment cycle is currently underway.  What comes beyond the current cycle is the open question.

My biggest concern therefore remains on the second question, namely, how will suppliers know when demand has moved to a more sustained growth cycle and,  when that occurs, what capabilities and/or resources will suppliers have to scale-up in a timely manner to stay ahead of such demand.

The WSJ article addresses these concerns through the example of Caterpillar and its outreach to its supplier network.  Caterpillar CEO Jim Owens has a PhD in economics, and that has pertinence to his understanding of “bullwhip” phenomenon. The company has prepared a number of potential business scenarios regarding business activity in 2010, ranging from conservative to optimistic.  In its latest fourth-quarter earnings announcement, the company’s current guidance for 2010 sales growth has a range of 10% to 25%. With these scenarios in hand, it dispatched two procurement executives to hold meetings with 500 of the company’s major suppliers, representing 80% of all component purchases. The messages delivered seemed straightforward: Explain that inventory buys would begin and that even if end-item demand were conservatively flat in 2010, an unlikely projection at this point, Caterpillar would boost production in its factories by 10%-15%, along with the need for re-stocking dealer parts inventories.  Caterpillar’s estimates that this baseline scenario alone would cause output from all of its suppliers to rise 30%-40% from current levels.  In essence Caterpillar’s messages will help suppliers to assess the bottom threshold of buying activity expected in 2010.

To help financially strapped suppliers with added resources, Caterpillar also instituted a program that allows suppliers to factor their Caterpillar accounts receivable at favorable interest rates, thereby accelerating payment at five days rather than an average 60 days from time of invoice.  Readers may recall our commentary related to major retailers such as Wal-Mart and Kohls also launching similar supplier financial assistance programs directed at key suppliers.

The article also notes how Caterpillar has proactively supplemented supplier relationships in other initiatives, namely:

• Creating a three month “freeze period” during the transition period, where orders will not be changed, allowing suppliers the ability to do firmer financial and resource planning
• Revamping end-item selling strategy away from predominately large customer customization, and instead introducing four “lanes” of customer buying options, ranging from a company configured in-stock lane containing most frequently ordered customer options, up to “lane four” custom configured with highest lead time.
• The existence of an ongoing supply risk-assessment team that meets weekly, assigning overall risk ratings to suppliers.

We should applaud Caterpillar for its proactive supplier outreach activities as well as its sensitivities to helping suppliers overcome the effects or false starts related to “bullwhip”.

In my view, if enough companies of the global scope and outreach demonstrated by Caterpillar institute such comprehensive supplier outreach programs, than industry supply chains will be able to more adequately scale and meet product demand needs.  If on the other hand, large OEM’s continue to treat suppliers as pawns in multiple games of chess, than the effects of “bullwhip” will be even more far reaching. 

Procurement and supply chain teams need to be thinking more like Caterpillar.

Congratulations and a thumbs-up to Caterpillar for their outreach, and to the Journal for its front-page recognition that supply chains, and suppliers do matter.

Bob Ferrari

A Wall Street Journal article last week (subscription may be required) noted that Toyota has accelerated its cost-cutting efforts.  The world’s leading auto producer by volume has requested the help of its key suppliers to meet a goal of reducing the cost of component parts by 30% in the next three years.

Toyota has been garnering considerable negative perceptions in the U.S. market of late.  First, a multitude of major product recall incidents has tarnished the company’s previous stellar reputation as a producer of reliable vehicles.  Second, the effects of near two years of global recession coupled with some business missteps has had a severe impact on Toyota’s sales growth and lack of profitability.  The company expects to suffer its second straight year of loses, and has lost some market share in the critical U.S. market.

This latest initiative, despite the need for the company to repair its balance sheet, is rather untimely and fraught with more risk. Toyota owners already have building concerns about the company’s building lapses in vehicle quality and reliability 

I like others have been a loyal Toyota owner, having purchased multiple vehicles over the last ten years.  I must admit that I too have noticed a noticeable deterioration in reliability.  Our 2004 Avalon has experienced three major part failures this year, which is very worrisome, and I suspect that our experience may not be an isolated one.  We, along with other Toyota owners, wonder aloud whether the so-called “sticking accelerator” problem reported among a group of sedans is limited to just a certain few vehicles or is more widespread.

It seems that ever since the bulk of vehicle production was shifted outside of Japan, quality seems to have slipped over time.  My evidence point is that our 1999 Toyota SUV, which was built and exported from Japan, continues to perform in the traditional Toyota manner. 

Pushing suppliers even harder to achieve significant further component part cost reductions without a context to the root-causes of eroding quality and reliability is risking even more damage to the Toyota brand.  A look back in history when major U.S. OEM’s such as Chrysler and GM embarked on similar initiatives with their suppliers would indicate a disastrous impact on the reliability of vehicles. 

Toyota should know better than to embark on an accelerated road toward destroying its brand and owner loyalty.  Let’s hope that they do due diligence to both business and reliability needs.

What’s your view?  Does Toyota have other options besides extracting more cost reductions in parts?

 Bob Ferrari

It has finally happened!

The Boeing 787 Dreamliner completed its first flight yesterday after almost two years of delays.  You can view a neat video of the actual flight at Boeing’s official First Flight web site.  Click on the 787 flight icon at the top of the page. 

First flight lasted over three hours and has already been officially declared a success.  I suppose getting this aircraft flying was the primary criteria for such success.

Supply Chain Matters has penned numerous commentary regarding the supply chain challenges and setbacks that have led up to this milestone.  Yesterday was a day of celebration for Boeing employees and suppliers, and we extend our congratulations to all for the hard work leading up to this event.

The next phase for the 787 Dreamliner is that of supply chain execution and delivery.  Once the Federal Aviation Administration (FAA) completes its certification of the aircraft, it will be up to Boeing’s internal and external supply chain teams to execute a consistent ramp-up of production, and deliver the 865 aircraft that have been ordered by airline customers.  Suppliers will not be able to completely recoup their resource investments until these planes are delivered in quantity, and Boeing needs to recharge its delivery and export engine to recoup its own financial setbacks related to delays thus far.

The events related to 787 Dreamliner remain as the supply chain story of the 2009, and perhaps the months to come.   They have provided testimonial to the title of this blog, namely that supply chain capability does indeed matter.

Again, best wishes to the extended Boeing 787 supply chain team.  Enjoy the upcoming holiday season and come back renewed to be able to shine in the next and most critical phase, getting these magnificent planes delivered to customers.

Bob Ferrari