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McDonalds Sticking with Supplier Under Fire

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Over these past days, business and general media has produced high visibility reports of expired meat products being served among global restaurant chains operating within China. The news of the expired meat originated on China’s Dragon TV Network. By now, many of our readers, particularly within consumer products and food service environments have read of these ongoing developments, along with consumer, regulatory and industry reactions.

Well-known brands such as McDonald’s, Yum Brands (operators of Kentucky Fried Chicken, Pizza Hut) and Burger King were named by both media and Chinese food regulatory agencies for offering such expired meat products to customers. The expired chicken and beef meat products were traced by restaurant operators to food supplier Shanghai Husi Food Company, which is affiliated with U.S. based OSI Group, a $6 billion producer of food products. OSI itself has garnered what is reported to be a solid reputation as a quality focused food supplier.

According to published reports, the Chinese based distributor Shanghai Husiallegedly re-labeled the meat products with new expiration dates after the original date had passed. Chinese authorities quickly detained five people as a result of these incidents. The Shanghai Food and Drug Administration later concluded that the violations were not the result of an individual but rather the result of an organized effort by the Chinese distributor, which is a serious charge. However, reports seem to indicate that the practice may have been limited to a single Shanghai Husi processing facility.

The CEO of OSI Group was quick to issue a public apology for the actions of its China based subsidiary. That statement begins: “What happened at Husi Shanghai is completely unacceptable. I will not try and defend it or explain it. It was terribly wrong, and I am appalled that it ever happened in the company that I own.” The distributor further pointed out that Chinese authorities inspected other facilities across China and found no issues. The supplier further dispatched a team of its own global experts to ensure that the problem is addressed and corrected.

Yum Brands took quick action by terminating OSI as its supplier in China Australia and the U.S… Burger King suspended all orders from the Chinese distributor. But something different is occurring with McDonalds.

Initially, McDonalds CEO issued a statement indicating that the chain was misled by its Chinese supplier and cut its ties with that supplier. But on Friday, the Wall Street Journal published an article (paid subscription or free metered view) indicating that the chain would stand by OSI Group, its loyal supplier for over 59 years. According to the WSJ, the supply agreement dates back to 1955 when founder Ray Kroc was looking to expand across the United States and now supplies up to 85 percent of McDonald’s global locations. OSI has been instrumental in supporting McDonald’s global expansion and reportedly helping the chain to maintain consistent quality standards. As noted, OSI is not just a supplier to McDonalds but to many other global customers. In 2011, this supplier was cited in a quality award by McDonalds for supply activities both in the U.S. and Asia. According to the WSJ, in 2013 food distributor Sysco cited the supplier with its “Gold Supplier” award.

By Thursday of last week, McDonalds decided to retain OSI as its global supplier, utilizing other OSI owned factories within China.  A statement issued to the WSJ stated: “We will not walk away from the issue but we are committed to resolving it.

Supply Chain Matters has a two-fold reaction to these events.  First and foremost, any food supplier that resorts to illegal product classification practices deserves the consequences of such actions.  On the other hand, a supplier that has garnered years of experience as a quality focused and rock solid supplier deserves the opportunity for the facts to come out and to take action to totally correct any deficiencies. 

In this era of instantaneous response and 7 by 24 news cycles, it becomes all too convenient to throw a supplier “under the bus” of negative publicity. Loyalty to a long-standing business relationship seems to be a fleeting principle.  Of course, a global restaurant services provider with such a dependency on a single supplier will often find it difficult to quickly source alternative suppliers.  One could argue that that might have led to the McDonald’s response.

However, kudos to McDonald’s management for taking a step back and giving its long-time supplier the benefit of the doubt with the opportunity to get to the facts and resolve the issue (s). A long history as trusted supplier deserves some consideration.

Bob Ferrari

 


Once Again Another Apple New Product Ramp-up of the iPhone Supply Chain

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On the eve of Apple’s report of quarterly earnings, its supply chain is leaking all sorts of information regarding the upcoming new production ramp-up of Apple’s new iPhone models in preparation for all important the holiday buying surge period that comes later this year.

Our Supply Chain Matters information alerts regarding Apple have been active for the past five weeks but the trigger point arrived today when the Wall Street Journal featured a front-page article regarding ongoing production plans.

According to the WSJ, Apple’s supply chain planners have placed orders for between 70 million and 80 million iPhones in both 4.7 inch and 5.5 inch screen configurations to be completed by the end of this calendar year. That compares to production orders of between 50-60 million phones for the same period last year as Apple ramped-up for the introduction of the iPhone5 model series. That is an obvious indication that Apple is making big-bets on the expected popularity of the new iPhone models. Apple also does not want to encounter a situation of being short on inventory for the most popular iPhone 5s model, as was the case during last year’s holiday season.

The WSJ report generally correlates with reports from Taiwan media several weeks ago. Where the reports differ is when volume production is scheduled to start.  Media outlets in Taiwan reported that the 4.7 inch model would begin volume production this month, while the 5.5 inch would begin production in mid-August.  Today’s WSJ report indicates the larger screen version production would begin in September. Previous Taiwan and Chinese reports indicated that contract manufacturer Foxconn was in the process of hiring an additional 100,000 workers to accommodate the cyclical production increase while secondary contract manufacturer Pegatron was in the process of hiring an incremental 10,000 workers. All of this data provides a sense of the sheer scale and flexibility that Apple requires from its supply chain partners.

What is remarkable is that a reading of today’s report gives a true sense of the complexity and variability challenges that Apple’s supply chain planners must manage.  The new larger screen is again, as in prior years, presenting production ramp-up and yield challenges due to more advanced in-call technology and a rumored sapphire based screen. The WSJ report indicates that orders for upwards of 120 million displays have been placed to compensate for yield challenges. If that number is accurate, it would imply that planners are factoring a 60 percent yield factor. The report further validates that Apple planners will make production adjustments based on early demand history, which was again demonstrated last year when production volumes for the iPhone 5c were scaled-back based on initial demand from consumers. Last month, China Times reported that global semiconductor chip producer TSMC was expected to produce 120 million touch ID fingerprint sensors for Apple, which is three times the volume produced last year, and a further indication of production yield factors and ramp-up scale.

Then there is the celebration of the Lunar New Year, which next year, arrives in February, when most production grinds to a halt as workers take time to return to their families. Apple planners must insure that adequate inventories remain to compensate for a lull in production, or that contract manufacturers make assurances that some production will continue during the period of the Lunar New Year celebration. Multi-tiered inventory visibility is an obvious necessity.

As was the case last year, Apple’s upcoming new product launches will place its supply chain with even more challenges. The competitive stakes for Apple are far higher this year as market dynamics and overall competition in emerging markets intensifies. Rival Samsung has already felt the effects of intensified competition from lower-price producers Lenovo and Xiaomi in China and Micromax and Karbonn in India. 

Pricing strategy will be critical and some reports indicate that Apple is seeking higher list prices from carriers for its upcoming new models.  The government of China recently raised media-wide concerns regarding the overall security of Apple smartphones in the midst of ongoing global spying scandals, which could place additional pressures on China Mobile to feature other brands. Android powered phones continue to gain more overall market share while Microsoft and other tech players are providing more incentives for lower-cost providers to adopt Windows based phones.

These are all variables that will drive Apple’s supply chain planning in the coming weeks, one that will again have to demonstrate responsiveness to increased market dynamics, synchronization of NPI and ramp-up plans and resiliency to unplanned disruptions or material shortages.

Then again, Apple continues to be rated by Gartner as the number one supply chain.

Bob Ferrari


A Lesson in Emerging Market Dynamics Within Consumer Electronics Supply Chains

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A new dynamic is occurring within the global E-tablet market, one that is being orchestrated by some key suppliers. This dynamic provides a reminder to the crucial importance of supplier intelligence strategies.

The Wall Street Journal recently observed that global microprocessor chip maker Intel, in response to being shut out as a key supplier for the Apple iPad and iPhone as well as Samsung models, is wooing smaller electronic tablet providers within China. The strategic objective is sub $250 tablet markets that are attractive to consumers within emerging market economies.

Intel has been calling on the likes of Shenzhen Hampoo Science & Technology Co., Shenzhen Ramos Digital Technology and select other China based mid-sized consumer electronics providers. These companies were previously learning towards existing ARM-based chip producers as well as Google’s Android operating system. According to the WSJ: “Among other tactics, Intel has taken a cue from Chinese chip makers and last year began offering “reference designs”- essentially ready-made tablet designs that allow manufacturers to create a product in as little as one month.” Intel has further sped-up its chip product development cycles in China.

This week provides another related development.  Microsoft announced that it would expand its subsidies to vendors for Windows-based tablets and sub 9 inch models priced below $250, in essence receiving free Windows licenses. Microsoft is betting that tablets featuring full Windows functionality, in combination with lower-cost processors, have a good chance of capturing added market-share from Android devices. A posting by Digitimes reports that with this new strategy, China white-box, private brand manufacturers have quickly raised their proportion of Windows based tablets.

Two major, influential suppliers are thus in the process of altering existing market dynamics and the stakes are high.  The sub-$250 electronic tablet market could lead to larger production volumes and subsequently, leverage existing electronic content distribution strategies.

As Supply Chain Matters has noted in previous commentaries, within today’s highly dynamic high tech and consumer electronics supply chains, key component suppliers can serve as either a strategic partner or a potential market disruptor by shifting product and market development strategies. The takeaway is that supply chain and procurement sourcing leaders need to fully understand the markets they serve and the key strategic suppliers within that market.  Supplier intelligence has never been as crucial as it is today. A key sourcing decision made for certain business outcome purposes can have ramifications when deep pocket suppliers elect to counter that strategy.

Bob Ferrari


Foxconn Continues to Hint at Building its own Branded Products and Services

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Global contract manufacturer Foxconn (Hon Hai Precision Corp) conducted its annual meeting of shareholders last week and continued to reinforce a business transformation strategy. The company’s chairmen indicated to shareholders that revenues and profits will grow 10 percent this year.

According to the Wall Street Journal, Foxconn’s $130 billion in revenues for 2013 were but a one percent increase over 2012 levels, while operating margins have flattened to 2.76 percent. The contract manufacturer’s direct labor costs have more than doubled since 2009, compelling the company to accelerate initiatives directed at robotics and factory automation.

Founder and CEO Terry Gou indicated to the company’s shareholders: “Business transformation is crucial for Foxconn’s sustainable growth in the next ten years.” That is the similar message delivered at last year’s stockholder event. Mr. Gou indicated that the contract manufacturer will continue to test new business models that integrate hardware, software and services initially in Taiwan, and then in global markets. According to a published report by China Post, the current investment plan reflects the company’s determination to go beyond its status as the world’s biggest contract electronics manufacturer and move into new generation businesses. Gou indicated a strategic focus on development in four key areas — smart grid networks, smart broadband networks, smart Information networks and cloud computing-based artificial intelligence networks.

Initiatives underway include the offering of mobile accessories under the Coverbank brand name, a Bluetooth headset branded under the name of Candyard along with smartphone related distribution and inventory management services including local distribution of Blackberry smartphones.

A recent posting by PC World indicates that earlier this month, Japanese tech company Softbank unveiled Pepper, a personal robot that Foxconn helped develop. Pepper is designed to interact with humans, and can talk and even read people’s emotions: “I believe it will become a huge platform for human companionship” Gou indicated, noting that additional software services could be bundled with the robot. According to PC World, Foxconn is already a partner with U.S.-based Tesla Motors, having built the touchscreen found inside the company’s vehicles. But last week, Foxconn’s CEO revealed that his company is developing its own electric cars, with a target price of less than $15,000.

However, the company continues to indicate that it has no plans to enter the smartphone market as a branded competitor since over half of current revenues come from being a key contract manufacturer for Apple. In a recent Supply Chain Matters commentary, we noted rumors that Foxconn is being tapped as the lead manufacturer for Apple’s next release of the iPhone.

As Foxconn , the most dominant global contract manufacturer continues at its efforts towards business diversification, the implications for other contract manufacturers are also evident.  Contract manufacturing is a low margin business without product diversification or increased investments in factory automation.  The China advantage for direct labor savings is fast evaporating.

The world of contract manufacturing is rapidly changing and so will the manufacturing outsourcing dynamic.  Supply Chain Matters has noted in prior commentaries, a new model of manufacturing will evolve over the next five years, one with different regional manufacturing capabilities and perhaps different global players. The inter-relationships will be dynamic and so will the notion of brands, products and services.  OEM’s will have increased pressures for opening up more customer value-chain opportunities to key suppliers, or else, suffer the consequences.

High tech and consumer OEM’s can no longer lean on past assumptions related to outsourced manufacturing business models.

Bob Ferrari


Impressions from the OpenText Industry Analyst Briefing

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In our Supply Chain Matters coverage of the B2B and supply chain technology space, we had previously provided commentary related to GXS, Inc. The roots of GXS stem back to the late sixties with its initial founding as General Electric Information Services (GEIS) providing computer time-sharing to general users, migrating to support value-added network (VAN) services such as EDI for both GE and external clients. By 1998, GEIS’s global electronic trading community exceeded 100,000 trading partners, and in 2002, the renamed GXS was spun out as an independent technology services provider purchased by venture capital firms Francisco Partners and Norwest Venture Partners.

In June of 2012, Supply Chain Matters declared that GXS was a hidden gem in the B2B information services and application support arena. In November of 2013, GXS was acquired by OpenText Corporation, Canada’s largest software technology provider. The purchase price at the time was reported to be approximately $1.2 billion, roughly 2.4 times GXS Fiscal 2012 revenues. T

The crown jewels of GXS is the GXS Trading Grid a global platform to support e-business and supply chain information integration that supported upwards of 550,000 trading partners and included some big-name and rather influential industry supply chains. The question was what Open Text’s strategic intent would end to be regarding the acquisition.

Earlier this month, this author was invited to attend a one-day industry analyst briefing hosted by members of the senior management team of OpenText. By the end of the day, I had acquired a broader understanding of OpenText’s business strategy, particularly as it concerned the leveraging of the newly acquired B2B transactional support network.  However, we walked away with some remaining open questions regarding the broad scope of the strategy.

For readers unfamiliar with OpenText, this vendor classifies itself as a broad-based Enterprise Information Management support provider.  Product support areas are rather broad and include:

  • Enterprise Content Management (ECM) – areas such as content management, secure email and electronic content, data and cloud integration.
  • Business Process Management (BPM) – classic business process workflow tools suite.
  • Customer Experience Management (CEM) - areas such web based content management, customer communities, and digital assets management.
  • Information Exchange and Discovery- areas such as B2B communication and transactional integration, secure messaging and information discovery.

Because of this rather broad technology support footprint, the OpenText vertical industry targeting strategy is broad ranging from manufacturing and retail to financial services, government, public utilities and other industries. Open Text’s prime targeted customers are CIO’s and internal IT, but with this broadened strategy and the acquisition of GXS, customer constituencies will have to include cross-functional supply and value chain groupings.

It was rather obvious to this analyst that OpenText acquired GXS for the value of its B2B supplier and trading partner network.  However, the evolving strategy is more about leveraging the Trading Grid in the context of EIM, document exchange, quicker on-boarding of supplier and trading partners and managed services support.  The current OpenText strategy assumes the existence of other business applications that touch or interact across the network and that business value is derived from the ability to leverage content among various business applications within and across the network.

The provider has placed a rather large emphasis on its partnership with SAP, which it classifies as its most strategic partner. The vendors’ EIM technology is positioned to support needs for SAP Business Suite, Ariba, and Microsoft Sharepoint content access, information management and electronic document exchange needs. The current most attractive interest among SAP installed based customers was described as a supplier electronic invoice solution where OpenText sits aside the Ariba Network. Briefing presentations emphasize that the firm was one of the first SAP ISV’s to run Archive Server on HANA for customers needing to manage combinations of both structured and unstructured data. Having achieved recognition as an SAP Solution Extension, 14 OpenText product offerings are currently sold jointly by SAP and OpenText sales teams. That implies that the SAP salesperson is directly compensated for selling OpenText technology in a deal. Asked by this analyst as to which other vendor in the current market is viewed as a prime competitor, the answer turned out to be IBM and its Sterling based B2B network. I would disagree, but that is subject matter for an additional commentary.

From our lens, it would appear that SAP is positioning OpenText for near-term customer requirements in EIM, B2B transactional and content integration needs.  A very open question is how SAP will position such partner support once Ariba and its Ariba Network platform become more integrated with broader SAP Business Suite, SAP Supply Chain Management, SAP SRM and SAP HANA enabled information and business intelligence needs over the longer-term window. Joint customers will need to continue to monitor the evolution of the partnership. Another open question would be the overall cost of layering these various technologies vs. the market appearance of a more holistic business network platform that marries infrastructure, content, application and business intelligence.

As for OpenText and its continued support for B2B and end-to-end supply chain business network and BPM support, a lot will depend on whether the OpenText management team can place more concentrated emphasis on manufacturing industry, retail and online commerce business process support needs.  The vendor further needs to alter its current product marketing messaging to be more in-tune with today’s industry specific business process challenges and desired business outcomes for supply, services and value chain networks. The entire day of briefings included very little mention of vertical industry focus and approach.

If readers require more specific intelligence and insights, give us a call.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.


A Flood of Rumors Surround Apple’s Pending Product Launches with High Expectations

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Wall Street insiders and the financial press are hard at work extracting tidbits of information from elements of Apple’s supply chain. The buzz and interest centers squarely on what can be anticipated for Apple’s Fall new product introduction (NPI) pipeline. Obviously there is a lot at-stake.

We at Supply Chain Matters have featured prior commentaries related to information leaks from the Apple supply chain ecosystem. But we put that aside in this commentary. Rather, let’s focus on Apple’s new product ramp-up, overall planning and supplier management strategies that are evolving in this current phase.

The current two areas of focus are on the rumored introduction of Apple’s next iteration of the iPhone along with the so termed, iWatch, a smartwatch that is rumored to have rather mind blowing functionality and characteristics.

Earlier this week, the Wall Street Journal published an article, Can Apple Crack the Smartphone Code? (paid subscription required) The article indicates that Apple will join other consumer electronics firms, namely Samsung, Sony, Intel and a host of start-ups who have already released versions of a smartwatch into the market. We recently called Supply Chain Matters reader attention to reports that Google was ramping-up volume production for  a smartwatch product as well. According to the WSJ article authors, thus far the market has been lukewarm in sales volumes. Thus, Apple does not have its usual first-mover advantage, and is compelled to provide more attractive product innovation to differentiate from existing competitors. The publication cites one market research firm as indicating that shipments of so-termed wearable devices amounted to roughly 3 million units in the first quarter of 2014, not a lot in the context of previous Apple product releases.

Regarding supply chain related insights, the WSJ cites a source indicating that Apple’s past ability to integrate both hardware and software design concurrently give it a leg-up in the market. Another source from a component supplier is quoted as indicating that Apple is planning for 2014 shipments ranging from 10-15 million production units this year.

A separate published report by Reuters , citing a source familiar with the matter, indicates Taiwan’s Quanta Computer will begin mass smartwatch production in July, with the planned product launch coming as early as October. Thus, we can surmise that in 3 months, Apple is planning to ship three to four times the market volumes that occurred in Q1.  That’s Apple’s big bet on more attractive production innovation. The cited source further indicates that Apple expects to ship 50 million units within the first year of the product’s release, although these types of initial estimates can be subject to change or later adjustment. Further noted is that LG Display Co is the exclusive supplier of the screen for the gadget’s initial batch of production. LG Display has become Apple’s preferred go-to supplier for next generation display technology, that which requires difficult challenges in overcoming initial production yields. Two other sources of Reuters indicated that the subject smartwatch is rumored to also contain a sensor that monitors the user’s pulse. Singapore-based imaging and sensor maker Heptagon is cited as being on the supplier list for that feature, a rather new player in the Apple ecosystem.

Now let’s turn attention to the rumored new iPhone6.

A published advisory on Seeking Alpha cites Taiwan’s Economic Daily News report indicating that global contract manufacturer Foxconn is being tapped to be the prime contract manufacturer and is in the midst of hiring 100,000 workers to help ramp up iPhone 6 production. Fellow ODMPegatron is also said to be ramping iPhone-related hiring. Further noted is the rumor that Apple is targeting a price hike for carriers regarding the new phone model, which perhaps implies a bigger margin. Yesterday, a published report from Bloomberg indicates that production for the new model iPhone will begin in July and include two different models. One model will have a 4.7-inch display, compared to the 4-inch screen of the current iPhone 5s and may be available to ship to retailers around September. A 5.5-inch version is also being prepared for manufacturing and may be available at the same time according to the Bloomberg sources. The new iPhones will also be rounder and thinner than previous models, and include curved glass. Production of the 5.5-inch model is more complicated than the smaller version, resulting in lower production efficiency that must be overcome before manufacturing volume can be increased.

That news concerning Foxconn is incredibly interesting because the CMS was previously transitioning away from Apple’s volume business. Foxconn actually declared in February 2013 that it would freeze all hiring in China.  Supply Chain Matters featured a past commentary related to Foxconn’s annual meeting of shareholders that communicated that having Apple as one of your prime customers is probably both a blessing and a curse, because the Apple way requires maximum flexibility with a magnification of the principle that the customer is always right, even when that customer abuses planning norms. In that stockholder event just about one year ago, Foxconn management indicated the intent to lighten its high exposure to Apple related production contracts in favor of both moving downstream in the consumer electronics supply chain and developing its own line of devices and software. At the time we opined that we would not be at all surprised that one day, there will be a number of consumer electronics devices branded by Foxconn, probably in the China market.  If the rumors that Foxconn will be the prime manufacturer for the upcoming iPhone 6 turn out to be accurate, that would place a new or different perspective, namely that Apple is leaning on its most trusted and experienced contract manufacturer to insure that innovative design can meet high volume production requirements in a more-timely manner.

Apple is obviously deep into two major new production introduction ramp-ups with entirely new product designs, over the next several months. Notice that the windows are shorter, production start in July with possible global product launches in September or October. Usually, these NPI ramp-up phases start earlier in the year, perhaps May or June.

A brand new product area, namely a wearable device, far different iPhone design functionality (bendable glass, touch fingerprint sensor, wireless charging to name but a few rumors) blended among dynamic connections among product design, management and contract manufacturing partners. No doubt, this is an intense effort, with high stakes.  Apple’s information connections from product management to the manufacturing shop floor, its inventory positioning and overall S&OP coordination are all dynamically at-play.  We would not be all that surprised to hear that product designers are still making changes.  That is the Apple way.

Yet, if any supply chain is up to the task, it certainly will be that of Apple.

We all await the results that come over the coming months.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


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