Four weeks ago, Supply Chain Matters called attention to the good news – bad news world of today’s aerospace focused supply chains. We cited a Bloomberg Businessweek report that posed a fundamental question- with over 10,600 firm orders for new commercial aircraft among Airbus and Boeing, when is order backlog too big?
Many of these new and technology laden fuel efficient aircraft orders are destined to support expected explosive Asia focused air travel growth. But, what happens when the CEO of Asia’s fastest-growing discount airline and other airline executives begin to communicate an air of caution. A more recent Bloomberg published report now indicates that Asian aviation guru Tony Fernandes, CEO of AirAsia has cautioned that the jet buying frenzy among Asian based carriers may give way to a more sober approach that reflects the current airline challenges of intense competition, pilot shortages and inadequate infrastructure. That is significant since AirAsia has reportedly 350 in unfilled aircraft orders. The report further quotes senior executives of prominent aircraft lessor firms indicating that there may well be a thinning of order volumes.
Carriers operating across Asia are responding to pressures to sustain 30 to 40 percent growth rates while having to deploy new aircraft on newer routes. Intense competition has raised concerns for overcapacity, especially if marginal airlines start to succumb to faster growing operators. Terminals, runways and air traffic control systems are reportedly not keeping pace with current demands for airline expansion across Asia. Euphoria has made way to the realities of hyper-growth.
The question posed by the January Bloomberg report was that elongated aircraft deployment plans can be impacted by ever changing business conditions motivating some aircraft owners to consider alternative aircraft deployment or deferred procurement strategies. When senior executives of the most influential customer stakeholders for new aircraft orders begin communicating such caution, than supply chains need to be cautious and diligent. Suppliers have a special take since OEM’s continue to practice financial compensation when aircraft are shipped.
We again echo our prior advisory, namely that an enviable industry position awash with order backlog does not condone a business-as-usual focus on product introduction and supply chain management. Rather, dynamic and responsive capacity management, end-to-end value chain intelligence, enhanced supplier collaboration and goal-sharing will all come into play as aerospace supply chains continue to adjust to extraordinary and constantly changing industry dynamics.
In late August of 2011, three of Japan’s liquid crystal display (LCD) component producers, Sony Corporation, Toshiba Corporation and Hitachi Ltd. merged their, at the time, money-losing LCD manufacturing operations to form a single company that was named Japan Display. Each of the former suppliers could not financially afford to continue to compete with the likes of other industry competitors such as Samsung Electronics and Sharp Corp., who were major suppliers to Apple and some other consumer electronics OEM’s. This new venture was financed primarily by $2.6 billion in funding by The Innovation Network of Japan, a government backed agency with strong industry influences. Each of the merging companies was reported to hold 10 percent ownership in the new venture while the government agency held 70 percent ownership. The goal at the time was to position Japan Display and its technology in strategic markets related to small and mid-sized LCD displays, and to have the new company operating as an independent entity by early 2016.
This week, Japan Display announced its intent to raise upwards of $4 billion in an initial public stock offering (IPO) which the Wall Street Journal characterized (paid subscription) as the largest IPO from Asia this year. The WSJ further noted that if successful, it would represent a rare turnaround for Japan’s manufacturing industry. The report indicates that Japan Display currently supplies LCD displays for Apple’s iPhone 5S and iPhone 5C and its customer list now includes other top Asian and U.S. smartphone makers. The supplier has been skillful in improving the overall energy efficiencies of its LCD products while integrating touch sensors directly into the display, eliminating the need for a separate touch screen layer. Japan Display also appears on Apple’s 2013 listing of its top suppliers, and according to the WSJ report, garners up to a third of its current revenues from supply agreements with Apple.
While Japan Display made a small profit for its fiscal year ending in March 2013, it has not indicated to business media what its profit figures are for the current fiscal year. That information should presumably come with the IPO disclosures.
Reports indicate that $1.7 billion of the IPO proceeds will be utilized to enhance production capacity and develop new technologies. The remaining proceeds will be directed at current investing shareholders who will be unloading their stakes
With this announcement, it would appear that the timetable for Japan Display to become an independent operating company may be accelerating. Then again, with current favorable basis of Japan’s currency, the IPO may have more to do with opportunistic timing.
In either case, this IPO marks a significant positive milestone in resurrecting previous un-competitive LCD suppliers in Japan into a singular entity that is now holding its own. It represents another positive indicator that industry and government came come together to resurrect a supply eco-system, similar to what has occurred in Europe and the U.S.. It provides a reference model for other suppliers and supply ecosystems as well.
This is a follow-up posting to our previous Supply Chain Matters commentary concerning Apple’s 2014 Supplier Responsibility Report.
In addition to charting progress in social responsibility actions, Apple is one of very few manufacturers that will publically identify its suppliers. This effort first began in 2012 with the advent of Tim Cook as the company’s CEO and his goal to make the company’s supply chain, previously clouded in high secrecy, must more open and transparent. Even though this listing represents the top 200 suppliers for Apple, it does provide important pointers to how the company strategically and tactically manages its supply needs.
Readers can view the 2013 supplier listing at the following web link.
Scanning the full list, we share some of our observations relative to previous disclosures:
Once again, consider for a moment the scale required by a supplier to be able to support Apple’s production volume needs on a global basis, and at the same time, manage geographic supply risk. The complete listing remains small by high tech industry standards, reflecting Apple’s procurement strategy for concentrating influence on a select few strategic suppliers, yet tasking these same suppliers to manage scale, operational and supply chain disruption risk.
A sampling for matching select supplier names with individual supplier geographically based facilities reveals:
3M Company- 9 facilities
Intel Corporation- 14 facilities that span China, Costa Rica, Ireland, Israel, Malaysia, Mexico, Netherlands, United States and Vietnam
Maxim Integrated Products- 9 facilities
Micron Technology Inc. – 10 facilities that include Israel, China, Taiwan, Singapore and the United States
Molex Inc., (a Koch Industries company) – 10 facilities, only two of which are located in the United States
Murata Manufacturing Co. Ltd. – 12 facilities that span China, Indonesia, Japan. Malaysia, Singapore, Taiwan, Thailand and Vietnam
Panasonic Corporation- 31 facilities, 20 of which are located in Japan and 6 within China
Samsung Electronics Co. Ltd. (subsidiary of rival Samsung) – 9 facilities
TDK Epcos Corp. – 20 facilities
Texas Instruments Inc. – 21 facilities, 9 of which are located in the United States
Vishay Intertechnology Inc.- 25 facilities which include Belgium, China, Czech Republic, Israel, Germany, Hungary, Mexico, Malaysia, Philippines, Portugal, Taiwan and the United States
In 2011, the widespread floods that occurred across Thailand severely impacted what was estimated to be upwards of 30 percent of existing hard disk drive supply at the time. Two of Apple’s prime HDD suppliers remain listed as Seagate Technology and Western Digital. A review of plant facilities indicates that Seagate has but one plant listed in Thailand, with two listed within China. Western Digital is noted with a total of 5 facilities, two located in Thailand, 2 within China and one within Malaysia.
In previous Supply Chain Matters commentaries, we have observed how Apple has strategically sourced in LCD Display needs among a number of strategic suppliers. The 2013 supplier listing reinforces that existence of that strategy with the names of LG Display Co. Ltd. (7 facilities), Samsung Electronics (noted above), Sharp Corp. (9 facilities) and Japan Display (3 facilities).
Finally, a commentary on Apple suppliers is not complete without addressing contract manufacturers. Last year, Apple announced that it would expand its contract manufacturing presence beyond its prime provider Hon Hai Precision Industry Co. Ltd. (Foxconn).The 2013 listing includes 29 Foxconn facilities, 26 of which are located in China. Flextronics International Ltd. is listed with 4 facilities, two of which are located in China, the other two noted as Austin Texas and Sao Paulo Brazil. Apple’s newest contract manufacturer, Pegatron Corp. is listed as 8 production facilities, all located within Shanghai and Jiangsu China. By our count, these three CMS suppliers equates to 36 production facilities across China. That, ladies and gentlemen amounts to a lot of manufacturing-driven employment and provides further evidence of how Apple manages margins.
As a community we very seldom get the opportunity to review any company’s listing of suppliers, let alone the supply chain rated highest. Learn from this opportunity and share in praising Apple for its openness.
As in previous year’s commentaries related to the Apple supplier listing, readers are welcomed to share any additional observations and thoughts in the Comments section below this posting.
Supply Chain Matters provides an update to our previous commentary concerning the latest citations from the U.S. Food and Drug Administration (FDA) concerning India based generic pharmaceuticals producer Ranbaxy. In addition to Ranbaxy, India based producers Wockhardt and Strides have also been cited for failures in compliance to good manufacturing practices.
Last week on her first visit to India, FDA commissioner Margaret Hamburg declared on her blog that lapses by a few select drug makers within India have clouded good manufacturing practices followed by other producers in the country. The commissioner noted: “Ensuring that the products distributed in the United States meet our requirements for product safety and quality is among my top priorities as Commissioner. Unfortunately the many Indian companies that understand good manufacturing and quality processes have been overshadowed by recent lapses in quality at a handful of pharmaceutical firms.” Dr. Hamburg further indicated that officials at India’s Ministry of Health and Family Welfare share this goal and both agencies plan to collectively work together, including a first ever, statement of intent, to improve the lines of communication and work diligently to ensure that the products being exported from India are safe and of high quality.
Dr. Hamburg’s visit was well timed and garnered significant press coverage within India, including The Economic Times. India’s legislative and regulatory leaders have hopefully internalized the need for stepping-up standards in drug manufacturing among the chosen few who reflect negative perceptions on the remainder of drug producers across the country.
Aerospace supply chain readers have obviously been following our ongoing commentaries related to the financial stress being placed on certain major suppliers when a major aircraft program, such as the Boeing 787 Dreamliner, falls behind original customer shipping milestones by years. Under the umbrella of its Partnership for Success program, Boeing has been pressuring suppliers for greater cost savings to offset its increased program costs, even though customer deliveries of completed aircraft continue at a reduced rate.
Spirit AeroSystems a spin-off from Boeing in 2005, is one of the largest suppliers of aircraft sub-structures for both Airbus and Boeing. This week, the company caught Wall Street in surprise by reporting significant pretax charges for the final three months of 2013, including $385 million directly related to work performed on the Boeing 787. That announcement, coupled with a reported fourth-quarter loss of nearly $587 million, compared to a year earlier profit of $60 million, wiped out one-fifth of the supplier’s market value.
News of a 4.8 percent increase in revenues and a 7 percent rise in order backlog was overshadowed by that related to charges and write-offs. Spirit’s CEO declined to rule out additional charges.
As a major airframe supplier, Spirit was deep in the crosshairs of OEM’s effort to outsource major component design and production further down the value-chain to share risks and costs. A new CEO assumedleadership of Spirit in early 2013 and immediately initiated a strategic review of existing businesses and subsequently dealt with business aircraft related component programs that ran-up considerable charges. Two production facilities were subsequently put up for sale.
In its reporting of this week’s announcement, the Wall Street Journal (paid subscription required) characterized this development as “raising concerns about the ability of jet maker Boeing Co. to maintain momentum in reducing costs on its flagship 787 program” and further noted that while Spirit’s stock was punished, Boeing’s stock rose by 1 percent. Spirit had previously recorded pretax charge of $184 million related to its work on the 787 program in October of 2012.
Business media continues to point out that Boeing has yet to sign-up the majority of suppliers to its cost control programs. That should not be a surprise to our reading audience. In last week’s commentary, Collaboration According to Boeing, we observed how this same supplier cost reduction program is being influenced on the 777x program, Boeing’s newest twin-aisle aircraft development program.
Is it any wonder that recent research surveys among procurement leaders continue to indicate that while improving cost savings remain among the top strategic objectives for many firms, incremental cost savings are much more difficult to achieve. When major customers insist of increased innovation but singularly shift the burdens of cost overruns down the value-chain, the results are obvious.
Old ways seem to die hard and aerospace supply chains must deal with the consequences.
This week will feature some noteworthy announcements in the supply chain and B2B network technology arena.
We begin with today’s announcement that Elementum, which describes itself as the first mobile platform for end-to-end supply chain management, formally announced its market launch after 18 months in stealth mode as well as securing $44 million in Series B funding from Lightspeed Ventures.. The actual genesis of this B2B network comes from global contract manufacturer Flextronics, also an investor as well as a primary user. Flextronics has been utilizing the Elementum platform to plan and coordinate aspects of its own global supply chain and is now extending both the platform and the established network connections to other potential customers, including consumer products producer Dyson, also noted as a current customer.
The company’s marketing tag line is: Supply chain made simple, which is perhaps a bit too simplistic in message. It is great for marketing purposes but many of our readers are acutely aware that managing today’s global supply chains is not at all simple.
Supply Chain Matters was briefed on the cloud-based platform and technology stack incorporated within Elementum in early December. The rather interesting aspect is the network’s data management, end user experience and security model. It is described as rather similar to Facebook and Linked-In and indeed that is what we observed. It offers intuitive software primarily targeted at mobile based users providing action-oriented coordination based on evolving events. For our IT based readers, this multi-tenant platform is anchored in massively scalable data management techniques, REST-based API’s and Hardoop data extraction and synthesis. The technology embraces a graph-like network data model providing synthesis and visibility to information associated to activities occurring across the supply chain. It includes both structured and unstructured information sources.
The Elementum marketing team has commissioned a slick You Tube video to demonstrate its mobile-based functionality
Initially available are three applications that are named Perspective, Exposure and Transport.
Perspective is an executive dashboard like mobile based application that helps to monitor and respond to supply chain key performance indicators including supplier performance, cycle times, working capital and some others. In our briefing we were informed that Tom Linton, Chief procurement and Supply Chain Officer at Flextronics is a current mobile user of this particular application. The Exposure app provides real-time monitoring of risk management through an event monitoring center. If an event has significant impact on a particular supply site, the app alerts to that site through calculation of bill of material supply links. The Transport app provides visibility to existing distribution and transport movements and provides predictive alerts to potential late shipments.
Flextronics is not a new comer in the area of software spinoffs. Does anyone remember SimFlex Group a supply chain planning and optimization provider spin-off many years ago along with other B2B supplier management offerings?
On the one hand, prospective customers get the intellectual where with all and experience of a globally-based contract manufacturer with a massive supply base satisfying multiple OEM customers needs. On the other, it is a Flextronics based perspective grounded in high tech and consumer electronics supply chain ecosystem practices.
There are other cloud-based offerings available in today’s B2B connectivity, direct and indirect procurement technology market. Some emphasize supplier management, procurement, deep supply chain planning, B2B messaging or transportation and execution fulfillment. This whole area remains in a state of change with broadening technology footprints and ongoing M&A activity. Our view is that at some point, one or a few of these networks will be closest to enabling true supply chain control tower management capabilities.
In the meantime, $40 million in funding coupled with the best in talent can lead to some interesting potentials down the road, not to mention another B2B network player for consideration.