In the prior Supply Chain Matters commentary, we reflected on some current commercial aircraft industry developments from the lens of product demand reflected by the building voice of the industry’s most influential customers. In this commentary, we focus on the strategic supply aspects of aerospace supply chains and provide background to this week’s news regarding another strategic acquisition announcement from Alcoa.
Earlier this week, this aluminum producer announced its intent to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. According to business media reports, RTI’s business focuses is centered on long-term supply of titanium fabricated parts that make-up landing gears engines and airframes for both Airbus and Boeing aircraft. The Wall Street Journal reported that as much as 80 percent of RTI’s 2014 revenues originated from the aerospace and defense sector.
The RTI acquisition follows last year’s acquisition of Germany based titanium and aluminum castings producer Tital, and U.K. jet-engine parts maker Firth-Rixson.
Titanium is a very essential and critical commodity and component aspect for aerospace and commercial aircraft design and production. The country of Ukraine currently is a prime source of the concentrates used for the fabrication of titanium. During the recent building political tensions among Russia, the United States and Europe over hostilities in Ukraine, Boeing and United Technologies augmented safety stocks of this key metal provided by VSMPO-Avisma, which has a parent company with direct ties to the government of Russia. Last August’s report indicated that Boeing and UT had amassed upwards of six month’s supply of safety stock of highly customized titanium forgings.
Another rather important strategic commodity for newer, lighter and more efficient aircraft is that of carbon fiber. So much so, that in November of last year, Boeing initiated an $8.6 billion long-term supply agreement with Japan based Toray Industries. The ten year supply agreement was initiated to support Boeing’s ongoing 787 Dreamliner production program along with provisions to supply wing structures for the new 777x aircraft development and production program.
Strategic sourcing teams for both Airbus and Boeing have to further consider mitigation of global supply risk and must practice a balanced component sourcing strategies to avoid too much dependency on a single region or suppler.
With current huge multi-year order backlogs, Alcoa’s strategic moves into key strategic commodity areas of commercial aircraft production assure a faster and perhaps more profitable growth prospect. The metals producer is also positioning itself to be a more strategic supplier to the global automotive industry, helping to pave the way for use of lighter metals in automobile product design and functionality.
In July of 2010, Boeing’s CEO candidly admitted that industry-wide growth was highly dependent and/or constrained by many of the key suppliers to this industry. Six years later, with even heavier order backlogs that supplier dependency remains, particularly when it concerns key commodities and fabricated components. Thus, Alcoa’s strategic moves to tap into the key component needs of this industry may prove to be rather interesting in the months to come, with prospects for additional high dollar multi-year supply agreements.
As the pressure mounts on Airbus and Boeing to step up delivery volumes for vast backlogs of newly designed commercial aircraft, strategic suppliers of key commodities and advanced components will ultimately be the linchpins for successful customer fulfillment.
It should therefore be no surprise that other global producers are positioning to harvest some of the benefits.
In the period between 2008-2010, pharmaceutical and healthcare products provider Johnson & Johnson, and in particular, its McNeil Consumer Products operating unit, faced a building crisis involving multiple branded OTC healthcare remedies such as Tylenol, because of quality and process issues focused on a specific production facility in Fort Washington Pennsylvania. After numerous product recalls, that plant was subsequently shutdown for remedial actions and has yet to re-open.
This week, McNeil announced an agreement with the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the U.S. Department of Justice to resolve the previously disclosed government investigation relating to the manufacturing of certain over-the-counter products at its Fort Washington facility. The company agreed to pay a $20 million criminal fine and forfeit $5 million. Under this agreement, McNeil reportedly pleaded guilty to a misdemeanor violation and accepted responsibility for the inadequate filing of required documentation during the manufacturing process. In its announcement, McNeil states in-part:
“McNeil has been implementing enhanced quality and oversight standards across its entire business to ensure we are best able to meet our commitment to consumers, patients and doctors who rely on our products.”
In a July 2013 Supply Chain Matters commentary, we highlighted all of the efforts that were underway to transform all of Johnson & Johnson’s supply chain processes. Senior executive changes were part of that transformation effort along with a declaration of five strategic priorities:
- Deliver on FDA consent decree milestones
- Ensure reliable supply of OTC products to retailers and consumers
- Achieve brand leadership
- Rebuild customer trust including top retail customers
- Execute a return to market plan for core U.S. brands and SKU’
J&J subsequently centralized its supply chain efforts under a singular leadership model, along with a singular quality and compliance model. In the systems area, a four year program was outlined to consolidate an overall systems landscape that was described as 60 different ERP systems supporting 275 operating companies
The McNeil statement indicates: “this plea agreement fully and finally resolves the federal government’s investigation, and closes a chapter on actions that led the company to review and significantly improve its procedures.”
In its reporting, The Wall Street Journal cited the U.S. Justice Department as indicating that McNeil continues working to bring the Fort Washington facility into regulatory compliance and plans to re-open the facility once it gains approval from the U.S. Food and Drug Administration. McNeill’s other production facilities are reportedly running under a 2011 permanent injunction and Consent Decree. McNeil indicates that a third party cGMP expert has now submitted written certification to the FDA after determining all sites are conforming with applicable laws and regulations.
Seven years and a considerable financial sum later, J&J continues in its organizational wide efforts to address consistency in good manufacturing practices.
No doubt, this has been an expensive lesson for Johnson & Johnson, as well as a rather important learning for the remainder of the industry regarding the critical importance of consistent product quality and supply chain wide standards in avoiding negative business outcomes.
There has been a new development regarding the ongoing large number of product recall activities involving suspected automobile defective airbag inflators produced by supplier Takata Corporation.
The Associated Press is reporting that rival Japan based airbag inflator supplier Daicel Corporation announced last week that it will accelerate the building of a second U.S. factory in Arizona to meet the growing demand for alternative capacity for these components. This supplier, responding to specific requests from Honda Motor for an alternative supplier, and expects to start operating the Arizona facility by March of 2016. According to this report, Daicel has further plans to increase production of inflators at its existing factory in Western Japan to supply additional replacement parts later this year.
This is an obvious sign that alternative component supply arrangements are being initiated as Takata continues to struggle in resolution of current component needs.
In late December of 2011, Supply Chain Matters raised awareness to Japan based automotive OEM’s, specifically Honda, with plans to shift a major portion of export production capability from North America instead of from Japan. We have since updated readers on this strategy to include other automotive OEM’s. We did so because for our readers, it provides a valid example of a globally-balanced and flexible global manufacturing sourcing strategy along with proactive supply chain risk mitigation.
Last week, The Wall Street Journal featured a report on 2014 U.S. auto exports, one that confirms rather active evidence that North America auto production continues to be viewed for both domestic as well as global consumption.
The report indicates that U.S. auto exports in 2014 recoded a record for the third consecutive year. In 2014, approximately 2.1 million new cars and trucks were exported to other global regions, an 8 percent increase over that in 2013, according to the U.S. International Trade Association. According to the WSJ, about half of these exports are destined to Canada and Mexico with other countries of mention being China, Saudi Arabia and South Korea. Exported vehicles include brands such as BMW, Fiat-Chrysler, Daimler, Jeep, Ford, Honda, Nissan and Toyota. One cited example was the Jeep brand which shipped upwards of 316,000 of that maker’s Wrangler and Cherokee vehicles to export markets. A 50 percent increase from 2012 levels. BMW has plans to boost U.S. production of its X3 and other SUV line-up by 50 percent over the next two years.
The article further points out that while the U.S. dollar is currently strong, these exports efforts began when the dollar was weaker, and momentum has continued.
As we originally observed, the implication in these shifting manufacturing export trends is that U.S. automotive supply chains now cater to the product-unique needs and product demand strategies of certain export markets and there lies the importance of global product platform development strategies. There is the added need to dynamically plan and respond to constantly changing and different geographic market scenarios. The U.S. automotive supply chain ecosystem therefore benefits and has the continued potential to be globally competitive in margins and consumer fulfillment. The U.S. automotive supply chain further serves as a backup strategy to any major supply chain disruption that might occur in another region.
Whether the growing export trend continues in 2015 is obviously dependent on shifting and highly changing currency trends. However, the strategy and capabilities invested upwards of five years ago appear to be paying off.
Yum Brands Challenges Within China Continue: The Importance of Proactive Supplier Quality Management
Supply Chain Matters often provides our readers education on the costs of supplier non-performance or the risks of supply chain globalization efforts. Such efforts take on critical importance in food and food services focused supply chains.
In the summer of 2014 well-known global restaurant brands such as McDonald’s, Yum Brands (operators of Kentucky Fried Chicken, Pizza Hut, Taco Bell) and Burger King were named by both media and Chinese food regulatory agencies for offering 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 was affiliated with U.S. based OSI Group, a $6 billion producer of food products. OSI itself had garnered what is reported to be a solid reputation as a quality focused food supplier. Unfortunately however, wide-scale publicity across China and continued regulatory scrutiny hampered efforts to restore consumer confidence.
Since that time Yum Brands as well as McDonalds have attempted to recover from potential damage to their brands by China’s consumers in the wake of this incident.
This week, in conjunction with reporting fourth quarters earnings, Yum Brands who derives almost half of its revenues from China operations, reported an 11 percent sales declines for China with sales for established stores down 16 percent. Revenues for the December-ending quarter fell 4.4 percent and the firm reported a loss of $86 million compared with a year earlier profit of $321 million.
By now, readers are also aware that McDonald’s has initiated a CEO change based on continued disappointing revenues and earnings for both China and U.S. outlets. McDonald’s has since encountered and overcome a shortage of French-fried potatoes within its Japan outlets.
Strategic sourcing and procurement teams are often well aware of the critical importance of proactive supplier quality management. Continued incidents such as those that occurred in China bring that awareness to the executive suite and boardroom.
Adhering to One’s Declared Standards for Quality: Chipotle Mexican Grill Suspends Regional Pork Supplier
In today’s restaurant and fast food industry, consumer impressions about one’s brand are more and more governed by the quality and standards of the food supply chain. Chipotle Mexican Grill has incurred explosive market growth because of its branding emphasis on “food with integrity” translating to higher quality, ethically based food ingredients served at its various restaurants.
Thus, business and general media were quick to feature the headline that on Friday, Chipotle suspended the use of pork sourced from an unnamed regionally based pork supplier. According to Chipotle, a routine audit discovered that the supplier violated declared humane-based standards for the housing of pigs with access to the outdoors. The restaurant chain, which was decisive in its decision to stop supply, indicated that this was the first time it had suspended supplies because of a violation of standards. A spokesperson indicated to media outlets: “This is fundamentally an animal welfare decision, and is rooted in our unwillingness to compromise our standards where animal welfare is concerned.”
The result is that an estimated one-third of its current 1700 restaurants now feature signs indicating that the Carnitas menu item is temporarily suspended due to a shortage of supply. This evening, this author visited a suburban Boston area outlet and witnessed such a sign, along with a very long line of queued patrons.
One has to admire a company that is willing to adhere to its supply standards in spite of the consequences, especially in the light of the realities of mass food production and of Wall Street’s short-term focus on profits. A published report from Reuters indicates that move could possibly hurt the chain’s first-quarter results. The report indicates that the move underscores the clash among the U.S. agriculture industry, commodity brokers and food companies as consumers continue to become increasingly concerned about the sources and practices of food supply. One equity analyst has already cut first quarter earnings expectations for the chain. Readers may recall that global restaurant chain McDonalds recently terminated the Chinese subsidiary of a long established beef supplier after discovering the altering of food expiration date labeling.
For its part, Chipotle is now hard at work seeking added supply from other existing suppliers. One AP syndicated report indicates that Niman Ranch, Chipotle’s oldest and largest pork supplier insists that it is not the supplier in question. Instead, it is working to get additional supply to fill-in for the current shortages.
We often are reminded on today’s realities that consumers and customer have more power and influence in buying decisions. This development concerning Chipotle Mexican Grill is certainly a testament to the meaning of such power.