There has been much reporting within social and business media regarding the potential industry supply chain disruptive effects of the recent massive warehouse explosions that affected the facilities adjacent to the Port of Tianjin.
It is rather important and crucial that industry supply chain and sales and operations team obtain meaningful and insightful information regarding what is happening on the ground as well as the potential short or long-term supply chain impacts, if any.
We at Supply Chain Matters are disappointed to observe that certain technology and service providers are attempting to utilize this tragic incident as a backdrop to product marketing outreach campaigns. Neither should technology providers suddenly become news outlets.
Not good ideas by our lens.
Supply chain technology providers should instead continue to educate on the benefits of the technology they provide and allow industry supply chain teams to receive clear, unfiltered and unbiased insights and information from informed and educated sources.
One of the better Tianjin perspectives Supply Chain Matters has reviewed to-date ia a published white paper: The Aftermath of the Tianjin Explosions: A Global Supply Chain Impact Analysis, authored by supply chain risk management provider Resilinc.
While this 24 page white paper does include some product marketing, along with requiring registration, the bulk of the report provides meaningful and insightful information related to potential immediate, near-term, medium and longer term supply chain impacts.
The paper concludes that the less apparent ripple effects of the warehouse explosions will be felt weeks, months and even years to come.
The paper provides meaningful background information regarding this vital logistics and manufacturing hub, which services industry needs of automotive, commercial aerospace, high-tech, petrochemical and general industrial manufacturing supply chains, among others. It further outlines important mapping of industrial manufacturing and supplier concentrations within close proximity of the explosions, based on a mapping of over 30 sites in a 2-10 mile radius of the blast. Four large industrial zone districts are adjacent to the port, with the port serving as what is described as the largest free trade zone in northern China, and the second largest Vehicle Processing Center for importing and exporting of automobiles.
On the topic of near-term ripple effects, the Resilinc analysis predicts that extensive delays can be expected for most companies and sites moving products through Chinese ports as government agencies deal with the after-effects of a regulatory environment needing extra attention.
There are predictions that Tianjin port operations will only begin to resume normal operations by approximately mid-September, and that any containers now at the port will be inaccessible for the next two months, even if they are intact. Resilinc indicates that for any suppliers located within 2-15 miles of the explosions, companies may presume 12-16 weeks of delays.
Long-term impacts outlined related to the ripple effects of increased regulatory actions impacting certain industry sectors including the location and storage of goods near large population centers.
Regarding potential long-term impacts, the paper cites Chinese media as indicating the economic cost of Tianjin crisis could be as high as $8 billion.
If your organization is dependent on operations, logistics partners, suppliers or service providers in the Tianjin area, we recommend you review this report which can be accessed at the following Resilinc web link. (Some personal registration information required)
Our high tech and consumer electronics supply chain readers may recall that Japan’s Sharp Corp., and specifically its LCD screen business unit has had months of financial struggle. One of the important significant factors related to Sharp is that it serves as one of the four Liquid Crystal Display (LCD) and flat panel screen suppliers to Apple, including screen supplier for the iPhone. Sharp has had a track record of innovation in LCD technology but a rather rocky financial history as well
This week, Reuters is reporting that its informed sources indicate that tie-up talks involving contract manufacturer Hon Hai Precision (aka Foxconn Technology) are now in-progress. The Financial Times also published a similar report. Hon Hai declined any request for comment by Reuters and FT.
Initial talks between Hon Hai and Sharp actually began in 2011, after both firms had established a joint technology partnership. In 2012, there were many business and social media reports indicating that Hon Hai was prepared to take an equity stake in Sharp’s LCD development and factory operations, but with implications that Hon Hai would become Sharp’s largest shareholder and have the ability to assume some strategic management control of Sharp. A further implication was that Apple, through its relationship with Hon Hai and Foxconn, was willing to invest in Sharp’s longer term supply, but that component strategies would cede to Hon Hai. The Hon Hai investment did not occur in 2012, because of Sharp’s deteriorating stock price and the threat of too much outside control.
During that same period, Japan’s Sony Corporation, Toshiba Corporation, and Hitachi Ltd. together merged their money-losing small LCD display operations to form a single company, Japan Display, backed by $2.6 billion of funding from Innovation Network Corp. of Japan, a government backed agency. Japan Display is currently another of the LCD component suppliers to Apple, and the combined operations and infusion of significant new capital likely cemented that relationship.
According to this week’s Reuters report, the latest proposed tie-up would spin-off Sharp’s display unit and possibly includes additional cash injections from other outside entities such as the state-directed Innovation Network Corp.
The two firms continue to jointly operate the advanced large LCD production facility located in Western Japan.
Interesting enough, in 2012, Apple rival Samsung opted to provide a $110 million lifeline investment for Sharp. The deal was reported to provide Samsung with a 3 percent stake, along with gaining access to leading-edge IGZO display and other technology. Business media reports at the time speculated that Samsung’s investment was an attempt to stem Apple’s strategic influence on Sharp.
In late June, Supply Chain Matters called attention to a published report from The Wall Street Journal indicating that Sharp senior management had struck a last-minute deal with the firm’s bankers to provide an additional $1 billion plus lifeline, the second in three years, in exchange for restructuring measures that included exiting the North American television market and a 10 percent workforce reduction. Also noted were the market prices for LCD panels remain in significant decline as other suppliers turn more to China based smartphone manufacturers for revenue needs. The WSJ cited data stemming from market research firm IHS indicating that 5 inch HD smartphone panel components prices have dropped nearly 60 percent from Q1 2013 through mid-year.
This legacy of Sharp represents the perils for being a leading-edge LCD technology provider in today’s high tech and consumer electronics sector. Product OEM’s such as Apple and others demand the latest breakthroughs in technology and more automated manufacturing processes, in return for orders representing volume scale. However, in a technology area where multiple suppliers fiercely compete for the same high-volume OEM business, and a cutthroat environment where severe amplitudes of supply and demand imbalances force prices to dive quickly, the need for constant capital becomes paramount. That may be the legacy of Sharp’s LCD unit.
If this reported tie-up were to occur, it would provide another significant milestone in Hon Hai’s prior strategic plan to move away from a sole focus on the slim margins of contract manufacturing, and more towards a supply chain vertically integrated high-tech and consumer products manufacturer that can control multiple key component supply tiers.
Many observers of commercial aerospace supply chains including Supply Chain Matters were anticipating forms of supply disruption and now we have a visible indication.
The Wall Street Journal reported today (paid subscription required) that a key supplier within Boeing’s 737 MAX program is wrestling with production ramp-up supply issues related to an engine thrust reverser. Difficulties in consistently manufacturing this part are apparently been flagged by Boeing as a significant development challenge for its commercial aircraft business.
According to the report, supplier GKN PLC will not be able to produce quantities of the new engine thrust reverser to support the ramp-up production needs of the newest version 737 MAX.
The problem is associated with the inner wall of the thrust reverser which is composed of a honeycomb titanium design to fit both size restrictions and withstand rather high engine temperatures. Key supplier Spirit AeroSystems transferred responsibility for working with component supplier GKN back to Boeing, because of the technical challenges.
The fact that volume production of the new thrust reverser is being flagged two years before planned first customer ship scheduled for 2017 is a good sign. However, as the article points out, initial prototype production is already underway including the wings, fuselage and new dedicated assembly line.
Boeing currently has firm orders for over 2800 of the new 737 MAX with plans to raise all models of 737 production volumes to 47 per month in 2017 and 52 per month in 2018. The 737 serves as the prime profitability engine for Boeing’s commercial business, hence it garners lots of attention.
The report indicates that Boeing executives have acknowledged the supplier and design challenge but indicate confidence that adequate resources and attention are being applied. A GKN spokeswoman declined comment to the WSJ and referred the question back to Boeing.
More than likely, there will be more supply challenges flagged for both Boeing and Airbus as each manufacturer strives to ramp-up production to unprecedented levels over the coming months and years. As always, the question will remain how each manufacturer responds to these challenges and proactively works with suppliers and design teams to resolve challenges on a timely basis.
Thirteen months ago, Supply Chain Matters called reader attention to the news that Boeing had reached a preliminary agreement to extend partnerships with a group of key Japan based suppliers to provide major structural components of the newly planned 777x aircraft. These suppliers provide major structural components such as fuselage sections, wings, and other components, and they involve parent companies Japan Aircraft Industries (JAI) and Japan Aircraft Development Corporation (JADC). Individual suppliers include:
Mitsubishi Heavy Industries Ltd.
Kawasaki Heavy Industries Ltd.
Fuji Heavy Industries Ltd.
ShinMaywa Industries Ltd.
Boeing has now announced that it has signed a formal agreement with these key strategic suppliers , which in aggregate will supply upwards of 21 percent of the major aircraft structure components for the planned new 777x model. The contract includes fuselage sections; center wing sections; pressure bulkhead; main landing gear wells; passenger, cargo and main landing gear doors; wing components and wing-body fairings.
In the Boeing press release, Boeing’s Vice President and GM of Supplier Management praises these Japanese partners for their commitment for working on the affordability goals associated to the 777X program. Judging on the interval of an entire year being required to finalize the supply agreement, we can all speculate on the back and forth negotiations. The JADC Chairmen and KHI President indicates in the release that the agreement involves investing in new facilities and introducing robotic and other automated systems. That may be the source of the negotiations and evolving production strategy.
Boeing notes that it has partnered with Japan based aerospace providers for nearly five decades, and that in 2014 alone, the company purchased more than $5 billion in goods and services. With the new supply agreement in-place, Boeing indicates it expects to purchase $36 billion of goods and services from Japan between 2014 and the end of the decade. From our lens, such a relationship is a testament to joint product design, component and production process innovation.
Teams have different definitions and context as to what may be termed strategic supplier. An overall spend of $5-$6 billion per year certainly qualifies for such a context.
Last week’s financial and equity market headlines featured the news that global investors and speculators are bailing-out on commodities amid mounting worries about the slower pace of global manufacturing growth. If you have been following our global tracking of select PMI indices featured in our Quarterly Newsletter, you will have visually noticed this slower overall trend as depicted in the visual attached to this commentary.
Likewise, the precipitous plunge across China’s key stock market also continues, having a potential further impact on China’s major manufacturing sectors as consumers financially stung by severe financial loses retrench in domestic spending.
Commodities such as copper, gold, silver and oil are at their lowest points in years. Global mining firms such as Anglo American, BHP Billiton and Rio Tinto are quickly addressing cost savings by restructuring their commodity businesses that relied on the manufacturing growth and commodity speculation that has occurred in China. Multiple state-owned steel companies across China continue with optimistic output levels despite the evidence of a global surplus and overcapacity condition in steel. Anglo American alone has indicated it would slash upwards of 50,000 jobs over the next several years, amounting to a 35 percent reduction in its current workforce.
Likewise, energy companies are planning additional cost-cutting moves in the light of the sudden drop of oil prices, increased glut of supply and declining trends in global demand for oil.
For the majority of multi-industry supply chain teams, this is ironically good news since lower commodity prices equate to lower input, logistics and cost of goods sold (COGS).
In our Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains (available for complimentary download in our Research Center), we highlighted a continued overall moderation trend for the cost of commodities in 2015 with certain industry specific exceptions. We predicted that dramatically lower oil prices would be the dominating headline driving commodity and pricing trends in 2015, and just past the half-year point, the trend is holding true. Purchasing and commodity teams can therefore anticipate inbound cost savings in the coming year with the usual exceptions related to unforeseen global weather or risk events such as the bird flu outbreak affecting turkey and poultry flocks in the U.S. Midwest and West regions.
However, teams cannot rest easy since the rising value of the U.S. dollar and resulting foreign currency shifts are providing rather significant headwinds to existing financial results for U.S. based manufacturers or those dealing in U.S. dollar dominated revenue flows. In some cases, such headwinds are having as much as a 10 percent or greater negative impact on overall revenues.
While lower commodity related inbound costs will help to offset some of the cost erosion, it may not be enough. Those manufacturers that had significant revenue and profitability expectations by tapping into China’s emerging consumer consumption could soon feel the effect of continuing concern. To provide added evidence, The Wall Street Journal reported today that the Chartered Institute of Procurement and Supply is raising its global risk index to its highest level since 2013. The heightened risk has a lot to do with certain key suppliers in China that may be impacted by the sharp decline in equity and consequent credit markets.
These are the not so good news messages.
Sourcing, procurement and supply chain leadership teams must therefore remain diligent to further opportunities to reduce inbound or supply chain services related costs for at least, the remainder of this year.
The following commentary is a Supply Chain Matters guest posting authored by Jim Barnes, Services Managing Director, Institute for Supply Management (ISM).
One of the biggest challenges in our industry is gaining recognition of the value procurement and supply chain management brings to the corporate bottom line. We know supply management increases shareholder value by making business more competitive and more profitable, yet it’s hard to tell the story. The perception is we’re not very strategic but are overly tactical: processing paper, comparing one price against another and policing what other departments order.
To change this perception many in supply management are exploring the option of automating some functions to move away from tactical processing and focus more on strategic interactions with suppliers. Generally speaking, automation can help reduce the number of people doing tactical work; reduce the amount of money needed to do that work; and provide supply management professionals with more time to develop better relationships with suppliers.
There are several factors to keep in mind when considering the option of automation:
- Know which processes can be automated and which cannot;
- Recognize your human resources may not be interchangeable; and
- Realize if you automate a bad process, you’ll just get bad stuff quicker.
Most transaction processes lend themselves well to automation, and there are tools to automate the bidding and RFP processes, too. However, it’s very hard to automate the human interactions in supplier relationships like strategic sourcing and negotiating.
As you automate processes and free up supply management professionals, don’t assume everyone has the ability to move into a more strategic, interactive role with suppliers. At ISM Services, we offer clients the opportunity to survey their supply management professionals to determine if they tend to be more tactical or more strategic. Then we put them through a negotiation exercise where they can learn the difference between the skill sets, the value of both and determine where their strengths lie. Participants learn that many times it makes sense to negotiate as a team with the best combination of negotiating styles to suit the objective.
It’s important to remember that automation on its own is not the answer; you still need to have a good process in place. One of our clients had a highly manual, time consuming process for receiving goods and verifying documentation. When they first automated the process they merely replicated their manual process, and it yielded the same result, a very high exception rate. After spending significant effort to re-engineer the process, they learned to rework and reset the rules to get much better results from the process.
Another problem can arise when departments are automated and outsourced at the same time, or at a later date. For example, supply management professionals who automate their accounts payable and outsource it can run into problems because the new people managing it don’t have the important knowledge of the inner workings of the company. The result, according to an experienced practitioner-friend of mine, is “your mess for less.”
So how do you decide which automation strategy is best for your company and avoid some of the pitfalls? First, determine what you want to accomplish in which departments and then establish the metrics to measure your progress and accomplishments. For example, do you want to take work out of a process? Do you want to eliminate onerous authorizations or unnecessary three-way match requirements? In the end you want to eliminate work of lesser value to the company and instill more strategic practices with your suppliers.
Second, take time to explore your options because there are quite a few available. Talk to your peers to find out what is working for them. Attend conferences and visit the vendors there and try their tools. ISM Services does not recommend nor endorse automation software but we are available to help you evaluate it against your goals.
When managed well, automation can be a game changer in the supply management industry. It can result in more efficient and cost-effective processes and give supply management professionals more time to collaborate and innovate with suppliers. It can shift the perception of procurement and supply chain management from tactical order processor to strategic partner in the C-suite.