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Chipotle’s Consumer Trust Crisis Enters a New Critical Phase

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In mid-December, Supply Chain Matters published our commentary: How Events Can Change in a Matter of Months- Time for Chipotle to Openly Demonstrate Resolve. In our posting, we outlined from a supply chain lens the crisis that Chipotle Mexican Grill was involved in after hundreds of consumers were sickened by a series of varying incidents ranging from E-coli outbreaks to norovirus that date back to last summer.   Chipotle logo

In our commentary, we declared what most consumers and general media have since concluded that Chipotle needed to rebuild trust in its brand and in its restaurant and supply chain food handling practices. We called for, among other actions, a temporary nationwide suspension of all outlets to perform top to bottom cleaning and rigorous employee training at each and every Chipotle outlet.

Yesterday, all Chipotle restaurants were closed for four hours during traditional lunchtime hours in order for all employees to participate in a company-wide meeting concerning food safety.

Thanks for listening.

According to reports, yesterday’s company-wide meeting included a briefing addressing the improved “farm to fork” food safety efforts that are being implemented, an announcement of paid sick leave to insure that sick employees stay home when they are ill, and a series of changes related to food preparation practices and protocols. There are a host of new protocols being implemented to include more preparation of food at central kitchens, DNA based testing of supply chain ingredients before being shipped to restaurants and new ways of marinating meats. In essence, Chipotle has little choice but to revert to a model of more centralized food supply chain control to restore trust and added food safety for the chain’s brand. Further announced was $10 million set aside to help smaller local farmers meet the restaurant chain’s new food safety standards and protocols.

The U.S. Centers for Disease Control (CDC) concluded its investigation of the recent nationwide E-coli outbreak last week without any conclusive findings.  That was not good for the restaurant chain since it leaves consumers with additional doubts. The Wall Street Journal recently reported that behind the scenes, Chipotle disagreed with health officials on the likely source of the infection.  While officials suspected some form of produce, Chipotle concluded it was imported Australian beef that must have been contaminated. But that does not fully explain the outbreaks not related to E-Coli infection.

The economic cost of Chipotle’s food crisis has also become far more visible. Sales at existing restaurants fell 14.6 percent in the fourth quarter while stock has fallen more than 25 percent in value since October. New costs incurred to mitigate food safety risks are yet to be totally quantified. This is yet more current day evidence that a supply chain focused disruption or snafu does and will directly affect both shareholder and brand value.

This crisis remains ongoing and Chipotle must now convince it’s once loyal customers that it serves safe food with integrity.

This author recently conducted an interview with Chole Demrovsky, Executive Director at Disaster Recovery Institute International (DRI), a noted foremost authority on business continuity and risk management. Our interview generally touched upon a trend toward lack of consumer trust in food related supply chains which has been come about from a new resurgence of food, drug and other related product recalls or food safety incidents.  While discussing the implications of these trends on food supply chains, we could not avoid discussing the ongoing Chipotle situation.

Ms. Demrovsky stressed how important and difficult it can be to restore consumer trust in a brand once it has tainted by unfortunate incidents. She also reminded me of how important it is for businesses to have business continuity and supply chain disruption plans in-place before any crisis occurs. We both touched upon business media reports that are concluding that for the past few months, Chipotle has been playing defense, trying to respond to one report after another. Any organization, especially those associated with food, needs to be prepared as to how to respond, and how to protect consumers and the brand when a major snafu or incident occurs. In helping companies with business continuity planning, DRI advocates a thorough risk assessment that includes both internal and external dimensions, coupled with a business impact analysis as cause and effect impact.

Consumer trust is hard won, but also hard to get back when consumers believe that trust has been violated. Consulting firm Deloitte recently partnered with the Food Marketing Institute and the Grocery Manufacturers Association (GMA) on a recent survey of 5000 consumers nationwide regarding food buying decisions.  One of the stated conclusions of this survey was that consumers not only want toxin and pathogen-free food but also more transparency from food producers and retailers about food safety. Another stated finding of this survey was that consumers want accountability and transparency across the entire food supply chain. Other food safety concerns identified by respondents included clear information on ingredients and sourcing, clear and accurate labeling, added visibility to the nutritional content of food.

Chipotle management is now planning to launch an extensive nationwide marketing plan to convince consumers that Chipotle outlets will be the “safest restaurant to eat at” and that the chain’s goal is to reduce risk of another infection outbreak “as near zero as possible.” The Wall Street Journal recently disclosed (Paid subscription required) an interview with a former Chipotle operations executive. According to that executive, Chipotle’s stated mission of “food with integrity” was always the prime emphasis, and when translated to supplier management; “they’d never talk about food safety. It doesn’t mean it wasn’t checked, but the discussion was always about the story behind the supplier and keeping up with growth.

A director of the University of Georgia’s Center for Food Safety indicated to The Wall Street Journal that claiming the risk of another outbreak is near zero is: “really going out on a limb.”

We concur.

Supply chain risk mitigation is not a marketing exercise, it is rather a comprehensive plan addressing area of supply risk, internal process shortfalls or vulnerabilities, and action plans to resolve such risks.

We would instead offer one further recommendation to Chipotle. That would be weekly and monthly management updates on progress obtained in the mitigation of food safety risks both within each and every restaurant and within the supply chain. That is not marketing but rather management’s efforts to continually inform consumers as well as shareholders on what is being done and how progress is being measured and achieved. Restoring consumer trust in a badly damaged brand is not a marketing challenge. Now is the time for straight talk not marketing spin.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Foxconn Finally Declares Desire to Acquire Sharp- A Long Legacy of Cultural Business Norms and High Tech Peril

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In our Supply Chain Matters commentaries related to high tech and consumer electronics focused supply chains, we have often featured commentaries related to Sharp Corp. Sharp is a volume supplier of advanced liquid crystal display (LCD) technology and is one of three strategic suppliers of LCD screens in Apple’s product value-chain. Sharp’s dependence on Apple has been reported to be as much as 20 percent of existing revenues.

This week featured the news that Apple contract manufacturer Foxconn, which assembles the bulk of Apple iPhones has offered approximately $5.3 billion to acquire Sharp. Behind this week’s headline is a rather long history related to Sharp, one that requires some history as well as some takeaways.

LCD screen suppliers have extraordinary challenges. The need for production innovation is relentless, the cost of capital is expensive and yet supply often exceeds demand, eroding abilities to maintain prices that insure adequate profitability as well as new investment needs.

In April of last year, we commented on the perils for being an Apple supplier, and specifically Sharp’s challenges in maintaining a leading-edge focus on screen technology innovation but having a track record of financial challenges including near bankruptcy. The conundrum of Sharp and other Japan-based high-tech component suppliers is that bankruptcy is culturally looked upon as a major failure and embarrassment of senior management, often a career-ending event.

There has been a rather long history of manufacturers, including Apple itself, taking some form of investment in Sharp in order to secure its longer-term financial future.  We have tracked this since at least 2012.

By April, The Wall Street Journal reported that Sharp would spin-off a portion of its LCD panel business unit with intent to seek a capital injection from Innovation Network Corp. of Japan, a governmental entity overseen by Japan’s Ministry of Economic Trade and Industry. At that time, banks were holding in excess of $5 billion of Sharp debt, and subsequently these same bankers agreed to provide an additional $1 billion lifeline, the second in three years, in exchange for restructuring measures that included a 10 percent workforce reduction along with other cost reduction measures.

In June, Sharp warned that its financial survival could be at-stake, and that it was pushing its own supply chain for deeper cost reductions.  Options being considered were sourcing components from China based suppliers rather than Japan based.

This was also the time when rumors continually surfaced that Hon Hai Precision, the parent of major Apple contract manufacturer Foxconn, was also considering an equity investment or outright acquisition of Sharp. Initial talks actually began in 2011 after both firms established a joint technology partnership. However, the one and off again talks involved many cultural implications of whether Hon Hai, a Chinese company would have a majority ownership with access to Sharp’s leading-edge technology. 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 sourcing and selection strategies would cede to Hon Hai.

In August, Reuters , citing its own informed sources, broke the news of Hon Hai’s more formal acquisition talks. According to Reuters as well as a subsequent Financial Times report, the proposed tie-up would spin-off Sharp’s display unit and possibly include additional cash injections from other outside entities such as the state-directed Innovation Network Corp of Japan.

This week’s announcement of Foxconn’s bid raises similar concerns.  In its reporting, the WSJ cites a person familiar with the talks as indicating that Sharp is evaluating a counter bid from Innovation Network Corp. of Japan for roughly half of Foxconn’s bid.  The issue of concern remains having Sharp come under foreign control.  Innovation Network already has controlling stake in the remnants of three other Japan based LCD producers.

The pressure has reportedly now shifted to Sharp’s bankers and creditors to make a decision. Sharp and its lenders are expected to make a final decision by early February.

From our lens, this long legacy of Sharp represents the perils for being a leading-edge LCD technology provider in today’s high tech and consumer electronics sector.  As we opined in August, high tech OEM’s such as Apple and others demand the latest breakthroughs in innovative technology and more automated manufacturing processes, in return for orders representing significant 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 adequate profitability to fund constant capital becomes paramount.  Added to this environment are business cultural challenges where innovation control is a rather big deal in insuring a country’s manufacturing presence.

The takeaway for strategic sourcing professionals and C-level executives is an understanding that supplier relationships continue to be not solely driven by needs for innovation and reduced cost, but by business cultural forces that sometimes run a course.  Supplier management and supply risk require broad-based perspectives and deeper knowledge of business nuances and the sensitivities of risk.  It cannot be solely one-dimensional and Apple’s sourcing teams are often balancing such forces and nuances.

The legacy of Sharp’s LCD unit will eventually run its course and in the end, provide business case study learning on strategic supplier management and how business cultural norms often move at a different pace.

Bob Ferrari

Copyright 2016. The Supply Chain Matters® blog and The Ferrari Consulting and Research Group.

 


Other 2016 Predictions Assimilated by Supply Chain Matters

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Our Supply Chain Matters and Ferrari Consulting and Research Group 2016 Predictions for Industry and Global Supply Chains were featured throughout December and are now available for downloading in our Research Center.

During the process and over the past few days, we have also read and received other supply chain management related predictions which we found interesting and feel should be of interest to our audience as well.

In alphabetical order:

Chris Jones, Executive Vice President, Marketing and Services at Descartes produced a number of insightful predictions. Two that resonated were:

Parcel power- There will be more of it and it will cost more in 2016. The continued double-digit growth of E-commerce has carriers clearly having market leverage and the impact will be felt by B2B and consumer-oriented commerce alike. With the recent changes in shipping charges, optimizing parcel shipping will be critical for E-commerce-based companies to maintain their margins in 2016.

Increased security- The recent attacks in Paris and San Bernardino will drive more screening of supply chain partners, carriers, employees, etc. Rather than traditional batch or bulk screening, the screening process will be more dynamic and at a transaction level in 2016. Governments will continue to reach further into importer and exporter supply chains for information to better understand all of the parties involved and how goods are being moved. One of the biggest challenges for importers and exporters in 2016 will be the ability to efficiently gather timelier supply chain data to keep goods flowing across borders.

Phil Lambert– The termed SupermarketGuru came out with eight 2016 Predictions featured on Consumer Goods Technology. Two that caught our attention were:

Trend #3. Bioregions:“Local” has been one of the biggest trends in the supermarket aisles for almost ten years. It is an unsustainable trend as weather conditions and climate change force changes to the sourcing of foods. Think bioregions. Nature defines the regions for what crops and livestock grow and thrive best in which climates, and we will see changes accordingly. Think about this: California farmers moving to Georgia because of the cost of water, and more wines coming from South Carolina. Produce growers moving to Peru. A recent study by A.T. Kearney found that women and children – are willing to pay more for locally produced food. The ultimate in local? Growing lettuces, herbs and yes even kale in your own kitchen year-round without herbicides. Perhaps the ultimate in bioregions? The Urban Cultivator and Grove are coming to your home very soon.

 

Trend #4. Micro-stores:Far from the everything-and-the-kitchen-sink hypermarkets, look for smaller, neighborhood grocers to spring up. These stores, such as ALDI (with over 1,400 locations in the U.S. and counting), Bfresh in Boston, Green Zebra in Portland are more relaxed, attentive and curated, with a heavy emphasis on products that Millennials yearn for, and buy. Excellent private and exclusive brands with prices that this generation can afford. Think about how Lund’s & Byerlys’ Kitchen with 17,000 square foot that includes a 4,000 square feett sit-down restaurant and scores of local beers on tap. The grocerant trend will continue as more supermarkets look to share of stomach vs. market share against their traditional competitors. These retailers are proactive offering benefits to their shoppers to build that relationship across many touch points. One example is how ALDI announced their decision to remove certified synthetic colors, partially hydrogenated oils and MSG from all its exclusive brand foods by the end of 2015. Look for these micro-stores to take a stand and dispel the belief that you need to stock 50,000 SKUs to be successful, or that you have to serve everyone everything.

Brian Miller, Vice President of Services at Intesource points to the expected increase of foodborne diseases and food recalls next year and strategies that companies will need to implement in order to counteract these issues.

Mickey North Rizza, Vice President of Strategic Services at BravoSolution believes that in 2016, the focus will be on supplier value, not just supplier relationships — a supplier’s total economic contribution to the buying organization’s operating profit will be the new financial value by which procurement teams will be measured.

Pierre-Francois Thaler, co-CEO of EcoVadis, believes that in 2016, companies will finally realize sustainable procurement is about more than just compliance and reporting and can shed some light into what leading organizations will do to integrate sustainability throughout all their systems and practices.

 

Continue to send us 2016 Predictions you feel are important and we will publish them in another Supply Chain Matters predictions update.

Bob Ferrari


Boeing Agrees to Pay Fine and Submit to Enhanced Quality Compliance Systems

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In what is being reported as a first-of-its kind settlement with U.S. federal regulators, Boeing has agreed to pay $12 million in penalties as part of a settlement mandating Boeing 737Max Linetighter oversight of suppliers and tighter quality controls inside its own production facilities.

This settlement resolves 13 pending or potential civil enforcement cases with the Federal Aviation Administration (FAA).  According to reports, the settlement subjects Boeing to as much as $24 million in additional penalties if manufacturing, auditing and regulatory reporting improvements are not implemented in the coming five years.

In its announcement, the FAA stressed the importance of internal corporate controls to insure that the design-to-manufacturing to maintenance processes are “operating according to the highest standards.” FAA Administrator Michael Huerta stated:

Compliance requires all certificate holders to develop and implement internal controls that ensure they’re operating according to the highest standards. “Boeing has agreed to implement improvements in its design, planning, production and maintenance planning processes, and has already implemented several of these improvements.”

Process areas cited for attention include, among others:

  • Improved management and accountability systems including a requirement that Boeing managers review regulatory compliance performance.
  • Improvement in internal audit processes across designated processes with audit teams reporting directly to Boeing’s Vice President of Quality.
  • Enhanced supplier management to determine whether incomplete work is being accepted.
  • Review and simplify at least 15 process specifications used to design, build, deliver and support Boeing products.
  • Report to the FAA at least on an annual basis on the effectiveness of Boeing’s regulatory compliance activities including a final comprehensive report after the fifth year of the agreement.

According to the FAA statement, prior issues involved installation of fuel tank flammability reduction equipment on Boeing 747 and 757 aircraft and insufficient corrective action after discovering that a supplier was providing incorrectly shaped fasteners. Details related to other specific enforcement matters were not released by the FAA.

Supply Chain Matters readers might recall that in March of 2014, after the FAA initiated a thorough formal joint review of Boeing’s 787 Dreamliner aircraft program, a subsequent report indicated that Boeing had placed too much reliance on suppliers for the overall quality of 787 components and systems.  It further stated that Boeing’s sometimes ambiguity in stating what was required of partners led suppliers to believe that they had met requirements.

Certain suppliers within Boeing’s supply chain will likely feel the effects of this new announced compliance agreement with the FAA. It comes as Boeing continues to ramp-up its production cadence for delivery of booked customer orders involving newly designed aircraft that stretch out over the enhanced conformance period.

This development is yet another reinforcement of the importance of effectively integrating product lifecycle management, manufacturing and quality management systems together in a continuous information and decision-making flow.


Leveraging Efforts for Wal-Mart’s U.S. Manufacturing Initiative- ThomasNet Corporate Edition

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In 2013, mass retailer Wal-Mart made a significant commitment in announcing a U.S. manufacturing investment  initiative, pledging to invest $50 billion in U.S. sourced products over the coming ten years, a total of $250 billion. This initiative included investing in current U.S. suppliers to aide them in expanding their own U.S. sourced products and supporting supply chains. It further included encouraging and sourcing contracts among new U.S. suppliers in categories such as textiles, sporting goods, furniture, pet supplies and other products.

Since that time, the retailer has initiated a number of supplementary web based supporting programs including a U.S. Manufacturing Portal (JUMP) where suppliers are encouraged to register and where specific program and other useful information is disseminated.  Wal-Mart additionally reached out to ThomasNet.com to collaboratively design and launch a cloud-based portal to aide supplier buyers in discovering other U.S. downstream suppliers. That portal was named Wal-Mart Corporate Edition.

In early October, while attending and speaking at the APICS Annual Conference ThomasNet executives Donna Cicale, Director of Audience Development and Kristin Carty, Manager of Audience Outreach, provided this author a demonstration of the impressive information discovery and retrieval functionality incorporated in the Wal-Mart Corporate Edition portal.  I further heard about plans to make this similar technology and database available to a wider and broader industry procurement audience.

Earlier this month I was able to catch-up with Tom Greco, Vice President of Publishing Operations for ThomasNet. He indicated that Wal-Mart and ThomasNet have had great success in expanding the listing of U.S. based suppliers along with their materials and component specialties. Existing confidentiality agreements prohibit the sharing of hard numbers but Greco did indicate that there has been impressive interest.

There are plans to now make this portal, complete with its expanded U.S. retail supplier listings populated for Wal-Mart available to the broader industry and ThomasNet clients it what will be termed ThomasNet Corporate Edition.

With the new Corporate Edition, buyers have the ability to search upwards of 600,000 suppliers among various buying categories, tag suppliers as an approved supplier for program or corporate purposes or seek out new sources of U.S. value-chain component suppliers.  Other valuable benefits we touched upon are the ability of product design engineers themselves to be able to search and incorporate components from previously approved or preferred  component suppliers, or buyers from the same firm able to share approved supplier listings for corporate conformance purposes.

ThomasNet Corporate Edition expands electronically enabled RFI support where prospective buyers can automatically launch RFI’s  with a number of portal  listed suppliers. I was informed that in the Enterprise Edition, every listed supplier has electronic RFI enabled and can  electronically respond to information requests. ThomasNet specialists will actually follow-up with RFI listed suppliers to insure information was received.

Over time, there are plans to add more information retrieval, sort and analysis functionality, added collaboration tools and services for both buyers and suppliers. The Corporate Edition is planned for early 2016.

Some of our readers may not be aware that ThomasNet offers a complimentary in-house staff of design engineers to help buyers evaluate their product designs and specifications and find up to 5 qualified suppliers with introductions.  I thought that was awesome.

Readers considering a broader U.S. based manufacturing sourcing effort, particularly for lower-tier components, or if your procurement team needs broader, more analytical supplier discovery and adoption support, you might consider what ThomasNet is making available.

Bob Ferrari

Content appearing on Supply Chain Matters® may not be used or re-purposed by any third party without written permission of the author or parent, The Ferrari Consulting and Research Group.


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