To continue with this week’s theme of decisive supplier management, Supply Chain Matters must also comment on Honda’s decision to no longer source air bag inflators from troubled Japan based supplier Takata Corp. after a U.S. regulator accused the supplier of misleading regulators and withholding information that eventually led to one of the largest product recalls in U.S. history.
The move comes after continuous multi-year product recall actions involving this supplier’s inflators which have on occasion, demonstrated the tendency to suddenly inflate under certain high humidity conditions and spread shrapnel on drivers or passengers. Even more concerning are actions and fines from U.S. safety regulators ordering the supplier to stop using an aluminum nitrate propellant in the Takata designed airbag inflators.
Takata had been a long-standing supplier for Honda, its largest customer and investing stockholder. This vote of no-confidence sends a significant signal in the notions of Japanese supplier management practices where automotive OEM’s constantly collaborate with suppliers on all forms of product design or supply challenges. According to reports, Honda reviewed millions of pages of this supplier’s internal documents and actually alerted U.S. regulators to evidence suggesting “misrepresented and manipulated test data for certain air bag inflators.”
Honda indicated in a statement: “Honda expects its suppliers to act with integrity at all times and we are deeply troubled by this apparent behavior by one of our suppliers.”
Regulators have now assigned an independent monitor to audit the supplier’s safety practices for the next five years and to stop the use of a certain form of ammonium nitrate air bag inflator by the end of 2018. At the end of last year,
Meanwhile, automotive service parts focused supply chains remain stressed by multiple air bag inflator recall campaigns, in some cases calling for multiple re-installations of a similar repair component. As noted in our previous commentaries related to the air-bag inflators, five auto manufacturers, BMW, Fiat Chrysler, Ford Motor, Honda and Mazda Motor account for 18 million of the since recalled inflators.
Honda itself incurred a $70 million fine from regulators for reporting lapses that included Takata air bag inflators. Our readers might wonder why the OEM did not sever its relationship with its air bag inflator at that time. Japanese corporate culture resists admission of a flawed or troubled supplier relationship and in the midst of a product recall crisis of such a magnitude, Honda probably needed to insure adequate supply of inflators to meet both product recall as well as new production needs.
Supply Chain Matters Book Review: The Power of Resilience- How the Best Companies Manage the Unexpected
From time to time Supply Chain Matters will feature book reviews which we believe would be of value and a learning asset to our extended global supply chain management community of readers.
In this particular posting, we share our review of: The Power of Resilience, How the Best Companies Manage the Unexpected. The author, Yossi Sheffi, is a well-known thought leader among the global supply chain management community serving as the Elisha Gray II Professor of Engineering Systems at the Massachusetts Institute of Technology (MIT) and Director of the MIT Center for Transportation and Logistics. He has authored a number of previous books including: The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage and Logistics Clusters: Delivering Value and Driving Growth. Professor Sheffi was gracious to this blog by previously contributing a guest commentary related to his Logistics Clusters book.
If you have been a long time reader of this blog, you have undoubtedly read of the many disruptive events that have impacted industry and global supply chains, along with some of the consequences. Events would include Hurricane Katrina that devastated New Orleans and the U.S. Gulf Region in 2005, the 2011 devastating earthquake and tsunami that impacted Japan and the severe floods that impacted Thailand that same year. Other events we have noted, such as additional earthquakes, major factory or warehouse fires, natural disasters and product recalls continue to uncover the vulnerabilities and dependencies among today’s globally based supply chains. In this new book, Sheffi provides with in-depth case studies that illustrate how companies have prepared for, coped with, and demonstrated resilience following such disruption, along with important learning related to the encroaching threats facing today’s supply chains. Further included are the business processes, corporate culture and technology tools utilized to prepare and learn from disruption. Indeed, the interconnectedness of global economies, the lean aspects of multi-industry supply chains today, and the implications of vast arrays of information amplified by all forms of media imply that unexpected events in any corner of the globe can ripple through the supply chain and affect customers and shareholders.
This blogger, analyst and consultant thoroughly enjoyed reading this book which I managed to read cover-to-cover on a recent roundtrip coast-to-coast plane ride. The book immediately captures interest, flows from chapter to chapter and compels one to read more. I highly recommend this text to current or aspiring senior executives and supply chain leaders as a must-read regarding the mitigation and response to supply chain risk. I especially applaud Professor Sheffi for incorporating supply chain social responsibility strategies under the umbrella of risk, which it should be.
The first five chapters of this book provides various insightful case studies of companies that experienced and responded to risk events including Cisco, General Motors, Intel, Medtronic, Procter & Gamble, Western Digital and others. These case studies bring out the importance differences among business continuity planning (BCP) and business continuity response (BCR). There are examples of risk metrics such as Value-at-Risk (VaR), Time-to-Impact and Time-to-Recovery, very similar to those defined in the latest releases of the APICS Supply Chain Council’s Supply Chain Operations Process Framework model (SCOR).
Chapters 6 through 11 address the strategy, preparation, communication and supply implications of supply chain risk and resiliency. Sheffi observes: “Building a resilient enterprise involves two broad categories of options: building redundancy and building flexibility of supply chain assets and processes.” Chapter 8, Detecting Disruption, explores methods for incident monitoring, mapping the supply chain for vulnerabilities, monitoring suppliers, and a rather important section related to leveraging social media in risk detection and response. Chapter 9 is a rather important read since it explores means for securing the information supply chain and the tendencies of cyber criminals to exploit supply chain partners as targets of information security vulnerability, as was the case of the Target credit-card hack where penetration vulnerability came from the stolen login credentials of a regional store refrigeration maintenance services vendor.
Chapter 12 addresses today’s “new normal” of disruption and risk along with methods to benefit from longer-term implications. In the final two chapters, Professor Sheffi explores the growing dependency on all levels of suppliers, including those in the lower-tier of industry supply chains. Sheffi notes: “Supply chain risk management is in a race between the fragility of complex supply chains and the resilience created by better risk management.” In Chapter 13, an argument is made that systemic supply chain risk, one that can bring an entire industry to a halt, has not occurred because of the combined efforts of today’s more responsive supply chains. Sheffi opines:
“Thus, it’s hard to conclude that modern global supply chains show evidence of true systemic risks. Companies have developed efficient response mechanisms, and the same globalization trends that could create disruption risks for specific companies that use suppliers from faraway lands may also contribute to the prevention of systemic risk by spreading manufacturing capacity around the globe. Most important, global capacity for manufacturing and distribution is large, and while it is crucial for any company to prepare and respond effectively to disasters, there are always others ready to take its place if it fumbles.”
We quoted that entire passage because upon reading and contemplating the book’s case studies, we were not as sure regarding this conclusion. While many firms have been able to eventually overcome supply and services risk, the open question is scale and timing of supply continuity. Customers, consumers and activist investors are far more impatient and unforgiving today, and the clock speed of business and industry change may not tolerate forms of extended supply chain disruption. However the one conclusion that is clear is that speed, resilience and flexibility are indeed the most important capabilities of any supply chain.
In the backdrop our previous Supply Chain Matters commentary related to Boeing and its decision to shortly assemble new 737 commercial jets in China, we provide another related development.
In November of 2014, we called initial attention to the announcement that Boeing had initiated a multi-billion long-term supply agreement with Japan based Toray Industries for the supply of carbon fiber composite material. This ten year strategic supply agreement was initiated to provide continuity of supply of carbon fiber material needed for the production of Boeing’s 787 Dreamliner and new 777X aircraft. Apparently Boeing is now considering a supply risk strategy regarding this strategic material.
Last week, The Seattle Times reported that Toray Composites America (TCA) celebrated the completion of a fifth production line at its plant near Tacoma Washington, but further warned that additional expansion will center on other U.S. east coast and overseas investments.
Noted in this Seattle Times report is that each pre-preg carbon fiber assembly line requires a $100 million investment and 14 months of rigorous testing before such line is qualified to produce high specification material. With the addition of this fifth assembly line, executives at parent Toray in Japan now indicate that any further investments will be directed at the existing TCA facility located in Spartanburg South Carolina.
Toray has purchased an additional 400 acres of land with plans to build a $1 billion fully integrated composites production facility that will span precursor chemical to finished carbon fiber tape. According to the article, Toray has signed additional supply contracts with Bell Helicopters and Brazilian jet producer Embraer.
A Toray executive is reported as indicating that diversifying supply in South Carolina is a desire by both Toray and Boeing to insure supply continuity, in the event of a shutdown at the Tacoma based facility. More revealing are statements by this same executive indicating that Boeing’s longer-term thinking centers on the labor cost intensity associated with manufacturing this material in the U.S. , with an eagerness to transfer some composite supply sourcing to perhaps India, which has a growing demand for new commercial aircraft, and could provide more attractive labor costs.
In the lens of Supply Chain Matters, this may be an additional indication that growing demand for new commercial aircraft within specific Asian countries may include additional provisions for more supply chain presence and value-add activity.
In April a front page published article by The Wall Street Journal reported on Wal-Mart’s increased pressures on North America based suppliers to squeeze costs. The retailer informed suppliers involved in a wide range of purchased categories to forgo any additional investments in joint marketing and focus the savings on lower prices to Wal-Mart. In July, Reuters reported efforts to impose added fees affecting upwards of 10,000 U.S. suppliers. Contract renegotiation letters were mailed to respective suppliers that included amended contract terms along with added fees to warehouse products at Wal-Mart DC’s. At the time, a Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low. Not all of the 10,000 suppliers would face the higher charges due to existing payment arrangements afforded these suppliers to utilize existing Wal-Mart distribution centers.
Last week, Bloomberg reported that Wal-Mart’s Suppliers Are Finally Fighting Back, indicating that some of the larger suppliers are saying no to these new cost squeezing measures. Some suppliers reported that the new fees are impacting their own bottom lines, while several firms are reportedly hiring attorneys to further pursue matters. The Bloomberg report indicates that two large, unnamed suppliers have refused to accept such terms. A senior vice president at Kantar Retail, which advises some Wal-Mart suppliers, is quoted as indicating: “It looks as though they (Wal-Mart) are trying to have it both ways and trying to pad their own margins where they are facing cost pressure.”
Regarding the report, a Wal-Mart spokesperson indicated to Bloomberg that the global retailer is willing to now negotiate with suppliers and will take into account prior history with a supplier, as well as quality of the products. The spokesperson further indicated that the retailer may encourage some suppliers to seek low-interest loans through an existing financing program, implying that those suppliers that do not agree to new terms may find their Wal-Mart business affected.
The report observes that smaller and even larger suppliers have the most at-stake in their ability to be able to push-back. “A smaller supplier, notified of the fees late last month and given two weeks to accept, said it won’t be able to make a profit on its Wal-Mart business under those terms unless it fires workers or cuts wages and benefits.”
From our Supply Chain Matters lens, these ongoing supplier developments related to Wal-Mart are indeed part of the realities for certain retail industry players who can leverage their sheer scale of buying power. On the other hand, it defeats more positive initiatives.
Wal-Mart’s ongoing initiative to purchase an additional $50 billion in U.S. sourced products over the next ten years could be a casualty of its ongoing supplier management efforts. Many of these newer suppliers will not only need the retailer’s long-term buying agreements and shared distribution facilities, but the ability to make meaningful profit in order to sustain their presence in the U.S.
Wal-Mart stated goals are to simplify supplier relationships and develop a broader U.S. supplier base. However, from our lens, cost-sharing tactics for having it both ways defeats such strategic objectives and places supplier relationships in the context for always on the ready for the next shoe to drop.
Supply Chain Matters has featured previous commentaries concerning GT Advanced Technologies, an advanced technology sapphire glass supplier that experienced some of the perils in being a supplier to Apple, particularly in a new product development phase.
In October of 2014, this advanced technology supplier was unexpectedly forced to file for Chapter 11 bankruptcy protection when Apple suspended its supply contract. The news reportedly wiped out in upwards of $1 billion in equity value when the news broke. A further casualty was a 1.3 million square foot advanced sapphire glass production facility near Mesa Arizona that included more sophisticated glass fabrication furnaces and was supposed to ramp-up to supply sapphire glass requirements for various Apple products including the iPhone.
Since that time, information leaked from bankruptcy court filings pointed to a tense supplier relationship that GT Advanced described as “an onerous and massively one-sided deal. “The supply agreement eventually ended when Apple withheld a product development process payment. GT was forced to lay off in excess of 700 employees at the Arizona production facility, which Apple has since announced will be converted into a world-class global command data center. Apple itself invested the sum of $439 million in the GT Advanced relationship.
On Monday of this week, after exiting Chapter 11 protection, the supplier has now announced that it will be reducing its workforce by an additional 40 percent in order to “right size” its cost structure. According to a published report by The Wall Street Journal, GT Advanced had about 1000 employees when it filed for bankruptcy.
As we observed in prior commentaries, product innovation involves time sensitive collaboration for product design and test changes as well as supply chain production ramp-up needs. That is why product design process information is quickly becoming the new requirement for inclusion within end-to-end supply chain business and collaboration networks.
The perils of being an Apple supplier include a high risk-reward ratio. That includes having the capability of high agility in the wake of what others would view as rather difficult obstacles. That tendency dates back to the era of Steve Jobs who instilled a perfectionist culture for design engineering. Also with Apple come huge scale and the potential for financial reward. In the case of GT Advanced Technologies, the risk-reward strategy continues to have an apparent far different outcome.
In July, we updated Supply Chain Matters readers concerning Tesla Motors construction of its $5 billion massive gigafactory, which when completed, will provide the capacity to be the single largest battery manufacturing volume plant in the world. Once more, the plant is located in the United States, an area that many thought impossible for sourcing such a plant.
Tesla’s strategy is bold, involving supply vertical integration. Given that a considerable portion of the cost-of-goods sold (COGS) for an electric powered automobile involves its batteries, the strategy is to control the bulk of the value-chain. The massive scale of this facility is targeted at reducing the unit costs of lithium-ion batteries by 30 percent.
Since the state of Nevada site selection announcement in 2014, a far broader strategy has been unfolding, one that extends beyond automotive supply chain needs, including the power storage needs of homes and businesses. The site was chosen because of its close proximity to supplies of the all-important raw material of lithium as well as to the Tesla factory in California. While the highest concentrations of lithium are mined in Bolivia and Chile, there are supply sources in the western U.S. and Mexico.
Last week, there was a significant joint announcement regarding one source of raw material supply for this new battery production plant, that being lithium hydroxide. Tesla announced that it had secured a five-year strategic long-term supply agreement through a partnership with mining firm’s Bacanora Minerals Ltd and Rare Earth Minerals PLC. The two suppliers have formed an entity termed the “Sonora Lithium Project Partners.”
According to a published announcement from Alberta Canada based Bacanora: “The Sonora Lithium Project Partners are working to develop a mineral-rich, lithium-bearing clay deposit into a planned low-cost, sustainable and environmentally conscious mining operation.” The announcement further estimates that the mine and processing facility will have an additional capacity of 35,000 tonnes of lithium compounds, with a scaling potential of up to 50,000 tonnes annually. That is a considerable supply, somewhat equating to global supply needs. The Sonora Lithium Project itself consists of ten mining areas in the northeast of Sonora State.
The supplier is further required to reach certain performance milestones and pass product specification milestones. A key milestone is noted as the ability to supply lithium hydroxide in accordance with the volumes and timeframes that will be established by Tesla. To do so, Sonora Lithium Project Partners will be tapping lithium supply from Bacanora, along with additional supplies located in Northern Mexico, owned by partner REM. The Mexico site will mine lithium from mineral-rich clay.
The electric automaker will additionally purchase specified minimum tonnages in accordance with an agreed-upon pricing formula which is described as below market pricing.
Noted is that this new agreement will form only a portion of Tesla’s lithium-based feedstock needs. The remainder will likely come from other mining suppliers which imply that Tesla has an active supply risk mitigation strategy for lithium feedstock.
The agreement requires that Sonora Lithium Project Partners raise additional financing to design and construct this mine and processing facility. That implies additional time required for fund-raising, permitting, construction and volume production. Thus, we strongly suspect that initial gigafactory lithium supply will come from other sources. However, the Bacanora announcement indicates that the Sonora Lithium Project will rapidly accelerate mining and development efforts.
In the spirit if its founder and CEO, Elon Musk, Tesla consistently makes bold moves in its product designs, detailed manufacturing, and now with its supply vertical integration strategies. It is going to be quite interesting to observe how all of this unfolds.