A well-known principle in public relations is that when companies have some bad news to share, it is best to do so late on a Friday or in the early weekend when business and general media is taking a breather. When it comes to Boeing and the 787 Dreamliner program, it seems that Friday and the weekend has consistently been utilized to make news releases.
This weekend, Boeing formally advised its customers of an icing risk on its new 747-8 and 787 Dreamliner aircraft, which will cause certain airlines to alter flight routes. The problem is specifically associated with aircraft engines powered by General Electric, after six reported incidents when GEnx engines suffered temporary loss of power at high altitude because of ice crystal build-up in these engines. Boeing has advised all 15 operating carriers to temporarily avoid flying these aircraft near the threat of high altitude level thunderstorms.
Thus far, Japan Airlines has elected to remove 787’s from two international routes that have risks for high altitude thunderstorms, substituting different aircraft. Other affected airlines will probably follow with altered scheduling and replacement aircraft. Meanwhile both General Electric and Boeing continue to work on the fix to the problem.
It seems that the 787 program continues with disappointing news and the repercussions for customers and for Boeing and its supply chain partners continue.
Supply Chain Matters Sustaining Sponsor E2open, Inc. announced last week that it is the first dedicated, cloud-based supply chain Software-as-a-Service (SaaS) technology provider to achieve International Organization for Standardization/Electrotechnical Commission (ISO/IEC) 27001:2005 Security Certification.
The internationally recognized ISO 27001 standard certification addresses the protection of information within an individual system. The ISO 27001 standard itself was first published in October 2005 and provides specifics for security management, governance, controls and compliance. The company joins many leading, global businesses that have earned the prestigious ISO 27001 certification, including Amazon, Microsoft, and Salesforce.com. E2open further maintains SSAE16 certification for controls for processes for the past seven years.
Corporate business, functional and IT teams continue to be diligent to the security of data, whether it resides inside or outside the firewall. Supply chain and B2B focused cloud-based systems must therefore protect such data, and achieving this level of ISO certification helps to assure customers that proper measures and controls regarding data have been outlined and are practiced.
Congratulations to the E2open technical teams for this important achievement and milestone.
Disclosure: E2open is one of other named sponsors of the Supply Chain Matters Blog.
If our community needed any additional reinforcement regarding how important, and perhaps how expensive, open contract management terms and supplier relationships have become, than today’s headlines involving Starbucks and Kraft Foods should be the reminder. (Paid subscription or tiered free viewing) Yesterday an arbiter ordered Starbucks to pay Kraft’s new spinoff, Mondelez International a total of roughly $2.8 billion dollars after the early termination of a Kraft’s supply coffee agreement with Starbucks.
The coffee supply agreement dates back to 1998 when Kraft was contracted to market and distribute Starbucks branded coffee among U.S. grocery and supermarket channels. In a November 2010 Supply Chain Matters commentary, we noted reports that the deal with Kraft was designed as an indefinite arrangement subject to certain conditions and limitations. In order to terminate the supply arrangement, Starbucks accused its partner of failure to actively market the brand and not maintaining appropriate promotional campaigns. Notice was given in November 2010 for termination in March 2011. For its part, Kraft indicated that Starbucks could take over the supply arrangement but needed to compensate the supplier for the market value of the business. At the time, Wall Street analysts’ estimates were that Kraft would seek $1.5 billion in compensation. Starbucks offered $750 million to settle the arrangement. The process was submitted to arbitration in 2011 after both sides could not agree to a compensation number.
While Starbucks now indicates that it strongly disagrees with arbitrator’s ruling, it must now reportedly restate its fiscal fourth quarter financials to show an operating loss. Because Kraft’s coffee business has now split into Mondelez International, that company will receive the recovery from the arbitration award. According to a report published in the Wall Street Journal, Mondelez management indicates that any proceeds will be utilized to buy back shares of that company.
For its part, Starbucks has taken control of its own packaged coffee distribution business and has entered into a distribution agreement with Keurig single-serve brewers. A company spokesperson indicated to the Wall Street Journal that it has sold more than one billion K-cups since the suspension with Kraft. Kraft, in turn, has now entered into an agreement to distribute McCafe branded coffee from McDonalds.
In our November 2010 commentary, we opined that instead of playing “my supply chain trumps yours”, perhaps it was better to move toward a “win-win” negotiation agreement where the lawyers and egos stand in the background. Readers can make their own judgment as to whether this was hindsight or wishful thinking. Three years later, the financial implications have now come to light.
From our lens, a final observation is in order from regarding Mondelez. Instead of allocating this award totally to stock buyback, perhaps some of these monies can be invested in supply chain transformation. After all, that was the original intent.
This week, Apple announced financial results for its September ending fiscal fourth quarter and analysts and stockholders were quick to respond. This latest event, coupled with the recent new product announcements for tablets and smartphones will no doubt, continue to place enormous challenges on Apple’s supply chain teams. As we pen this posting after the stock market closing one full day after the earnings announcement, Apple stock closed down $13.20 or 2.29 percent from the day’s opening.
In the September ending quarter, Apple posted quarterly total revenues of $37.5 billion and a quarterly profit of $7.5 billion. These results compare to total revenues of $36 billion and net profits of $8.2 billion in the year ago quarter. The company sold 33.8 million iPhones, 14.1 million iPads and 4.6 million Macs in the fiscal fourth quarter. Gross margin was reported to be 37 percent down from 40 percent a year earlier, as increased costs associated with new production introduction and intense competition ate away margins.
What really caught the market’s attention was Apple’s guidance for the all-important upcoming holiday quarter which includes revenues of between $55 billion to $58 billion and gross margin between 36.5 percent and 37.5 percent. In its reporting of these projected financial results, Bloomberg Businessweek noted that this forecast “would be the slowest holiday-sales rise since 2008, when revenue jumped 6 percent. Profit would be the same as last year, based on Apple’s predictions for gross margins.”
In the earnings briefing, CEO Tim Cook exclaimed that the company’s lineup of tablets would do well: “we think it’s going to be an iPad Christmas”. Regarding the new lineup of iPhones, Cook noted that the 5s model ended the quarter with significant backlog, but supply is building each week. Commenting on the newly released iPad Mini with retina display: “we’ll start shipping later in November. We know how many we can make but we won’t be able to assess demand until we ship” Regarding the controversial pricing strategy associated with the new lineup of smartphones, Cook stated: “If you look at what we’ve done, we’re selling the iPhone 4 as our entry level model. We sell the iPhone 5c as a mid-tier device. And then we have the iPhone 5s at the high end. Obviously some people read rumors about the 5c being an entry-level device, but that was never our intent”
In the view of Supply Chain Matters, that collection of above statements is the clear reinforcement of the Apple supply chain challenges that lie ahead. The release of the new lineup of iPads was pushed back to this month because of a series of rumored supply delays, particularly concerning the Mini’s retina display. A new untested contract manufacturer, Pegatron, is now added to ramp-up challenge.
The iPhone 5c was widely speculated to be Apple’s smartphone product to meet consumer growth across emerging markets. In our previous commentary concerning the IHS teardown analysis of the 5c, a preliminary analysis by IHS declared that “the iPhone 5c is basically an iPhone 5 in a plastic disguise.” IHS pegged the full bill of material and manufacturing cost of the 5c model with 16G of memory at a value of $173 with the unsubsidized carrier price tag of $549. The firm also concludes that in order to meet expectations of an unsubsidized target of $400, which is considered attractive for emerging markets. the manufacturing cost would have had to come in at a targeted $130 cost range. Thus the supply chain cost savings opportunity ramp appears to be steep with the current design, adding more challenge to product margin goal performance. There have been recent reports and rumors from the Apple supply ecosystem indicating that production forecasts concerning the 5s and 5c are already being adjusted in favor of lower forecasted needs for the 5c, and placing more dependence on the 5s to deliver revenue and product margin goals in the coming shipping quarters.
Apple’s CEO has indeed declared that it is going to be a great holiday shopping season for the company, but its supply chain teams may face rather difficult challenges in meeting that outcome. A combination of late product launches, constrained supply concerning the most desired product models, a ramp-up of new suppliers and increased costs of premium transportation may all compound themselves. More geographic markets are involved in order to meet revenue goals and we have already speculated on building tensions among sales, marketing and the supply chain. Rumored distribution agreements with China Mobile are still to be factored.
Apple will indeed be one of the supply chains to watch in the upcoming holiday surge.
The again, Apple’s supply chain has often risen to such challenges and may rise to the latest set of challenges.
Yesterday, the long anticipated and incredibly pre-leaked Apple product launch event occurred, and Wall Street and the rest of the industry did not seem all that impressed. As we pen this posting on the morning after, Apple stock has already dived more than 7 percent, over $40 lower than pre-announcement. Most of the reaction to the event stems from the pricing strategy of the new model of iPhones along what was not announced.
As was widely rumored, the company announced two new models of smartphones. The new generation iPhone 5S includes a faster and more powerful A7 64 bit microprocessor, a fingerprint scanner, an advanced camera, and a phone case constructed of highly durable liquidmetal which is available in three high-end color options including gold. The screen size is a 4 inch Retina display, the same as the prior model. Pricing for the new iPhone 5S was announced at a carrier subsidized price of $199 for the entry 16GB model.
Much more attention was placed on the announcement of the so-termed, lower-cost iPhone C version. That phone essentially packages most of the technology of the previous iPhone 5 and adds five available color combinations. As we have noted in previous Supply Chain Matters commentaries, this newer scaled down version was supposed to be Apple’s response to consumer preferences in high growth emerging markets such as China and India. The long awaited declared pricing is where most equity analysts and Supply Chain Matters were disappointed. The 5C was priced at a carrier subsidized $99 with a two year contract for the 16GB version, which equates to a reported $549 without carrier subsidy for the U.S., and $733 for China, which is roughly 4500 yuan.
In its reporting, the Wall Street Journal noted that competitor Samsung is offering smartphones in China and India for less than $100 without a carrier subsidy. Other Chinese based OEM’s such as Lenovo, ZTE and others have similarly lower cost alternatives with attractive functionality. Unlike the U.S., smartphone consumers in China usually pay the unsubsidized price with carrier subsidies coming later in the term to lower monthly phone bills. Thus it would appear that Apple has initially targeted the 5C not as a lower cost model but rather for the far upper end of consumers in emerging markets who would be attracted to the Apple brand. It is believed that this initial pricing strategy provides an ample opening for existing competitors to undercut Apple in pricing and features. Equity analysts have further concluded that the 5C model has to be less expensive to produce, by witness to a lower cost segmentation of Apple’s supply chain which we have also concluded.
Thus, Apple’s strategy appears to be protection of higher margins at the risk of further erosion in global market share.
A sample of reaction from Silicon Valley circles was penned by Troy Wolverton columnist for the San Jose Mercury Times, which concluded; Apple’s Timid Tim once again disappoints, and that: “The iPhone 5C is just a new version of that old strategy.” Another conclusion was that it was clear the company (Apple) is not exactly stretching itself in product and market innovation.
Of further significance was what was not announced yesterday. There was no announcement of the rumored deal with carrier China Mobile, although that is likely to come. There was no announcement of the introduction of the rumored iWatch or upgraded models for both the iPad and iPad Mini, which are rumored to be coming before the end of the year.
Apple’s supply chain teams now face rather tough challenges in the weeks and months to come. Rather than a phased product available launch that occurred in prior market introductions, the current plan call for simultaneous inventory availability of the 5S and 5C in all major countries and geographies. Information leaks emanating from various areas of Apple’s supply chain these past weeks indicated that there were production ramp-up issues involving the 5S fingerprint scanner, its new casing as well as the larger display. Prior newly introduced iPhones tended to sell out rather quickly, and the supply chain had to rally to make adequate inventory available for the all-important Q4 holiday buying period. Supply chain teams supporting the new innovative 5S are additionally tasked with preparations for launching potential other new products later this year.
Teams supporting the 5C model had already been anticipating a high volume ramp-up to support expected volume growth from emerging markets. Whether the higher list price will affect forecasted or anticipated shipment volumes remains to be seen. Some equity analysts are already speculating that Apple may cut the price of the 5C earlier than past cycles, if consumer response and margins are not as anticipated. There have been charges of alleged worker labor violations associated with at least two contract manufacturers associated with 5C volume manufacturing which no doubt will have to be investigated. With the introduction of multiple color models, inventory mix planning will become far more important, especially if one or two colors become far more attractive for consumers.
More importantly, the pressure on Apple’s management to restore its reputation as most innovative in the market will place added pressures on the entire value-chain for discipline in meeting highly aggressive time-to-market and time-to-volume objectives while supporting its corporate culture of last-minute design changes. Other information leaks point to Apple’s current plans to double staffing in its marketing groups which will add more tension in cross-functional discussions and objectives.
Readers of this author’s prior commentaries related to the Apple supply chain might have noted the disclosure that the author was a holder of Apple stock. This morning, that situation changed, since our meager amount of stock sold-off automatically because of a short, protected position. Some companies tend to pay more attention to protection of margins and the status quo, and that turned out to be the negative response of the market.
The new transparency of Apple and its supply chain is becoming more visible and more concerning.
As the world awaits Apple’s long awaited announcement this week’s on new models of iPhones, another report of potential labor rights violations associated with this phone’s production ramp-up has surfaced.
On Thursday, labor rights watchdog group China Labor Watch cast another light on the potential existence of labor rights violations at the contract manufacturing production facility operated by Jabil Circuit in Wuxi China. The labor rights organization conducted an undercover investigation that resulted in alleged infringements involving millions of dollars in unpaid overtime wages, over 100 hours of monthly mandatory overtime, more than 11 hours of standing work with little rest outside of 30 minute meal breaks, along with hiring discrimination and lack of worker pre-training.
A posting on Huffington Post Business reports echoes the China Labor Watch report and points to workers having little time to eat during meal breaks, having to travel to a distant factory cafeteria after being required to pass through mandatory security checkpoints. Workers are also alleged to be sleeping in 8 person dorms where workers assigned to day or night shifts are sharing the same dorm room.
For its part, Apple informed Huffington that it had conducted three audits of Jabil Wuxi over the past three years with some findings, and that Jabil has “an excellent track record of meeting Apple’s high standards.” At publishing, Huffington was unable to secure a comment from Jabil management.
Reviewing the Jabil web site, one can find a rather definite declaration of business conduct, signed by the firm’s CEO, that addresses supply chain transparency, health and safety and other business requirements supported by audit processes. Thus both Apple and Jabil do indeed publish high standards related to social responsibility and worker labor practices. In addition, Apple contracts with the Fair Labor Association to conduct ongoing formal audits of its supply chain across China and other regions and much work is underway in identifying problem areas and corrective plans. To its credit, Foxconn, Apple’s largest contract manufacturer has made some strides in correcting previous labor audit findings.
The timing of this latest China Labor Watch report is a bit suspect since it comes just before Apple’s pending media blitz for new model iPhone announcements. The fact that an undercover investigation has led to these alleged findings should be indicator of practices which factory audit teams are either not discovering, or worker reluctance to identify grievances through formal channels.
As Supply Chain Matters has noted in a previous commentaries related to the Apple supply chain, its transition to a segmented lower-cost supply chain model, in addition to one supporting its higher cost innovative products is still underway, and newer suppliers may be in the midst of adjusting to higher demands for volume and efficiency. None the less, the issues raised by China Labor Watch should warrant additional response from both Jabil and Apple management.
Disclosure: The author is a current holder of Apple stock.