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For Smartphones- Integrated Product Design, Supply Chain and Manufacturing Capabilities Matter

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A growing tenet in what is today’s broad supply chain management capability umbrella is the ability to be able to integrate product and manufacturing process design with global-wide production capabilities, faster and cheaper than existing competitors. The notions of responding to local customer needs and desires are now often manifested by co-locating or virtually connecting product design with supply chain process capabilities and continue to become important differentiators for industry supply chains, and for industry disruptors.

These notions are now playing out in the global smartphone market with recent revelations that China based industry disruptors are gaining more global market-share by a strategy of a keen focus on local and regional consumer needs, and on a keen dependency on an integrated and demonstrated agile manufacturing region in China.

Information technology and consumer electronics quantitative market analysis firm IDC recently disclosed that a collection of Chinese smartphone manufacturers have now secured more than 40 percent of global smartphone market-share in the first quarter of this year, nearly double the number of five years earlier. That is a remarkable achievement.  A recent published report by The Wall Street Journal (Paid subscription required) brings forward two significant reasons for this achievement.

The first is the willingness of brand providers such as Transsion Holdings, maker of branded Tecno, itel, and Infinix phones, along with BBK Electronics, maker of branded Oppo and Vivo smartphones, to engineer product features of specific interest within local and regional markets. Localized features include dual SIM card slots, differing camera and imaging features that cater to local norms or demographics.

The second noted reason for success was a common dependence on China’s coastal Pearl River Delta high-tech manufacturing region, the original home to many electronics focused contract manufacturers, for deep supply chain process and manufacturing capabilities. More than 20 Chinese smartphone producers now have manufacturing and engineering dependence within this region.

The WSJ report declares: “The fight (among smartphone producers) is all about staying competitive in pricing and features, and Shenzhen is the battleground. Once known as a little more than a hub of contract manufacturing for Western technology giants, the region has given birth to an array of domestic upstarts by marrying low-cost production and high-tech engineering.

In other words, the region has now developed a collection of integrated product value-chain capabilities that are able to respond to market needs in a far quicker manner, and a more competitive product

Interesting enough, as our Supply Chain Matters readers are often aware, Apple has had a similar reliance on the Pearl River region, specifically Foxconn and other contract manufacturers for manufacturing engineering and production capability as well as new product time-to-market needs. Apple elected early on to maintain product design engineering in Cupertino, and to engineer its smartphones for general global user needs. The same could be stated for Samsung, which relies on China and Vietnam as manufacturing centers, but maintains centralized engineering. Both producers have since added local and regional engineering centers to identify local product functionality needs.

Once again, the name chosen as blog nameplate was purposeful, that indeed, supply chain capabilities do matter for successful business outcomes, and in today’s global markets, supply chain represents a far broader collection of functions and capabilities spanning the product value-chain.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Supply Chain Sourcing Taking on More Geo-Political Significance

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In this new era of geopolitical risks, the critical importance of supply chain management sourcing strategy was again brought to light in a published article by The Wall Street Journal. The report, When Currencies Fall, Export Growth Is Supposed to Follow- Until Now (Paid subscription required), questions common theory that a weaker currency is a boon to export growth. The reason stems from existing supply chain sourcing realities.  Container Term 300x200 Supply Chain Sourcing Taking on More Geo Political Significance

The report specifically examines a test case reflected by the ongoing effects of Brexit to the manufacturing sector of the United Kingdom. As Supply Chain Matters has profiled in a prior posting, the country’s decision to initiate efforts to exit the European Union, caused the British pound sterling to fall significantly. The effect was that products exported, such as chemicals, autos or aircraft parts became more price competitive in global markets. That obviously raised expectations for boosted economic growth, and indeed the PMI indices for the UK have been generally rising.  The evolving reality as depicted by the this latest WSJ published report, is that supply chain sourcing strategies that resulted in significant dependencies on importing value-chain components and/or raw materials served to have generally served to offset any lower price advantages of produced goods.

One specific example profiled was auto producer Aston Martin which exports a reported 80 percent of its vehicles to foreign markets. Post Brexit, with the decline in the value of the pound in low double-digits, Aston sales resulted in as much as 12 percent in additional sales margin. However, an industry reality that many automotive component suppliers are primarily based in offshore lower-cost locales presented the effect of increased costs for imported materials.  That has reportedly offset sales margin gains. Likewise, retail prices of many consumer items that are often imported into the UK have risen significantly since the Brexit referendum decision.

A contrast provided is that of the whiskey industry in Scotland, where the bulk of the product value is generated and produced locally and where producers have now been able to reap the rewards of increased export sales as well as profits. With the majority of the end-product locally sourced, a devalued currency has provided meaningful economic benefits for this industry.

The WSJ report makes note of two recent papers from both the World Bank and the Organization for Economic Cooperation and Development (OECD) that both found that movements in exchange rates had a declining impact on trade in advanced economies.

The sum of these developments is noted to be the same conclusion, that industries and companies have become more embedded in global supply chain sourcing.  Cited as evidence is an OECD statistic indicating that between 1995 and 2011, the import content of exports rose from 14.9 percent to 24.3 percent among OECD nations. Obviously, beneficial for developing, lower-cost manufacturing regions.

From our Supply Chain Matters lens, the evolving data again points to ongoing conflicts among individual companies, who’s product value-chain strategies are driven primarily by overall profitability, manifested by landed and total cost considerations, and on individual governments who must strive to grow domestic economies and employment. Specific case in point is the ongoing manifestations of the Trump Administration’s Make America Great policies that are reflected toward existing global trade policies.

Increasingly, economists and political leaders, have begun to question the overall benefits of globalization in the context of impacts to local economies, social responsibilities and to long-term economic growth. The spillover to existing global supply chain sourcing strategies seems inescapable.

Geo-political forces surrounding global trade are likely to occupy the attention of many industry supply chain teams, all of whom must be prepared to deal with near or longer-term implications. The takeaway for industry supply chain sourcing, procurement and overall supply chain leaders will continue to be the need to be well informed as to ongoing international geo-political events that will impact certain industries, and to ensure that respective C-Suite executives are well informed as-well.

In late September, this Editor is scheduled to deliver an Accenture Academy Trend-Talk online seminar: Supply Chain in an Anti-Trade and Anti-Globalization Era. We will be sharing further details in the weeks to come.

Stay tuned.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


NAND Chip Supply Challenges Looming Across Consumer Electronics Supply Chains

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Supply chain management professionals are often attuned to the weakest link that may develop among various tiers of the product value-chain. There are now building concerns that consumer electronics supply chains may be dealing with a potential industry-wide shortage of a key component during its most critical product demand period.

The Wall Street Journal recently called attention to a looming battle between electronic game console producer Nintendo against high-volume consumer electronics producers such as Apple. (Paid subscription required)

Component supply challenges include liquid-crystal displays (LCD’s), miniature motors and NAND flash-memory chips. The latter specifically points to NAND supplier Toshiba, which has become the second largest supplier of more advanced NAND memory chips.

For Nintendo, enthusiastic consumer demand for its newly released Switch gaming console is leading to aggressive planning for console output for its current fiscal year that ends in March 2018. According to the report, while Nintendo’s official sales target is 10 million units, the producer is reportedly pursuing plans to produce as many as 20 million units, double the official amount.  Nintendo Switch 425 NAND Chip Supply Challenges Looming Across Consumer Electronics Supply Chains

As supply chain planners are acutely aware, that is a considerable variance to hedge for.  A Toshiba spokesperson indicated to the WSJ that demand for NAND has been overwhelmingly greater than existing supply and the situation is expected to remain the same through the end of the current year. Compounding the component challenge are the realities of high-volume smartphone producers such as Apple, who can garner a heck of a lot of NAND memory supplier influence based on shear buying volume.

Companies such as Nintendo therefore must factor such realities and find more ways to garner added influence with Toshiba as well as other NAND suppliers.  A further, and likely more dynamic situation involves a building significant financial crisis surrounding Toshiba itself.

The supplier’s U.S. focused Westinghouse Electric nuclear reactor construction business unit has incurred significant financial losses forcing that unit to file for bankruptcy in March, leading to concerns for Toshiba’s financial survival as well.   In March, in what was reported as an acrimonious annual shareholder meeting, Toshiba shareholders agreed to split off the prized NAND flash memory unit in hopes of raising at least $9 billion to cover U.S. nuclear unit losses.

According to various reports, Toshiba’s NAND chip business includes a venture originally contracted with memory producer SanDisk, and that company was since acquired by Western Digital, which in-essence took ownership of the SanDisk stake in Toshiba’s memory operations.  Toshiba began making overtures that it would sell its attractive memory chip business to raise immediate cash.  Upon learning of that move, Western Digital threatened to block such a sale, based on its stake in the business. The latest reported iteration is that Toshiba has made a legal concession, in-essence keeping part of the memory unit in-house to appease Western Digital. However, the reality is that there are many active bidders for the prized memory business, including Western Digital.  Other reported bidders are industry leader SK Hynix, Broadcom as well as contract manufacturing services provider Foxconn. The latter, to little surprise, has sought the influence of Apple in helping to leverage its financial offer for the NAND business. As has been the case with Japan’s high-tech producers, the government of Japan, in the presence of Innovation Network Corp. of Japan,  remains active behind the scenes to ensure that any sale address concerns for intellectual and advance technology protection.

Where all this maneuvering ends-up is the purview of lawyers and industry-watchers.  A recent published report by The Financial Times concludes that negotiations are likely to be complex and subject to further delay, which adds more pressure on Toshiba’s need to stem overwhelming red ink. The length and overall outcome adds to the obvious uncertainties as to Toshiba’s plans to continue to be able to meet overall customer demand for NAND chips, not to mention the overall industry’s capacity availability.  With Apple planning to ramp-up production for the 10th anniversary editions of the iPhone, along with other global smartphone producers hoping to outdo Apple in second-half consumer demand, supplier influence and bargaining power are likely to be important determinants as to which producers garner the bulk of capacity-constrained supply.

Supplier contingency planning, along with the adherence to business and product-margin objectives will be a further challenge for industry supply chain teams, once-again placing an emphasis on more informed and data-driven planning and decision-making capabilities, not to mention supply chain risk mitigation as-well.

Approaching the mid-point of the year, with keen awareness that the second-half is most critical for business results, consumer electronics and high-tech supply chains have likely awareness to a difficult period ahead, one where agility, built-up supplier relationships and overall planning and execution capabilities will again be put to the test.

Stay tuned.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Summary Highlights of the 2017 ISM Conference

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This author had the opportunity to attend the annual conference of the Institute for Supply Management (ISM) annual conference held in Orlando Florida this week. This conference brings together supply management professionals spanning areas of direct and indirect supply sourcing and procurement. In this blog posting, we touch upon highlights and some important takeaways and learning expressed by those attending.  ISM2017 logo 002 Summary Highlights of the 2017 ISM Conference

This year’s conference drew a rather large number of attendees, much more than last year’s event.  We estimate attendees were more than 2500, and sensing from some hallway discussions, many came to seek added knowledge and understanding to rapidly changing industry and business environments.

The ISM organization deserves praise for recruiting two keynote speakers that spoke first-hand to the current wave of geo-political and economic events that could well impact industry supply chains in the months to come.

General Colin Powell, former U.S. Secretary of State and Chairmen of the Joint Chiefs delighted the conference audience with his comments on topics related to global events, politics, and industry supply chains. Regarding the latter, General Powell noted that Operation Desert Storm was won by superior logistics, and he shared some rather humorous stories relative to the challenges of moving vast amounts of material, supplies and personnel. He described today’s global landscape as a pressure cooker in the notions of the rise of populism, accelerated by the information revolution. General Powell voiced his view that the U.S. rejection of the Trans Pacific Partnership was an “unfortunate decision”, one that can likely benefit China as a larger influencer in global trade.

Former UK Prime Minister David Cameron’s address came on the morning of the tragic terrorist attack at a concert in Manchester England. Mr. Cameron spoke of the long struggle to defeat terrorism across the globe and on the renewed resolve of his country to march on. On the topic of supply chain management. Mr. Cameron observed: “What you do is extremely important to the global economy.” The Prime Minister later noted that he is a huge supporter of global trade, yet acknowledged that the rising tide has not lifted all boats. He noted that societies must reject tendencies toward protectionism because they failed miserably in the nineteen-thirties. He also addressed the rising tide of populism in observing that the pace of change has perhaps been too-fast, the scale of immigration too great, causing many to be fed-up with mainstream political parties. Addressing specific supply chain topics, he observed that ethical and sustainable supply chains are good for the brand and for society.  During a Q&A sit-down with ISM CEO Tom Derry, Mr. Cameron spoke of the implications of Brexit and what supply management teams can expect in scenarios of a hard or soft Brexit. Finally, responding to the question of what countries will likely be economic stars in the next five years, Mr. Cameron specifically mentioned India and Vietnam as emerging global commerce leaders.

A combined news conference featuring ISM CEO Tom Derry, Hans Melotte, Executive Vice President, Global Supply Chain for Starbucks Corporation, and Kristopher Pinow, Vice President and Chief Procurement Officer for B/E Aerospace, addressed some common themes impacting the supply management area. One was clearly the area of technology, described as quickly changing the current and future practices in supply management, which have typically been more transactional in-nature. Mr. Melotte observed that many in the profession are underestimating the impact of new technologies on processes, which he feels are coming sooner rather than later. CEO Derry observed that procurement managers are becoming much more aware of the importance of the Sales and Operations Planning (S&OP) processes, and the expansion of scope that it implies. This author had a later discussion with Jim Barnes, ISM Professional Services Director who shared feedback from various ISM regional chapters has reinforced the need for added education and involvement in S&OP, and why that involvement pulls procurement into the scope of the end-to-end supply chain.

Another top-of-mind topic remains talent management with an acknowledgement that absolutely, supply management does not have the talent to be able to leverage the tide of new technologies impacting the profession. Melotte noted- “We need to learn how to ask different questions as well as to sharpen our intellectual curiosity as to technology trends impacting our businesses.” Mr. Pinow noted- “We have to recognize that we do not know everything” and he quoted Shelly Stewart, Vice President, and CPO at Dupont in his observation that procurement leaders need to be more actively curious, including what is occurring external to procurement.

While attending other conference sessions, we further noted some rather consistent themes, especially from several panel discussions addressing timely topics. Addressing the challenge of CPO’s in making B2B networks work better together, Beverly Gaskin, Executive Director, Global Purchasing at General Motors observed that procurement has to improve practices in the science of marketing, namely how well procurement leaders sell and influence value to the business and to suppliers. Thomas Linton, CPO and Supply Chain Officer at Flextronics noted that procurement needs to understand the different management cultures of both internal and external partners and can build successful alliances based on different cultures. Many panelists addressed the need for leveraging knowledge and talent in today’s business environments, and that knowledge extends across the product value-chain to include close collaboration with supplier teams.

There were other common themes and takeaways and we will be sharing some of them in subsequent Supply Chain Matters commentaries.

A final note- after attending two subsequent ISM conferences, this author has noted a rising tide of desire and zeal among supply management professionals to become more recognized providers of business value, beyond procurement cost savings. It behooves other teams that make-up today’s broad supply chain management umbrella that spans product design to after-market services to include supply management in collaboration and to recognize suppliers for the partnership value that they can provide. That obviously includes S&OP teams.

Yes, the reality of increased supply chain cost saving needs is not going away and must be accommodated. However, it remains important that supply chain wide teams jointly recognize what capabilities in process, technology and people skills need to be preserved or augmented by trading-off cost savings for key investment needs.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Boeing Grounds Newly Designed 737 MAX Aircraft Over Engine Component Manufacturing Flaw

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Just days before the scheduled first customer delivery of the new Boeing 737 MAX aircraft, the commercial aircraft manufacturer has had to suspend ongoing flight testing after being notified by the engine supplier of what is believed to be an engine component manufacturing problem.

According to various published reports, Boeing was notified by aircraft engine provider CFM International about a “quality concern” related to the low-pressure turbine (LPT) discs installed within the new CFM LEAP-1B engines. A collection of five LPT discs with attached blades sit at the rear of this new, more fuel-efficient engine.  CFM LEAP1B 300x200 Boeing Grounds Newly Designed 737 MAX Aircraft Over Engine Component Manufacturing Flaw

Boeing spokespersons have indicated that the test flight suspension was ordered “out an abundance of caution.” Boeing further indicates that no operational problems were detected during the ongoing series of test flights. Affected LEAP 1B engines have been dispatched to CFM’s facilities for further inspection.

Reports are quick to point out that the engine problem is not engine design related but initial news of the suspension caused Boeing stock to initially drop nearly 2 percent.

As our Supply Chain Matters and aerospace supply chain industry readers may be all too aware, the industry remains sensitized to ongoing engine design issues. Specifically, design issues related to Pratt and Whitney’s new geared-turbo fan (GTF) engines which have impacted Airbus A320 neo customer delivery schedules and are still be addressed. CFM supplies an alternative engine, the LEAP 1A, as an option to the A320-neo, and those engines remain operational with some airlines. Initial indications are that the problem related to the 1B version are not affecting the 1A model.

A published report by the Seattle Times indicates that CFM informed Boeing late last week of a potential quality issue with the LPT disks within prior-delivered engines. CFM quality inspectors discovered an anomaly in the manufacturing process related to forging the discs.  As is often the case, LPT discs are provided by multiple suppliers, and the problem may rest with a single supplier’s discs. Thus, the likely steps underway are determining which specific engines included the suspect discs and assuring that all other discs meet manufacturing and performance specifications.

The irony of this news is that the 737 MAX program had repeatedly been reported as being ahead of schedule with very few issues. There have been upwards of 2000 hours of flight tests with first customer delivery to launch airline customer and Malaysia based Malindo Air, a subsidiary of Lion Air scheduled for later this month. Boeing indicates that the delivery will go ahead as planned, along with scheduled May delivery to Norwegian Air.

Boeing further indicates that production plans for the 737 MAX remain as planned, obviously with an expectation that the engine issue is temporary in nature.

Product management, procurement and supply chain teams are acutely aware that despite rigorous planning and testing, a supply or manufacturing glitch can occur at any time during a product lifecycle.  The challenge is often in the timely detection, the response, and the mitigation plans. This week, commercial aircraft supply chains have yet another current reminder that even the best planned programs are subject to unplanned events.

Always be prepared.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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