In a June 2014 Supply Chain Matters commentary, Automotive Component Supply Strategy Meets Sensitized Regulatory Environment, we called attention to a published Reuters report indicating that product recalls involving airbags supplied by Japan based Takata Corp. would expand and involve millions of affected motor vehicles and ensnarl many global brands.
That situation has become ever more visible in a multitude of cascading product recalls and urgent consumer advisories involving many auto brands from entry-level to upscale luxury.
Today, the National Highway Traffic Safety Administration (NHTSA) issued a high visibility consumer advisory, urging owners of over 4.7 million recalled vehicles to act immediately on recall notices and replace defective Takata airbags due to suspected defective air bag inflators. Brands involve BMW, General Motors, Honda, Mazda and Nissan and the vehicle models date back as far as 2000-2001. While this advisory notes specific urgency for certain U.S. states and regions featuring warm, humid climates that fact seems to be blurred by the blast of Monday news from general media. The other reality is that many vehicle owners may have ignored previous recall notices which could jeopardize the safety of occupants.
Aftermarket service and spare part networks are already stressed by a surge of product recalls issued from an abundance of caution to avoid punitive financial fines. This latest high profile consumer warning related to certain airbag deflator defects will add more stress to overly stressed networks that lack the tools to handle such volumes.
Automotive OEM’s have fostered component product innovation strategies among a key set of lower-tiered component system suppliers, and OEM’s leverage such innovation across multiple vehicle and brand platforms. These strategies were put in place to foster both faster product innovation cycles as well as to be able to leverage volume supply costs across multiple global platforms. The objective of leveraging lower component costs has never gone away, at least for certain OEM’s.
Earlier this month, The Wall Street Journal featured a report (paid subscription or free metered view) indicating that Honda, after a long supplier relationship, is re-evaluating that arrangement with Takada in light of a series of airbag inflator product defects. Reports indicate that defective air bags, some dating back to the early 2000’s, could send metal shrapnel flying upon air bag inflation, posing serious injury risk to drivers and/or passengers. According to reports, Takada utilizes a different propellant than other suppliers, one that is cheaper but more volatile. Rival air bag suppliers that could benefit from the current crisis include Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which is being acquired by German based ZF. The WSJ further reported that Toyota and Nissan are also concerned about Takata air bag systems in the light of the current circumstances. But, switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.
The WSJ report provides some in-depth perspective on how Takada has expanded its global just-in-time supplier footprint to accommodate individual OEM platform demand. The report alludes that the product quality problems may have stemmed from a period of rapid growth, testing communication and process discipline among far-flung regional plants. After two years of investigation, Honda and Takata joint quality teams discovered certain machine defects in a plant in Washington state and in process parameters in a Mexican plant. At times, poor record keeping hindered the ability to figure out which cars had defective inflators installed.
Whether Takada can recover from this ongoing and compounding product recall and branding crisis is certainly open to skepticism and speculation. However, Supply Chain Matters feels that automotive OEM’s face their-own realities related to product development and global product platform cycles. A global platform strategy supported by component supply agreements has to be balanced with supplier risk. Requiring suppliers to locate just-in-time production across far-flung global regions requires an assessment of rigid process control discipline and conformance. When such controls indicate cause for concern, two-way communication must be forthright and honest and procurement teams need to be proactive in assessing and communicating risk implications.
Today’s overly sensitized regulatory environment requires timely feedback and responsive risk mitigation.
The passenger safety, financial, and brand risks are far higher.
This week brings two visible and poignant reminders of the perils for being an Apple supplier. There are of course, the positives related to the sheer production volumes that doing business with Apple provides, along with being on the leading-edge of product or component innovation. Along with the positives come the perils for dealing with a highly demanding and influential customer.
Today’s printed edition of the Wall Street Journal cites suppliers and other sources as indicating (paid subscription) that because of the current surging demand for Apple’s newly announced iPhone 6 models, the Apple supply chain ecosystem has altered previous plans for ramping-up production volumes associated with new models of iPads, and instead are allocating current production resources to iPhones, specifically the iPhone 6 Plus. Apple’s Sales and Operations process has obviously issued marching orders that indicate all hands on deck supporting iPhone shipment needs. That implies a invariable delay for new iPad market availability plans as critical component supplies such as displays allocated their current efforts strictly to supporting current iPhone output demands.
Foxconn, Apple’s prime contract manufacturer has again placed in the role of doing whatever it takes to keep-up with demand, fulfill customer orders and not let lack of finished goods supply be an inhibitor to Apple’s financial results in this all important holiday shipping quarter. The WSJ reports that Foxconn’s Chairman Terry Gou is personally at the Zhengzhou assembly facility “… to monitor production closely.”
In prior Supply Chain Matters commentaries we have pointed out that Foxconn’s real desire is to continue to diversify its business models with less overall dependence on the ebbs and peaks of Apple. That includes building independent branded products. The contract manufacturer has thus been willing to assume a secondary provider role for other of Apple’s products such as the iPad Mini. But, when the stakes are really high, the Apple operational pattern is to turn to its long-standing CMS provider to pull the proverbial rabbits out of the hat in providing almost virtual capacity to move finished goods to consumers and channel partners.
Thus, one peril for being an Apple supplier is having the capability of high agility in the wake of what others would view as rather difficult obstacles.
The other supplier peril reminder comes from this week’s sudden and unexpected news regarding evolving sapphire glass supplier GT Advanced Technologies and its filing for Chapter 11 bankruptcy protection, sending its stock plummeting. This was a classic current day example of what various supply chain academics have noted as bad supply chain news directly correlated to negative stock performance. In GT’s case, it was literally wiping out upwards of $1 billion in equity value according to one report.
Since the GT news broke earlier this week, the reports we have been monitoring indicate that after further testing of the new sapphire glass material that GT was producing a its new start-up plant near Mesa Arizona, Apple engineers determined that the material was not appropriate for the new iPhone models, and reportedly, withheld the final seed investment payment involving upwards of $130 million. Today, the WSJ reports that GT Technologies will exit the business of manufacturing sapphire. A U.S. bankruptcy judge allowed GT to keep the details of its relationships with Apple secret, no doubt from the influence of Apple as a major creditor. Apple has apparently declined any further statements to business media regarding its relationship with GT.
We sense that this Supply Chain Matters commentary regarding perils will resonate with our readers residing within either Apple’s or other supply chain dominant customer supply chain business models. We know that there not much any of you can state publically. However, we as a broader community, in just one week, have open visibility and can dwell, albeit briefly, to such perils.
We usually strive to point out important takeaways for readers in our individual postings. In this particular case we rather play the observer role and state that perhaps this is today’s mission for supply chain, namely dealing with whatever is required to make the business model successful, including a can-do relationship with the most influential and important of customers. It is what is expected for today’s industry supply chains.
© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
In a sudden and startling announcement, GT Advanced Technologies Inc., a developing supplier for new, more durable sapphire glass applications for Apple’s product lineup, announced today that it had commenced a voluntary filing under Chapter 11 of the Bankruptcy Code as a best means to reorganize and protect that company and provide a path to future success. In the announcement, GT indicated that as of September 29, 2014, the company had approximately $85 million in cash, but there is no mention in the release of current outstanding liabilities.
In early August in its announcement for fiscal year second quarter results, the company indicated six month, year-to-date revenues of $80.5 million including $49.7 million attributed to sapphire equipment and materials. Non-GAPP operating expenses were reported as $76.3 million year-to-date and the supplier incurred a $139 million net loss from operations. GT reported ending its second quarter with $333 million of cash, cash equivalents and restricted cash, compared to a $509 million at the end of the company’s first quarter.
A statement from this supplier’s CEO states:
“GT has a strong and fundamentally sound underlying business. Today’s filing does not mean we are going out of business; rather, it provides us with the opportunity to continue to execute our business plan on a stronger footing, maintain operations of our diversified business, and improve our balance sheet.”
The company indicated that it expects to provide additional details with respect to the Chapter 11 filing as soon as they are available.
Readers may recall that in our previous commentaries related to Apple’s ongoing efforts in product innovation, that Apple provided a long-term strategic seed investment in GT, valued in excess of $500 million, to develop a stronger more durable alternative to the use of gorilla glass for displays in Apple’s forthcoming line-up of products. GT invested in a 1.4 million square foot production facility near Mesa Arizona to produce sapphire at high volumes at comparative cost. There was further speculation that GT was being positioned as the prime supplier of sapphire for the iPhone line-up and the now announced Apple wearable watch scheduled to ship early next year. The recent iPhone 6 new product announcements from Apple did not include sapphire glass as a feature, leading to speculation that GT could not initially ramp to Apple’s high volume production requirements for its newest model.
Suppliers with groundbreaking technology can often fall victim to a far larger and very influential customer with demanding requirements. What happened with GT Technologies will obviously unfold in the coming weeks including its current relationships with Apple.
UPS’s Latest Survey of Healthcare Supply Chains- Some Interesting Conflicts and Needs for Broader Perspectives
This week, UPS announced the results of its seventh annual “Pain in the (Supply) Chain” survey involving pharmaceutical and healthcare supply chains. According to the authors, the survey was conducted from phone interviews with 536 senior supply chain management decision-makers within the healthcare industry. Global coverage for this survey is noted as Asia, Canada, Latin America, the United States and Western Europe.
For the third consecutive year, the survey points to regulatory compliance as the top supply chain pain point, cited by 60 percent of the 2014 respondents, indicating that this trend alone is driving current business and supply chain changes. From our Supply Chain Matters lens, that finding is not a surprise since so many pharmaceutical and healthcare supply chain are indeed regulated, but more importantly, they are now globally extended for both supply and service demand needs.
The next largest concern was noted as product protection challenges, with 46 percent of respondents citing product security, and 40 percent citing product damage and spoilage as top concerns. Again no surprise, given the ongoing challenge of counterfeit drugs and global extensions of transportation and logistics networks.
However, what was surprising, at least for us, was that a mere 26 percent of these supply chain leaders cite contingency planning as a top supply chain concern. Perhaps this is an area that these supply chain leaders feel is being adequately addressed. Yet, 34 percent of those surveyed in Asia and 22 percent of those residing in Latin America indicated their firm’s supply chain was impacted by an unplanned event in the past 3-5 years. Cited reasons that were noted were:
- Events being too unlikely or infrequent
- Back-up infrastructure too expensive to deploy
- Little or no prioritization being given to this area vs. other challenges
For an industry that is required to spend so much on product development, brand value and patient trust, it is surprising to once again note such viewpoints. The industry need only look to the previous supply chain disruptions that occurred at Johnson & Johnson to ascertain how about contingency planning has become.
Deeper in the UPS news release perhaps finds a rather important assumption related to the above concerns in compliance, product protection and contingency planning. Many healthcare supply chains are not viewing production, distribution, logistics and transportation as a core capability and have thus outsourced these activities. According to this latest UPS survey, 62 percent of decision makers cited increased reliance on third-party logistics providers as a strategy into the foreseeable future. (3-5 years) Therefore business partners have become an important enabler in helping to overcome stated supply chain challenges.
In a previous Supply Chain Matters commentary, we called for a broader technology vision among supply chain execution partners, specifically 3PL’s. As more and more industry supply chains opt to outsource logistics, transportation and customer fulfillment to logistics and transportation partners, leveraging the potential benefits of newer technologies in item-level tracking, Internet of Things (IoT) and supply chain control towers become a de-facto capability requirement to overcome business challenges and deliver required business outcomes. Too often today, the outsourced 3PL decision has been driven solely by cost control vs. broader requirements for supply chain resiliency and responsiveness. While UPS and FedEx have embraced advanced technology, other 3PL’s have relied on customers to fund such investments, and there remains the conundrum. For us, these latest UPS survey findings concerning healthcare focused supply chains have special meaning to the new reliance on supply chain execution partners for joint goal enablement. Beyond logistics, globally dispersed contract manufacturers have an important enabling and support role as well.
The report’s executive survey indicates that healthcare supply chain leaders are themselves eyeing technology investments in two specific areas of the supply chain, namely front-end order fulfillment and overall product protection in the form of serialization and item-tracking. Supply Chain Matters advises these leaders to also consider the all-important supporting element for connecting the front and back-end of the extended healthcare supply chain. That would be a cohesive supply chain business network that synchronizes planning, execution and early-warning intelligence to unplanned events.
In our streaming Supply Chain Matters commentaries related to Boeing’s supply chain efforts in commercial aircraft production, we have highlighted that the global aerospace provider has been re-negotiating its key commodity and specialty supplier agreements in an effort to reduce long-term costs.
Last week, Alcoa announced a multiyear aluminum supply with Boeing’s Commercial Airplane unit valued to be more than $1 billion. According to the announcement, the agreement makes Alcoa the sole supplier for wing skins on its metallic structure commercial aircraft, while aluminum plate products used in wing ribs or other structural aircraft components. The two parties indicate that they will continue to collaborate on developing newer, high-strength and corrosion resistant alloys including aluminum-lithium applications. This supply agreement represents nearly a 25 percent potential boost to Alcoa’s existing aerospace industry business unit. Details of the new supply agreement were not disclosed and thus how much Boeing was able to save remains an open question.
Earlier this year, Alcoa previously announced its intention to acquire United Kingdom based Fifth Rixson, a reported leader in aerospace jet engine components. The deal was reported to be approximately $2.9 billion.
In its reporting, The Wall Street Journal noted that Alcoa has been strategically targeting aerospace amid declining aluminum supplies amid a current glut in global aluminum supply, and a reduction of 1.2 metric tons of smelting capacity since 2007. Combined industry production cuts have enabled to boost raw aluminum prices to above $2000 per ton for the first time in 18 months.
In mid-July, business and social media was abuzz with the announcement that two long-time rivals, Apple and IBM, would team-up in an alliance to create business apps leveraging Apple’s iPhone and iPad devices. Under the alliance, IBM will create what it terms as “simple” business productivity apps leveraging the respective Apple mobile devices.
Today, Bloomberg released some somewhat stunning news which many are speculating is directly related to above announcement. Supplier sources informed Bloomberg that Apple is preparing to manufacture the largest model iPad ever, a 12.9 inch screen device, with production scheduled to commence in the first quarter of 2015. That is 6-9 months from today.
As we have echoed in previous Supply Chain Matters commentaries, the Apple supplier network is feverishly ramping-up production volumes for new models of iPhones and iPads for the all-important upcoming holiday buying surge period. Apple’s three key suppliers of LCD screens are especially challenged due to a rather late design change incurred on the new iPhone 6 model.
According to the Bloomberg report, this rather large iPad screen model is being positioned to compete in the business applications arena as an alternative device for business tasks currently performed by laptops. The Q1 timing is especially noteworthy since that is the time when Apple’s China based suppliers and contract manufacturers temporarily shut-down for celebration of the Lunar New Year as workers return to their homes and families. It is a period where suppliers recover from the hectic end-of-year scramble. The fact that Apple is targeting yet another product release in this period is a probable sign that the IBM-Apple discussions were already in the planning stages prior to the official announcement last month. Both parties are aggressively planning to take advantage of the alliance opportunities.
Apple’s supply chain, S&OP teams and value-chain partners are once again going to be put to the test of simultaneous volume production ramp-ups involving a multitude of products including a new iWatch as well as phones and tablets. There is obviously little room for snafu’s and LCD screen suppliers may well be the critical linchpin to pull-off a series of simultaneous successful product launches.