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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.


Yet Another Significant Supply Chain Risk Looming

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Here at Supply Chain Matters, we often highlight for our readers’ important areas of industry supply chain risks. That is why recent published reports by Bloomberg Businessweek and by Reuters specifically regarding South Korea caught our attention. Our readers have most likely been reading and hearing of growing tensions between the United States and North Korea over the latter country’s continued development of a missile system.

The Bloomberg Businessweek report, A Korean War Could Cut Pipeline of Vital Technologies to the World (Paid subscription required) indicates that: “If South Korea were to be hit by a missile, all high-tech electronics production will stop.” Noted is that the globe’s premier manufacturing center for advanced organic light-emitting diode (OLED) panels, the LG Display Co. facility in Paju, is in just a 15-minute drive from the Demilitarized Zone that separates North and South Korea, and within easy range of North Korea’s artillery capability. Further reported by Bloomberg is that about 12 percent of Apple’s existing suppliers are from South Korea, with LG Display being one of its largest suppliers. Once more, South Korea’s semiconductor manufacturers, including SK Hynix and Samsung Electronics reportedly supply tw0-thirds of the world’s electronic memory chips. A manufacturing supply disruption here would impact not only high-tech and consumer electronics, but various other equipment sectors as-well.

Reuters concurs that any interruptions could significantly disrupt global manufacturing of smartphones, televisions, computers, and tablets, but further notes that investors continue to pour money into South Korea’s equity markets, despite such risks.

Risks among other industry supply chain sectors are also noted.

Two of South Korea’s most prominent drug makers, Samsung BioLogics and Celltron have facilities located in a special economic zone located about 25 miles from the DMZ.

South Korea also hosts three of the globe’s largest shipbuilding firms, Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries, and Samsung Heavy Industries, and according to the report, two could be likely targets because they produce war ships.

The Bloomberg report raises concerns for South Korea’s logistics and transportation facilities being disrupted, which potentially could impact multinational manufacturers such as Hyundai and Kia Motor.

While businesses in this region have continually be sensitized to business risks because of their specific proximity to North Korea, most firms have forms of supply chain or other risk mitigation plans.  However, as noted from industry experts interviewed by Bloomberg, tensions this time seem far higher, along with the overall scope.

The takeaway from both reports are that a war with North Korea could indeed paralyze the global electronics industry and disrupt vital trade routes in the Pacific. While tensions in the area are not a new phenomenon, and have been accepted for many years, the unanswered question remains if the building escalations are now different, with added concerns.

Supply Chain Matters would additionally add that certain leading-edge high-tech producers have their supply chain risk mitigation teams sensitized to conducting various risk contingency scenario analysis and contingency planning. That would include augmenting some safety stock levels for certain top-line revenue components as well as back-up sourcing scenarios of alternative suppliers of DRAM and other electronics components. In the case of OLED displays, such back-up plans may have limitations due to an inherent shortage of the technology.

Yet other stark reminders of global supply chain risk.

Bob Ferrari

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


General Motors Production Plant Seized in Venezuela

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In the many dimensions for supply chain disruption and risk, we sometimes cite geo-political events as a significant risk factor. Thankfully, this particular type of risk does not occur often, but this week provides a real-world example, in a country that has increasingly had tendencies towards seizing private assets and operations.

General Motors was forced to halt production operations in Venezuela after its plant in the country was unexpectedly seized by local authorities. Widespread political and sometimes violent street demonstrations have erupted in recent weeks after current political administration barred an opposition leader from holding political office for the next 15 years. At least nine people reportedly have been killed in these protests.

GM described the takeover as an “illegal judicial seizure of its assets” and that the seizure showed a “total disregard” of its legal rights. According to media reports, authorities had removed assets including cars from company facilities.

Venezuelan news reports indicated that the GM plant seizure stemmed from a lawsuit that dated to the early 2000s with a company in the western city of Maracaibo. But a GM spokesperson indicated that the plant had been shut down for the past 42 days because of a takeover by members of one of its labor unions.

In its reporting, the New York Times notes that the country was once among the most lucrative markets in Latin America for foreign businesses, but such times are long gone. According to the Times, the average Venezuelan must now wait in long lines for bread and medicine, and many are going hungry and unpaid, as the government struggles to avert default.

The GM plant in Valencia employed nearly 2,700 workers at its peak, but stopped producing cars in 2015 and has only been selling spare parts since then, according to a company spokesperson.

According to the U.S. State Department, the government of Venezuela has expropriated more than 1,400 private businesses since 1998. Manufacturers such as Bridgestone, Clorox, Coca-Cola, Ford Motor Company, General Mills, Kimberly Clark and Procter and Gamble have all since ceased production operations in the country.

Reuters reported that the country’s economic crisis has hurt many other U.S. companies, including food makers and pharmaceutical firms. A growing number are taking their Venezuelan operations into suspended states.

Because of the country’s volatile currency issues coupled with a severely declining economy, automakers produced only 4,900 vehicles last year, including heavy-duty pickups, down from 31,000 in 2015. In addition to GM, other automakers, including Ford and Toyota, have suspended operations for several months because of low product demand and an inability to get necessary supply chain parts.

Global based industry supply chains are indeed subject to geo-political risks as is being manifested in Venezuela and certain other countries. It is perhaps another tradeoff to forces of globalization.

Bob Ferrari

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


A Warning from European Shippers as to Existing Ocean Container Capacity Disruption and Spiking Rates for Exporters

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The European Shippers’ Council (ESC) this week reported that many shippers who regularly export goods to Asia have recently been facing a large drop of available slots for containers on almost every shipping line. The ESC is an association that represents the logistical interests of European based manufacturers, retailers, and wholesalers, collectively referred to as shippers.  MSC Ship 2 300x199 A Warning from European Shippers as to Existing Ocean Container Capacity Disruption and Spiking Rates for Exporters

According to this report, this problem has been attributed by multiple industry watchers to the repositioning of vessels after the celebration of the Chinese New Year in Asia at the end of January and early February. The primary reason provided by ocean container carriers is the repositioning of ships among various new shipping line alliances to start various alliance network services in April.

Within its update related to this European development, American Shipper added more clarity by indicating that The Ocean Alliance, consisting of CMA CGM, COSCO, Evergreen and OOCL, as well as THE Alliance of Hapag-Lloyd, Yang Ming, NYK, MOL and “K” Line will start their new services in April. The ESC members are now indicating that the 2M Alliance of Maersk Line and MSC has stopped accepting freight from competitors’ customers that have turned to 2M because of the capacity shortage among the other competing alliances.

In its statement of the current situation ESC observes:

Shippers are confronted with heavily damaging situations, ranging from breeching of contractual commitments by some liners to impossibility to get boarding slots before May. Either this results in a very fluctuating freight rates situation, with instant hikes up to 45% to firm up a booking. Or this translates into missed sales, stock failure, significant extra costs as some exporters are trying to circumvent these obstacles by using other modes.

ESC has called for carriers to take responsibility to give an accurate display of the current situation, including the causes, while ensuring that some form of scheduling and capacity normalcy is achieved in the coming weeks.

Within its update, American Shipper noted that in November, the ESC joined with the Global Shippers’ Forum (a consortium of various global based shippers) to promote a report that called on regulators to “ensure sufficient independent competition on key trade routes” and repeal existing exemptions from antitrust laws and effective monitoring of alliances.

What This Means

From our Supply Chain Matters lens, what the current situation described amounts to is threefold:

  • Either the new ocean carrier alliances have not done an adequate job of planning or adequately communicating the status or implications of the April transition of alliance schedules and capacity on the Europe to Asia routing, or there may be the possibility that the shifting of capacity towards more higher demand global shipping routes are occurring without communicating the impacts of such shifts to shippers and stakeholders.
  • In this week’s statement, the ESC is sounding a discernable warning of potential supply chain disruptions or significantly higher freight rates for European exporters to Asia.
  • Global regulators are likely beginning to sense a groundswell of shipper and industry stakeholder concerns on the impacts of the new shipping line alliances related to reliability of shipping schedules and non-market-driven rate structures.

Within Prediction Five of our 2017 Predictions for Industry and Global Supply Chains, we questioned how much global maritime regulators would continue to tolerate regarding consolidation of capacity under multi-carrier alliance networks, before the economic and supply chain predictability interests of shippers are considered. We therefore surmise that global regulators are likely beginning to sense such a groundswell of shipper and stakeholder concerns on new ocean shipping alliances impacts to service reliability, predictability, and non-market-driven rate structures.

All of this relates to the ongoing turbulence surrounding a shipping industry that is still attempting to alleviate a self-induced overcapacity situation. The result has been spot market ocean shipping rates in 2016 that were often below operating cost break-even points. The Hanjin Shipping bankruptcy was the most significant indicator to-date to overall industry unsustainability regarding excess capacity chasing more subdued global-wide shipping demand. Reports of subpoenas being served to ocean line CEO’s are other developments surrounding this industry dilemma.

The takeaway for industry supply chain, logistics and transportation procurement teams is to not assume business-as-usual for the coming few months regarding ocean container shipping reliability and non-contract rate structures. There are a lot of forces at-play right now.

Bob Ferrari

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


Samsung Galaxy Note 7 Investigation Points to Battery Flaws- or Something Broader

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As we continue deep dives on the remainder of our 2017 Predictions for Industry and Global Supply Chains, we have fallen behind a bit on some other noteworthy supply chain news and developments. This being Friday, this Editor wanted to catch-up.

One event that we wanted to highlight in this blog was last week’s meeting with U.S. regulators and the disclosure from Samsung of its investigative efforts to seek the root causes of the battery explosions and fires that impacted that firm’s newly announced Galaxy Note 7 smartphone. These incidents caused the recall of all 2.5 million produced Galaxy Note 7’s and the unprecedented decision to suspend all subsequent sales of this model. The irony was that this model phone had received rave product reviews prior to its market release. Samsung Gal Note 7 Sized 300x200 Samsung Galaxy Note 7 Investigation Points to Battery Flaws  or Something Broader

According to various published reports, Samsung conducted its investigation with the aide of two independent quality control and one supply chain analysis firm.

The report outlines what many of our readers can relate to as a series of cascading supply chain focused snafu’s. The findings were announced after testing 200,000 devices and 30,000 batteries in a special charging and recharging test facility fitted for the task.

The initial phones released in August were fitted with lithium-ion batteries supplied by Samsung SDI, one of the electronic component subsidiaries of Samsung Electronics. The investigation revealed that the SDI batteries were irregularly sized and there wasn’t enough room between the heat-sealed protective pouch around the battery and its internals. This disparity apparently led to battery shorting, overheating and the subsequent fires.

A secondary supplier of batteries was Amperex Technology which produces its batteries in China. This supplier was originally tasked to supply batteries for the China version of the Note 7. As Samsung began to sense a disturbing pattern of fire incidents related to its initial phones, it recalled the devices while urging Amperex to ramp-up production of more batteries to re-fit customer replacement phones with the alternative Amperex battery.

To the likely frustration of many product focused managers, these second issue phones also experienced battery overheating and fires. The second series of battery fires prompted the decision in October to pull the plug on this model.

The investigation of the Amperex batteries points to manufacturing inconsistencies. According to a posting by Wired, some cells were missing insulation tape, and some batteries had sharp protrusions inside the cell that led to damage to the separator between the anode and cathode. The batteries also had thin separators in general, which increased the risks of separator damage and short circuiting. Wired further provides a detailed review of all the other technical issues brought forward in the investigation and similarly cites a subsequent published report by The Wall Street Journal, reporting that Samsung had misdiagnosed the problem when issuing the first recall.

Samsung reiterated during the press conference that it found no irregularities with phone features that may have “helped” the battery overheating issues. However, the consumer electronics mobile chief, D.J. Koh, half acknowledged some product design process deficiencies:

To produce an innovative Galaxy Note 7, we set the goals on battery specifications. We now feel a painful responsibility for failing to test and confirm that there were problems in the design and manufacturing of batteries before we put the product out to the market.”

To address regulator concerns as to how Samsung will avoid future incidents, the manufacturer has established a new eight-step process that includes supplemental testing, inspections and manufacturing quality checks, among other measures. As for its own phones, the company is designing a new compartment to give batteries more space inside the phone to avoid damage from physical drops. Koh finished the event by saying that Samsung will share its lessons with the entire industry to improve overall lithium-ion battery safety

But, as we all probably know, major damage has been done to the Samsung brand, and this recall alone will cost the company upwards of $5 billion.

One of the more insightful reports concerning this Samsung recall came from the New York Times. (Metered view) The Times authors posed the question:

How could such a technologically advanced titan — a symbol of South Korea’s considerable industrial might — allow the problems to happen to begin with?

Noted was that Samsung, like South Korea as a whole fosters a top-down, hidebound culture that stifles innovation and buries festering problems.  Cited is a former Samsung employee who states: In the Samsung culture, managers constantly feel pressured to prove themselves with short-term achievements. Executives fret that they may not be able to meet the goals and lose their jobs, even when they know the goals are excessive.”

The Times spoke with Samsung officials, who spoke on the condition of anonymity while the Note 7 investigation was being completed. Their reported observation was:

With the Note 7, Samsung pushed its business model, as well as its technology, to the limit… Driven by the desire to prove it was more than a fast follower of Apple, Samsung rushed the Note 7 to market ahead of Apple’s iPhone 7. To fend off Chinese competitors like Huawei and Xiaomi, it packed the phone with new features, like waterproof technology and iris-scanning for added security.”

A further insight:

Samsung’s insistence on speed and internal pressures to outdo rivals in part signal a breakdown in the ability to truly innovate and push out new ideas, critics say. In place of big new ideas, Samsung focused on maxing out the capability of components like the battery. That philosophy, which worked to keep Samsung on the heels of the likes of Apple, simply is not as effective as Samsung tries to push ahead, they argue.

As noted in our most previous Supply Chain Matters commentary related to the Note 7 incident, Samsung achieved a significant $5 billion in profitability in its latest quarter. That had more to do with the performance of the Samsung Electronics component businesses as opposed to the Mobile business.

We wonder aloud if the observed flaws in corporate culture and its consequent implication to management’s ability to manage and weigh risk factors will be a lost memory because of its recent financial performance.

Somewhat similar to Volkswagen and its emissions cheating incident, the real question comes down to long-term damage to the brand, and to the ability to recruit talent and leadership willing to make the right decisions for both the business as well as customers and supplier partners.

In the minds of consumers and customers, product and supply chain component integrity and safety trumps all other concerns.

Bob Ferrari

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

 


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