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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. Recalled Samsung Galaxy Note 7

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.

 


Tesla Motors Falls Short of 2016 Customer Delivery Target- Not for Lack of Effort

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This week, Tesla Motors announced that the innovative auto manufacturer reluctantly fell short in its 2016 operational milestone goal to deliver between 80,000 to 90,000 vehicles to customers during 2016.

The electric vehicle manufacturer delivered a reported 22,200 vehicles to worldwide customers during the December-ending quarter. When added to prior quarter deliveries, total year 2016 deliveries were approximately 76,230 vehicles, a shortfall amounting to just over 3700 vehicles to the 80,000 threshold.  tesla-interior_sized_450

Q4 vehicle deliveries were impacted by what Tesla described as short-term production challenges that began at the end of October and extended through early December. This delay was attributed to the transition to new autopilot hardware needing to be installed in vehicles.

In July, Israeli-based advanced technology camera supplier Mobileye elected to drop Tesla as a customer, and according to news reports, the cause was attributed to “disagreements about how the technology was deployed.” Earlier in May, a fatal crash involving a Model S operating on semiautonomous mode autopilot control had reportedly motivated the decision to drop Tesla at contract renewal time because this supplier wanted more control as to how its camera technology would be operationally deployed. Tesla has since indicated that its autopilot system will rely more on its radar sensors and advanced software to detect obstacles, rather than the forward-facing camera.

In its published update, Tesla indicated that teams were ultimately able to recover and fulfill its Q4 production goal, but the delay led to cars missing shipping cutoffs for Europe and Asia based customer deliveries. As manufacturing and supply chain teams know all too well, the best planning can often be impacted by unplanned events or disruptions, and the ability to recover quickly is what really matters. In addition to the 22,200 recorded deliveries in Q4, about 6450 vehicles were in various stages of transit to customers at the end of the quarter. These in-transit vehicles will be counted in the Q1-2017 revenue bucket.

As we have noted in prior Tesla focused commentaries, the company’s unique and self-perceived conservative customer fulfillment model is made-to-order and self-distribution driven, and calls for not recording full revenue until a car is manufactured and physically delivered into the hands of a customer with all ownership paperwork correctly transferred and acknowledged. For internationally focused deliveries, the fulfillment cycle is literally many weeks.

Readers could surmise that Tesla indeed had the capability to actually exceed its 2016 customer delivery goals of between 80,000 to 90,000 vehicles.  A total of 83, 922 vehicles were produced during the full year.

We believe Tesla should be lauded for consistently adhering to its conservative customer fulfillment policies of complete physical delivery, and for efforts to fulfill Q4 operational delivery milestones despite a noteworthy supply glitch involving a modified supply plan.

Perhaps in the future, customer delivery hurdles will be overcome by formally inviting the customers to Tesla manufacturing facilities to participate in a formal physical delivery transfer process that includes a maiden test driving experience on a test track. Who knows!

To get back to serious, CEO Elon Musk Tesla has committed to investors that the company would have the capability to produce upwards of 500,000 vehicles annually by the end of 2018. More than 300,000 people have put down deposits to reserve the newly announced Model 3, scheduled for 2018 delivery. That represents over a six-fold scaling from 2016 operational performance. If there is going to be a notion of how to improve required production and delivery scale in the months to come, it will likely center on more innovative and globally centric vehicle manufacturing and distribution processes.

Musk has challenged Tesla engineering teams to the principles of “you build the machines that build the machine.” In other words, the context is in thinking that the factory is the ultimate product of engineering, and that you design a factory with similar principles as in designing an advanced computer with needs for many interlinking operational performance requirements. In November, the company acquired German consulting firm Grohmann Engineering to add specific manufacturing automation engineering expertise.

Much work remains, but then again, Tesla has always been a manufacturer that thinks and acts beyond industry convention.

Bob Ferrari

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


Is There More Immediate Financial Crisis Involving Retailer Sears?

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Late last week, a published report by web-based Business Insider indicates that retail chain Sears is on the brink of financial catastrophe. This report cites both the sudden departures of two of the retail chain’s highest ranking executives along with speculation among internal employees, suppliers and several banks fearing that the retail chain may soon file for bankruptcy.

Sears has consistently and repeatedly dismissed such speculation.

The report notes that a recent SEC filing indicates that Executive Vice President Jeff Balagna departed the company last week, a highly unusual move for any retailer during the absolute peak of the holiday sales period. A further executive departure was Sears President and Chief Member Officer Joelle Maher which Sears confirmed to the online publication, but declined to indicate reason for the departure.

Sears will formally report third-quarter financial results later this week.

Further noted is that the retail chain’s Sears Hometown and Outlet Stores business unit has been experiencing significant inventory availability challenges along with reinforcement that a least six suppliers have “significantly’ reduced inventory shipments to Sears over broadening concerns related to financial health. In October, Supply Chain Matters highlighted reports that toy supplier Jakks Pacific suspended inventory shipments to the Kmart business unit due to concerns for overall financial health. Also in that month, Fitch Ratings identified Sears as one of seven retailers at risk of going bankrupt in the subsequent 12 to 24 month period. In August, Sears indicated that its overall cash balance had fallen to $276 million from $1.8 billion over the last 12 months.

Business Insider notes that Sears CEO Eddie Lampert has many other financial levers yet to be exercised to keep the retailer alive including the sale of additional real estate or major private brands. More news will likely come to light later this week when Sears makes its financial report to investors.

Each of these financial lifeline steps weaken consumer’s and supplier’s confidence in the longer-term financial sustainability of Sears as an influential national retailer.

In our revisit of our 2016 Predictions for Industry and Global Supply Chains, we indicated that the B2C Retail sector with include several financial casualties because of the ongoing compelling effect for consumers opting for online buying. Casualties this far in 2016 have included the bankruptcy and liquidation of Sports Authority along with athletic goods retailer Finish Line having to shutter upwards of 600 retail stores. Candidly, we can also disclose to our readers that when we formulated this prediction at the start of this year, we were of the belief that Sears would also succumb. We suppose some credit should be extended to Sears management for continuing to financially prevail, but any recent visit to a Sears retail outlet is a remainder of a very scaled-back retail operation with far more limited merchandise options. Once more, there are visible signs of degrading inventory management.

How Sears ultimately performs in this critical holiday fulfillment quarter will be crucial, but the current signs of senior executive departures and widening supplier concerns already point to downward spiral.

Bob Ferrari

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


Labor Strike at ABX Air Comes at Most Critical Time

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Yesterday, a labor strike among 250 cargo airline pilots working at ABX Air, a subsidiary of Air Transport Services Group (ATSG) grounded more than 75 flights contracted for both Amazon and DHL Worldwide Express. The move came just before the start of busy Thanksgiving, Black Friday and Cyber Monday holiday shopping events.

As we pen this posting, reports indicate that just before 5 p.m. Wednesday, U.S. District Court Judge Timothy Black granted a temporary restraining order against the strike involving the pilots. That would allow for a temporary reprieve in the labor action if the pilots adhere to this order and continue negotiations over grievances.

Readers will recall that last year, Amazon contracted with ATSG to lease a total of 20 Boeing 767 air freighter aircraft to move Amazon Prime shipments from various customer fulfillment centers across the U.S. and other regions. A posting from Cincinnati.com, noting court documents indicates that ABX is a contractor to DHL, which employs 2,400 at its North American hub at Cincinnati/Northern Kentucky International Airport in Hebron. It operates about 35 flights a day for Amazon and 45 for DHL. Grounded flights may have affected as many as 20,000 individual customers for each aircraft affected.

Striking pilots claimed that ABX’s flight schedule demands have forced pilots to work an excessive number of emergency assignments because of limited flight staff, with little time for rest. Obviously, the timing of the work action, coming just before the busiest period of the year, is added attention mechanism.

Amazon officials have stressed to business media that their ability to do business is not beholden to a single cargo carrier. Reports from The Wall Street Journal and other publications indicate that the backup plan includes reliance on both FedEx and UPS air assets. But, in the case of UPS, airline maintenance workers who maintain UPS’s fleet of aircraft have announced that they have authorized a labor strike affecting the global parcel carrier after contract talks remained deadlocked over the issue of health-care benefits. That situation may come to a head after the ATSG action, as both actions involve chapters of the Teamsters labor union.

All of these developments are obviously disconcerting to B2C providers, online and traditional retailers.  The air cargo industry has a long history of labor concerns given the constant demands for longer overnight flights and constrained staffing levels. It would now seem that the industry has entered a period of increased assertiveness among employees to include labor actions to gain maximum action.

Supply chain transportation and logistics teams should continue to monitor ongoing developments since each of these actions, if they continue, will obviously have cascading effects. Rest-up for tomorrow’s Thanksgiving holiday since the coming days look to be challenging.

Bob Ferrari


Breaking News- Major Earthquake Strikes Northern Japan with Accompanying Tsunami Warnings

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Breaking news reports indicate that a magnitude 7.3 earthquake has struck Northern Japan off the coast of Fukushima Prefecture.

The US Geological Survey initially placed the earthquake at a magnitude of 7.3 but later downgraded it to 6.9. The quake reportedly occurred 37 kilometers (23 miles) east-southeast of Namie off the country’s east coast at a depth of 11.4 kilometers (7 miles).

As we pen this posting, a tsunami warning remains in place for Japan’s northeast coast with a tsunami wave of 1-3 meters (3-10 feet) possible.

Two aftershocks have been already reported by USGS, one 5.4 and one 4.8.

Thus far reports indicate boats are attempting to get out to sea to avoid imminent tsunami waves while residents living near the coast are being warned to evacuate to higher ground. Japan Railways has suspended operations of dozens of bullet trains operating in eastern Japan so engineers can check tracks to make sure they have not been damaged by the earthquake. Similarly, addition remediation measures have been ordered for what remains of the Fukushima nuclear plant comp

Penning this alert reminds us of the 2011 earthquake and tsunami that struck this same region in 2011. Only this time, the tsunami could impact eastern coastal regions. Hopefully, the same scope of such a disaster will not occur again. Many industries discovered the consequent impacts of supply chain disruption after the 2011 incident.

Industry supply chain teams should obviously be monitoring ongoing developments.

Our thoughts and prayers are with the safety of all citizens in the potential impacted coastal areas and we trust that events will not repeat themselves.

Bob Ferrari

 


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