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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.

 


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 300x225 Tesla Motors Falls Short of 2016 Customer Delivery Target  Not for Lack of Effort

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.


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