We previously alerted our Supply Chain Matters readers to the stunning and somewhat embarrassing news that Samsung initiated on its own, a global recall of its newly announced Galaxy Note 7® smartphones due to reports of battery fires. It is now becoming much more evident that Samsung has created additional customer creditability and market perception challenges by attempting to manage its ongoing faulty battery issues on its own, without timely notification to product safety regulators. Yet, once again, there exists other multi-industry supply chain learning regarding needs to closely coordinate potential product or equipment safety issues with governmental regulatory agencies. Learning that other manufacturers and their respective suppliers have painfully encountered. 

As of this week, Samsung has received 92 reports of the batteries overheating in the U.S., including 26 reports of burns and 55 reports of property damage, including fires in cars and a garage. And that is just for the U.S. The consumer electronics provider itself has been reluctant to share details relative to which supplier batteries are suspected (there are multiple battery suppliers) and why the uncontrollable thermal events are occurring. We came across a well written analysis commentary penned by Brian Morin on Seeking Alpha that points to overheating of a battery cell as a result of anode-to-cathode shorting caused by flawed separators as a potential cause. This analysis raises speculation that the problem may not just concern Samsung but other smartphone manufacturers as well, depending on the specific supplier involved. Again, Samsung has yet to identify the specific battery supplier involved in the recall, or whether the battery performance issue extends to other models.

Samsung launched the top-of-the line Galaxy Note 7 on August 17 in an effort to announce the new model prior to Apple’s expected iPhone 7 product launch. Approximately two weeks later, reports surfaced as to occurrences of faulty batteries that were exploding during the recharging process. Now as the hubris of Apple’s iPhone 7 permeates media channels, Samsung must deal with effects and visuals of battery fires among its smartphones.

Today, a published report by The Wall Street Journal, coupled with other business media reports all seem to conclude that Samsung has fumbled this recall because of attempts to singularly investigate and respond to the occurrences of faulty lithium-ion batteries that were causing unexpected explosions and fires. Global wide telecommunications carriers as the principle distributors of the Note 7 were caught in the middle of this situation, receiving conflicting information from the manufacturer and from consumers, while unable to act without a formal product recall notice.  It still remains unclear as to whether the problem can be corrected by a different battery, and when supplies of that different battery are made available. Meanwhile, individual consumers and business customers are reluctant to suspend using their new smartphones without having a replacement in-hand.

This week. The United States Consumer Product Safety Commission (CPSC) was obligated to take direct control of the ongoing issues with the occurrence of some overheating batteries by issuing a formal and immediate product recall notice. The notice urges consumers to “immediately stop using and power down the recalled Galaxy Note 7 devices purchased before September 15, 2016.”  They are further instructed “to contact the wireless carrier, retail outlet or Samsung.com where they purchased the device to receive free of charge a new smartphone with a different battery, a refund, or a new replacement device.” The latter statement is of course what will obviously lead to other confusion but the timing and the urgency left little choice.

According to U.S. law, the CPSC must be notified within 24 hours after a product safety risk has been identified.  The agency did not issue a statement until a week after Samsung’s initial announcement. The chairman of the CPSC indicated to the WSJ that for a company to go out on its own is not a recipe for a successful product recall, and in other media interviews, was somewhat blunter in his remarks.

This 24-hour notification was initiated as a result of the aftereffects of the prior sudden unattended vehicle acceleration and other perceived vehicle safety issues that impacted Toyota during the period from 2009-2010. Three years later, Toyota was still dealing with the after effects and U.S. legislators collectively called for stricter controls related to product safety. Today the automotive industry as a whole continues to deal with the challenges of faulty air bag inflators and other product safety related recalls that have now exceeded all previous records for total number of recalled automobiles.  The 24-hour threshold coupled with the potential for significant financial and litigation implications related to the mere potential of product safety concerns has led automotive producers to err on the side of caution and engage regulators much earlier in the process and issue a product recall. Currently it seems that not a week can go by without news of some major recall involving an automotive brand.

Samsung’s faulty battery issues further have some parallels to the 2013 challenges that impacted Boeing’s 787 Dreamliner aircraft as a result of unexplained lithium ion battery fires affecting the aircraft’s own power systems. A series of unexplained battery compartment fire incidents triggered a subsequent six-month grounding of all existing operational 787 aircraft while government safety agencies and Boeing searched for the cause.  The aircraft was later approved for service after Boeing reluctantly initiated a complete redesign of the battery housing unit containing lithium-ion batteries. The incident was very costly or Boeing from both a financial as well as brand reputation basis. Airline flyers began to question the overall safety of the 787.

Boeing’s initial reaction was to push-back on government regulators. An NTSB investigative report later concluded that the probable cause was an internal short circuit within a battery cell which led to a condition of thermal runway. The report also pointed to cell manufacturing defects and oversight of cell manufacturing processes involving the battery manufacturer. Today, there are little incidents of battery issues for operational 787’s but there will also be some concerns on the part of airline travelers as more and more lithium ion battery related fires come to the forefront.  U.S. and other airline safety regulators are considering outright bans on allowing bulk quantities of the batteries to fly in aircraft cargo compartments.

Hence the learning is again that product defects often involve the supply chain, not just your organization, but others as well.  In this specific Galaxy Note 7 issue, Samsung SDI is a supplier, along with other battery suppliers. The open question is whether Samsung was somehow trying to control the broader industry fallout of its battery manufacturing process. We will not likely know the answer to that until later in the investigative process.

Like others, Samsung will eventually garner important learning regarding the control or management of consumer focused product performance data and in trying to control the fallout.  On the one-hand, today’s social media based channels, whether good, or not so good, provide instantaneous feedback and perceptions related to consumer experiences and product performance.  A belief that the fallout can be controlled or buffered by internal control processes has passed. Like any other challenge involving major supply chain disruption or business continuity, there must always exist a set of response plans that include important decision criteria as to what needs to occur at any point. Lawyers, corporate risk and other senior managers will often have their own viewpoints but they must understand that this new world of always-on media and instantaneous information requires the most-timely responses, often with a supply chain purview.

The lesson for all is to look to multi-industry learning from past events and not let internal or external perceptual concerns cloud regulatory requirements, regardless of how your organization views such requirements. In the minds of consumers and customers, product and supply chain component safety trumps all other concerns.

Bob Ferrari

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

It seems quite evident that August and September have featured quite a lot of significant developments involving multi-industry supply chains and Supply Chain Matters continues in the following subsequent postings to highlight those with significance or either short or longer-term implications.

We have previously alerted our readers to percolating supply chain related challenges concerning Pratt & Whitney, and specifically the aerospace engine provider’s newly released geared turbofan engines. In our July commentary related to mid-year operational performance results for both Airbus and Boeing, we highlighted that Airbus’s first-half shipping performance related to the new A320 neo aircraft were noticeably impacted by delayed delivery of Pratt’s new engine. Airbus had delivered just 5 A320neos in Q1 and 3 in Q2 while nearly a dozen of completed of the new model A320 were reported at the time as lined-up on factory adjacent runways and parking areas awaiting Pratt to deliver completed engines. The July delay was associated with fixing the engine’s cooling design through a combination of software and component modifications.  

This week featured an announcement from Bombardier, designer and manufacturer of the new C-Series single aisle aircraft targeted to compete with Airbus and Boeing. The Canadian based aerospace provider was forced to cut its 2016 delivery guidance down to 7, from a prior planned 15 completed aircraft, specifically citing delays in engine deliveries from Pratt. In its formal operational update, the president of the firm’s commercial aircraft operations indicates that Bombardier is working very closely with Pratt to address “supplier ramp-up” issues. In its reporting of the Bombardier development, The Wall Street Journal includes a statement from a Pratt spokesperson acknowledging that while there are some pressures on new engine deliveries, some progress is being made on delivery commitments.

The C Series delivery adjustment announced this week will result in lower revenues for Bombardier Commercial Aircraft for the year and the manufacturer is indicating the cutback will not materially affect operational earnings. None the less, Bombardier has much at-stake since the new Pratt geared turbo-fan engine is currently the sole engine specified for the C-Series. Obviously, Pratt is also trying to balance the needs of Airbus, with far higher short and longer-term order commitments with that of competing Bombardier. Once again, in times of delivery shortfalls, a de-facto balancing of prioritization in deliveries comes to the forefront.

In a related development and reinforcement, a Reuters published report this week features the head of the world’s largest independent aircraft leasing company, AerCap Holdings NV, which currently has outstanding orders for over 100 Pratt powered Airbus A320 neo’s, voiced concern that a delay in delivery of the Pratt engines could ripple out and affect AerCap’s ability to receive a new Airbus jetliner due in the next few days. A Pratt spokesperson subsequently indicated to Reuters: “”To meet what has been incredible demand for the GTF engine, we are working collaboratively across our entire manufacturing process to ensure maximum performance, and we are keeping our customers apprised throughout the process.”

In June, executives from Pratt indicated to The Wall Street Journal that roughly half of the company’s suppliers for its new geared turbofan engines were not delivering parts and materials at expected levels as seamlessly as the company expected. United Technologies Chief Executive Gregory Hayes further indicated to the WSJ that at the time, 44 percent of the company’s 1,600 suppliers—including the 500 to 600 who supply parts and materials for the engines themselves—weren’t meeting the company’s on-time delivery and quality control targets. The WSJ further observed that unlike previous generations of engines, 80 percent of parts for the geared turbofan are produced by entities other than Pratt itself, then shipped and assembled in the company’s engine manufacturing centers in Connecticut, Florida, Canada and Germany. This is a similar supply chain sourcing strategy as practiced by today’s leading aircraft manufacturers themselves.

Pratt has reportedly invested upwards of $10 billion in development of its revolutionary geared turbo-fan engine.  Yet, with the June report indicating 44 percent of suppliers not meeting on-time delivery commitments during the engine’s initial production ramp-up phase, it brings into question how much was invested in overall supplier production process needs. Pratt’s engine component supplier base is also shared with rivals such as General Electric and CFM International, providing yet another dynamic as to which engine manufacturer features the more aspects of design for manufacturability and design for volume.

United Technologies, the parent of Pratt, also provides a recent history of investing heavily in lean process, overall cost and production methodologies.  That, by our lens, provides a further looking glass as to whether such methodologies or organizational approaches impacted needs to adequately plan for the ramp-up and the production volume requirements for the new engine.

Obviously, Pratt will remain under an intense industry and media looking glass for some time to come as it attempts to deal with its ongoing challenges in meeting engine delivery needs.

The open question will be how long will airline customers and certain manufacturers tolerate such delays without taking other actions.  Since the cost of aviation fuel remains historically low, Pratt may have some leeway in addressing its ongoing engine delivery challenges.  Pratt’s goal is the ability to ramp-up production levels of the geared turbo fan model to upwards of 1200 engines annually by 2020 in order to address its current overall order backlog of upwards of 7000 engines. As some supply chain leaders would opine- it is better to flush-out and adequately address overall supply chain issues during the initial ramp-up than to have to experience such challenges on a continual basis. There indeed is the current challenge for Pratt’s sales and operations planning teams and its supply chain ecosystem and we trust that teams will rise to such challenges.

Bob Ferrari

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

As businesses enter the all-important final four months of 2016, news of supply chain disruptions are permeating business media channels.

We, along with global media, have already alerted readers to the ongoing and quickly cascading implications of Hanjin Shipping’s financial receivership, which we have characterized as a financial shot heard across the globe. The potential for supply chain disruptions is imminent along with other cascading implications for shipping rates or further ocean container industry consolidation moves.

Samsung Galaxy Note 7 Product Recall

Today brings the stunning and somewhat embarrassing news that Samsung has initiated a global recall of its newly announced Galaxy Note 7® smartphones due to reports of battery fires. All sales have been halted pending an investigation of why certain batteries are exploding during the re-charging process. According to a published report by The Wall Street Journal, Samsung had logged 35 cases of battery explosions which has prompted the electronics giant to issue a global recall. Apparently, Samsung has multiple suppliers for the lithium-ion batteries of the Note 7 and not all of the phones are affected. Samsung teams are now in the process of tracing the faults to a specific supplier. Still unclear at this point is whether suspect batteries effect other new Samsung models. An estimated 2.5 million of this model phone have been shipped since its availability announcement of two weeks ago.

The glitch comes at an obvious awkward time for Samsung, with holiday sales looming and with next week’s planned announcement from rival Apple rumored to be about the announcement of the newest versions of iPhones.

Gap Distribution Center Fire

Clothing retail chain Gap is dealing with its own supply chain disruption as a result of a fire that occurred at one of the retailer’s online support distribution center located in Fishkill New York.  According to business media reports, the fire that occurred on Wednesday of this week, completely destroyed about 25 percent of the warehouse while the remainder of the facility suffered extensive smoke and water damage. The center supports Northeast U.S. online and store fulfillment needs for both Gap and Banana Republic branded merchandise and according to one report, represents 10 percent of the retailer’s nationwide warehouse capacity. In reporting of the incident, The Wall Street Journal quotes a Wells Fargo equity analyst advisory as indicating that the disruption of the fire could: “create a meaningful bottleneck given the upcoming critical holiday season.”

According to the WSJ, the retailer’s logistics and distribution teams are now working on plans to rely on other distribution centers located in Ohio and Tennessee, as well direct shipments from retail stores to support Northeast online fulfillment needs. Teams are further working to accelerate the reopening of a nearby New York warehouse that was planned to supply Old Navy branded merchandise.

This fire is obviously untimely since Gap has been in the process of a merchandising turnaround to boost sales and profitability.

Continuous Natural Disasters

It seemed that during the months of July and August, a week did not pass without some occurrence of natural disaster. Whether it was continuous wild fires across the U.S. West, severe flooding southern Louisiana and China, devastating earthquakes in Peru and Italy or this week, the first hurricane in 10 years to impact southern Florida and the U.S. Southeastern coast, supply chains are continually disrupted in various degrees.

Indeed, the timing and occurrences of major supply chain disruption cannot be controlled, especially when occurrence is just prior to one of the most important and meaningful revenue and profitability quarters. After and in spite of such occurrences, supply chain teams learn more of the critical importance of active supply chain risk mitigation and business continuity planning.

As our U.S. readers prepare to take advantage of the summer’s last long Labor Day holiday weekend, keep in mind that supply chain teams remain engaged in responding to supply chain disruptions.

Bob Ferrari

Ocean container shipping and logistics are the lifeblood of global supply chain movements. For over three years, Supply Chain Matters has continually warned of pending disruption concerning the deepening global overcapacity conditions among global ocean container carriers. This week marks a clear definitive statement of that disruption, the unraveling of the financial implications. The declaration of receivership by Korean based Hanjin Shipping Company should be viewed as the first of many other cascading developments and consequent implications of multi-industry supply chains. It could not come at the most critical period for shippers, the ongoing peak period of inbound holiday related products and components.

Developments concerning Hanjin began on Tuesday when South Korea’s sate-owned Korea Development Bank withdrew its financial support indicating that a funding plan by the carrier’s parent group was not adequate enough to address outstanding debt of $5.5 billion. The South Korean government then indicated that it wanted domestic rival Hyundai Marine to buy designated healthy assets of the financially troubled Hanjin, in-effect eliminating the option of a merger among the two Korean carriers. Hyundai itself had already embarked on a creditor-led restricting program of its own On Wednesday, Hanjin management had little option but to declare the firm in receivership, a form of creditor protection. According to industry sources, the ocean carrier represents the seventh-largest shipping line by overall capacity.

As global transportation managers are well aware, a carrier’s filing of receivership precipitates another of subsequent actions.  Many global ports will not accept nor export cargo on the carrier’s vessels because of uncertainties as to whom we pay charges or more importedly, whether specific vessels will be seized by creditors as captured assets in jurisdiction outside the control of Korea’s legal system.  We noted reports of two vessel seizures thus far, one involving the Port of Singapore, the other Shanghai.

According to business media reports, a South Korea court has yet to determine whether he carrier should be liquidated or given the opportunity to survive under an extended creditor-enforced restructuring, which has been in-effect since May. From our lens, we would be surprised if extended restructuring is approved given the history of events.

Today, The Wall Street Journal reports that the repercussions of the carrier’s receivership were nearly instantaneous. The carrier has stopped accepting cargo as U.S. and other global ports began turning away its inbound ships. Ports have further indicated that they will not accept outbound containers routed for Hanjin vessels, causing exporters to now scramble to rebook on other ocean carriers and secure other non-Hanjin containers. Other industry sources are quoted as indicating that shippers are now experiencing new rate surcharges by remaining carriers. That is to be expected since the entire container industry is experiencing current market rates that just cover the cost of fuel.

Once more, the WSJ reports that the receivership would likely lead to the carrier’s exclusion from the six-member shipping alliance termed The Alliance.

Compounding the developments concerning Hanjin Shipping are reports of major cutbacks and restructuring among Korea’s shipbuilding industry, the major producer of new container ships.  Last week, STX Shipbuilding, Korea’s fourth-largest shipyard, announced a sweeping restructuring including the potential sales of a profitable shipbuilding yard in France. Three of the other major Korean shipbuilders, Hyundai Heavy Industries, Daewoo Shipbuilding and Samsung Heavy Industries are each under restructurings from creditor banks.

Likewise, other existing global ocean container lines have reported recent financial performance amounting to aggregated operating losses amounting to billions of dollars. Thus on both the supply of new vessels, and the demand for ocean container shipments, meaningful developments are occurring that will lead to further developments.

We therefore conclude that the ocean container industry has now reached the point of inevitable financial crisis, and our multi-industry readers should expect consolidation related consequences in the weeks and months to come. Global financial networks and interrelationships are now coming to the realities of an industry that has been too slow to address its gross overcapacity situation.

In March of 2015, The Boston Consulting Group published an industry perspective concluding: “The container-shipping industry has a highly fragmented value-chain, marked by complexity, overcapacity, and low returns.” The authors declared that overcapacity had fueled a downward spiral of decreased earnings and marginal shareholder value. Obviously, that spiral has now reached a phase of far more consequence and the question will be which carriers survive and which carriers are forced into other actions.

Bob Ferrari

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

The Associated Press and other media outlets today reported that AB InBev expects to cut approximately 3 percent of its total global workforce, the equivalent of thousands of jobs, once the giant consumer goods conglomerate complete it latest $110 billion mega acquisition, that being rival beer brewer SABMiller.

The AP report notes that with a combined global workforce of roughly 230,000 employees, the 3 percent cutback could amount to around 6600 employees over a three-year period.

Such news should not at all be surprising, given the track record of performance from InBev’s controlling investor 3G Capital. The Brazil based private equity firm is noted for its zeal for zero-based budgeting techniques, along with a formula for the shedding of thousands of employees and across the board cuts in all forms of “unnecessary” expenses. Such zeal includes the extension of payment intervals involving suppliers which have been reported to average in the hundreds of days.

In our October 2015 Supply Chain Matters commentary, Are Mega Acquisitions Toxic for Product Process and Supply Chain Innovation, we observed that the sheer size and scope of bringing together two global beer giants is sure to provide added challenges in rationalizing product innovation, consolidation of business systems, supply and demand fulfillment capabilities on a global scale. Thus, today’s report is not at all surprising.

This week’s report additionally notes that InBev is yet to evaluate “front-office supply departments, for which integration plans are not completed.” By our lens, that is the indication of even more cuts to come along with other potential consolidations in the above noted areas.

In October, we observed that acquisitions of the dizzying scope and magnitude of-late have led to months of organizational disruption and changing management focus. That is especially pertinent in industries such as food and beverage and consumer goods, where consumer preferences and buying trends have caused upheavals among existing players and have led to current consolidation or growth via acquisition. Many of such past mega acquisitions have admittedly mixed results as to overall long-term success.

The open question is whether such acquisitions are likely toxic for required needs for product, process and supply chain focused innovation, agility and capability efforts, not to mention enhanced collaborative relationships with value-chain partners.

We have our views, but the ongoing new AB InBev consolidation efforts may provide different evidence.

Stay tuned.

Bob Ferrari