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Country of Origin Legislative Actions for Food Has Broader Industry Supply Chain Implications

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In June, The United States House of Representatives voted to repeal country-of-origin labeling (COOL) for beef, pork, and chicken and social media commentary regarding the move continues to dominate as an ongoing trending topic.  The reasons are obvious- consumers demand and expect knowledge as to the specific sourcing origins of food products. Consumers are right to be concerned and watchful, and the impact of these actions continue to impact food, beverage and consumer product goods focused supply chains.

The original COOL legislation had good intent, requiring meat products sold in supermarkets and grocery stores to specifically indicate where the animal was born, raised and slaughtered.  Reports indicate that the original law was prompted by the lobbying of U.S. ranchers who compete with the Canadian cattle industry, and later garnered the interest of consumer watchdog interests.

But this current ongoing process now involves the political and economic implications of other supply chains, in addition to food.

The broader issue involves the World Trade Organization (WTO) which after the initial U.S. legislation was passed, ruled that the labels regarding animal origin would have a discriminatory impact against the two U.S. border countries, Canada and Mexico, and thus a barrier to free trade.  Both border countries indicate that the law requires that animals be segregated by country of origin, a costly process that has U.S. wholesale buyers avoiding the buying of export origin meat products.

Both countries are seeking permission to impose what is described as billions of dollars in added tariffs on U.S. goods in retaliation.  And there lies the supply chain impact which threatens to change the existing economics and stakeholder interests of cross-border trade.

U.S. legislators are thus caught in what is described as a damned if you do, or damned if you do not conundrum regarding the existing COOL repeal legislation which has now moved to the U.S. Senate for consideration.

In order to seek additional insights regarding the implications of COOL, Supply Chain Matters had the opportunity to recently speak with Candace Sider, vice-president of regulatory affairs, Canada, at international trade compliance services provider Livingston International. Ms. Sider has a significant background in understanding Canada’s regulatory processes involving interaction with federal and provincial officials, regulatory agencies and policymakers.

She explained that Canada viewed the original U.S. COOL labeling requirements as having a $3 billion impact on that country’s cattle and hog industry.  During the current arbitration period, decisions are expected to be made as to what commodities would remain on the original impacted list. If the surtax were to be implemented, importation from the U.S. of the subject products could ultimately passed on to consumers. The U.S. government has indicated to the WTO that it disputes Canada’s figures.  However, Canada is preparing to lift tariffs on U.S. imports that include in excess of 100 different commodities including products such as range and refrigerator parts, wine, and yes, chocolates.

The WTO is not expected to rule on the U.S.’s latest appeal to the threatened tariff increases until early August, or possibly September. Meanwhile, the implication of the ongoing dispute actually impacts more than just meat-focused supply chains.

Livingston is currently advising its clients to prepare for a number of potential scenarios involving the ongoing trade dispute process invoked by COOL.

Where all of this eventually ends-up is subject to many viewpoints.  After all, this is very much a process driven by economic, multi-industry and lobbyist forces.

However, one aspect is clear. The complexity of today’s globally based supply chains takes on many different dimensions and implications.  While you might have perceived that legislation affecting packaging disclosure of meat products has little to do with service parts, chocolates and wine, it indeed does. The takeaway is to nurture contacts and resources that can alert your team to ever changing developments and multi-industry implications.

Bob Ferrari

 


Major Blast Occurs at Zodiac Aerospace Fabricated Material Plant

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Supply chain risk management and Sales and Operations planning teams for both Airbus, Boeing and other commercial aerospace aircraft producers are likely hard at work today after news of the powerful explosion at the Zodiac Aerospace factory located in Washington State last night.

According to various news reports, the explosion that occurred at Zodiac’s Newport Washington plant was felt miles away, injured at least seven persons, and prompted the evacuation of surrounding homes and businesses due to strong chemical odors. At least one person was reported to be in critical condition. A report indicates that that the power of the explosion lifted an entire floor off its foundation, caused multiple areas to collapse and toppled large pieces of machinery. Thirty people were reported to be working at the plant at the time of the explosion.

According to a published Reuters report, the plant itself produces resin-impregnated honeycomb core and composite panels used by various other Zodiac production facilities to produce aircraft lavatories, galleys, overhead bins and other structures. Zodiac serves as one of the largest suppliers of aircraft interiors for multiple commercial aircraft producers.

In a mid-December posting, Supply Chain Matters called attention to a media report indicating that a component shortage involving new lie-flat airline seats occurring at Zodiac was suspected of causing delayed shipments of brand new Airbus and Boeing airplanes. Three months ago, the head of Airbus’s passenger jet business called attention to suppliers of cabin equipment, speculated to include Zodiac, indicating their failure to get to grips with chronic production delays was “unacceptable”. Thus the pressure on this supplier to step-up and meet production requirements might have been high.

This incident will, in all likelihood, continue to be of concern to commercial aircraft producers for the coming weeks as Zodiac assesses and communicates the potential impact on current and future interior equipment supply commitments.

Stay tuned.

Bob Ferrari

 


Report Indicating the Profit Power of Apple

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A firm’s supply chain exists to support and enable specific business outcomes.  Such outcomes might include increased profits, broader product selection or higher levels of customer satisfaction and service. Supply chain strategy setting can often stumble when specific outcomes are not clearly defined or outcomes become conflicted. Consider the notion that a strategy driven to overall supply chain cost efficiency can sometime hinder needs for more agile response to market opportunities.

Supply Chain Matters has often praised Apple’s supply chain capabilities, not only from aspects of product and supplier innovation, but in overall agility as well as enhancing product margins. By our lens, few supply chains exhibit such a track record.

That point was driven home by today’s published report from The Wall Street Journal, Apple Gets 92 Percent of Smartphone Profit. (Paid subscription required) The report cites estimates from Canaccord Genuity concluding that in the first quarter: “Apple recoded 92 percent of the total operating income from the world’s top smartphone makers.” That was an increase of 65 percent from a year earlier. According to this report, the combination of Apple and Samsung accounted for more than 100 percent of industry profits since other makers broke even or lost money.

According to the report, what stands out even more regarding this achievement is the fact that Apple sells fewer than 20 percent of total volume, yet manages to garner the highest average prices and occupy the high end of the smartphone market.

Once more, as we have pointed out in our numerous Supply Chain Matters commentaries, Apple has the ability to practice highly agile sales and operations planning, segmented supply risk and multi-channel customer fulfillment while supporting the industry’s highest product margins.

From our lens, a lot of the success of the Apple supply chain stems from the ecosystem of responsive suppliers who can scale with Apple’s relentless requirements. And in fact, some suppliers have succumbed because they could not continue to meet Apple’s requirements while attempting to support individual financial outcomes for profitability.

Some will speculate that Apple’s advantage may eventually succumb to the track record of other high tech or consumer electronics OEM’s that eventually over-saturate their market and are attacked from more innovative producers. For now, however, Apple and its supply chain remain the ‘best of show”.

Bob Ferrari


Do Not Let Your Firm be the Headline for a Supply Chain Systems Failure

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As our U.S. based readers are likely aware, Wednesday of this week was not necessarily a good day for the IT community. In the course of a few hours Wednesday morning, mission critical systems of the New York Stock Exchange, United Airlines and The Wall Street Journal failed, and respective customers were not pleased.

With the cascading breaking headlines on Wednesday, just about everyone’s initial impression was that this was some form of a coordinated cyber-attack.  After quick investigations from various federal agencies, that premise was later negated.

Since Wednesday, the NYSE communicated to its brokerage customers that the outage was likely caused by a planned software upgrade that was underway. The outage resulted in a four hour outage, but remarkably, had little impact on the exchange of stocks because ancillary systems took on the task of transacting trades. According to a report in today’s WSJ, the problem started with a new software program designed to more precisely time-stamp data that was installed during the prior evening.

The WSJ outage was reportedly caused by a volume surge that overwhelmed the publication’s home page. It remains unclear, at this point, as to why the volume surge occurred.

The United Airlines outage, which extended upwards of 90 minutes, causing the cancellation of 60 flights and consequent delays to hundreds of U.S. based flights, was attributed its outage to a failed router in its computer network. As anyone who has flown lately can attest, airlines like United have cut back on airport customer service agents. Thus, system-wide interruptions cause significant passenger disruption, particularly when backup planning is inconsistent. Given United’s continual history of computer failures, schedule interruptions and poor customer service, the Wednesday incident was yet another source of continuous disappointment from United’s long-standing customers. (This author is included in that category).

As a supply chain community who deal with business and mission-critical systems each and every day, Wednesday’s litany of IT incidents provide us poignant reminders.  The first and obvious reminder for IT teams themselves is that no mission-critical system should have a single-point of failure.  While that appears to a simple statement, the existence and complexity of global-wide outsourced systems and/or networks has added new vulnerabilities which must be communicated and addressed.  There is the further theme of complex software upgrades that can precipitate outages.  It is no wonder that IT and business functional teams remain very concerned about the potential risks of complex ERP or supply chain business critical system and applications upgrades.

For functional supply chain and line of business team leaders, the prime takeaway is twofold. First, listen to your IT support teams when they raise concerns regarding system vulnerabilities or needs to invest in IT redundancy in specific business critical systems.  Too often, functional business and supply chain teams become too impatient with planned system maintenance downtime or extra time needed to complete a planned software upgrade.  Better to invest that energy in preparing consistent contingency back-up plans. Insure that there are plans associated with each and every business critical system. Take the time to thank and reward both IT and functional teams for their diligence in planning.

A final message relates to senior executive leaders and their zest for cost control. A theme surrounding Wednesday’s concurrent outages is that larger and more complicated business critical systems require adequate resources to support testing, monitoring and reliability. That includes not only adequate defenses to guard against hacking and cyber-attacks but day-to-day operations as well.

Many years ago, I worked for a very insightful CIO who mastered communications to senior executive management. Often, when he received pressure regarding systems maintenance budgets associated with mission critical business systems such as order fulfillment, he would use an analogy of flying on a jet aircraft.  “Do you expect the pilots to upgrade or change an engine while flying at 30,000 feet.” Of course not, and that is why diligent and timely maintenance and backup plans exist.

Don’t let your firm be the next headline for a supply chain systems failure.

Bob Ferrari


Reflecting on Supplier Management Practices Related to the Apple Watch

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In our prior Supply Chain Matters commentary concerning Sharp Corporation, we reiterated the two sides of supplier based relationships involving the most recognized supply chain, that being Apple.  On the one hand, being chosen as an Apple supplier can provide enormous scale, global reach and financial rewards.  However, Apple is a demanding customer with unique and exacting processes that can test any supplier.

Apple further practices very active supplier risk mitigation, insuring that this global consumer electronics provider has at least two or more supplier agreements in-place for key components.

In a May commentary, Supply Chain Matters highlighted a report indicating that one of the key technology components within the Apple Watch had experienced reliability issues. The taptic engine component, which controls the sensation of tapping the watch while transmitting heart-rate data, was sourced among two key suppliers.  Citing people familiar with the matter, The Wall Street Journal reported at the time that reliability testing has discovered that the taptic engines supplied by a China based supplier demonstrated reliability problems, with Apple electing to scrap some completed watches. Engines produced by Japan based Nidec Corp., the backup supplier, reportedly had not experienced the same problem. Apple subsequently moved all remaining sourcing of this component to Nidec.

Today’s WSJ report regarding Sharp also makes mention of the Apple Watch component issue in the context of how manufacturers can discard faulty products when design issues or production snafus are evident. The report again noted how Apple subsequently turned to Nidec for nearly all of its taptic engine production needs, but it took time for this other supplier to ramp-up its own production processes to be able to accommodate Apple’s overall production volumes. Thus, for our readers who were wondering what was causing the delay in the delivery of their new Apple Watch, now you know.

The obvious takeaway is that active supply risk mitigation is essential for key technological components, as well as the ability to lend a helping hand to suppliers in time of product or business crisis. Such risk mitigation is especially critical in new product ramp-up stages as volume production processes are tested for volume scale.

There are two-sides to supplier loyalty and management, and how they are practiced goes a long way in the determination of overall supply chain agility and responsiveness.

In November of last year, the WSJ stated in a report related specifically to Apple’s supply chain: “If you cut a deal with Apple, you better know what you’re getting into.” That statement continues to sum it all.

Bob Ferrari


The Implications of Sharp Corporation’s Ongoing Financial Crisis

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Supply Chain Matters has featured several prior commentaries specifically related to Sharp Corporation, one of three current liquid crystal display (LCD) screen suppliers in Apple’s supply chain.

Sharp has a track record of innovation in LCD technology but a rather rocky financial history as well. Our last commentary in early April, Perils of an Apple Supplier- Sharp Corporation, highlighted continuing reports of severe financial crisis surrounding Sharp. The Wall Street Journal reported at the time that various restructuring options were being considered but no final decision had been made. One reported option was that this supplier was moving to spin-off a portion of its LCD panel business unit with intent to seek a new capital injection from Innovation Network Corp. of Japan, a governmental entity overseen by Japan’s Ministry of Economic Trade and Industry. One of the tenets of Japan’s high tech industry is to rely on government funded agencies to bridge times of financial crisis. Since our April commentary, Sharp’s bankers agreed to provide an additional $1 billion plus lifeline, the second in three years, in exchange for restructuring measures that included a 10 percent workforce reduction. Also since that time, the market prices for LCD panels remain in significant decline as other suppliers turn more to China based smartphone manufacturers for revenue needs. The WSJ cites data stemming from market research firm IHS indicating that 5 inch HD smartphone panel components prices have dropped nearly 60 percent from Q1 2013 through the current quarter.

Today, the WSJ featured a report (paid subscription required) indicating that Sharp has warned that its survival could be at-stake, and that it is now pushing suppliers for deeper price cuts and that it further considering sourcing of display components from new China based suppliers rather than its former Japan based suppliers. At its annual meeting for shareholders held this week, sales directly attributed to Apple accounted for 20 percent of Sharp’s fiscal year revenues.

For the fiscal year that ended in March, Sharp racked up a loss reported to be $1.8 billion, due to write-downs of its LCD operations. Yet, this supplier maintains a public confidence that it can implement steps to maintain its ongoing viability, despite its share price haven fallen upwards of half over the past year.

LCD screens are highly strategic for Apple, and the consumer electronics juggernaut has elected to initiate strategic supply agreement among three different suppliers to insure both leading-edge technologies as well as the ability to scale to Apple’s flexible volume requirements.

All of which leads back to the perils of being an Apple supplier. In a recent Spend Matters sponsored webinar (no relation to this blog), chief research officer Pierre Mitchell observed that Apple imposes very strict contract terms among its supplier base, shifting considerable risk on the backs of suppliers while preserving major rights to product based intellectual rights. So much so that GT Advanced Technologies recently elected to seek voluntary bankruptcy in order to gain leverage with Apple over what was described as onerous contract terms.

The conundrum for Sharp and other Japan based high tech component suppliers is that bankruptcy is culturally looked upon as a  major failure and embarrassment of senior management. So much so that the most optimistic financial forecasts are stubbornly held to up to just prior to the formal reporting of the bad news. On the other hand, firms such as Apple that practice active supply risk mitigation for key components will often have contingency options to buffer the shortfalls or stumbles of any one key supplier.

The financial challenges involving Sharp will most likely linger and through its ongoing re-structuring efforts, this supplier could introduce even more risk into its ability to deliver to customer needs.

The takeaway for the broader high-tech supplier community is to insure you understand all the terms and risk implications of your supply and technology agreements.

Bob Ferrari

 

 


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