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.
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.
This week brought significant and perhaps troubling news to food and consumer product goods producers and their respective suppliers distributing products throughout the U.S.. Business headlines noted that a ConAgra Foods business unit agreed to plead guilty to a federal misdemeanor charge and pay an $11.2 million fine in conjunction with 2006-2007 salmonella outbreak involving the firm’s Peter Pan and Great Value branded peanut butter products.
At the time, the salmonella outbreak occurred across 47 states and sickened a reported 700 people. The outbreak was eventually traced to a manufacturing facility in the state of Georgia. As part of this week’s plea agreement, ConAgra admitted it had been aware of some risk of contamination prior to its voluntary recall. After this outbreak, ConAgra subsequently made was is reported to be significant upgrades to its manufacturing facility along with instituting advanced safety protocols.
This news is significant for this industry in a couple of rather important dimensions. This week’s fine, although meager by today’s liability standards, is noted as the largest fine levied to-date in a food safety case. Once more, over these past months, federal authorities are now demonstrating intent to hold both companies and their individual executives accountable for food safety. According to The Wall Street Journal, since 2013 the Justice Department has won convictions or guilty pleas involving four criminal cases against food companies or the executives that run them. The WSJ notes that in most of the recent cases, successful prosecution occurred even without proof that officials acted with criminal intent, which was a difficult hurdle for investigators to previously overcome. The significant nuance of holding executives accountable without proofing criminal intent has reportedly jolted the food industry, given its broad implications. That implies that executives are now legally accountable for food safety, and that might be interpreted to include senior supply chain executives. Certainly, we are not lawyers, and industry supply chain leaders are advised to seek out specific opinion from in-house legal counsel.
Food companies are now stepping-up efforts to improve food safety including investments in new technologies to monitor any signs of contamination or erosion in quality and to speed-up data analysis. That, in reality, may be good. However, it opens the doors to added sensitivities as to when manufacturers should recall food products, and the types or levels of internal documentation required as proof of proactive response to suspected contamination and/or disease. The industry may well experience an increased rate of recall actions out of abundance of caution, as these new nuances are more fully understood.
The takeaway for consumers is hopefully safer food products in the coming months. For supply chain management teams, the implication is added cautions and increased scrutiny of individual production, storage and distribution practices related to food production. Any notion that assuring proactive food safety practices is not my job is now null and void. Food safety is every executive’s and every employee’s concern.
Lumber Liquidators, one of the largest and fastest growing retailers of hardwood and laminate flooring in North America, announced this week that it is suspending all of its China sourced laminate flooring products. The announcement comes after the 60 Minutes investigative news television program turned a public light on suspected high levels of formaldehyde from certain China based flooring offered by this retailer. In our prior Supply Chain Matters commentary related to this incident, we expressed little doubt that the situation would continue to reverberate among business headlines, and so it has.
In its latest announcement, the retailer indicates:
“Based on the review to date, it appears that the Company’s Chinese laminate flooring suppliers have sold product to the Company that the suppliers have certified and labeled as compliant with California formaldehyde standards. However, the Company is further reviewing the underlying certification and labeling processes and practices of its suppliers.”
The retailer further indicates that a Special Committee composed of independent directors, with the assistance of third party advisors, has been conducting an ongoing review of allegations regarding laminate flooring sourced from China. That body has now engaged a former FBI director and his firm to review the retailer’s product sourcing practices and to serve as an independent compliance advisor.
Since the March disclosure by the 60 Minutes program, Lumber Liquidators began voluntarily offering free indoor air quality screening to certain of its flooring customers, predominately those who had purchased laminate flooring sourced from China. Home air test kits were selected as a quick means to measure the total level of formaldehyde in indoor air from all sources, not just from the flooring. This week’s release further indicates:
“From early March through May 1, 2015, BHC sent approximately 26,000 testing kits to nearly 15,000 Lumber Liquidators customers and approximately 11,000 of those testing kits were returned. As of May 1, 2015, over 3,400 testing kits from approximately 2,600 households with laminate flooring sourced from China had been reviewed and analyzed. Of those households, over 97% had indicated indoor air concentrations of formaldehyde that were within the guidelines set by the World Health Organization as protective against sensory irritation and long-term health effects.”
Lumber Liquidator’s swift actions and response are laudable, but as a supply chain and procurement community we all know, consumers will undoubtedly have their own impressions regarding the safety of flooring sourced from China. Thus, the action to temporarily suspend all sourcing of China based supply, pending a total independent review, makes practical and timely business sense.
To reiterate, beyond the Wall Street, shareholder and legal messiness, this incident is yet another example of the needs for transparency across the global supply chain, particularly when an individual country’s or state’s product safety standards are cited. As business media such as The Wall Street Journal is now reporting, there is no recognized national U.S. standard for indoor formaldehyde concentrations and global wide standards vary among agencies. Interpretation of standards can tend to take on a different lens from different suppliers and thus the need for vigilant and consistent supplier monitoring and risk awareness.
Supply Chain Matters has in the past provided our readers examples of supply chain segmentation and/or diversification strategies that are directed at providing enhanced customer fulfillment as well as the ability to support expected business outcomes. High tech and consumer manufacturers were the first to demonstrate such capabilities but other industry supply chains continue to adopt such practices.
One of the top-ranked supply chains, that being Apple, has an active and changing supply chain segmentation strategy directed at both customer fulfillment as well as mitigation of supply chain risk. In 2012 and again in 2013, Supply Chain Matters called attention to reports of Apple augmenting its prime contract manufacturing supplier Foxconn with augmented contract manufacturers. As we have noted in many prior commentaries, the sheer output volume that Apple can command from suppliers can be both a blessing as well as a risk. Any stumble can be a cause for concern.
During 2012 and 2013, a response to the pending lower cost product offerings in both the iPhone as well as iPad product lineup prompted both diversification and segmentation efforts. With the addition of Pegatron and other contract manufacturer’s supplier, Apple had the ability to leverage a lower-cost manufacturing capability as well as mitigate dependency on any single supplier.
Now there is new news leaking from Apple’s supply chain universe. Taiwan based Digitimes, citing sources, reported last week that Apple was expected to adjust its lower-tier supplier Q3 order volumes for both the iPhone 6 and the newly released Apple Watch to minimize the risk of too much volume dependency on any one single supplier, as well as to meet or maintain targeted gross-margin goals. Noted was that Apple had invited both Compal Electronics and Wistron, noted contract manufacturers in laptops and other consumer electronics, to join its supply chain as augmented suppliers. The report further indicates that Apple’s two major PCB partners, Zhen Ding Tech and Flexium would have their order rates adjusted while suppliers Largan Precision and Advanced Semiconductor Engineering, which reportedly have advantages in advanced technology, will benefit from increased orders. Earlier this week, the publication further cited a TechNews report indicating that AU Optronics will soon sign an agreement to supply LTPS In-cell screen panels for future models of the iPhone expected in 2016.
Since the Digitimes report, other Apple community blogs have amplified the report. The Cult of Mac blog opined that the obvious reason for augmentation is that Apple does not run the risk of leaning too heavily on one supplier, as occurred with the bankruptcy of sapphire producer GT Advanced Technologies.
Regarding the newly launched Apple Watch, a recent posting appearing on Apple Insider cites KGI analyst and highly followed Apple observer Ming-Chi Kuo as indicating that existing production bottlenecks related to the watch’s haptic vibrator and advanced OLED display screen are restricting initial product rollout fulfillment. Kuo predicts that given current supply chain bottlenecks, output should reach 2.3 million units by the end of May with total shipment volumes expected to be between 15-20 million units in 2015. That is reportedly below current Wall Street expectations. Also disclosed is that LG Display is the Watch’s sole display supplier, an indication of Apple’s pattern for depending on a single supplier for market innovating technology, diversifying later when the technology reaches mature production volumes.
Fulfilling customer expectations, assuring customer retention and meeting expected financial outcomes is challenge shared by many industry supply chains. In the specific case of Apple’s supply chain strategies, balancing supplier risk coupled with segmentation are exercised to manage both new product introduction and volume production phases.
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Many of our Supply Chain Matters commentaries related to supply chain disruption and supply chain risk management relate to events that many would not believe would actually happen. This weekend featured the news that even iconic General Electric can be impacted by an unforeseen event, a devastating warehouse fire impacting a massive production facility.
Last Friday, a parts warehouse supporting GE’s home appliance factory complex in Louisville Kentucky was destroyed in a six-alarm fire. Nearly 200 firefighters battled the blaze and as of this writing, local news media reports indicate the hot spots remain. Luckily, there were no injuries since most employees had taken time-off for the Good Friday religious observance. According to media reports, the fire in Building Six raged for hours and required evacuation of the entire 900 acre Appliance Park factory complex. GE has since decided to suspend all production for at least a week while assessment of overall damage to operations and contingency plans are completed.
Appliance Park produces dishwashers, refrigerators, washing machines among other consumer appliances. Already, GE officials have indicated that an alternate space for the Building 6 warehousing operations has been identified and it does not anticipate any disruption for customers. A Wall Street Journal report quotes a labor union spokesperson as indicating that adequate inventory is available at an adjacent distribution center. These are obviously a timely business continuity response.
Ironically, GE had previously agreed to sell its home appliance business to Europe-based Electrolux for a reported $3.3 billion. The deal was expected to close later this year.
Generally, past events of this nature often provide a different picture once full assessments are completed. In the case of this warehouse destruction, assessment will focus on both product manufacturing and service parts supply chain needs. However, manufacturers such as GE have made investments in business continuity response and supply chain risk mitigation.
More news should be forthcoming in the coming weeks.