Prediction Ten of our Supply Chain Matters 2015 Predictions for Industry and Global Supply Chains calls for increased attention and new investment interest for service focused supply chains in the coming year. This includes after-market business process services, service parts and service delivery supply and demand business processes.
The obvious reasons are the unprecedented increases in occurrence of product recalls that add large amounts of consumer negativity towards a brand, especially in the U.S. automotive sector. Too often, there has been a “throw it over the wall” mentality involving service beyond product sale and thus the after-market service supply chain has lagged in process modernization and investment.
Yesterday, the New York Times published an article, Auto Industry Galvanized After Record Recall Year (paid subscription but complimentary metered view with sign-up). This article reminds readers that about 700 individual recall announcements involving more than 60 million motor vehicles occurred in 2014 across the United States, double the previous record logged in 2004. The rate of recalls was the equivalent of one in five vehicles currently in the road. Many of our readers can probably attest to the current situation.
Auto manufacturers have been forced to clean-up years of defects that were either undetected or ignored amidst heightened regulatory scrutiny.
The result is obvious, service supply chains swamped with requirements for numerous replacement parts and service networks buffeted by consumer rage as to why their perceived unsafe vehicles cannot be immediately repaired. In the care of the massive recalls involving airbag inflators sourced from supplier Takata, product recalls are prioritized for warm region sensitivity along with broader U.S. wide needs.
The Times article observes that sending out notification letters does not suffice, requiring more direct interaction with consumers. That, by our lens, implies more timely information and visibility as to the prioritization of repair campaigns and availability of required repair parts for specific regions. The article further hints to underreporting of potential product defects or failures.
OEM’s such as Toyota are overhauling safety and product recall practices as well as processes incorporated within its service networks. Supply Chain Matters has previously highlighted General Motors new brand survival emphasis on up-front product quality and more responsive tracking and detection of potential product problems. Social media will play a very important role in these new methods including the transmission of product recall information directly to consumers and their individual vehicles. Legislators continue utilizing the big-stick of criminal prosecution of executives and a means to motivate automotive OEM’s to be more responsive to product quality and overall vehicle safety.
Crisis often brings opportunity, and in the case of service networks, the opportunity is the ability to leverage today’s more advanced technologies related to vehicle sensors, predictive analytics, advanced simulation and scheduling, demand sensing and item-level B2B business network wide visibility among service focused supply chains.
The forces are indeed in motion for greater attention to service supply chain capabilities in the New Year.
In early August, Supply Chain Matters called attention to a tragic explosion and subsequent fire that occurred at a factory belonging to a Tier Two auto parts supplier located in China. The factory belonged to Kunshan Zhongrong Metal Production Co. and was located in a development zone in the Jiangsu provincial city Kunshan City located about 50 kilometers west of Shanghai. The plant performed plating and polishing of metal hubs that include wheel hubs, a pre-production preparation for aluminum car wheels used by automakers. The explosion was initially believed to have been caused by accumulation of metal dust particles within the facility. At the time of this incident, media reports were unclear as to the full extent of deaths or injuries but the government news agency indicated that 75 workers perished as a result of this accident. The accident was China’s worst industrial disaster in nine years and highlighted continuing problems with workplace safety.
Earlier this week, Chinese investigative authorities reported that the blast killed at least 146 workers, nearly double the initial reported death toll. Reports in August indicated that there were upwards of 260 workers in the plant at the time of the explosion, and this revised number amounts to a significant casualty toll. According to various global and business media reports, Chinese authorities indicated this week that they would prosecute three senior executives of Kunshan Zhongrong Metal Production as well as 15 Kunshan governmental officials. China’s government further announced the firing of two top officials within the city of Kunshan.
According a published report by the New York Times, Beijing has been holding local government officials and company executives accountable by handing out harsh penalties for work accidents with high casualties. In Kunshan, the investigation team found that local officials were negligent in enforcing safety regulations and that plant management failed to provide safety training for workers, ignored rules on building spacing, density in manufacturing lines, dust cleanup, and use of anti-explosion equipment.
As noted in our August posting, previous incidents of explosions caused from combustible metal parts involved two different suppliers to Apple. In May of 2011, a significant explosion rocked a Foxconn Technology Group production facility located in Chengdu, China where two workers were reported killed. In December of that same year, an explosion at a manufacturing facility of Ri Teng Computer Accessory Co., a subsidiary of Pegatron Corp, located in Shanghai’s Songjiang Industrial Park, injured upwards of 60 workers.
This latest report is a further indication that China’s governmental leaders are indeed clamping down on factory safety standards by holding individual executives and investigative agencies accountable for enforcing worker safety standards.
We continue with our series of Supply Chain Matters postings reflecting on our 2014 Predictions for Global Supply Chains that we published in December of last year.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. We not only publish our annualized ten predictions, but scorecard the projections as this point every year. After we conclude the scorecard process, we will then unveil our 2015 annual projections for industry supply chains.
As a reminder, our self-scoring process will be based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different.
In our previous Part One posting, we score carded 2014 Predictions One and Two related to economic forces to expect in 2014.
In our Part Two posting, we revisited Prediction Three, related to continued U.S. and North America based manufacturing momentum, and Prediction Four, ongoing challenges in supply chain talent management.
In our Part Three posting, we rated Prediction Five, our specific call out of extraordinary supply chain challenges among three specific industries.
In this Part Four posting we re-visit Predictions Six and Seven.
2014 Rating: 2.0
Throughout 2013, business headlines were focused on the occurrence of highly visible incidents of perceived or alleged labor abuses, coupled with environmental safety concerns among production facilities supporting multiple industry supply chains. Thus, our 2014 prediction called for higher levels of visibility to those supply chains proactively addressing social responsibility and unfortunately, those that are inclined in accepting past status-quo. We predicted consequent business and shareholder implications surrounding such practices.
This was a prediction that unfortunately, did not occur to the levels we anticipated and thus we have given ourselves a low self-rating.
On the positive side, labor activism continued to be a discernable trend among so-termed, lower cost manufacturing regions. Business media such as Bloomberg provided added visibility to worker safety and pay conditions among female workers within regions such as Bangladesh. In China, the workforce has turned toward male dominance and reports of sexual harassment have come to light. In a Supply Chain Matters commentary in May we noted trends reflecting for the most part, a female dominated workforce in Bangladesh enduring workplace perils to sacrifice for the better good of their families. A predominately male workforce in China has become much more activist and vocal for motivations of career, marriage, and future benefits. The commonality is increased activism, appealing to social conscience and the collective voice of many to stop abuses and the taking of workers welfare and advancement opportunities for granted.
In the high-tech sector, Apple continued to undertake meaningful steps to initiate broader supplier responsibility practices including substance use regulations across its supplier network. The highly visible consumer electronics provider published both its Eight Annual Supplier Responsibility report along with a new Regulated Substances Specification which was made available for open viewing. The substances specification called for the banning of cleaning agents’ benzene and n-hexane within all supplier factories. Unfortunately other high tech and consumer electronics brand owners appeared not to join in openly declaring higher standards for safe chemical use.
Many consumer products companies along with their respective supply chain suppliers made some continued strides in environmental and social responsibility particularly in the areas of palm oil and other agricultural commodity sourcing.
The apparel industry continued efforts by various industry consortiums to improve factory safety working conditions across countries such as Bangladesh and Cambodia. In an early November update, we were disappointed to observe that a large number of garment factories across Bangladesh failed safety inspections. According to reports, the inspections uncovered critical structural deficiencies within 100 factories that require immediate repairs. In 17 of the inspections, factory conditions were deemed to be so unsafe that the factories were ordered closed. Around 110 of building inspections uncovered the need for immediate actions required to bring the facility above acceptable safety levels for production to continue. Garment workers in Cambodia have increasingly become more vocal in seeking higher wages within that country and some European retailers have pledged to offer higher wages. However, industry consortium efforts appear to have bogged down with little outcry from external groups or stockholders.
Prediction Six was a disappointment in 2014, not just for us, but for various industry supply chains who still weigh lowest cost higher than active social responsibility practices and accountability.
Our prediction cited that the ongoing cumulative effects of increased financial and business related risks would motivate manufacturers and retailers to once again revisit multi-tiered global sourcing strategies.
Overall, 2014 has turned out to be a tame year in terms of global supply chain risk and major disruptions, with some notable exceptions, and that more likely has muted any major efforts for changed sourcing.
According to global re-insurer Munich Re, Natural disasters worldwide caused about $42 billion in economic damages during the first half of 2014, well below the average amount of $95 billion for the same period during the past 10 years,. Insured losses totaled about $17 billion during the first half of 2014, compared with a 10-year average of $25 billion. Increased volcanic and earthquake activity caused some concerns in Northern California and in Iceland during August while in Asia, there were constant incidents of major earthquakes, many of which located in non-industrial areas.
Social and Political Unrest
In the area of social and political unrest, early 2014 brought a new wave of worker protests within China’s low-cost manufacturing sectors such as footwear while territorial hostilities among Russia and Ukraine presented threats of potential European supply chain disruption. In May, a dispute over drilling rigs in the South China Sea precipitated rioting across Vietnam that caused disruption to hundreds of China-owned factories. The Middle East was a constant threat for continued hostilities, specifically related to Syria and Iraq.
One of the largest ever recorded outbreaks of the deadly Ebola virus that has struck certain West Africa based countries has the strong potential to impact industry and global supply chains if the outbreak is not controlled. The outbreak which initially began in March has now broadened to nearly 16,000 reported cases and nearly 5700 deaths. Potential threats are in global transportation and logistics as well as localized outbreaks that could impact specific industry supply chains in the light of past severe global outbreaks of SARS or influenza.
Humanitarian focused supply chain activities continue to provide the critical defenses for avoiding a broader pandemic outbreak involving far more countries and geographies. While a global pandemic might have been characterized as a low probability scenario among various industry supply chains, Ebola remains an acute current day reminder of a disruption that can impact many industry and global supply chains.
Merger and Acquisition
In the pharmaceutical and drug sector, business headlines reverberated with a slew of planned or attempted merger and acquisition activity as the major industry players jockeyed for strategic advantage in product pipelines, cost structuring and emerging market access. Any of these would have provided the potential for major supply chain disruption.
Specific Industry Disruption
Two of the most notable industry related disruptions in 2014 involved automotive and global shipping. An unprecedented level of product related recall announcements precipitated by lax product design and supplier management practices prompted the cumulative effect of multitudes of brands recalling millions of automobiles and light trucks that has brought automotive service supply chains to crisis stages. The most visible incidents involved an alleged defective design of ignition switches installed on multiple General Motors produced vehicles. The other ongoing crisis involves alleged defective air bag inflators produced for multiple automotive brands by Japanese supplier Takada. Automotive OEM’s may well revisit their supplier sourcing, quality conformance and product design practices in the light of the current levels of risk exposure.
The other major disruption with ties to global sourcing was the perfect storm of near paralysis that impacted U.S. west coast ports at the very height of import and export shipment activity related to the 2014 holiday fulfillment period. As we pen this self-rating commentary, the port crisis continues, with little optimism related to easing, and the reverberations and effects of this crisis will likely alter global surface shipment routings in the months to come.
We continue in the belief that the days of global sourcing based on one-dimensional dimensions of direct labor or transportation are over. Consequent sourcing decisions that factor elements of possible risk will bring forward far different dimensions of balancing global sourcing with risk mitigation. Since 2014 provided an overall tamer risk environment, out of sight was probably out of mind. However, the symptoms and casual factors remain evident.
This concludes Part Four of our report card on our Supply Chain Matters 2014 Global Supply Chain Predictions. Stay tuned as we assess our remaining 2014 predictions in the final posting of this series.
©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.
The World Health Organization (WHO) has declared the ongoing outbreak of the deadly Ebola virus in West Africa to be a Public Health Emergency of International Concern (PHEIC) and humanitarian organizations such as Doctors Without Borders continue to work on the front lines to control the outbreak. The consequences of further international spread of the virus coupled with fears of wider-scale contagion have created a call for coordinated global public health actions to stop and reverse the outbreak.
Other concerns should be the short or longer impacts to industry and global supply chains if the current outbreak cannot be adequately controlled. Within close proximity to the current effected region within West Africa is the country of Cote d’Ivoire, which is a major supply source for cocoa. Countries within the West Africa coastal and interior regions also produce supplies of palm oil, iron ore and other commodity materials.
Beyond local sourcing are the broader implications to global transportation and logistics networks if the current outbreak spreads to other countries and spawns additional travel and cross-border restrictions. In short, industry supply chain and sales and operations planning teams definitely need to monitor the current Ebola outbreak and have some form of scenario and backup plans identified.
This posting serves to alert our Supply Chain Matters readers who subscribe to Accenture Academy training and webinars that this author will overview the current Ebola crisis from an industry and infrastructure supply chain perspective and provide expert perspective on the areas to watch along with considerations for building risk contingency scenarios. Accenture Academy is launching a new series termed Trend Talks, which are more compact and two-way interactive webinars that address and provide collective discussion on important, rapidly developing trends among industry supply chains.
I am pleased and looking forward to delivering this inaugural Trend Talk webinar addressing this timely and rather concerning global topic. The session is scheduled for Wednesday, December 10th at 10am Eastern time with participation available only to Accenture Academy members. Readers can utilize this Accenture Academy web link for login and registration.
This evening The Wall Street Journal Technology blog is reporting (paid subscription or free metered view) that the hackers behind the recent massive data and credit card breach at home improvement retailer Home Depot gained access from username and password information stolen from a services vendor. The WSJ cited informed sources as indicating that after two months of investigations, Home Depot was the victim to the same infiltration tactics hackers used in the Target stores data breach that occurred a year ago, namely hijacking the credentials of a contracted services supplier. Once inside Home Depot’s internal systems the hackers reportedly were able to jump the barriers between the peripheral vendor system and the retailer’s more secure retail network by exploiting security vulnerabilities.
It is now believed that 53 million email addresses were exposed in addition to the previously reported compromise of 56 million credit card accounts. The revelation comes after Home Depot recently declared to its customers that its retail systems were now safe.
The timing of this added information concerning Home Depot also comes at an in-opportune time, with the holiday fulfillment season right around the corner.
In our prior Supply Chain Matters commentary related to the Target incident, we noted important ramifications for B2C and B2B customer fulfillment or Omni-channel processes that involve third-party services or supplier vendors. With this latest revelation that the Home Depot breach indeed succumbed to similar vulnerabilities, retail industry IT and supply chain teams will be under increased scrutiny as to system and information security practices and vendor access credentials.
Business media continues to note that Target is still trying to bounce back from a loss of consumer confidence, recently announcing the closure of an additional 11 retail stores by February 2015. Today, Target announced the appointment of a Senior Vice President and Chief Risk Compliance Officer reporting directly to Target’s CEO and Chairmen. Jacqueline Hourigan will lead continued efforts to overhaul information security and compliance that umbrellas centralized leadership of enterprise risk management, including vendor management. That model may well be replicated by other large retailers.
Consumers must be assured that information security remains a top priority and strict standards are being adhered. That unfortunately will lead to further scrutiny of supply chain wide information security practices.
There are many ways to remediate a perceived supply risk management problem and Constellation Brands has just exercised its bold and approach.
The beer and spirits producer recently reported fiscal 2015 second-quarter results. While total revenues increased 10 percent, the company had to reverse approximately $37 million of net sales in the quarter as a result of a product recall at the height of the seasonal beer consumption period in August. This recall was prompted by the discovery that some glass beer bottles contained tiny bits of glass. In what the company describes as an abundance of caution regarding these glass bottles, two million case shipments of Corona Extra branded beer were recalled from wholesalers and retailers during several weeks in August. Perhaps some of our readers experienced the effects of this recall, not being able to drink their favorite beer brand. According to Constellation, there have been no reported injuries due to the defective bottles.
The supplier of the subject beer bottles was Anheuser-Busch In-Bev, specifically a bottle producing plant located at its Mexican based subsidiary. Beer drinkers may recall that the Corona brand was sold to Constellation in order for In-Bev to conform to regulatory restrictions for one of its product acquisitions.
To alleviate this type of problem in the future, Constellation additionally announced its intent to acquire from Anheuser-Bush InBev’s glass plant and associated warehouse facility that was associated with the prior recall. This bottle producing facility sits adjacent to the Corona brewery in Nava Mexico.. The company is investing the sum of $300 million in a vertical supply strategy to gain more control of quality conformance processes and to boost production. The deal further calls for a 50-50 joint venture ownership with Owens-Illinois to own and operate both the Mexican bottling facility and to source Owens-Illinois as a secondary glass bottle supplier.
According to the announcement, the glass plant currently has one operational glass furnace and plans are in-place to scale to four furnaces over the next four years at an additional cost of $300-$400 million, costs that are expected to be equally shared by Constellation and Owens-Illinois. When fully operational, the Nava Mexico bottle facility, operating under the leadership of Owens-Illinois is expected to supply more than 50 percent of the glass needs for Constellation’s U.S. beer business. Constellation also has a long-term bottle supply agreement with bottle supplier Vitro.
While we can all speculate that some of these plans were in the works leading up to the bottle recall, Constellation has indeed taken a bold step in assuring long-term bottle sourcing supply along with added assurance of quality conformance.