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.
In a June 2014 Supply Chain Matters commentary, Automotive Component Supply Strategy Meets Sensitized Regulatory Environment, we called attention to a published Reuters report indicating that product recalls involving airbags supplied by Japan based Takata Corp. would expand and involve millions of affected motor vehicles and ensnarl many global brands.
That situation has become ever more visible in a multitude of cascading product recalls and urgent consumer advisories involving many auto brands from entry-level to upscale luxury.
Today, the National Highway Traffic Safety Administration (NHTSA) issued a high visibility consumer advisory, urging owners of over 4.7 million recalled vehicles to act immediately on recall notices and replace defective Takata airbags due to suspected defective air bag inflators. Brands involve BMW, General Motors, Honda, Mazda and Nissan and the vehicle models date back as far as 2000-2001. While this advisory notes specific urgency for certain U.S. states and regions featuring warm, humid climates that fact seems to be blurred by the blast of Monday news from general media. The other reality is that many vehicle owners may have ignored previous recall notices which could jeopardize the safety of occupants.
Aftermarket service and spare part networks are already stressed by a surge of product recalls issued from an abundance of caution to avoid punitive financial fines. This latest high profile consumer warning related to certain airbag deflator defects will add more stress to overly stressed networks that lack the tools to handle such volumes.
Automotive OEM’s have fostered component product innovation strategies among a key set of lower-tiered component system suppliers, and OEM’s leverage such innovation across multiple vehicle and brand platforms. These strategies were put in place to foster both faster product innovation cycles as well as to be able to leverage volume supply costs across multiple global platforms. The objective of leveraging lower component costs has never gone away, at least for certain OEM’s.
Earlier this month, The Wall Street Journal featured a report (paid subscription or free metered view) indicating that Honda, after a long supplier relationship, is re-evaluating that arrangement with Takada in light of a series of airbag inflator product defects. Reports indicate that defective air bags, some dating back to the early 2000’s, could send metal shrapnel flying upon air bag inflation, posing serious injury risk to drivers and/or passengers. According to reports, Takada utilizes a different propellant than other suppliers, one that is cheaper but more volatile. Rival air bag suppliers that could benefit from the current crisis include Autoliv, DaicelKey Safety Systems and TRW Automotive Holdings, which is being acquired by German based ZF. The WSJ further reported that Toyota and Nissan are also concerned about Takata air bag systems in the light of the current circumstances. But, switching suppliers that support one or several global product platforms is somewhat more challenging from a timing perspective.
The WSJ report provides some in-depth perspective on how Takada has expanded its global just-in-time supplier footprint to accommodate individual OEM platform demand. The report alludes that the product quality problems may have stemmed from a period of rapid growth, testing communication and process discipline among far-flung regional plants. After two years of investigation, Honda and Takata joint quality teams discovered certain machine defects in a plant in Washington state and in process parameters in a Mexican plant. At times, poor record keeping hindered the ability to figure out which cars had defective inflators installed.
Whether Takada can recover from this ongoing and compounding product recall and branding crisis is certainly open to skepticism and speculation. However, Supply Chain Matters feels that automotive OEM’s face their-own realities related to product development and global product platform cycles. A global platform strategy supported by component supply agreements has to be balanced with supplier risk. Requiring suppliers to locate just-in-time production across far-flung global regions requires an assessment of rigid process control discipline and conformance. When such controls indicate cause for concern, two-way communication must be forthright and honest and procurement teams need to be proactive in assessing and communicating risk implications.
Today’s overly sensitized regulatory environment requires timely feedback and responsive risk mitigation.
The passenger safety, financial, and brand risks are far higher.
UPS’s Latest Survey of Healthcare Supply Chains- Some Interesting Conflicts and Needs for Broader Perspectives
This week, UPS announced the results of its seventh annual “Pain in the (Supply) Chain” survey involving pharmaceutical and healthcare supply chains. According to the authors, the survey was conducted from phone interviews with 536 senior supply chain management decision-makers within the healthcare industry. Global coverage for this survey is noted as Asia, Canada, Latin America, the United States and Western Europe.
For the third consecutive year, the survey points to regulatory compliance as the top supply chain pain point, cited by 60 percent of the 2014 respondents, indicating that this trend alone is driving current business and supply chain changes. From our Supply Chain Matters lens, that finding is not a surprise since so many pharmaceutical and healthcare supply chain are indeed regulated, but more importantly, they are now globally extended for both supply and service demand needs.
The next largest concern was noted as product protection challenges, with 46 percent of respondents citing product security, and 40 percent citing product damage and spoilage as top concerns. Again no surprise, given the ongoing challenge of counterfeit drugs and global extensions of transportation and logistics networks.
However, what was surprising, at least for us, was that a mere 26 percent of these supply chain leaders cite contingency planning as a top supply chain concern. Perhaps this is an area that these supply chain leaders feel is being adequately addressed. Yet, 34 percent of those surveyed in Asia and 22 percent of those residing in Latin America indicated their firm’s supply chain was impacted by an unplanned event in the past 3-5 years. Cited reasons that were noted were:
- Events being too unlikely or infrequent
- Back-up infrastructure too expensive to deploy
- Little or no prioritization being given to this area vs. other challenges
For an industry that is required to spend so much on product development, brand value and patient trust, it is surprising to once again note such viewpoints. The industry need only look to the previous supply chain disruptions that occurred at Johnson & Johnson to ascertain how about contingency planning has become.
Deeper in the UPS news release perhaps finds a rather important assumption related to the above concerns in compliance, product protection and contingency planning. Many healthcare supply chains are not viewing production, distribution, logistics and transportation as a core capability and have thus outsourced these activities. According to this latest UPS survey, 62 percent of decision makers cited increased reliance on third-party logistics providers as a strategy into the foreseeable future. (3-5 years) Therefore business partners have become an important enabler in helping to overcome stated supply chain challenges.
In a previous Supply Chain Matters commentary, we called for a broader technology vision among supply chain execution partners, specifically 3PL’s. As more and more industry supply chains opt to outsource logistics, transportation and customer fulfillment to logistics and transportation partners, leveraging the potential benefits of newer technologies in item-level tracking, Internet of Things (IoT) and supply chain control towers become a de-facto capability requirement to overcome business challenges and deliver required business outcomes. Too often today, the outsourced 3PL decision has been driven solely by cost control vs. broader requirements for supply chain resiliency and responsiveness. While UPS and FedEx have embraced advanced technology, other 3PL’s have relied on customers to fund such investments, and there remains the conundrum. For us, these latest UPS survey findings concerning healthcare focused supply chains have special meaning to the new reliance on supply chain execution partners for joint goal enablement. Beyond logistics, globally dispersed contract manufacturers have an important enabling and support role as well.
The report’s executive survey indicates that healthcare supply chain leaders are themselves eyeing technology investments in two specific areas of the supply chain, namely front-end order fulfillment and overall product protection in the form of serialization and item-tracking. Supply Chain Matters advises these leaders to also consider the all-important supporting element for connecting the front and back-end of the extended healthcare supply chain. That would be a cohesive supply chain business network that synchronizes planning, execution and early-warning intelligence to unplanned events.