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The Initial Signs of the Donald Trump Era- Continuous Change, Uncertainty and Supply Chain Risk Mitigation

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As Supply Chain Matters has noted in prior commentary, the election of Donald Trump as the incoming President of the United States will present quite a number of global and domestic supply chain management uncertainties for industry teams to manage over the coming months, and perhaps years. The question is how to be prepared.

Thus far, Trump’s initial communications and proposed Presidential Cabinet appointments would imply that campaign promises to kill unfavorable trade agreements as well as openly confronting American companies to keep jobs in the United States are holding true. Then again, news of potential Cabinet and advisor appointees would imply a pro-business administration.

The first public confrontation involving the heat and air conditioning Carrier business unit of United Technologies over proposed job reductions that were transferring to Mexico has received quite a lot of media coverage. Trump’s supporters are elated with this initial confrontation. In the end, after closed door discussions, Carrier has agreed to keep roughly 1,000 jobs in Indiana, while the state of Indiana had to agree to provide UTC upwards of $7 million in financial incentives to remain in the state. While Carrier still plans to invest $16 million to retain some operations in Indiana, the intent is to go-ahead with the movement upwards of 1300 other jobs to Mexico and close another facility in Indiana as originally planned. While visiting the Carrier Indiana facility yesterday, Trump once again vowed to reexamine existing trade agreements such NAFTA, and put U.S. businesses on-notice that there would be consequences for any decision related to the movement of jobs out of the country.

Political opinion is now raising the specter of U.S. corporations having to base business sourcing decisions on threats of punitive actions. That further raises speculation that other countries will respond to a Trump administration with threats or their own punitive actions.

On a somewhat positive note, the selection of Elaine Chao, a former Cabinet secretary serving eight full years during the Bush Administration as the nominee for Secretary of Transportation is being perceived as an intent to follow-through on the campaign promise to aggressively invest in needed infrastructure in roads, bridges and other badly needed U.S. transportation infrastructure needs. Ms. Chao provides what is widely perceived as an extensive policy background and she is also the spouse of U.S. Senate Majority Leader Mitch McConnell. If confirmed, Ms. Chao will inherit management of current unprecedented levels of safety related recalls involving the U.S. automotive sector, especially those related to air bag inflators manufactured by supplier Takata. She will have oversight of regulations pertaining to Uber-like transportation services as well as regulations pertaining to autonomous driving vehicles.

For industry supply chain teams, there is little doubt that capabilities in assessing supply chain network design decision support options based on criteria related to direct labor costs, inventory, transportation and landed costs, as well as what may be constantly changing local content requirements will be essential.  Capabilities in managing what may turn out to be very fluid and changing global trade management policies and regulations will obviously be essential along with integrating such information with existing product sourcing and planning systems.

Supply Chain Matters sponsor LLamasoft has already indicated a marked uptick in interest levels in the firm’s supply chain network design and Supply Chain Guru focused technology coming from UK based firms because of the Brexit referendum, and anticipates similar increased interest levels as the Trump leadership era unfolds.

As teams prepare for their 2017 investment and resource budgets, minimizing risks related to global sourcing and material movements, deeper analysis and more informed decision-making capabilities, along with overall agility in supply chain focused decision making should be high priority areas.

In 2017 and beyond, supply chain and product management teams will indeed be very involved in counseling senior and line-of-business management on the various whiplash effects of a far more changing global trade environment.

Bob Ferrari

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


Asia Pacific Leaders Wrap-up Their Weekend Meeting in Peru and Vow to Continue Trade Alliances

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This past weekend, political leaders of the Asia-Pacific Economic Cooperation forum met in Lima Peru to discuss free-trade, and specifically pending ratification of the Trans Pacific Partnership (TPP). According to various media reports, the delegates sent a direct message to President-Elect Donald Trump, namely that they will move forward with Asia-Pacific trade pacts with or without the support of the United States.  The implication could well be more trade influence for China.

The election of Trump reportedly loomed large over this summit of 21 nations, and President Barack Obama had his hands full in trying to assuage fears of the U.S. withdrawing from TPP and other pending global trade pacts. The U.S. Congress has failed to take up TPP ratification in the now lame-duck session, with little likelihood of doing so in 2017 now that there is full Republican Party control across all branches of government.  During the presidential campaign, Donald Trump blamed bad trade deals as one of the primary causes of manufacturing and other job losses in the U.S. and threatened to specifically scrap TPP and re-negotiate the North America Free Trade Agreement (NAFTA). In the light of this current perceived trade retrenchment climate, China indicated at the summit that the country was prepared to take the lead in promoting trade. The TPP alliance was a critical component of the Obama policy to counter China’s influence in influencing trade deals and more attractive trade arrangements among Asia-Pacific regions.

This weekend, the countries of Chile and Peru, two existing members of TPP, indicated they were interested in joining the Regional Comprehensive Economic Partnership (RCEP), a China led pact that could involve 16 nations.

Leaders of Both Canada and Mexico also indicated this weekend that they remained committed to North America based trade, which leaves open the question of how much they are willing to re-negotiate the existing NAFTA agreement.

As industry supply chains complete 2016 activities, there is a clear uncertainty looking out to 2017 and beyond if the United States, one of the globe’s largest trading partners takes on a harder trade stance. Many are looking to President-Elect Trump’s policy statements and pending Cabinet appointments to assess how hard a line the U.S. will take.

There are obviously many implications related to protections to intellectual property protection rights (IPP), more open access to Asia Pacific markets and the potential for tariff implications for certain products.  All could involve impacts to existing global supply chain product sourcing strategies.

Stay tuned as we continue to assess these changing geo-political developments and their impacts to global supply chain management strategies.


The Donald Trump Presidency- Our Supply Chain, Product, Procurement and Technology Management Focused Perspective

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It has taken this analyst over a day to recover from the shock and outcome of the recently completed U.S. Presidential election. Front page newspaper and online media headlines across the globe reflect such unprecedented shock and surprise. Today’s primary headline from The Wall Street Journal declared: A New Political Order.

Supply Chain Matters has become a well-recognized blog providing insights and observations directed at the broad umbrella of what has become supply chain management today. Our perspective is global in nature, not just the United States. Thus, it is probably no secret that this week’s stunning election result has global as well as domestic supply chain management implications for many months to come.

President Elect Trump won the election echoing populist views that favored building frustrations of the everyday workers who remain fearful of the growing tide of globalization. They are perhaps the workers employed, or previously employed in your manufacturing or supply chain operations areas that have had their economic livelihood impacted by various cost-cutting or other business moves.

Populist sentiments fueled Great Brittan’s referendum results to favor exiting the European Union, which was the prior shock heard around the world. There again, populist sentiment was in protection of jobs, a rising tide of immigration and in the burdens of government taxation.  Already there is speculation that the populist movement will perhaps impact pending important elections across Europe that are scheduled to occur througout 2017.

However each of us voted, the United States will plan for a peaceful and successful transfer of power. Similarly, U.K. political leaders and institutions will plan for a formal two year exit plan from the European Union.

In this initial viewpoint commentary, we can only touch the surface since so many uncertainties come to mind and a Trump administration is yet to govern and lead the United States. Thus, our first of surely many commentaries to come will focus on helping our readers and clients to begin to think about and context such implications.  At this point, supply chain leaders can only assess the potential scenarios and remain prepared to brief the C-Suite on how the overall supply chain is prepared to deal with such implications.

Let’s therefore dwell upon some important areas.

 

Upcoming Holiday Fulfillment Surge

The most immediate impact is potentially the upcoming holiday fulfillment period. Most retail industry demand for the past two years has been fueled by a positive consumer sentiment. The open question is whether the shock and fear resulting from the U.S. election and other global political concerns spills over to holiday buying sentiments, particularly discretionary type goods such as clothing, jewelry or high fashion. Early product demand sensing will perhaps be a key determinant of any impact.

 

Trade Policy

President Elect Trump was rather vocal and direct regarding current U.S. trade policies involving North America and other global countries. He called for re-negotiation of the North America Free Trade Agreement (NAFTA) and the refusal to ratify the proposed Trans Pacific Partnership (TPP) agreement. There was open admonishment of currency and trade policy related to China with a threat to pose significant tariffs on Chinese manufacturing goods being shipped to the United States.

When the political realities set-in, the campaign rhetoric will likely focus on actions related to both China and NAFTA, but to what degree remains to be seen and assessed. The President Elect was not shy in calling out specific manufacturers such as Ford and Apple on their manufacturing investment strategies and lost U.S. jobs going to China and Mexico. Similarly, online buying and commerce has generally been allowed a free and open access to global markets. Global trade shocks could well spillover to online providers such as Amazon’s access to sell in certain overseas global markets.

For most multi-industry supply chains, it is likely a wait and see perspective at this point. For supply chains that currently have a high-profile sourcing dependency within China itself, there should be consideration for business impact. However, for those that have a stronger sourcing presence in Vietnam and other Asian countries, failure of the United States to support TPP has from our lens, trade and intellectual property protection implications. Like it or not, China today has garnered enormous power to influence basic commodity pricing which is another reality that must be balanced with sudden policy moves.

The obvious industry impacted by a harder currency and trade line with China is high tech and consumer electronics. A further industry is apparel and footwear. The high-tech supply chain with considerable China exposure is that of Apple. However, Apple is not alone from an overall high-tech perspective since the bulk of the industry’s component and final assembly value-chain originates in China. Clothing and sporting goods manufacturers have already moved some sourcing to other low-wage countries but high-margin and high-fashion goods remain likely sourced within China.

The commercial aerospace industry has a potential impact from a product demand perspective because so many of current booked orders involve China’s air carriers, reflecting explosive long-term demand for increased air travel across China. Retaliation to increased U.S. or even European tariffs could result in a demand focused backlash. Also from a demand perspective, a harder U.S. line on currency and trade policy has an obvious impact on global transportation carriers, and ocean container shipping lines that are already struggling with lower demand and significant excess capacity.

A hard line on shipping jobs to Mexico and the threat to build a wall on the U.S. border with Mexico has a potential impact on automotive manufacturers who have made significant strategic production sourcing bets for Mexico to serve as a major manufacturing hub for smaller and mid-sized vehicles serving North American and other geographical consumption markets. The President Elect threatened a 35 percent tariff on cars imported from the country and a backlash on borders could spill over to free movement of goods.

Overall, we might foresee a resurgence towards more accelerated near-shoring sourcing strategies to serve domestic product demand.

 

Environmental Policy and Climate Change

A Trump Administration is not likely to actively support global climate change initiatives and there is already speculation that U.S. policies related to clean and alternative energy buying and development incentives or electric car purchases will be quickly rolled-back. Campaign rhetoric shunned scientific climate change evidence and included the cancelling of large payments to United Nations sponsored climate change initiatives. Further speculation points to lifting existing restrictions related to oil pipeline construction from the Bakken region, adding a further long-term demand blow to North American railroads. However, to appease coal country voters, the lifting restrictions on coal use would be a commodity movement offset for railroads.

We tend to agree with others including Kevin O’Mara of SCM World that it may be just a matter of time before a Trump administration withdraws support for the Paris climate change initiatives which will serve as a big disappointment to current signors, and could result in added backlashes directed at U.S. produced goods.

This author has already openly stated that a sustainably focused supply chain strategy should serve as the component of a broader overall sustainable business strategy. Current sustainably focused initiatives could well be sidelined by ongoing political events.

 

Global Economic and Consequent Supply Chain Strategy Trends

The entire Trump Presidential campaign was predicated on shock and bold statements related to the United States being far more aggressive in world markets.  Hopefully, such statements will moderate with the realities that U.S. based businesses need to continue to benefit from access to such global markets. Already, corporate CEO’s from Boeing, General Electric, Procter and Gamble and United Technologies who each have a major stake in sustaining global business expansion have reached out to the President Elect seeking to promote what was described as “healing and reconciliation.”

Mr. Trump promised a new tax policy that reduces overall corporate tax rates and will likely allow corporation to move accumulating overseas profits back to the U.S. or elsewhere without substantial tax consequences. The re-patriating of overseas profits triggers the potential risk of other nations seeking more of their fair share of taxation from overseas based corporations, as demonstrated by the European Union’s latest efforts to collect hundreds of millions in added taxes from Apple that were sheltered by Irish tax shelter laws. More local based taxation implies added supply chain movements for inventory and production declarations.

All of the above may well provide an incentive for more near-shoring or increased investments in U.S. and major geographical hub based supply chain capabilities.

However, the largest risk is additional shocks to the overall global economy which is already struggling to bounce back from the prior financial meltdown led global recession. With the threat of more populist sentiments, additional political shocks within other countries such as in Europe, or a complete loss of confidence in global financial structures and currency values, anything can happen.

 

Technology and IP Protection

A nationalist agenda within the U.S. can well trigger prohibited access to advanced technology across the globe or to local intellectual property provisions that require more sharing and less protections of trade secrets. Certain technologies could be banned, or certain products could be subject to added securitization by regulatory and domestic product safety agencies. This is likely an area of greatest strategic risk and businesses have already experienced such effects in China. A chilling or clash of trade policy among the U.S. and certain other large countries can trigger many ancillary effects.  Access to technical talent or IP residing in non U.S. countries could well be even more restricted or shutout all together. Likewise, access of U.S. citizens possessing critical technology skills could be banned from entering other countries without agreeing to waive intellectual property or trade secret disclosure.

We certainly trust that cooler discourse will ultimately prevail but for now, supply chain teams need to think about any of the above implications and their impacts on current supply chain sourcing and distribution strategy.

Indeed, we are all about to enter a new phase of uncharted global uncertainty with added shocks to come.

Bob Ferrari

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


Supply Chain Matters Q3 2016 Newsletter Has Published- Content Capsule

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We would like to alert our Ferrari Consulting and Research Group clients and our Supply Chain Matters readership that our Q3 2016 Newsletter published yesterday and should be in the email inboxes of those who have subscribed.

Our latest newsletter again reinforces important trends brought forward by developments this past quarter.

Global manufacturing and supply chain activity as recorded by the JP Morgan Global Manufacturing PMI index reflected some bounce back but otherwise the long-term trend of low growth prevails.

Among Developed Regions, there were mixed signals with Japan and Taiwan experiencing stronger demand conditions but the United States experiencing some setbacks. GDP in the United States was reported to be a disappointing 1.2 percent in the second quarter.

Emerging Regions reflected slower growth momentum in Q3.  Manufacturing and supply chain activities continue to improve in India, but there was some moderation reflecting on the prior growth levels within Mexico, Vietnam and Indonesia. Activity across China moved to expansion level however, the rate of expansion is characterized as marginal.

Among other Newsletter articles for Q3:

  • Significant Industry and Supply Chain Developments in Q3- the quarter was dominated by significant and highly visible supply chain related news and developments. That included the emerging financial fallout from Volkswagen’s cheating on emissions levels over a year ago. Samsung’s unprecedented sales and production suspension of the Galaxy Note 7 smartphone after continuing reports of fire and explosions with this device dominated media channels, as were the emerging implications and learning. In global transportation, The Hanjin Shipping bankruptcy events cascaded among multi-industry supply chains and provided the wake-up call to the extent of industry overcapacity and more pending consolidation. Wal-Mart’s revised strategic emphasis on online shopping, and fulfillment capabilities coupled with additional retailers announcing permanent closings of physical stores motivated us to declare that the retail industry has entered a new phase of online and omni-channel fulfillment.

 

  • China Investing in Broad Industry Value-Chain Capabilities- we highlight a recent report from The Wall Street Journal reporting on the trend of more of China’s manufacturers turning to domestic sourcing of key components, with a government strategy emphasizing more value-chain sourcing within that country. More and more product value-chain component suppliers in-turn are developing world-class manufacturing capabilities at lower inbound costs for China’s end-item manufacturers. All of this has implications for broader global supply chain activities and global trade.

 

 

  • Vietnam- Asia’s Next Manufacturing and Supply Chain Tiger– we highlight a report by The Economist for why the country is increasingly becoming a new end item manufacturing and component sourcing destination for many industries which include strategic cost advantages in areas such as workforce, geography, policies and global trade.

 

  • Record High Global Supply Chain Risk– we also highlight the latest report of the CIPS Risk Index which reportedly rose to its highest level in nearly two decades. The existing rise in global supply chain risk is attributed to heightened geopolitical risks, to include the unknow effects of Brexit and the U.S. Presidential Election, the extent of the growth slowdown and protectionist trends within China, emerging markets financial vulnerabilities and increased terrorism impacts on global cross-border movements. CIPS recommends that supply chain teams gain clear visibility of the supply chain, and with continued exchange rate downside risks, that teams consider paying suppliers ahead of contracted payment.

 

As a reminder, all registered subscribers of the Supply Chain Matters blog automatically receive a copy of the newsletter at their designated email address. If you are not signed-up for distribution and would like a copy of our latest Newsletter, please send an email with the title Newsletter Request to:

newsletter <at> supply-chain-matters <dot> com.

Please remember to include your Name, Role and/or company with your email address and we will have a copy sent directly as well as automatically add your email to future distribution.  As a reminder, our policy is to not sell or disclose any individual subscriber data to any third parties.

Thanks again for your continued readership.

Bob Ferrari, Founder and Executive Editor

 


The Samsung Smartphone Product Recall Crisis Bears Important Similarities and Learning

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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.  Recalled Samsung Galaxy Note 7

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.


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