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Report of Explosion at Auto Parts Supplier Factory in Japan

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This week, a prominent auto parts supplier experienced an explosion at one of its factories in central Japan, injuring four people. News of such an incident of supply chain disruption would not be considered unusual in these times of global-wide supply chain activities. However, considering the Japan location and the major automotive OEM customer being Toyota, it may well be noteworthy.

The factory where the explosion occurred was operated by Aisin Advics Co.is a major supplier to Toyota Motor for automotive braking systems. The explosion occurred at the supplier’s production plant located in Kariya, Aichi Prefecture, near one of its paint lines. On Monday, the supplier indicated that it was still in the process of evaluating the extent of the damage which had the potential to impact the supply chain of its customers.

As Supply Chain Matters and other business media has indicated, Toyota had already suffered production delays as a result of two major earthquakes that impacted southern Japan in April.  A body factory and a die-casting plant, both operated by Aisin Seiki Co., and located in Kumamoto region, were damaged as a result of the quakes, and Toyota had to suspend nationwide production operations for upwards of a week because of this disruption. A fire at a steel production plant operated by Aichi Steel Corp. also impacted Toyota.

Coincidentally, Aisin Advics is owned by Aisin Seiki Co. and thus may well be versed in supply chain risk mitigation and business continuity planning..

The overall impact of the April earthquakes came to more light this week in the release of the Nikkei Japan Manufacturing PMI for May. The May reading of 47.7 in production and manufacturing activity represented a 40 month low. According to the panelists that are polled by Markit Economics, the earthquakes had a detrimental effect on production output prompting an economist to indicate:

“The aftermath of the earthquakes in one of Japan’s key manufacturing regions continued to weigh heavily on the goods producing sector.”

Depending on the extent of damage involved in this latest factory fire incident, the Japan automotive manufacturing sector and specifically Toyota will have another supply chain business continuity effort underway in the coming days.

Stay tuned.


Highlights of Supply Chain Matters Interview with Jabil

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Supply Chain Matters recently had the opportunity to speak with contract manufacturing services (CMS) firm Jabil’s, specifically Vice President of Supply Chain Solutions and Global Logistics, Fred Hartung.  If readers had any perceptions that certain CMS firms were laggards in advanced technology adoption, our interview led to quite the contrary perception.

Jabil has been featured in supply chain industry headlines these past two weeks. At the recent Gartner SCM Executive Conference, Jabil’s intelligent supply chain capabilities in real-time visualization and advanced analytics resulted in receiving an award as a “Supply Chaininnovator.” Hewlett Packard unveiled what it termed as the first production-ready commercial 3D printing system and Jabil participated in the press conference. At last week’s SAP Sapphire customer conference, SAP and UPS announced a partnership for services related to an on-demand 3D printing network which involves this CMS as well.

Hartung oversees multiple roles including responsibility for advanced supply chain technology, digital supply chain, advanced planning and trade compliance. He additionally heads a team overseeing Jabil’s supply chain global network.

Our discussion touched on a number of business and technology areas.

Regarding the current CMS industry landscape, Hartung described changing global transportation costs, foreign exchange rate volatility and changes in the “value density” of products as all dynamic industry forces.

More manufacturing focused OEM’s now see themselves as incorporating more and more software and technology as major parts of product design and functionality features and that impact spills over to contract manufacturers. OEM customers were further described as increasingly practicing near-shoring manufacturing sourcing practices aligned to major geographic product demand regions with Mexico and Vietnam really taking off along with resurgence towards manufacturing in Malaysia. Hartung indicated Jabil’s belief that 3-D printing will make a big difference in localized manufacturing tied to customer fulfillment. OEM’s are still experimenting with incorporating 3D printing concepts into product strategy and Jabil is assisting by maintaining various labs across Silicon Valley.

We discussed what is often described as the number one multi-industry supply chain decision-support challenge, that being gaining and enabling end-to-end planning and customer fulfillment visibility. Hartung described this challenge in the context of “actionable visibility”, a focus on the most pertinent information supporting business processes along with “in-control” digitized streaming information flow that is anchored in analytics-driven decision-making capabilities. Another Jabil consideration in its use of advanced analytics is directed at managing and mitigating supply chain risk. Nine separate categories of risk are continually tracked ranging from low to higher supply chain disruption and risk factors.

In the area of addressing Internet of Things, machine learning and cognitive computing opportunities, Hartung acknowledged that information security has got to be an area to be taken very seriously, and prominent in the early design process. Jabil views IoT as an enabler of new business models for customers and for Jabil, and here again, leveraging analytics, either prescriptive or predictive, is the important area of concentration. Responding to the question of whether customers ready for these types of initiatives, Hartung indicated that while Jabil is way ahead on the learning curve, customers indicate that they want to hear more.

Besides incorporating advanced supply chain technology and multi-tenancy practices across Jabil’s own extended supply chain, the CMS is increasingly being called upon to assist OEM customers themselves in deployment of such technologies across their extended supply chains as-well.  This has been a new area of technology services for some CMS providers.

As a key supply chain partner in many more multi-industry settings, a contract manufacturer must be knowledgeable of the business process and enabling technology competences that make a difference in meeting both customer and internal business and supply chain outcomes. This is an industry that moves in lock-step with its customers, and is constantly challenged with narrow margins to work with.

As a recognized supply chain industry analyst, this author has had the opportunity to view a number of Jabil industry presentations over past years as well as to speak with the firm’s executives. This CMS has consistently demonstrated a willingness to leverage and collaborate with customers on advanced technology use cases across its supply chain management processes.  After my recent interview, I am further impressed with the firm’s understanding and practice of leveraging areas where technology enablement can indeed be a facilitator of a more adaptive and resilient supply chain.

Bob Ferrari

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


Chipotle Feels the Financial Impact of its Ongoing Food Safety Crisis

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This is a Supply Chain Matters update commentary regarding Chipotle Mexican Grill, specifically efforts to address its ongoing food-safety challenge that not only threatens the restaurant chain’s value to its brand and to its investors, but on perceived quality risks in its farm to fork supply chain.   Chipotle logo

This week, the restaurant chain posted its first quarterly financial loss as a public company amid a nearly 30 percent reduction in same store sales. Total revenues were down 23.4 percent while net income dropped by $122.6 million. Operating margin dropped to 6.8 percent from just over 28 percent a year earlier due to what was described as higher marketing, waste and food testing costs.

In a previous February commentary, we observed that the restaurant chain had entered a new critical phase, one focused in rebuilding its brand integrity along with assuring that food safety practices were re-addressed across the supply chain and within its individual restaurants. In our mid-March commentary, we highlighted reports that seemed to put a different twist to the ongoing crisis. At the time, The Wall Street Journal citing informed sources, reported that the restaurant chain considered stepping back from the food safety changes touted back in February. Rather than conduct high-resolution DNA testing on a multiple of inbound supply ingredients, the plan was apparently to test only certain foods. Further reported was that the chain’s beef supplies would be pre-cooked in centralized kitchen facilities to insure that E.coli was eliminated, and then packaged in vacuum-sealed bags and shipped to local outlets where the product could be marinated and grilled.

We speculated that the decision to scale back DNA testing may have been brought about by further process and supply chain focused analysis.  Yet, the restaurant chain later announced the hiring of a noted meat industry food safety expert to be its new director of overall food safety.  We questioned whether such decisions for scaling back testing should have been made so early in the process, without the insight or input of the chain’s newly hired food safety expert, and without allowing more time to address consumer concerns regarding uncertainty in food sourcing and handling practices.

Our stated belief was that restoring consumer trust in a badly damaged brand is not a one-time marketing or financial budgeting challenge, but rather a systemic management challenge to address quality and food safety practices among all farm to fork processes and activities.

The chain has since stepped-up training within local restaurants on food safety and food handling practices as well as the assistance of a field leadership program to assist local managers in managing and auditing food safety and handling practices.

Chipotle’s co-CEO, Steve Ells indicated to investors that rebuilding trust with customers would take some time. While we found that that admission insightful and somewhat overdue, we were taken back by a subsequent statement:

We will continue to make it our top priority to entice customers to return to Chipotle through effective promotions and marketing, and when they do return, we’re committed to providing the very best experience that we can to help ensure that they will keep coming back.”

Not a mention of testing and assuring consistent food safety practices as the top priority.

Further noted in business media reports are even further changes in food preparation and sourcing practices after apparent customer feedback indicated a decline in the quality of certain ingredients. Customers complained that produce or lettuce no longer tasted as it should. For instance, now the chain claims to have refined its washing of lettuce which will once again allow local restaurants to cut lettuce locally while still ensuring that it is safe. Similarly, bell peppers will be blanched and sliced in local restaurants rather than the previous change to do so in central kitchens.

On a positive note, customers apparently have endorsed the process for cooking organic beef in vacuum sealed bags within central kitchens because the meat is now perceived to not as dry to the taste.

As Chipotle customers may now be aware, the chain is attempting to incent customers to return by offering free burritos and other promotions. Over 5 million free burrito offers were issued followed by a direct mail promotion distributed to over 20 million households. Judging from the customer traffic statistics to-date, the chain’s most loyal consumers may not be completely convinced as of yet to return, although data seems to point to return by some not as loyal but cost conscious customers. One equity analyst has indicated that couponing is a short-term rather than a more sustainable strategy for restoring traffic.

In recent weeks, both Glass Lewis & Co. and Institutional Shareholder Services, both influential proxy advisory firms have weighed in on management. ISS is recommending a vote against re-election of certain current Chipotle board members at the upcoming annual stockholder meeting in May. The firm questions whether the ongoing food safety issues have exposed a flawed board succession process that nominated directors who have the management skill sets to keep pace with a chain’s size and complexity. Further stated was a failure of risk oversight by the firm’s Audit Committee.

Glass Lewis has reportedly taken issue with the board’s pay-for-performance model. As we noted in our March commentary, senior executive bonuses were recently changed to be pegged to increases in the firm’s stock price alone. ISS has also opined that the majority of discussion with major investors has focused on improving share price and changing executive compensation as opposed to addressing food safety.

The reality of losing the trust of loyal customers is indeed an ongoing challenge and Chipotle management must by our lens, have as its collective top priority means and methods to address food safety and quality from farm to fork. Management compensation not directly tied in some fashion to that goal, and management briefings and direction-setting that continues to lead with marketing and sales tactics are not going to convince this past Chipotle consumer that issues have been addressed and the quality and safety of food is industry-leading. Apparently we are not alone in that perception.

Bob Ferrari

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


Major Earthquake Occurences Remain Multi-Industry Supply Chain Concerns

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It has been two days since our Supply Chain Matters breaking news alert published on Friday on the occurrence of multiple severe earthquakes impacting southern Japan. While the major focus continues toward tending to the injured and missing, along with the assessment of the impacted region’s major infrastructure, the supply chain disruption implications are indeed evident and potentially include multi-industry dimensions.

Numerous incidents of aftershocks continue to impact the area which is hampering efforts by companies to assess damage to facilities and supply chain operations. Reports that we are monitoring indicate that Toyota will gradually halt automobile production across Japan because of a shortage of components. The Toyota Lexus production plant in Fukuoka prefecture remains in production halt for the remainder of this week. The Tustsumi plant which produces the Toyota Prius will halt production from Tuesday thru Saturday of this week.

Toyota supplier Aisin Seiki has acknowledged the discovery of broken walls, windows and assembly equipment at its facilities in the quake area but has indicated that plans are underway to shift the production of door and engine parts to other owned facilities located in other parts of Japan as well as other external plants. The open question is how much additional time will be required to implement this shifting of production.

Other automakers such as Honda and Nissan have also halted operations within factories within the impacted region. Honda has a motorcycle manufacturing plant near the city of Kumamoto.

Sony is assessing damage to its smartphone image sensor plant in Kumamoto indicating that that plant operations are unlikely to re-start soon. Sony’s camera image sensors are included in the Apple iPhone but the supplier has indicated that full operations remain at its plants in Nagasaki and Oita which also produce sensors used in smartphone cameras.

Semiconductor producer Renesas Electronics confirms it has sustained damage to equipment at its plant in Kumamoto which produces microcontroller chips for automobiles. Further assessment of damage remains to be completed before deciding when to resume production at this particular facility.

In addition, on Saturday, a more powerful magnitude 7.8 quake struck Ecuador, about 17 miles from the northwestern coastal city of Muisne, near the border with Colombia. What makes this incident so concerning is that this earthquake lies on the same geological “Ring of Fire” plates that surround the Pacific Ocean. Thus far, more than 200 deaths have been confirmed and there are reports of significant damage to the region’s infrastructure.

The top exports of Ecuador are crude petroleum, bananas, crustaceans, processed fish  and cut flowers.

Such considerable natural disaster events occurring over a short period of time should cause ongoing concern for multi-industry supply chain professionals since there is a lot of strategic component, commodity and finished goods production located in various regions along the “Ring of Fire.”  These incidents continue to remind all that the North America west coast region including California, Washington State and Oregon remain vulnerable to a major earthquake.  As geologists constantly remind regarding the U.S. west coast region, it is not a matter of possibilities, but rather a matter of when a rather significant seismic event occurs.

Another aspect already being raised by business media has been what learning came from the 2011 major earthquake and subsequent divesting tsunami that struck northern Japan regarding supply chain disruption and business continuity planning, and how that will come into play over the coming days and weeks.

Our thoughts and prayers remain with the numerous victims of these disasters along with the impacted families. These tragic natural disaster events provide constant reminders that are planet remains fragile to devastating seismic and climate related events.

Bob Ferrari


Not a Good Week and Time for Automotive Service Management Supply Chains

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For service facing and aftermarket automotive related supply chains, news developments this week have undoubtedly bordered on the surreal or even bizarre.

The ongoing product recall crisis involving airbag inflators’ producer by Takata took on even broader dimensions. The National Highway Traffic Safety Administration (NHTSA) indicated this week that as many as 85 million potentially defective airbag inflators are still inside cars and trucks now being driven across the United States. That number is supposedly in addition to the nearly 29 million inflators that have already been designated for replacement in the ongoing massive product recall campaign.  Reports indicate that thus far, at least 11 people have died and over 400 have been injured by defective airbag inflators.

There are many facets compounding this overall logistical challenge. NHTSA itself indicates that because of inadequate reporting information from automotive producers, the agency does not exactly know how many vehicles are exposed to potentially defective airbag inflators that were produced by Takata. There are also multiple inflators installed in every vehicle. Add to this, that previous replaced inflators were not properly designed, causing a second recall.

As Supply Chain Matters has noted in our previous commentaries regarding this industry recall challenge, the problem of premature explosion of the inflators has been linked to long-term exposure to high humidity.  Thus the failure profile can be linked to specific U.S. states whose climate matches such humidity, such as Florida and the U.S. Gulf Coast states. One potential fix to the problem has been the addition of dessicant drying agent material to the inflator to lessen the moisture caused by high humidity.  That obviously implies a separate part identity.

The far broader problem is the sheer scope of the potential campaign. The government is not even sure it has the authority to mandate a recall of such volume and with such monetary implications. With a potential of over 100 million inflators having to be eventually replaced, the recall campaign would obviously exceed current capacity for producing replacement parts, implying multiple years of effort.  The sheer volume is of the magnitude of supporting the redesign of multiple new models of automobiles and trucks and would have to involve many more airbag inflator suppliers.  As Supply Chain Matters noted earlier week, suppliers such as Autoliv have already benefited from the crisis, and with such massive numbers, other suppliers will benefit as well. And then there is the biggest question of all, who will pay for all of the replacement parts and installation costs.

The Donald Trump analogy of: “This is a HUGE problem” is an appropriate descriptor.

This saga and its implications will obviously test the limits of automotive service supply chains and dealers for many months to come.

Then the industry has the diesel engine emissions crisis involving certain Volkswagen produced models. Since our prior commentaries in late 2015, we have refrained from other updates because of the sheer kaleidoscope of bizarre actions by Volkswagen.  First there was the sacking of senior corporate product design and quality executives.  Then came the sacking of the top U.S. executive Michael Horn, who was revered by U.S. dealers, after Horn supposedly proposed monetary gestures to affected vehicle owners.

While the global auto maker has initiated a product recall plan for affected vehicles in Europe, the deadline for a plan to address polluting vehicles in the U.S. has come and gone and remains somewhat a work-in-progress.  According to industry reports, VW continues to face upwards of $20 billion in potential fines as well as class-action lawsuits, not to mention a rather tense ongoing relationships with U.S. regulators and legislative bodies as well as its U.S. dealers.

Meanwhile VW senior executives had the shear nerve to position themselves for management bonuses. That had drawn the ire of executives of the IG Metall trade union who are influential members of the company’s Supervisory Board. The news this week is that executive bonuses have now been squashed by that board.  Details related to future actions that VW will take related to a recall plan for the U.S. are not expected until VW’s board of directors meets later this month to review various investigative reports related to the U.S. emissions scandal.

The VW service management supply chain remains with lots of pending challenges and unknowns. Thousands of in-service diesel-powered vehicles may be subject to costly vehicle hardware and software fixes that potentially will involve significant labor hours per vehicle. Unsold diesel-powered vehicles remain in dealer lots awaiting a disposition as well. If a vehicle recall is initiated, individual owners are likely to very intolerant to repair times that extend over many, many months. Then again, what-if VW elects to buy-back certain models? That’s a reverse supply chain challenge in the making.

Overall, automotive service management supply chains remain stressed and face unprecedented process and execution challenges in the coming months and years. There is obvious learning that will come from this ongoing multi-brand crisis, involving product-design, supplier quality and supplier management dimensions. Many consumers will be impacted and will get first-hand knowledge of the effects.

Bob Ferrari

 


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