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Yet Another Airline System-wide Outage- Implications for Supply Chain Backbone Systems Technology Change


Last week, thousands of airline passengers were delayed worldwide after a computer glitch temporarily halted departures at United Airlines, the latest in a series of outages to affect other airlines as well. Last week’s United system glitch was reportedly attributed to the airline’s weight reporting system which calculates and governs an aircraft’s total weight load for takeoff and other needs. According to both general and social media reports, passengers were forced to either wait onboard planes or inside terminals when respective United flights were delayed for several minutes or in some cases hours, disrupting travel plans and schedules.

Last week’s incident represented the third computer glitch to impact United’s operations in recent months.  In June, software needed to dispatch United’s flight plans faltered and in July, flights were disrupted after a computer problem blocked access to reservations records.

In September, a system-wide computer problem at British Airways caused significant delays.  In August, Delta Air Lines was forced to cancel or delay thousands of flights after a power outage impacted its operational computer systems. This blog subsequently praised Delta’s CEO for his public acknowledgement and apology for the systems outage and its impacts for customers. Also in August, a highly visible system outage also impacted Southwest Airlines after a prior system-wide outage in July, prompting the airline’s two major labor unions to demand the removal of that airline’s CEO.

These continuing series of systems related incidents that are impacting the airline industry and its customer service perceptions and ranking have pertinence to multi-industry supply chain and customer fulfillment systems that have not been updated for many, many years.

There are many parallels. let’s briefly explore them.

Older transactional systems implemented twenty, ten or in some cases even five years ago, were specified with different operational and information technology business needs and requirements. These older systems represented the architecture of either centralized computing and data retrieval, or client-server based systems architectures. They were the manifestation that all transactions and data related to customers and operational business processes would be managed and controlled via a central IT backbone system that included lots of redundancy and back-up provisions. During their prior phases, they indeed served that purpose. They were also rather expensive representing millions of dollars of direct investments related to hardware, software, database and network management needs not to mention likewise investments in initial and ongoing systems integration and consulting needs.

But as we know all to-well, today’s business world is one of continuous and constant change, some of which is rather significant.  There are mergers and acquisitions involving other airlines and their respective processes and systems.  New customer revenue service programs have been added that included paid upgrades to premium seating, payment of baggage handling fees and increased needs for regulatory passenger security reporting have all added to systems needs and requirements.  Investors, Wall Street and private equity firms continue to, on-average, have a short-term expectation window for profitability and stockholder value. There seems waning tolerance for any larger-scale, big-bang, multi-year business and systems transformation efforts without the profitability and cash-flow benefits to sustain such efforts.

Similarly, the ongoing needs of online customer empowerment and self-service require the ability of smartphone and other mobile-based applications to inquire, modify and update reservations, check on airline mileage balances or flight status. This is the building conflict of customer needs for total and complete mobile-based enablement with applications and supporting systems that were never initially designed to support such needs and requirements. They are systems designed prior to Cloud based computing, software-driven hardware and in-memory computing technology and analytics driven operational decision-making that have made their presence in today’s technology landscape.

Yet, even though line-of-business and IT teams have become more increasingly knowledgeable in the benefits of these newer technologies, the risk of potential business disruption related to systems changes continues to haunt these teams.

We recently highlighted efforts by American Airlines toward a major IT system conversion that consolidated all of its pilots and planes onto what is described as single flight operating system. Such an effort required an immense amount of operational and IT staff pre-planning and preparations, as much as a reported 1.3 million hours of IT staff time alone, since it involved a collection of what was described as more than 500 applications that manage everything from dispatching of crews to movement of aircraft.

At the same time, American is now evaluating whether to move major portions of its customer website, including and other direct web-based customer enablement support applications to a totally Cloud-based deployment model.

There are indeed many implications for systems technology change not only for the airline industry but multi-industry supply chain transactional systems as-well. The increasing needs and expense or supporting Omni-channel and online customer fulfillment needs is taxing existing other systems and applications, some to the break point. Such systems will require bolder vision yet multi-year manifestations of continuous improvements that generate the business expense savings that can fund and add credence to the value of moving forward in the journey.

Cloud computing and other new technologies will add to the economics of IT deployment and ongoing operational cost savings especially when applications and systems become optimized for their respective core missions, be that managing operations, supporting online customer enablement or more informed business results oriented decision-making.

We close this blog commentary with a food analogy.

Mixing large batches of cookie dough for too long creates tougher and less satisfying cookies. Smaller batches, with different variation recipes focused on taste, take less mixing time with a more delightful overall eating experience. Similarly, cooking large batches of various sized spaghetti in one pot yields a pot of unappetizing pasta that is a mass of uniformly cooked and a real mess.

Invest staff and resource time in comprehensive multi-year applications and systems planning focused on specific output needs and requirements. Open your thinking to the benefits of advanced technology but in the context of more managed scope efforts and streaming economic and cash flow benefits for the business.

Bob Ferrari

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

Tesla Motors Reports Q3 Operational Performance and Some Progress is Evident


In July, innovative electric car manufacturer Tesla Motors announced its Q2 product and operational results.  In our July Supply Chain Matters blog posting related to Q2’s performance, we concluded that Tesla remained challenged with supply chain ramp-up issues as it strives to meet aggressive short and required longer-term production scale-up needs for existing as well as future model needs. Tesla ModelX_Live

Yesterday, Tesla reported its Q3 operating performance and it would appear that the auto maker is now responding to its short-term supply chain challenges.

According to a published report by The Wall Street Journal, CEO Elon Musk called for a strong third quarter to strengthen his equity raising case for scaling up the supply chain and production needs of the newly announced Model 3, along with massive lithium-ion battery facility, the termed gigafactory, near Sparks Nevada. It appears that operational teams indeed performed in Q3.

From an operational perspective, Tesla delivered approximately 24,500 vehicles across the globe in Q3, of which 15,800 were Model S and 8,700 were Model X. That level of output was nearly double that of the year-earlier quarter. The Model X production performance improvement stands out because of that vehicle’s previous production hiccups due to design-for-supply chain challenges causing some components such as the vehicle’s doors to be brought in-house. It further represented an increase of just over 70 percent from last quarter’s deliveries of 14,402. Quite impressive. In addition to Q3 deliveries, the manufacturer indicated about 5,500 vehicles were still in transit to customers at the end of the quarter and these will not be counted as deliveries until Q4. Tesla further reiterated its prior guidance of 50,000 vehicles being delivered for the second-half of 2016.

In late July, we posted a blog commentary reflecting on Tesla’s revised master plan as communicated by founder Elon Musk. After taking hundreds of thousands of advanced reservations and up-front financial deposits for the Model 3, Tesla’s initial answer to a mass-produced and more affordable electric vehicle, Tesla had to revise its longer term production plans to target total annual vehicle output of 500,000 vehicles two years earlier than originally planned, which is now planned to occur by 2018. Musk’s response has been to rally his engineering teams to now focus on what is termed: “designing the machine that makes the machine.” In essence, the effort reflects on turning Tesla’s supply chain and existing production facilities into an engineering design challenge in accelerating capacity, integrated design and tory automation. As readers are also aware, Tesla maintains its own global wide logistics and delivery network for finished vehicles, without the use of traditional dealers and finished automobile lot inventories. That adds to the challenge.

If Tesla indeed continues to perform and deliver its anticipated 50,000 vehicles in the second-half of this year, 2016 will close with a production rate of slightly over 83,000 vehicles. That will set the stage for 2017/2018 to ramp-up to the 500,000 volume target, a near tripling of existing capacity and value-chain ramp-up volumes.

While short-term performance indeed looks better, the longer-term challenges remain and it will obviously involve all of the best engineering, supply chain operational minds and advanced technology adoption that Tesla can muster. That is not to state that the goal is not achievable, but rather the effort will be one that will make-up business case stories for many years to come.

Bob Ferrari

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

A Changing Product Design and Volume Manufacturing Strategy for the Automotive Industry


In 2011, this analyst began to share observations on a growing reality of a changed model of outsourced contract manufacturing services (CMS).  The following two postings provide some specific evidence that this shift is now underway and involves multiple industry sectors. We begin with commentary related to automotive industry supply chain strategy.

Product strategy change within the automotive industry is now underway, and will continue to involve industry disruptors.

Looking back, initial reports of high tech and consumer electronics Apple potentially entering the electric car business came to speculation light in early 2015. In a Supply Chain Matters commentary published in February of that year, we called attention to published reports by both the Financial Times and The Wall Street Journal indicating that Apple was working on a secret research lab possibly directed at developing a concept electric car.  According to the reports at that time, the code name “Project Titan” was assigned to the effort and hundreds of automotive engineers were recruited. Apple, of course, has declined comment to any of these publications.

Since that time, business media has reported that the effort shifted its product development strategy away from internal development of an electric vehicle and more towards a potential autonomous electric self-driving vehicle that could rival that of Tesla. Once more, information leaks indicated that without a definitive deliverable, Project Titan was waning, leading to informed sources indications of layoffs and talent exits occuring within the Project Titan team this summer.

A recent new report from the Financial Times cited informed sources as indicating that the consumer electronics giant was in talks to potentially acquire luxury sports car manufacturer McLaren.  Both companies have been quick to deny the occurrence of such talks.

As our readers are aware, manufacturing an automobile is enormously expensive with a single plant costing upwards of well over $1 billion. Thus, it was of little surprise that in 2015, Apple was already investigating existing contract manufacturing options. The February 2015 WSJ report specifically cited Canadian based contract manufacturer Magna International as an option and reported that that Apple executives had flown to Austria to meet with the Magna Steyr unit of the Canadian based auto parts supplier.

In the latest edition of Bloomberg Businessweek, a report titled: The Foxconn of the Auto Industry, indicates that Magna has taken more proactive actions to position itself as the contract manufacturer of choice for self-driving vehicles. The premise is that if Apple, Google, Uber or other technology focused firms want to manufacture a self-driving vehicle than Magna may well remain as the first step as the design and manufacturing outsourcing option, freeing up resources of the automotive or transportation services provider to concentrate on a software and managed services business model.

According to this Bloomberg report, CEO Don Walker has initiated plans for Magna to be the one-stop option. Walker has tasked his Chief Technology Officer to establish an effort across Magna’s various component divisions to develop an autonomous self-driving vehicle capable of transporting four to five people within the next two years. A noted strategy shift is that rather than waiting for a customer to engage with Magna to respond to certain design specifications, Magna will instead provide a vision and capability for where the transportation market is headed, and a pre-designed Magna product platform that can be leveraged for more responsive time-to-market entry into the market.

The premise of this new strategy is twofold.  First, there is a belief that in the coming five years, the core of product design expertise and IP for hybrid or electric powered self-driving vehicles will rest in software and services, rather than automotive component design such as bodies, engines and transmissions. Second, the contract manufacturing industry itself is moving more towards a one-stop shop for product design as well as more automated manufacturing processes including additive manufacturing techniques. Such a shift allows contract manufacturers to broaden their margins while increasing a presence up and down the automotive value-chain.

As Bloomberg, other business media, and we at Supply Chain Matters continually point out, Tesla, after reaping the benefits of thousands of consumers providing up-front deposits to secure a slot for the new Model 3, must now figure out a supply chain wide scaling process to internally manufacture this new vehicle in sufficient volumes to meet customer delivery and product margin expectations.

Magna on the other hand has a premise that industry disruptors will pursue an asset-light strategy, preferring to outsource physical component design and final assembly to a competent and trusted contract manufacturer.

Magna already has relationships with BMW, Land Rover and Mercedes for the outsourcing of model production. As noted in the report, Magna has been producing the Mercedes Benz G-Class vehicle for decades., and has now brought on BMW. This latest Bloomberg report further indicates that Magna has assigned nearly a dozen engineers to work with the Apple team in Sunnyvale California in vehicle development.

As noted, the contract manufacturing model is now quickly changing placing more responsibility for product and supply chain network design with the contract manufacturer. We will all likely observe the consequences of this new model in the not too distant future and it will involve many more industries and products.

Bob Ferrari

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

Pratt and Whitney Publically Discloses Supply Chain Challenges and Production Shortfalls


Previously and again last week, we alerted Supply Chain Matters readers to the increasing visibility to noteworthy supply challenges occurring at Pratt and Whitney related to its newly developed geared-turbofan aircraft engines.  The development is significant since just was we anticipated, the weakest link in commercial aircraft supply chain ramp-up production cadence is indeed turning out to be Pratt.

Late last week, the United Technologies CEO, parent to Pratt warned the company’s investment community that Pratt will likely miss its 2016 customer engine delivery goals by 25 percent, amounting to a shortfall of 50 engines for aircraft manufacturers.  The obvious question is which manufacturer will take the bulk of the impact.

CEO Gregory Haynes indicated the obvious in that Pratt’s airline customers were not happy with the news.  Neither were UA stockholders who initiated an initial 2 percent sell-off in UA stock. This development represents yet another real-world example of significant supply chain glitches directly impacting stockholder perceptions.

Mr. Haynes further indicated that: ‘five parts are causing us pain this year”, due to supplier challenges in meeting Pratt’s current volume production and quality needs. There are approximately 800 parts for the high level bill of material for this new Pratt engine. The challenges are expected to extend into 2017.

A particular problem is the heart of this new engine, its newly designed aluminum titanium composite fan blades.  Further indicated is that he has personally visited the shop where these blades are produced, an obvious indication of the high levels of management visibility being exhibited on the current supply challenges. Haynes indicated that today: “it takes 60 days of cycle time to build these blades and the through the shop and it needs to get to 30 days.” Obviously, that is a significant challenge for a highly engineered component, a doubling of production cycle time.

In 2014, aluminum metals provider Alcoa and Pratt announced a 10 year $1.1 billion agreement to supply state-of-the-art engine jet engine components. That included the forging of the new aluminum-titanium fan blade along with a proprietary manufacturing process. Pratt’s engineering design is different than that of GE Aircraft and its partners Snecma and CFM International.  Whereas the latter has invested in carbon-fiber and ceramic composites for materials and manufacturing automation, Pratt has bet on a revolutionary new gearbox and aluminum-titanium composites to allow the engine to burn cooler, with fewer parts and more fuel efficient technologies. Supply chain design and deployment strategy is different along with approaches to manufacturing automation as well. There further exists a fierce competitiveness among existing aircraft engine manufacturers to demonstrate their new fuel saving gains and build ongoing customer loyalty and long-term commitments to each supplier’s new engine designs

Mr. Haynes assured investors that Pratt has a well-defined plan identified to address the current supply chain ramp-up challenges. Obviously, that should provide some assurances.

At stake is the ongoing production ramp-up of the Airbus A320 neo which first certified with the new Pratt engine.  Certification of the neo version with CFM International engines is in-process, and with the current visible challenges for Pratt, Airbus production operations teams must now deal with the option of whether to shift current backlog order fulfillment more to CFM powered versions to insure attainment of Airbus’s 2016 and perhaps 2017 production commitments for the overall market. There is obviously a lot of market visibility on Airbus right now from its A320 customers.

Bombardier, developer and manufacturer of the new C-Series single-aisle aircraft have placed a current singular bet on the Pratt fuel efficient design, and thus have already had to warn its investors of a production cutback.

While a buffering effect has been the current historically lower-cost of aviation fuel, airlines, particularly lower-fare startups want to gain a market advantage in lower operating costs.

Commercial aircraft supply chains will indeed be one of the dominant headlines stories for the weeks and months to come. A significant theme will be the classic trade-offs of product design and design for supply chain scalability.

Stay tuned since further developments are likely.

Bob Ferrari

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





Reports That Apple Has Shifted the Focus of Car Development Efforts


In February of 2015, Supply Chain Matters called attention to business media reports indicating that Apple had initiated a secret development lab to develop a concept electric car.  These reports fueled a hail of social-media based commentary regarding Apple’s potential entry into the automotive sector. However, late last week, both the Associated Press and the New York Times report (Paid subscription or free metered view) that Apple has now shifted the focus of the development effort towards creating the technology for an autonomous driving vehicle.

According to these reports, Apple’s initial efforts in automobile design: “have suffered from management turnover and technical delays.” Instead, the reports indicate that Apple’s new direction, while not foreclosing on the possibility that the firm might consider building its own car, instead focuses on partnering with other established automobile companies.

In our 2015 commentary, we echoed that designing and manufacturing an automobile from scratch is enormously expensive with a single plant costing upwards of well over $1 billion. Auto supply chain teams know all too well that sourcing production in any particular country and transporting autos among global regions can be an expensive proposition without volume and market scale. It’s clearly not the same as manufacturing and shipping volumes of iPhones and iPads or for that fact, ramping-up new product and supply chain labor resources to coincide with a product development lifecycle. Once more, intellectual property (IP) protection becomes a larger consideration because of the nature of the multiple components and new technologies that may be involved. For electric powered vehicles, the design and production cost of the batteries is the single most important material and product margin component.

This latest reported e-focusing, if accurate, would be an indication that Apple and other technology providers such as Google would be better served by focusing on embedded systems that manage and control autonomous driving as well as passenger experiences. A further rather interesting tidbit from the AP report was a statement from Elon Musk, CEO of Tesla Motors indicating that Apple had hired hundreds of engineers, including some from Tesla, to work on the original design project. The latest reported shift in strategy would be a reinforcing sign that Apple would have more reliance on an existing auto maker supply chain and manufacturing resources.

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