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Announcement of China’s first Flexible Display Production Line is Significant

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A significant announcement caught our attention this week, one related to the global race for next-generation high technology development. China Daily echoed a report from China’s Xinhua news agency indicating that the country’s first flexible display production line will go into operation next year. We believe that this is a rather significant development for high tech and consumer electronics product development and supply chain sourcing strategy.

According to Wikipedia: “A flexible display is an electronic visual display which is flexible in nature; differentiable from the more prevalent traditional flat screen displays used in most electronics devices. In the recent years there has been a growing interest from numerous consumer electronics manufacturers to apply this display technology in e-readers, mobile phones and other consumer electronics.” The technology is evolving to feature more flexible screens with higher contrast and wider visual angles compared with traditional flat-screen display found on many of today’s electronic devices.

Further noted is that research and development into flexible e-paper-based displays largely began in late 2000s with the main intentions of implementing this technology in mobile devices. However, this technology has recently made an appearance, to a moderate extent, in consumer television displays as well.

Since 2005, Sony Electronics has had interests in a flexible display video, promising to commercialize this technology in TVs and cellphones sometime and in May 2010 Sony showcased a rollable TFT-driven OLED display.

In 2008, Nokia first conceptualized the application of flexible OLED displays in mobile phone with the Nokia Morph concept mobile phone.

In 2010, Samsung Electronics announced the development of a prototype 4.5 inch flexible AMOLED display.  In early 2012 Samsung acquired Liquavista, a tech firm with expertise in manufacturing flexible displays.  By October of 2013, the Samsung Galaxy Round was unveiled as the world’s first mobile phone with flexible display that featured a 5.7″ touchscreen display made of flexible material, allowing its body or the screen to be bendable.  The concept would later surface as part of the Samsung Galaxy Note Edge and today, Samsung is seen as a recognized leader in this type of technology.

This week’s investment news stems from BOE Technology Group Co., Ltd. is a supplier of display products founded in 1993 and now headquartered in Beijing The firm’s business profile indicates that it is engaged in research, development, and technology accumulation which led them in establishing business units such as TFT-LCD for IT, mobile and TV products.

The report indicate that BOE will invest almost $7 billion on its 6th generation AMOLED production line in Chengdu, which is scheduled to go into operation by sometime next year., no doubt in an attempt to directly compete as a supply chain component alternative to Samsung.

From our Supply Chain Matters lens, there are two significant aspects to this week’s announcement.

The first is the government of China’s strategic plan for the country to be much further invested in advanced technologies. BOE recently reported first-half 2016 results that reflected net losses amounting to upwards of 600 million yuan. Thus, obtaining such significant financial investment implies external assistance from China’s resident banks, municipal investment agencies and/or other governmental agencies.  China based smartphone producers have been increasingly gaining domestic market share based on their ability to offer premium functionality at more affordable price points. The existence of a new domestic source of the production of flexible screens can add to that momentum and provide domestic producers a value-chain technology edge.

Further, with Apple so significantly invested in China based value-chain capabilities, we wonder aloud if the potential of Apple’s future product development and supply needs had anything to do with such an investment. Apple currently sources its LCD display needs among four suppliers including Samsung Electronics. A China based sourcing could provide Apple additional bargaining leverage for future sourcing decisions related to flexible displays. Such capability could also be viewed as a threat to Japan, Taiwan and South Korea based LCD screen providers, not to mention any hopes of the U.S. to be sourced with such advanced screen technology.

LCD display technology development and advanced production process capabilities are very expensive to maintain with each technology evolution and thus supply agreements assuring large volumes are essential.

Thus, this week’s announcement should be noted as rather noteworthy, and if BOE is successful in its development and production timetables, it will present a different competitive dynamic in the volume production of flexible screen technology, not to mention triggering other rather expensive rounds of additional investments from other existing screen suppliers.

Bob Ferrari

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


The Newest Phase for Elongated Supplier Payments- More Aggressive Supplier Push-Back

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Of late, the trend of extending payment terms to suppliers should not be any new news to many of our Supply Chain Matters readers since such practices continue to gain multi-industry momentum. Such momentum continues because private equity firms and high powered consultants in finance now advocate and practice this tactic as a means to boost earnings and operating cash flow.  However, what we view as an even more disturbing trend is current more aggressive efforts by suppliers to now push back by exercising whatever options they have, up to and including significant supply disruptions.

To ascertain the scope of the trend towards extending payments to suppliers, we exercised a Google search this morning on the term: News- suppliers not being paid. That search yielded and eye-popping 9.7 million item results, an obvious indication of industry-wide trending.

Just about a year ago, Bloomberg published an article: Big Companies Don’t Pay Their Bills on Time. The author, Justin Fox attributed the increased trend among large global companies to extend payments to suppliers to two principle influences. The first was Amazon, that being yet another aspect what we often describe as “the Amazon effect.”  In essence, the online retailer had a cash conversion cycle of negative 24 days in 2014, meaning the online retailer received cash from customers 24 days before it was paid out to suppliers. The other major influence was noted as Brazilian private-equity firm 3G Capital which has acquired well known consumer brands and operates primarily today as Anheuser-Busch InBev. A chart in the Bloomberg report indicates that since the acquisition of Anheuser in 2008, supplier payments stretched to near 260 days by 2014 with InBev on-average paying suppliers 176 days after the company was paid by customers. That is nearly six months of cash float.

Similarly, after previously attending this year’s Institute of Supply Management (ISM) annual conference, this author penned a blog commentary on a session where private equity firm representatives leveraged their stated tactic of operational intervention and improvement, namely concentration in procurement policies to harvest cash flow and margin savings.

The Bloomberg article further charts well-known names Procter and Gamble, Mondelez and Kimberly-Clark, who collectively have to now respond to 3G’s industry presence with the acquisition of both Heinz and Kraft. in the consumer-goods sector. By 2014, days payable outstanding for all three had grown to between 70 and 85 days.

And so the ripple effect of this trend continues offering the brand owner opportunities to leverage cash flows, product margins and profitability, while the ripple effects cascade down the to the remainder of the supply chain.

The open question now remains as to what are various industry norms for paying suppliers, and invariably, the principles of supplier survival and stakeholder interest come into play when such practices become more wide-spread. More and more, such incidents seem to be on the increase.

In early July, General Motors encountered a brief supply disruption over a contract dispute and bankruptcy filing from Clark-Cutler-McDermott Co. a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America. The supplier stopped producing parts for GM after work shifts on a Friday and laid off its workforce. Subsequently the supplier refused to grant GM access to any remaining inventory or production tools forcing GM layers to enter a legal process proceeding in bankruptcy court to gain rights to tooling and any leftover inventory.

In late July, avionics producer Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments and noted as a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. In its reporting, The Wall Street Journal observed that the industry relationship among Rockwell and Boeing was previously noted for positive collaboration in ongoing cost-control efforts resulting in Rockwell gaining additional supply contracts involving other produced commercial and military aircraft.

Similarly, British based GKN, a supplier of cabin windows, ice protection systems and winglets, openly called Boeing to task for extending supplier payments. Both Reuters and The Wall Street Journal had earlier reported that to boost its cash flows, Boeing was extending supplier payments from 30 days, too upwards of 120 days while at the same time continuing efforts to scale-up the supply chain to address upwards of ten years in booked orders.

Other noteworthy news related to supplier push have involved UK retailer Tesco as well as global  iron and steel producer Rio Tinto.

The most recent public incident of outright supply disruption is now Volkswagen dealing with the possibility of reduced working hours involving multiple German based final assembly plants resulting from a supplier dispute with two suppliers, Car Trim and ES Automobilguss. Car Trim reportedly supplies parts for seating and ES Automobilguss produces gearbox components for a variety of different VW car models. As of today, business media is reporting that negotiations are ongoing to resolve the matter after the suppliers cut component supply deliveries feeding four final assembly plants. The suppliers have denied responsibility for the situation, indicating that VW cancelled contracts without explanation or compensation and the decision to halt delivery was taken to protect their own workforces. As we pen this posting, upwards of 10,000 workers at VW’s main plant in Wolfsburg, Germany are close to being idled due to parts shortages. Both suppliers, which are part of holding company Prevent, have denied any responsibility in the pending supply disruption claiming that VW is responsible for creating its own supply crisis because of the lack of timely payments to suppliers and that the suppliers’ decisions were taken to protect their own workforces and financial health.

Thus we observe a common theme beginning to manifest across different industry supply chain settings, more aggressive supplier push-back to existing payment terms and the transfer of the burden of cash-flow.

In prior Supply Chain Matters postings, this Editor has not been very keen on such strategies namely because of the short and longer-term havoc imposed on supply chain capabilities and ongoing relationships. But, with the realities of the current business environment being what they are, and with so many firms now under the short-term professional looking glass, the elongated payment strategies extend, testing such relationships. This is obviously not healthy, and many other voices are beginning or have already concluded as-such.

Our prior advice to procurement professionals was essentially to be forewarned and prepared since those possessing or prepared with termed financial engineering skills can reap some short-term financial and other bonus rewards.

We now extend advice to the broader supply chain management leadership and operations management communities. If you have little choice but to exercise such strategies, best be prepared for the new consequences of supplier push back and potentially harmful supply disruptions and eroded supplier relationships.

The age old adage remains that long-term success is built on two-way, win-win relationships. An I win-you lose relationships helps lawyers to stay gainfully engaged and your supply chain to be in constant jeopardy. When times are good, such strategies can yield some benefits. When times are challenged, such as the 2008-2009 global recession, they often lead to massive supply disruptions or calls for mutual sacrifice from suppliers.  They further lead to missed opportunities for joint-collaboration on product and process innovation since suppliers are indeed savvy to stick with customers to consistently try to adhere to win-win relationship building.

Bob Ferrari

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

 


There is a New Phase of Online and Omni-Channel Fulfillment

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From time-to-time as developments warrant throughout the year, we publish various succinct research advisories to clients and blog readers focused on specific industry, line-of-business, functional or technology trending that warrant specific attention for both management teams and supply chain management professionals. Normally our advisories are included within regular blog posts, but when significance warrants, and content length dictates that we provide deeper insights, we will now provide these advisories in our Research Center as complimentary downloads.

There have been several phases related to the ongoing explosion of online commerce and its impact on retail and B2C focused industry supply chains. Take note that 2016 marks the beginning of the newest phase, namely impacting the long-term presence of brick and mortar retail.

The watershed events have been recent Q2 financial performance results from various retailers, and more specifically, last week’s public acknowledgement by broad based merchandise retailer Macy’s that declining foot traffic makes the cost or value of real estate and physical store operations a new determinant of long-term strategy. The initial shockwave came in January with Wal-Mart’s announcement that it would close 260 stores globally, including 154 across the United States as part of comprehensive strategic alignment of strategy. By June, there is additional discernable evidence of  this new phase.

In our Ferrari Consulting and Research Group Research AdvisoryThe Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains, we address background, the iteration of phases and including the tenets of this new phase, along with actions to consider.

Our only requirement for this complimentary research advisory report is that readers fill-out an electronic download form that requires some basic information. To download the report, access our Research Center from the top menu, double-click on the words Research Advisory- August 2016 on the right-hand side and complete the form.


Continued Rant for Pharmaceutical and Drug Industry Supply Chains

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Supply Chain Matters has highlighted a number of supply risk and potential ingredient safety challenges impacting pharmaceutical and drug supply chains of life-critical medications and yet such challenges seem to persist, often in the same dimensions. A recent Bloomberg published article highlights the latest involving cancer-drug shortages with supply chain ingredients continuing to be sourced from banned Chinese producers. The open question is why the industry continues to foster such sourcing practices.

When we launched Supply Chain Matters back in 2008, one of our first series of commentaries concerned supply chain risk management, specifically the issue of the tainted pharmaceutical drug heparin that originated from Chinese based suppliers.  At the time, tainted batches of the prime API compound that produces heparin, a key life-saving drug utilized as a blood thinner, were found to later contain over sulfated chondroitin, an altered version of the required chondroitin sulfate.  Instead of sourcing this active API from designated pig intestines, the tainted API apparently came from shark cartilage.  This specific incident was directly attributed to the death of 80 persons and many others became seriously ill. Our 2008 commentary, Will FDA Inspectors in China Solve Product Safety Issues?, questioned whether regulatory agencies were ill equipped to keep up with the pace of global outsourcing of pharmaceutical compounds and specifically getting a handle on the increasing occurrence of counterfeit or non-conforming products.

In 2012, the pendulum shifted towards global-wide shortages of life-saving drugs due to a number of domestic and global-based API suppliers either unable to produce required quantities or having to temporarily suspend production operations because regulatory inspections citing lapses in good manufacturing practices. Agencies subsequently had to alert doctors and healthcare providers that in the light of severe shortages of hundreds of drugs, there were clear signs that unauthorized or counterfeit versions of these drugs had infiltrated global supply chains. The U.S. FDA alerted to the appearance of “non-FDA approved injectable cancer medications” and later, patients and drug companies were subjected to counterfeit versions of the drug Avastin, widely prescribed to treat brain, colon, lung and kidney cancers.  Swiss drug maker Roche, and its Genetech unit, the global producers of Avastin later indicated that counterfeit versions of its top-selling cancer drug, ones without any active ingredient, were being circulated in the U.S. Patients receiving this counterfeit version would thus not have received required therapy, or worse, could suffer potential harm.

The latest iteration outlined in a recent Bloomberg Businessweek article cites data from the National Academy of Medicine indicating that more than 80 percent of ingredients used in drug manufacturing are now produced externally, primarily in China and India.  Further cited is an incident where the U.S. FDA inspected a Chinese production facility in early 2015 and uncovered what was termed “broad data manipulation” resulting in a warning letter to plant owner Zhejiang Hisun Pharmaceutical. That subsequently led to an indefinite ban for this facility in September 2015, a first for one of China’s leading exporters of pharmaceuticals. However, according to this report: “…to avoid possible drug shortages, the regulatory agency allowed the Hisun facility to continue to export about 15 ingredients used for drugs produced in the U.S., including nine components of cancer medicines.” The report goes on to explain the delicate balancing act regulators currently face in insuring adequate supplies of life-saving drugs while de-facto transferring the burden of assuring safety and quality inspections to end-item drug manufacturers themselves. End-item drug producers are therefore asked to perform additional inbound testing, hire independent auditors or take other mitigative actions. Overall, Bloomberg indicates that the FDA has for the current year added 13 plants to its listing of banned plants, with a cumulative total of 52 classified banned plants.

We found that statistic to be staggering and alarming. Once more, we wonder aloud about the strategies that have led to increased outsourcing to lower-cost production regions, especially for drugs that are held to such high specification standards and currently sold for staggering margins in developed countries. One has to wonder aloud as to why.

According to the Bloomberg report, among the 15 API’s from the subject Hisun Taizhou plant that can be exported by exception, most are widely used for producing chemotherapy treatments for leukemia, breast and ovarian cancers. One would surmise that these drugs are expensive. A former FDA official who once was responsible for domestic and international investigations indicated to Bloomberg of his belief that not all U.S. companies are ensuring the safety of ingredients purchased from known banned factories.

Regulators such as the U.S. FDA are indeed placed in a rather difficult position in trying to assure that life-saving drugs remain in adequate supply in the light of an overall industry trend to source compound ingredients from lower-cost production regions. Critical drug shortages of expensive drugs lead to the creation and distribution of counterfeits which obviously adds to overall safety concerns.

Yes, drug markets serving China and India should come with government controls that require far lower costs to healthcare providers and patients. Drug companies continue to extract far higher end-item drug costs for distribution among highly developed countries and economies. Ingredient sourcing and quality conformance strategies should align.

The pharmaceutical and drug industry has often been in media headlines portrayed as profit-grubbing villains. In some cases, that may be underserved, since research, development and production costs for life-saving drugs are rather expensive.  However, when the industry continues to pursue supply chain sourcing strategies that are driven more by lower-cost and do not insure adequate safeguards, than they need to be called out. Armies of FDA inspectors chasing endless foreign producers are a Band-Aid to a broader challenge of supply chain sourcing.

Bob Ferrari

 


Tesla Motors Reports Q2 Production and Operational Results- The Critical Ramp-up of the Supply Chain

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Tesla Motors remains challenged by supply chain ramp-up issues as it strives to meet aggressive short and long-term production and supply chain needs.

On Sunday, Tesla announced that the electric auto maker had produced 18,345 vehicles during Q2, a volume increase of 20 percent from Q1. However, in classic “hockey stick” fashion, 5150 completed vehicles were still in-transit to customers at the end of Q2 because production completion was skewed toward the latter part of the quarter.  That in-transit number represented double the number reported in Q1 (2615 in-transit), a reflection of Tesla’s unique challenge of supporting a direct to consumer distribution model that adds direct to customer delivery acknowledgement to actual revenue recognition.  Telsa Motors Model S

The auto maker acknowledged that almost half of the quarter’s Q2 final production occurred in the final four weeks of the quarter which is an obvious sign of component supply and other production challenges.  The goal set by Tesla management in Q1 was to produce 20,000 total vehicles in Q2.

Tesla reaffirmed that it is on-track to deliver 80,000 – 90,000 new vehicles in 2016 which implies that production volumes in Q2 and Q3 must continue to ramp-up to deliver 50,000 total vehicles. To that end, Tesla indicated that it excited Q2 at a production rate of 2000 vehicles per week, with milestones of 2200 vehicles per week in Q3 and 2400 per week by Q4. Thus there is little tolerance for any future supply chain disruptions.

As noted in previous Supply Chain Matters commentaries and in the company’s statements to shareholders and customers, Tesla has elected to accelerate plans to ramp annual production volumes to 500,000 vehicles annually by 2018, two years earlier than previously planned. At the recent annual meeting of shareholders, Founder and CEO Elon Musk indicated that Tesla will “completely re-think the factory process.” Musk repeatedly raised the notions of “physics-first principles” and made the point that his team now realizes that where the greatest potential lies is in designing and building the factory. To that end, he disclosed that he now no longer has a Tesla office, instead spending the bulk of his time residing on the production floor and observing. He has challenged Tesla engineering teams to the principles of “you build the machines that build the machine.” In other words, the context is in thinking that the factory is the product, and that you design a factory with similar principles as in designing an advanced computer with many interlinking operating needs.

Further acknowledged was that the Model X design was overcomplicated, perhaps too much to accommodate production volume needs. Going forward with the development of the new Model 3, he indicated that a tighter integration loop among product design and manufacturing would be fostered.

Going forward, Tesla has to have a laser focus on supply chain and production execution. Invariably, the company will become distracted by other needs requiring management attention such as product issues or the ongoing autonomous auto-pilot software caused accident that has caught the attention of U.S. regulators.

Traditional auto manufacturers attain a supply chain ramp-up focus via a permeating culture of just-in-time continuous production and total elimination of production waste. Culturally, that can be a tall order for most innovative high technology companies whose emphasis is on innovative and breakthrough product design while leaving the production details to contract manufacturers.

Tesla however continues to push the envelope of traditional thinking. Over the coming months and years, we all get to observe the results.

Bob Ferrari

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

 

 

 


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