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Pratt and Whitney Publically Discloses Supply Chain Challenges and Production Shortfalls

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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

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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.


General Electric Continues with Aggressive Investment Plans

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These past few weeks have been rather noteworthy for General Electric in terms of acquisitions, most of which point toward continued investment and leveraging of advanced technology for industrial manufacturing and transportation service’s needs.

In late August, GE’s Transportation business unit announced its acquisition of ShipExpress, a provider of Cloud-based software that supports transportation, industrial and commodities businesses to more efficiently collaborate with supply chain partners. According to the announcement, this deal will extend GE Transportation’s portfolio of technology directed at the logistics supply chain, expanding the opportunities to deliver incremental information and transactional services for railroad customers. The acquisition further deepens GE Transportation’s domain expertise, enriching the division with a talent pool of nearly 200 industry, technical, and software development experts.

Last week, GE additionally announced plans to acquire two premiere suppliers of metal-based 3D printing devices, Arcam AB and SLM Solutions Group AG for a combined $1.4 billion. Both companies will report into the firm’s GE Aviation unit, an indication for further leveraging of additive manufacturing techniques in the production of aircraft engines. In addition, GE Aviation will lead the integration effort and the GE Store initiative to drive broader additive manufacturing applications across GE.

According to the announcement, Arcam AB, based in Mölndal, Sweden, invented the electron beam melting machine for metal-based additive manufacturing, and also produces advanced metal powders. Its customers are in the aerospace and healthcare industries. Arcam generated $68 million in revenues in 2015 with approximately 285 employees. In addition to its Sweden site, Arcam operates AP&C, a metal powders operation in Canada, and DiSanto Technology, a medical additive manufacturing firm in Connecticut, as well as sales and application sites worldwide.

SLM Solutions Group, based in Lübeck, Germany, produces laser machines for metal-based additive manufacturing with customers in the aerospace, energy, healthcare, and automotive industries. SLM generated $74 million in revenues in 2015 with 260 employees. In addition to its operations in Germany, SLM has sales and application sites worldwide.

Business media has noted that GE has long been a proponent of industrial 3D printing, utilizing the techniques to produce customized fuel nozzles for GE Aviation’s new LEAP jet engines.  The LEAP engine is the new aircraft engine produced by CFM International, a 50/50 joint company of GE and Safran Aircraft Engines of France. More than 11,000 LEAP engines are on order with up to 20 fuel nozzles in every engine,  GE-CFM CFM56 LEAP engine

GE has invested approximately $1.5 billion in manufacturing and additive technologies since 2010. According to the announcement, this investment has enabled the company to develop additive applications across six GE businesses, create new services applications across the company, and earn 346 patents in powder metals alone. In addition, the additive manufacturing equipment will leverage Predix and be a part of GE’s Brilliant Factory initiative. Investing an incremental $1 billion in this area is another important indication of the seriousness that GE attributes to additive manufacturing techniques, particularly given the backlog of thousands of orders for new more technologically advanced and fuel efficient jet engines.

We recently highlighted the challenges of rival aircraft engine producer Pratt & Whitney, currently experiencing a number of supply chain challenges related to its new geared turbo-fan commercial aircraft engine.  Pratt has exercised a different manufacturing and supply chain strategy than rival GE, one that places more emphasis on component suppliers as opposed to in-house manufacturing automation and production capability.


Another Apple iPhone Product Introduction and Added Supply Chain Challenges and Concerns

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It is that time of the year again, one which has become rather predictable for Apple’s supply chain ecosystem.  Every year in the September-November time period, the world anticipates Apple’s announcements of its newest products including the all critical iPhone.

September triggers other external industry actions as well that reflect on what may be occurring across the company’s supply chain.

Apple has established a predictable pattern for announcing its new products in the September-November period, and the consumer giant’s loyal followers are patterned to anticipate such announcements in-time for Q4 holiday gratification.  Every other year, Apple’s new product announcements typically include a compelling hardware revamp.

However, patterning and predictability has allowed Apple’s principal competitors such as Samsung, Huawei Technologies, Xiomi and others to move their new product announcements to occur mid-year, prior to Apple, in-essence scooping Apple in marketing features and function buzz.

We have longed praised Apple’s public relations and marketing teams for the superb job they do in building-up the hype interest related to Apple’s newest products. Every September, not only do social media channels buzz with comments related to what may be announced in the latest iteration of iPhone, in this year’s case, the iPhone7, but also the usual rumors of supply chain challenges that may hinder consumers in getting one’s hands on the newest phone by the holidays.

This week was no exception with Apple’s iPhone7 announcement, only this time, Apple’s PR teams have what appears to be a greater challenge of convincing existing iPhone owners of the compelling need to upgrade to the newest model. Already, the initial buzz seems to be that Apple has not included enough compelling evidence to warrant a new upgrade purchase. Then again, there are always those that have to get their hands on the latest iPhone model.

The new iPhone7 and iPhone7 Plus models were announced with longer battery life, sharper screens and long awaited larger storage, but alas, the elimination of the headphone jack has captured most of the initial social commentary. The jack was eliminated to make the newest model thinner and allow for more waterproofing. Instead of the traditional plug-in jack, Apple has introduced AirPods, wireless headphones that are designed around a wireless microprocessor that can be obtained for a mere $159.  According to a report from today’s edition of The Wall Street Journal, technophiles in China have affectionately dubbed the new AirPods as hair dryers.

For customers in the all-important China region, it would appear that the new features and functions can be garnered from competitor manufacturers at less cost.

This week’s iPhone7 announcement schedule was far more aggressive.  Orders for the new model will begin shipping on September 16 for 28 countries, up from an initial 12 countries for last year’s iPhone6 launch.

 

Supply Chain Ramp-Up and Sourcing

August and September are when Apple’s component suppliers and contract manufacturers ramp-up volume production to build inventories for the all-important holiday fulfillment quarter. Multitudes of temporary workers are brought on-board, and select Asian country production and inventory activity indices predictably spike in Q3/Q4 to reflect the Apple wave. This year, as is in past years, rumors are prevalent about production ramp-up challenges, lower than expected production yields and other supply challenges. Most are directed as the new dual-lens camera feature.

Earlier this month, the WSJ reported that as Apple grapples with subsequent quarters of declining iPhone sales, the consumer electronics icon began an effort in January to once-again cut better supplier deals, However the latest development is the double whammy of cutting prices as well as setting lower volume expectations with component suppliers and contract manufacturers, threatening to further impact various supplier financial performance.  According to the report, suppliers are wary about the lack of a smash hit and the demands from Apple for additional discounts is not sitting well.  Foxconn, one of Apple’s largest and most trusted contract manufacturers has seen its operating margin slip from 3.4 percent to 2.3 percent in Q2. Other Q1 and Q2 financial performance results from various key Apple suppliers reflect weakening results and increasing operating margin stress,

No doubt, Apple will be closely monitoring weekly fulfillment results and will dynamically adjust supply requirements.  Suppliers will be expected to respond and conform to any required changes either up or down in nature.

Social Responsibility Concerns Continue

Also every September, social responsibility watchdog China Labor Watch, reports on its latest findings of alleged labor abuses involving Apple’s major suppliers. This year is no exception, with the watchdog group again focusing on reported abuses involving contract manufacturer Pegatron. Readers may recall that in 2015, Apple further segmented its supply chain with the addition of Pegatron as a supplemental, lower-cost contract manufacturer.

In a report published in late August, the labor watchdog analyzed over 12 months of payroll statements from select Pegatron workers. This latest report concludes that while the average wage rates in China have steadily increased, contract manufacturer worker wages decreased significantly in the past 8 months from a series of payroll practice changes along with added worker deductions.  The report further points to the occurrence of excessive overtime work particularly occurring during production ramp-up periods. The China Watch analysis of 2015 pay statements concludes that 62 percent of Pegatron workers worked over 82 hours of overtime per month, and that factory workers continue to be forced to work overtime hours. The labor watchdog group indicates that it has shared its findings with Apple.

In fairness to Apple, labor conditions across China’s consumer electronics sectors are not just common to Apple.  China Labor Watch has issued similar concerns regarding Samsung’s China based suppliers as well as other manufacturers, which reflect a continual environment of accepted or tolerated labor abuses. At least Apple is willing to put more effort and broader visibility to its social responsibility expectations and audit practices.

 

Thus, the Apple supply chain enters another Q3-Q4 period of expected performance and miracle-making but with far more uncertainties related to the financial fortunes for being an Apple supplier.  Meanwhile, Apple itself seems to be protecting its high operating margins and the potential expense of a more volatile supply chain.

This will indeed be an interesting subsequent period of the new iPhone and other newer Apple product models. Apple’s influence and clout remain open to challengers. If you had thoughts that your firm or organization’s sales and operations planning (S&OP) was continually challenged and constantly changing, think perhaps of Apple.

Bob Ferrari


General Electric Embarks on New Footprint for the Future of Manufacturing

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General Electric broke ground today for its brand new Welland, Ontario, Brilliant Factory located just across the Canadian border from Buffalo New York.  The diversified manufacturing conglomerate indicates that this plant, when operational in approximately 20 months: “will strengthen the base of North American manufacturing and equalize the region’s ability to compete where direct labor costs are cheaper.” The decision to move the plant to Canada from a previous U.S. location was politically charged.

According to a GE Reports commentary, the new factory will produce massive Waukesha branded natural gas powered reciprocating engines that are primarily utilized in petroleum and oil and gas exploration. The plant will further produce other components for GE’s Transportation, Oil & Gas and Power business units. What makes the facility different is that production equipment machines will have embedded sensors with the plant connected to GE’s Industrial Internet via use of GE’s Predix software platform. Near real-time streaming data from production processes will then be available to manufacturing and product engineers allowing quicker needed changes to production and faster prototyping and commercialization of parts. GE’s $165 million investment in Weiland follows plans to build similar “brilliant factories” in the U.S. including Greenville, South Carolina.

GE’s chief manufacturing scientist is quoted in the commentary as noting that with the application of these combined technologies, factories no longer need to be sourced where labor is cheaper. Instead, they can compete where educated workers can make the most of advanced technology, and where opportunities can be leveraged to shorten supply chains and reduce inventories.

However, there are obvious realities to smarter plants that will leverage streaming data, constant feedback loops and advanced analytics.  According to the GE commentary, the new plant will employ 220 highly skilled employees.

The Waukesha branded engines were previously produced at a factory located in Waukesha Wisconsin that employed a reported 350 employees. That plant began operations in 1910. In September 2015, GE indicated plans to move the facility to Canada citing concerns over the U.S. Congress’s failure to re-authorize the U.S. ExportImport Bank.  At the time, a senior GE executive indicated: “We believe in American manufacturing, but our customers in many cases require Export Credit Agencies financing for us to bid on projects. Without it, we cannot compete, and our customers may be forced to select other providers.” Since that time, the U.S. Congress has yet to re-authorize the bank.

The news came as an unexpected shock to both factory employees and local community residents. President Barack Obama toured the Waukesha Wisconsin plant in January 2014, praising its worker apprentice training and re-education programs, calling them a model for the U.S.

GE has made an obvious bold move from two dimensions. One is an effort at self-demonstrating the benefits of GE’s termed Industrial Internet powered by the Predix operating platform in its owned production operations.  The other is straddling the political waters of demonstrating an ongoing commitment to both U.S. and North America based production and the realities of a global economy that must deal with international financial and labor markets.

How both turn out is a matter of time.

Bob Ferrari

 

 


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