Supply Chain Matters has been observing how U.S. automotive producers continue to fall back on what we view as a bad habit- a reliance on big-ticket, larger margin trucks and SUV’s for profitability and hence manufacturing strategy. Perhaps you have noticed this same trend.
These past few days have featured troubling news that points to the same tendencies. It is like an unhealthy habit that does not seem to abate and it reflects on both product demand as well as supply strategy aspects of the automotive supply chain.
These past months of an unprecedented global oil glut has led to sub two dollar per gallon pricing for gasoline, although that trend is changing with the spring fuel composition conversion. As reflected in past history, it has apparently motivated many U.S. consumers to once again buy shiny new automobiles and trucks at a very healthy pace. According to The Wall Street Journal, nearly 57 percent of vehicles sold in the U.S. were classified in the light truck category. Many of these consumers are seeking out the biggest and most feature laden pick-up trucks and luxury SUV’s. Why not! With the occurrence of such low prices of gasoline, it’s like suddenly reverting back to a bygone era, and doing so before it is too late. Perhaps we can choke that up to short-term memory loss.
At the same time, other consumers (we will keep the term generic), foresee the continuing overwhelming implications of climate change and the need for the global economy to substantially reduce dependence on fossil fuels. They perhaps have the insight that the era of sub $2 per gallon gasoline is temporary and much more dependent on ongoing geopolitics among oil producing and consuming nations.
As noted in a prior commentary, last week Tesla Motors unveiled its latest Model 3 all electric powered SUV with a declaration that the vehicle achieves 215 miles of operating range per charge, delivering superior performance with a starting price of $35,000 before incentives. Immediately, the Model 3 has garnered over 200,000 customer reservations, and yes, it will produced in Tesla’s California assembly facility with the now infamous gigafactory producing lithium-ion batteries in Nevada.
A glance of this week’s business headlines indicates a confirmation from Ford Motor on investing $1.6 billion for a new auto assembly facility in Mexico to produce the Ford Focus and other smaller sized vehicles. This is incremental to prior announcements to invest $2.5 billion in other Mexican based factory and supply chain facilities.
Fiat Chrysler Automobiles, which previously touted that it could competitively produce smaller cars in U.S. factories, indicated it plans to cut upwards of 1600 jobs this summer at its existing Michigan based auto assembly facility which produces smaller vehicles. Overall, Fiat Chrysler is reportedly investing upwards of $1 billion to re-align manufacturing capacity towards larger vehicles.
Conversely, General Motors indicates that it will continue to build its smaller car models in the U.S. including the newly designed 2017 Chevrolet Bolt with an estimated 200 plus mile range and $40,000 price tag. That is in addition to the current hybrid powered Chevrolet Volt that provides 420 miles of driving range for a base price of $35,000. The Volt is assembled at GM’s Detroit Hamtramck production facility.
Beyond the current rhetoric of these announcements reverberating in the current U.S. Presidential Election cycle, it is important to focus on what is occurring. These are not, from our lens, solely temporary adjustments in existing manufacturing capacity to reflect near-term changes in product demand brought about from consumer buying euphoria from dramatically lower fuel prices. Instead, the level of new investments implies strategic shifts in manufacturing capabilities towards non U.S. sites, perhaps a reflection of pending new global trade agreements such as the Trans Pacific Partnership and NAFTA that view North America as a contiguous trading, supplier and production zone.
Business strategy pragmatists will probably view these events as smart moves to insure larger margins on smaller, lower-margin vehicles. This is the consistent strategy of lowest cost direct labor but the tradeoff is often in product design and management more than likely residing a plane ride away. The counter-argument is that with so much of the production process now highly automated with robotics and additive manufacturing techniques, shouldn’t direct labor costs be manageable regardless of location?
Organized labor likely views these moves as a betrayal of prior agreements made during the 2008-2009 bankruptcy crisis that surrounded the bulk of U.S. automotive OEM’s. Chrysler and GM subsequently sought government bailout funding with assurances that there would be a continued U.S. manufacturing presence in small and larger car production alike.
From the sustainability strategy lens, we submit it is yet another fallback to an old and troubling habit, trading-off direct labor savings with added logistics and transportation costs.
Larger vehicles with higher fossil fuel consumption are added to the nation’s byways while added surface transportation movements are required to transport smaller vehicles from Mexican supplier and final assembly facilities to various U.S. and Canadian consumption regions. The net result is more greenhouse gas emissions and an industry where certain producers view product strategy solely as a facilitator of near-term financial results vs. integrated product strategy and regionally based manufacturing flexibility that can produce either small or large vehicle models in any plant.
And so the habit of certain producers lives on, along with the overall implications. Short-term memory loss perhaps applies to certain consumers and producers.
Praise to Tesla and GM for continuing efforts toward broader strategy that insures sustainability for both the business and the planet.
© 2016 The Ferrari Consulting and Research Group and the Supply chain Matters® blog. All rights reserved.
Prediction Eight of or 2016 Predictions for Industry and Global Supply Chains (Available for Complimentary Downloading in our Research Center) anticipates developments surrounding global trade will occupy the attention of many industry and regional global supply chain organizations in 2016 and beyond.
The most prominent trade development is turning out to be the ratification process involving the proposed Trans-Pacific Partnership (TPP). In early October, ministers of the 12 TPP countries announced conclusion of their negotiations regarding trade among what is estimated to represent 40 percent of current global GDP, which is rather significant, especially from a global supply chain context. The countries to be included in TPP are: Australia, Brunei, Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam. In early February, ministers from the 12 countries signed-off on the overall agreement paving the way for the individual member country ratification process that must be completed in two years.
Supply Chain Matters highlighted some of component sections within TPP in a two-part commentary series in November.
As we near the completion of Q1, the TPP ratification process among member countries has involved much political discourse. It now appears that a building political tide among developed countries will delay or possibly derail TPP.
Our original feeling was that as TPP details emerged, industry supply chains would begin to uncover certain strategic and tactical opportunities and impacts related to current global sourcing strategies. Some of these impacts will relate to specific industries and include either current or potential future global value-chain strategies that exist in China, Vietnam, the Eurozone or other countries. Among the goals of TPP was lower trade barriers and increased export opportunities for developed countries in their efforts to market and sell more products in the emerging markets of Asia.
However, as the ratification process continues to unfold, lots of concerns are being raised regarding the true benefits of open global trade as well as the protection of jobs in developed countries.
While business trade groups and associations such as the U.S. Chamber of Commerce have endorsed TPP, other industry factions as seeking either additional concessions or added protections. For instance, pharmaceutical firms are seeking broader provisions for intellectual property protection while the apparel industry remains concerned that TPP could disrupt efforts in fast fashion sourcing, where regional designs are sourced and produced in the consumption region just as the Eurozone of the U.S. in order to accelerate time-to-market turnaround.
Yesterday, a front page article appearing in The Wall Street Journal provided added awareness to the notion that free trade policies are not at all resonating with the electorate in the United States and other developed nations. Resentment toward free trade and indeed building frustrations around government policies more influenced by lobbyists and big business appears to occupy the minds of voters, and consequently, legislators.
In the ongoing U.S. Presidential primary voting process, candidates for both the Democratic and Republican parties have each declared opposition to TPP. What’s even more interesting is to observe primary elections held in U.S. states that would seem to have significantly benefitted or were harmed from free trade. For instance South Carolina, which has become a hub for automotive manufacturing and exporting for a variety of foreign based manufacturers, had voters electing to favor candidates openly opposing TPP adoption in its current form. A state such as Michigan which remains the hub of automotive supply chain manufacturers with unionized workers opted for candidates such as Donald Trump and Bernie Sanders who threaten to blow-up existing trade deals that take away from U.S. jobs. It’s interesting to hear Mr. Trump rail on a company such as Apple that favors a supply chain sourcing strategy where upwards of a million contract manufacturing assembly jobs exist across China. Perhaps Mr. Trump’s staff have read some of our Supply Chain Matters related to Apple.
In yesterday’s report, the WSJ cites a survey of 1200 people conducted by Caddell Associates, indicating that among Republican voters, by a margin of 59 percent to 4 percent, and among Democratic voters by a margin of 35 percent to 4 percent, many believe that trade deals benefitted other countries rather than the United States.
Thus, political support for TPP ratification among both U.S. political parties has indeed faltered making any ratification this year somewhat unlikely. Similar opposition is building in other developed countries such as Australia, Canada and Japan. Meanwhile, countries such as Vietnam are embracing the potential benefits that TPP will provide to that country’s economy.
Perhaps lost in all of the current discourse are broader tenets provided by TPP in areas such as intellectual property protection, stricter social responsibility and labor collective bargaining requirements along with broader and more impactful supply chain sustainability standards.
Obviously, in order for TPP to gain ratification, much more education and informed discourse will be required. Those companies that favor TPP will have to shift their energies from one of political influence to that of public education and open discourse. Other trade initiatives such as the Transatlantic Trade and Investment Partnership (T-TIP) could be bogged down by the same political discourse.
Rather than be muddled by ongoing uncertainties as to trade and manufacturing sourcing environments, we are now of the view that energies are better focused on efforts directed at insuring long-term supply chain sustainability and greenhouse gas emission reduction strategies. This is an area where, despite political rhetoric, there is a building populace consensus that our planet is in jeopardy from the effects of global climate change. Those effects include risks to strategic supply continuity and longer-term impacts to markets served.
By influencing value-chain sourcing strategies towards strategies that insure supply chain sustainability you risk not getting de-railed by an uncertain political tide directed at the perceived value of free trade agreements. While business executives can rail on too much regulation and regulatory complexity, they should readily understand that climate change poses a far greater strategic threat.
We would certainly value reader comments on this topic.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Last week this author attended Oracle’s Modern Supply Chain Experience conference held in San Jose California. This conference is hosted annually by Oracle, and provides a singular focus on broad supply chain related technology and business process topics. Attendance this year was impressive, upwards of 2000 attendees from multiple industry settings.
I had the opportunity to participate in two different panel discussions. One was the role of sustainability in the modern supply chain. Our panel was moderated by Rich Kroes, Director, and Sustainability Strategy at Oracle and included two other panelists besides myself: Jon Chorley, Chief Sustainability Officer and Group Vice President, SCM Product Strategy at Oracle and James Ayoub, a student at Penn State University.
To its credit, Oracle sponsored the attendance of nearly 80 students from various supply chain management programs both in the local area and across the country. These students were afforded the opportunity to attend general sessions, a dedicated set of student focused session tracks as well as participate in a panel discussion, including our sustainability panel. Our sincere thanks and shout-out to Oracle for their generous outreach and support, was of the first that this author has witnessed from a specific technology company.
Our sustainability panel touched upon various topics regarding how sustainability is manifesting itself across industry supply chains.
On Supply Chain Matters, we have highlighted industry supply chain efforts dating back to at least our founding in 2008. While some initiatives have stemmed from regulatory directives and requirements such as REACH across chemical focused supply chains, RoHS within high tech, or Conflict Materials, others have been spawned from aggressive and committed corporate sustainability goal setting. Many global corporations have declared carbon reduction and sustainability goals mapped to specific timelines and much of the facilitation or enablement of such goals originates specifically within supply chains because product value-chains are responsible for a considerable portion of carbon and greenhouse gas emissions. Consider the carbon emissions footprint of transportation and logistics, manufacturing or agricultural production for example.
Many Consumer Products and Food producers such as Procter & Gamble, Nestle and Unilever and others are recognized for their wide reaching efforts for incorporating sustainability in business strategy. Beverage companies such as Coca Cola, PepsiCo and SAB recognize that large consumption of water is a critical component of a sustainability strategy. They have each appointed senior managers responsible for water conservation and sustainability initiatives that insure supplies of water are continuous.
High profile manufacturers in the high tech and consumer electronics sector such as Apple, Dell, Hewlett Packard and others have always been on the forefront of sustainability initiatives. Across various other industries, innovators have been openly active and committed to sustainability efforts because it drives benefits.
Consumers and customers have in-turn, continued to actively support brands that demonstrate a commitment to sustainability and preserving our planet. James Ayoub was very articulate in expressing how consumers of his millennial generation care about their environment and factor buying and loyalty decisions based on the reputation of the brand in active sustainability efforts. James further shared highlights of internship efforts in supporting corporate initiatives in this area as well as how Penn State’s supply chain management programs and academic instructors weave sustainability into the curriculum.
Jon Chorley noted the dual role of Oracle in the area of sustainability, first as a corporate citizen and in providing technology that supports the management and tracking of such efforts. Having inherited a high tech manufacturing supply chain from the past acquisition of Sun Microsystems, Oracle inherited a high tech manufacturing value-chain with many opportunities for continued efforts in sustainability. As Chorley exclaimed to the audience, it makes good business sense to have sustainability weaved into business strategy in four impactful dimensions:
- Innovation- both product and process focused and in supply and value-chains that become self-sustainable
- Enhancing the Brand– Consumers and customers making their buying decisions not only on product form and function but on the brand’s commitment to sustainability and combating climate change.
- Strategy and Stockholder Value– Sustainability efforts insure strategic continuity of supply of commodities, raw materials and natural resources. They insure that a firm has plans and strategies that can support long-term competitiveness and industry leadership.
- Cost– in carbon and missions reductions that save our planet and in the monetary costs of materials, processes, product packaging and movement of goods.
I also had the opportunity to share with our audience my perceptions of the potential industry supply chain impacts from the recent Paris climate agreement. In December, 195 nations became parties to the Paris Climate Agreement (COP21) that commits to holding the increase in global average temperature below 2 degrees Centigrade (3.6 degrees F) above pre-industrial levels and to pursue efforts to limit temperature increase to no more than 1.5 Celsius above pre-industrial levels.
Whereas the prior Doha Agreement among 37 nations, the new Paris Agreement addresses climate change challenges after 2020. The Paris Agreement further represents the first time that such a large portion of the global countries have explicitly declared that the existence of climate change and heighted greenhouse emissions provides global risk.
From the accounts that I have read, the implication of this Agreement reflect clear messages that much of the globe’s remaining reserves of coal, oil and gas must stay in the ground. Reduction of deforestation must become global-wide priority.
The implications of such goals are yet to be fully understood by industry and supply chain audiences. One European based research firm declared that supply chain mitigation initiatives will be the Number 2 most effective strategy for achieving COP21 commitments.
Our panel concluded with thoughts that under COP21, industry supply chain involvement in sustainability has little choice but to move into a mandatory stage. Think of all the ships, railways, trucks and equipment that make-up the global movement of goods. Think about current manufacturing, assembly and farming processes primarily powered by fossil fuels and you begin to get a sense of the seriousness of this next stage. Businesses and their associated supply chains must take on a more implicit responsibility to act in ways never before, in with innovation of a large scale.
Thus, vision and leadership among both public and private sectors is now a must and critical for alignment of efforts in joint investment, in policy, in rewards and in penalties. Because supply chains are intrinsically global in scope, there will be requirements for far broader collaboration within and across industries, suppliers and service provider communities to overcome these new challenges.
I very much enjoyed discussing such an important topic with my fellow panelists and I thank Oracle for the opportunity as well as the commitment to the topic of sustainability.
© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
In this two-part commentary Supply Chain Matters shares some initial impressions of the Trans-Pacific Partnership (TPP) which has reached the stage of preliminary agreement pending the ratification by member nations. In early October, ministers of the 12 TPP countries announced conclusion of their negotiations regarding trade among what is estimated to represent 40 percent of current global GDP, which is rather significant, especially from a global supply chain context.
In our Part One posting, we shared perspectives on the defining features and summary descriptions of Sections 2, 3 and 4 of TPP.
We continue with pointing out some other important sections for the education of our cross-industry supply chain reading audience.
Section 14- Electronic Commerce
This chapter prohibits the imposition of customs duties on electronic transmissions and prevents TPP parties from favoring national producers of suppliers. TPP members agree to adopt and maintain consumer protection laws related to fraudulent and deceptive online related commercial activities and ensure that consumer protections can be enforced in TPP electronic messaging. To promote more online focused trading network activity, the agreement calls for promoting paperless trading between businesses and governments including electronic customs forms, electronic authentication and signatures for commercial transactions. The parties agree not to require that TPP companies build separate data centers in store data as a condition for operating in a member country, and that source code of software is not required to be transferred or accessed.
This area will surely aide in measures to streamline B2C/B2B business process and customer fulfillment networks. We also view this as potentially removing barriers to facilitating electronic supply chain control tower capabilities spanning both planning and execution visibility and decision-making needs.
Section 18- Intellectual Property Protections
Consistently, one of the more important concerns for firms and their respective value-chains is IP protection. This chapter of TPP is described as making it easier for businesses to search, register and protect IP rights in new markets. It establishes standards based on WTO’s TRIPS Agreement and international best practices. For trademarks, it provides protections of brand names and other signs that businesses and individuals use to distinguish their products in the market.
This section further contains pharmaceutical-related IP provisions that address both innovative medicines and availability of generic medicines.
Section 19- Labor
All TPP parties are noted as International Labor Organization (ILO) members and thus recognize the importance of promoting internationally recognized labor rights. Rights are noted as the right to collective bargaining, elimination of forced labor, abolition of child labor and elimination of discrimination in employment, among other tenets.
There are further acknowledgements to have common laws related to governing minimum wages, hours of work and occupational safety and health. This section will have special meaning to high tech and consumer electronics, high direct labor focused, and general lower-cost focused contract manufacturing focused value-chains.
Section 20- Environment
TPP parties are to share a strong commitment to protecting and conserving the environment and to effectively enforce their environmental protection laws. There is specific language related to the protection of fisheries, endangered species, water and wetlands and marine environment. The parties are to commit to cooperate to address matters of joint or common interest, including areas of conservation and sustainable use of biodiversity along with transition to lower emissions and resilient economies.
Section 24- Small and Medium-Sized Businesses
A special chapter promoting a shared interest for small-and-medium-sized businesses sharing in the benefits of TPP. It includes commitments from TPP members to create user-friendly business practices, provide assistance in accessing new markets and in overall training.
Section 26- Transparency and Anti-Corruption
A rather important section for strengthening good governance and addressing the effects of bribery and corruption practices. It calls for laws, regulations and administrative rulings be publicly available along with consistent enforcement of anticorruption laws and regulations. The section covers areas for both corporate and public officials.
Obviously there is much more to TPP, more than we can cover in a couple of blog posts. Ratification is expected to occur in 2016 as legislators of individual member countries vote approval. We can’t help to speculate that this effort may take-up most of 2016, given the far reaching aspects of TPP.
As we noted in our initial commentary, certain influential nations such as China are not a current member of TPP. That country, instead, is now actively promoting the Free Trade Area of Asia Pacific (FTAAP) as a further alternative. This week, Chinese President Xi Jinping stated: “With various new regional free-trade arrangements cropping-up, there have been worries about the potential of fragmentation. We therefore need to accelerate the realization of FTAAP and take regional integration forward.”
With a significant global and supply chain influencer such as China, representing the other significant portion of global growth, promoting yet another or alternative trans-Pacific focused trade pact, TPP can either be ratified, compelling other nations to join in its tenets, or could be fragmented by conflicting standards.
Industry supply chains are obviously important stakeholders in these major trade pacts and it will be important to keep up to date on these trade developments along with their implications on easier access to new markets, more leveraged use of technology and impacts to existing business practices.
Supply Chain Matters will do our part to keep readers informed of important developments.
Supply Chain Matters Book Review: The Power of Resilience- How the Best Companies Manage the Unexpected
From time to time Supply Chain Matters will feature book reviews which we believe would be of value and a learning asset to our extended global supply chain management community of readers.
In this particular posting, we share our review of: The Power of Resilience, How the Best Companies Manage the Unexpected. The author, Yossi Sheffi, is a well-known thought leader among the global supply chain management community serving as the Elisha Gray II Professor of Engineering Systems at the Massachusetts Institute of Technology (MIT) and Director of the MIT Center for Transportation and Logistics. He has authored a number of previous books including: The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage and Logistics Clusters: Delivering Value and Driving Growth. Professor Sheffi was gracious to this blog by previously contributing a guest commentary related to his Logistics Clusters book.
If you have been a long time reader of this blog, you have undoubtedly read of the many disruptive events that have impacted industry and global supply chains, along with some of the consequences. Events would include Hurricane Katrina that devastated New Orleans and the U.S. Gulf Region in 2005, the 2011 devastating earthquake and tsunami that impacted Japan and the severe floods that impacted Thailand that same year. Other events we have noted, such as additional earthquakes, major factory or warehouse fires, natural disasters and product recalls continue to uncover the vulnerabilities and dependencies among today’s globally based supply chains. In this new book, Sheffi provides with in-depth case studies that illustrate how companies have prepared for, coped with, and demonstrated resilience following such disruption, along with important learning related to the encroaching threats facing today’s supply chains. Further included are the business processes, corporate culture and technology tools utilized to prepare and learn from disruption. Indeed, the interconnectedness of global economies, the lean aspects of multi-industry supply chains today, and the implications of vast arrays of information amplified by all forms of media imply that unexpected events in any corner of the globe can ripple through the supply chain and affect customers and shareholders.
This blogger, analyst and consultant thoroughly enjoyed reading this book which I managed to read cover-to-cover on a recent roundtrip coast-to-coast plane ride. The book immediately captures interest, flows from chapter to chapter and compels one to read more. I highly recommend this text to current or aspiring senior executives and supply chain leaders as a must-read regarding the mitigation and response to supply chain risk. I especially applaud Professor Sheffi for incorporating supply chain social responsibility strategies under the umbrella of risk, which it should be.
The first five chapters of this book provides various insightful case studies of companies that experienced and responded to risk events including Cisco, General Motors, Intel, Medtronic, Procter & Gamble, Western Digital and others. These case studies bring out the importance differences among business continuity planning (BCP) and business continuity response (BCR). There are examples of risk metrics such as Value-at-Risk (VaR), Time-to-Impact and Time-to-Recovery, very similar to those defined in the latest releases of the APICS Supply Chain Council’s Supply Chain Operations Process Framework model (SCOR).
Chapters 6 through 11 address the strategy, preparation, communication and supply implications of supply chain risk and resiliency. Sheffi observes: “Building a resilient enterprise involves two broad categories of options: building redundancy and building flexibility of supply chain assets and processes.” Chapter 8, Detecting Disruption, explores methods for incident monitoring, mapping the supply chain for vulnerabilities, monitoring suppliers, and a rather important section related to leveraging social media in risk detection and response. Chapter 9 is a rather important read since it explores means for securing the information supply chain and the tendencies of cyber criminals to exploit supply chain partners as targets of information security vulnerability, as was the case of the Target credit-card hack where penetration vulnerability came from the stolen login credentials of a regional store refrigeration maintenance services vendor.
Chapter 12 addresses today’s “new normal” of disruption and risk along with methods to benefit from longer-term implications. In the final two chapters, Professor Sheffi explores the growing dependency on all levels of suppliers, including those in the lower-tier of industry supply chains. Sheffi notes: “Supply chain risk management is in a race between the fragility of complex supply chains and the resilience created by better risk management.” In Chapter 13, an argument is made that systemic supply chain risk, one that can bring an entire industry to a halt, has not occurred because of the combined efforts of today’s more responsive supply chains. Sheffi opines:
“Thus, it’s hard to conclude that modern global supply chains show evidence of true systemic risks. Companies have developed efficient response mechanisms, and the same globalization trends that could create disruption risks for specific companies that use suppliers from faraway lands may also contribute to the prevention of systemic risk by spreading manufacturing capacity around the globe. Most important, global capacity for manufacturing and distribution is large, and while it is crucial for any company to prepare and respond effectively to disasters, there are always others ready to take its place if it fumbles.”
We quoted that entire passage because upon reading and contemplating the book’s case studies, we were not as sure regarding this conclusion. While many firms have been able to eventually overcome supply and services risk, the open question is scale and timing of supply continuity. Customers, consumers and activist investors are far more impatient and unforgiving today, and the clock speed of business and industry change may not tolerate forms of extended supply chain disruption. However the one conclusion that is clear is that speed, resilience and flexibility are indeed the most important capabilities of any supply chain.