Supply Chain Matters has provided a number of previous commentaries regarding when is it appropriate to execute a more vertical integration strategy within a specific industry supply chain. Our commentaries on this strategy focused on General Electric in aerospace engines, Delta Airlines in airline service operations, Hon-Hai Precision in high-tech contract manufacturing services and Hyundai Motors in automotive manufacturing.
This week, general, business and social media as abuzz with the announcement that electric automobile maker Telsa Motors has announced audacious plans to build its own $5 billion electric battery “gigafactory” capable of supplying up to 500,000 electric vehicles per year. This strategy is fairly savvy, given that when one reflects on the entire value-chain and cost-of-goods sold (COGS) for an electric powered automobile, the batteries are indeed the highest portion of cost. The location of this factory is stated as somewhere within the U.S. Southwest, with locations in Arizona, New Mexico, Nevada and Texas all being explored. The area of the U.S. is an obvious choice because of its proximity to the supply of lithium carbonate, a key raw material for lithium-ion batteries. Another neat aspect to the proposed 10 million square foot production facility are plans to have the factory green and sustainable, including solar and wind farms for supporting internal power needs. Telsa’s blog features a presentation that describes the conceptual plans for the proposed “gigafactory”.
According to published reports, the total cost of the plant is estimated in a range of $4-$5 billion, with $1.6 billion raised through a convertible bond issue and a $2 billion investment from Telsa. Panasonic is the current primary supplier for Telsa’s lithium-ion batteries and in its reporting, the Wall Street Journal indicated the possibility that Panasonic and other unnamed Japanese suppliers could contemplating a $1 billion investment in this proposed facility. Reports caution, however, that Panasonic’s plans are still fluid.
Telsa currently supplies batteries for the Toyota RAV4 EV and the Mercedes B-Class electric. In its reporting, the San Jose Mercury Times notes that Telsa’s prime assembly facility in Fremont California is directly located on a Union Pacific railway spur line and that the “gigafactory” will more than likely be serviced by rail as well, to control transportation costs in shipping batteries to the final assembly point.
Telsa expects that the new factory would reduce its current battery costs by 30 percent in its first year, which as we all know, is a significant contribution to COGS, and further opens up opportunities to produce electric cars for the mass market. The WSJ further reported that Telsa is attempting to break through the $200 per kilowatt hour cost point which affords the opportunity for these types of batteries to be economical as backup power supplies for electric utilities along with other forms of static energy storage. Telsa CEO and principal owner Elon Musk also is chairmen of SolarCity Corp., a solar energy provider, and that is fueling additional speculation among certain Wall Street analysts that Telsa could morph to become a power storage company.
From an industry value-chain perspective, reports that that the proposed facility will produce more lithium-ion batteries than the entire global supply for 2013 has incredible meaning with the implication for establishing a highly significant alternative energy value chain capability within the United States. It is obviously an attempt to provide a more competitive lithium battery sourcing strategy from current areas such as China, South Korea and other countries. By our view, is a rather exciting and bold announcement, one that has the potential to add more to U.S. manufacturing and value-chain momentum for alternative energy, high-tech, consumer electronics and other industries.
Investors seem also impressed since Telsa stock has shot-up since the announcement.
Forms of vertical integration or closed supply chain strategies do indeed have their applicability and seem to be garnering additional favor.
Supply Chain Matters does not normally cite or comment on the huge plethora of opinion research studies concerning the discipline and state of global supply chain management. By our view, there are too many outlets, beyond experienced analyst anchored firms, producing so called research vs. opinion of the day among a limited set of respondents.
We were recently able to obtain a copy of The Chief Supply Chain Officer Report 2013, Pulse of the Profession, conducted and compiled by SCM World, and we were impressed with the research approach as well as the key findings. The full report is available for no-cost download by registered members of SCM World and is well worth a reading. An Executive Summary can be obtained by no-cost registration.
This is fourth year of this particular study and the continuity of the study and its findings adds particular meaning. This year’s research survey was conducted during late July and August of this year and was noted as including over 750 completed responses, which is a substantial study considering today’s practices in these types of surveys. It is current and timely.
The goal of this commentary is not to re-produce the findings but rather to add some of our impressions to the findings. SCM World, the authors of the report have done a great job of articulating individual findings.
Our impressions are the following:
More and more, senior supply chain executives now have a seat at the senior executive table but that comes with the reality check of added accountabilities. According to the summarized findings, supply chain leaders are apparently caught in the middle of rising customer demands and expectations and the global growth ambitions of their firm’s management teams. The conundrum of objectives directed at continued reductions in costs while helping to grow the business are being taken on. There is rather interesting detail that points to how these pressures now manifest themselves in stated supply chain process and management objectives, which should capture the attention of peer supply chain executives.
By our Supply Chain Matters lens, this is not an area that is addressed by summarizing multiple years of industry performance and metrics, but rather leadership for weighting and interpreting key business objectives to required supply chain outcomes.
The report further provides compelling evidence on the impact that omnichannel online fulfillment is having on retail supply chains as well as key suppliers to retail. The report concludes: “the omnichannel model is swamping traditional store-based operations.”
We were fascinated with some of the findings related to changing perspectives and landscapes surrounding the firm’s supply chain related social and environmental responsibilities (SER). Responses point to more and more focus towards leading corporate social responsibility efforts, while consumer willingness to pay for socially responsible products remains low. SER efforts continue to be driven by cost and efficiency goals, but the recent visibility to health and safety issues has increased the ranking of health and safety objectives across the global supply chain
Concerning the area of supply chain risk management, the authors point to responses indicating easing concerns in this area. Executives actually quantified multi-million impacts of recent risk events in their responses and the report authors conclude that this easing stems from supply chain teams investing in risk sensing and management capabilities these past few years. Survey findings rank the top ten risk mitigation practices, and by our view, tend to have a procurement focused bias toward continuity of supply. Report authors point to more executive mindshare now focused on other cost and price risks which we believe, further reinforces a procurement lens, and perhaps the need for broader cross-functional perspectives related to other forms of key risk.
In these times, no supply executive survey neglects to reinforce the challenges related to overall talent management and the annual occurrence of this particular survey provides a historic perspective to some progress being made in this area. The findings point to specific successes in knowledge workforce development but efforts to provide an overall compelling career management perspective in supply chain remains challenging. Again, there is interesting data related to different perspectives, a broader skills umbrella, and advocating for broader cross functional and cross business training initiatives.
Overall, we view this research as insightful and thought-provoking, and recommend that industry supply chain executives take the time to review and absorb the findings.
This week marks the one year anniversary of the tragic grounding of the mega cruise ship Costa Concordia resulting in the loss of 32 lives and the evacuation of 4200 passengers and crew. At the time of the accident, Supply Chain Matters penned a commentary on the spillover effects of this accident on the broader shipping industry, where big mega-ships are the current operating principle. The world’s largest ocean container vessel, the 16,000 TEU capacity Marco Polo, operated by French line CMA CGM entered into service in mid-December, and we might add, a marvel of technology.
Shortly after the Concordia accident, there were estimates that an incredibly challenging salvage operation would take at least a year to complete and cost in excess of $500 million. There were also implications related to current cruise ship safety, crew training and ship evacuation procedures.
A video report from NBC News hosted by Yahoo Business provides images of the ship still sitting in its original spot as salvage cranes and floating platforms surround it. The person in charge of the righting and salvaging describes the incredible complexity of re-floating this vessel, which is not likely to meet its original salvage milestone. Meanwhile the sunken ship continues to sit within one of the most sensitive ecological areas on the Italian coast.
Incredibly, the captain of the vessel indicates that he has no regrets, and still believes he was misunderstood in escaping the vessel prior to all passengers. He places the blame on lower-ranking officers. This captain is yet to stand trial on the charges of multiple manslaughters, wrecking and abandoning ship, even as victim’s relatives attend a memorial ceremony one year later. One wonders if the Italian government and cruise industry is really invested and having Captain Schettino brought to justice.
The open question is whether the industry has learned from this tragic accident? With the advent of super technological-laden mega-ships, have ship crew training, safety, and evacuation procedures been vastly improved or are we all turning a blind eye on what occurred with the Costa Concordia. Does the existence of these large mega-ships, designed for ultimate operating efficiency and capacity come with appropriate safety and navigational measures to avoid another major accident with loss of life or considerable monetary and ecological damage.
These were the questions we posed one year ago.
What have we learned?
A posting this morning from Levi Sumagaysay on SiliconValley.com indicates that electronic components and Android smartphone manufacturer Samsung has dispatched a team of inspectors to investigate a claim that one of its contract manufacturing assembly suppliers is utilizing child labor.
The posting notes that New York based Child Labor Watch, the same group that exposed poor working conditions at contract manufacturer Foxconn, are behind the latest allegations. The CLW organization accuses HEG Electronics (Huizhou) Co. Ltd. of utilizing seven children, all under the age of 16, of working in a single department. CLW orchestrated a group of its investigators to work within the HEG Electronics factory during the months of June and July as the basis of the allegation. The CLW report further indicates that while the precise number of total underage workers is unknown, this organization suspects that 50 to 100 children may be working at this facility.
According to the CLW investigative report, HEG Electronics is an important supplier for Samsung, assembling products such as mobile phones, DVD’s, stereo equipment and MP3 players. The report indicates that the HEG web site identifies Motorola and LG as other prominent customers. It further identifies social responsibility auditing firm Intertek, the labor audit services provider to Samsung, of overlooking violations because some auditors have accepted bribes. According to the SiliconValley.com and a separate Bloomberg published report, a Samsung spokesman indicated that two inspections of HEG’s working conditions were conducted this year with no “irregularities.”
In his posting, Sumagaysay points out that while Apple has been in the global spotlight of suspect labor practices among its major suppliers, the timing of this latest allegation comes in the same week as the Apple-Samsung patent infringement trail.
This is a development that is certain to gain continued visibility by Silicon Valley social and business media but beyond that, has continued implications for consumer electronics manufacturers and their supply chains.
Through the gracious efforts of the MIT Center for Transportation and Logistics (CTL), Supply Chain Matters had the opportunity to attend Crossroads 2012: Supply Chains in Transition held on June 28 at the MIT campus. The conference included insightful speakers who brought forward some new and interesting perspectives. The highly informative sessions addressed five key challenges that the MIT CTL organization feels will impact supply chains in the next five years:
- Megacities and Sustainability
- Managing Resource-Constrained Supply Chains
- Mining Digital Data for Actionable Strategies
- Talent Management that Supports Global Growth
- Emerging Supply Chain Risks
Our condensed commentary highlights some of the key takeaways we garnered from the various speakers.
Dr. Edgar Blanco of MIT addressed compelling trends in megacity growth in the coming years. Megacity was defined as a city population of at least 10 million persons. The current growth in megacities primarily involves the emerging economies, and Dr. Blanco provided some compelling data that indicate why logistics and distribution strategies directed at supporting megacity retail and product fulfillment needs will need to be revisited in the light of current trends. Dr. Blanco’s argument was that megacity complexity grows faster than current policy and logistics operations supporting these cities. MIT CTL also announced the launch of a Megacities Logistics Lab that would involve a team of academic collaborators and researchers from Latin America, Europe, Asia and other counties to participate in this effort. The most interesting discussion points from this session were the concentration of a cash economy in megacities along with the broad use of mobile phones.
The resource-constrained supply chains session addressed the availability of inbound raw materials and whether certain supply chains would become resource constrained in key materials such as rare earth and other scarce metals, water and other resources. The key takeaways were how important enterprise-wide sustainability initiatives are so critical to addressing longer-term supply needs and how important it has become to have a complete mapping and perspective of the entire global-wide supply and value-chain. One rather thought-provoking question brought forward to the three speakers in this tract was: Where Should Our Supply Chains End? The consensus answer was that the supply chain ends at the final disposal of the product.
The two speakers addressing the mining of digital data for actionable strategies were terrific and brought important differentiation in addressing actionable strategies for mining data needed in supply chain decision-making. The consensus was that the term “big data supply chains” is all too overwhelming. Dr. Jeanne Ross, Director of MIT Sloan School’s Center for Information Systems Research, noted that “small data/little analytics” is a far more sustainable approach in data mining, but is, in-turn, incredibly hard for businesses. (Technology vendors take note!). Dr. Ross outlined three management imperatives for helping teams to work smarter:
- Development of an information backbone for building good data and for provisioning data to support key decision-making.
- Management of consistent set of business rules.
- Re-design of structures, roles and accountability to support a smarter supply chain organization
Tony Grichnik, Intelligent Systems Leader at Caterpillar Logistics, challenged the audience to determine whether supply chain organizations were just collecting a mass amount of data vs. collecting the right data. He then shared a Caterpillar Logistics methodology that provides teams with a set of key questions to answer in the efforts to determine the long-term effectiveness for collecting data, information and required knowledge. In the Q&A session, both speakers reminded the audience as to why big data warehouse initiatives failed in the 80’s along with the importance of changing people’s habits to test, interact, and be comfortable with the most knowledgeable data required to do their jobs.
The session addressing emerging supply chain risks was an outstanding interactive panel discussion consisting of three highly knowledgeable risk related experts moderated by Jim Rice, Deputy Director at MIT CTL. The panelists were:
- Gary Lynch, Managing Director, Global Supply Chain Risk, Marsh Inc.
- John Wass, CEO, WaveMark
- Heinke von Seggern, Head Procurement Sustainability and Risk Management, F. Hoffman-LaRoche Ltd.
The discussion was insightful and the takeaways were many. They included the need to continually look for structural change impacting the supply chain. Supply chain leaders need to more often step out of day-to-day firefighting and think strategic, including challenging business assumptions when they present far higher risks. Also noted was the important learning that has occurred across industries from the recent major disruptions that occurred in 2011 and 2012. Panelists also reinforced the need for relentless mapping of supply chains, constantly analyzing threats and practicing scenario-based planning and management techniques. Gary Lynch brought forward an observation that Supply Chain Matters outlined in our 2012 Predictions, namely that business risk interruption insurance is becoming far more expensive as a result of past expensive disruptive events.
The 2012 Crossroads conference was timely and informative. Readers should consider attending this conference in the future.
Supply Chain Matters readers are probably aware that this author pens periodic guest blog commentaries on the Infosys Supply Chain Management Blog. The Infosys Asset Management consulting team has noticed that while discussing needs in asset management, clients are expressing new interest in coupling sustainability with asset management needs. Today we initiated a two part commentary to explore sustainable operations and their relationship with asset management pain points. In my initial guest commentary, I respond to a series of questions that were posed related to current sustainability challenges within asset intensive industries. The questions explore my views of how asset intensive industries are starting to shift focus more toward sustainable operations and green assets, opportunities to tie these needs with asset management approaches and current concepts in smart buildings and IT data centers. The notion comes down to thinking a bit differently, that smarter asset management, real-time monitoring, coupled with sustainability and product objectives opens up new opportunities to compete for business and revenue growth.
In the second part of this series, Praveen Agrawal, Enterprise Asset Management Consulting and System Integration lead from Infosys will further list the areas in which asset intensive organizations are going to focus more on sustainability based on the current research which Praveen and his team are undertaking for clients.
Our readers, especially those within asset intensive industries should gain benefit and insights from this series of commentaries and please share your own thoughts as well.
Disclosure: Infosys is one of other named sponsors of the Supply Chain Matters Blog and strives to promote thought leadership and insights for supply chain and asset management.