The printed edition of the Wall Street Journal will report tomorrow (paid subscription required or free metered view) that the Fair Labor Association (FLA), the designated supplier social responsibility auditor for Apple, has discovered multiple instances of average work weeks exceeding 60 hours along with other safety issues at prime contract manufacturer, Foxconn.  Also reported was that the FLA found that workers weren’t being fairly compensated for overtime, an issue that Foxconn, FLA and Apple are committed to fix.

Apple requested this audit earlier in the year in an effort to put more teeth into its social responsibility practices.

The audit was based, in part, on surveys of over 35,000 workers among Foxconn Chinese facilities located in Shenzhen and Chengdu.  The WSJ reports that the FLA found at least 50 legal or code violations. The FLA found that during some periods over the past 12 months workers worked an average of more than 60 hours per week, and there were several months in the past year where the majority of Foxconn workers exceeded China’s legal maximum of 36 overtime hours per month. The WSJ further indicates that the FLA report cited an average of 80 overtime hours worked per month.

Interestingly, FLA’s report indicates that 48 percent of worker respondents thought working hours were reasonable while 64.3 percent of workers thought their salary was not sufficient for basic needs. That certainly merits further discussion and analysis.

The report indicates that Foxconn has agreed to bring its factories in China within China’s legal limits by July 2013, and further indicates that Foxconn would need to recruit tens of thousands of extra workers to comply. In the article, FLA President and CEO Auret van Heerden is quoted as indicating that the findings were “no worse than any other factory in China”.

As Supply Chain Matters posted earlier today, Apple CEO Tim Cook has been visiting China this week and as we suspected, Mr. Cook took the time to visit and tour an iPhone assembly line at Foxconn’s Zhengzhou facility.

As a final note, we would not be surprised if Foxconn now decides to accelerate its investment and installation plans for factory automation and robotics in the wake of this latest audit development.

Bob Ferrari

This week business and technical media reported the visit of Apple CEO Tim Cook to meet with Chinese government officials. The agenda related to an ongoing dispute involving the iPad trademark which has hindered sales of that device within the country, as well as other potential topics including the opening of additional Apple retail stores in China. Apple had previously relied on Chinese resellers to distribute its products within the country.

While many procurement and supply chain professionals have had China on their travel itineraries,  it seems that the name recognition and clout of Apple can overcome many obstacles, both business and supply chain related.

Apple is involved in a rather complicated legal dispute with Proview International Holdings over the trademark rights to iPad.  Mr. Cook’s visit is reported as a “big deal” on the Chinese focused Internet with consumers sharing photos of themselves posing with “Captain Cook” at the Apple store in Beijing.

Mr. Cook was not expected to meet with Proview officials during his visit.

Coincidental or not to this visit comes a posting by Hana Stewart-Smith on the ZDNet blog that the company’s Wi-Fi enabled iPad model has passed certification for sale in China, despite the ongoing dispute with Proview. According to ZD Net, the Wi-Fi version device was granted its compulsory certification, a requirement for sales in the country, but the 4G capable model still requires certification approval.

One can also speculate that the other potential hidden agenda is the presence of over one million workers assembling electronic devices at contract manufacturer Foxconn, along with other China based suppliers participating in Apple’s value-chain.  Much visibility has been brought to the forefront regarding Apple’s commitment to supplier responsibility commitments and worker safety audits. Shortly after last year’s well publicized incidents of worker suicides occurring at Foxconn, Cook secretly traveled to China to personally meet with Foxconn officials.

Not many CEO’s in the world get the opportunity to meet with Chinese government officials, unless of course, you represent the most valuable company, with the coolest products and retail stores, representing a significant production and supply chain presence, and upwards of $100 billion in cash to invest.

All of which is somewhat compelling to state the least.

Bob Ferrari

In June 0f last year, Supply Chain Matters provided commentary related to announcements made at the annual meeting of Hon Hai Precision Industry Co., the parent of global contract manufacturer Foxconn International Holdings Ltd.  At the time, Hon Hai Chairmen Terry Gau declared that the company would be a high-tech manufacturer, as opposed to a contract manufacturer.  He further indicated that the company’s long-term direction was to continue to develop more prowess in advanced technology, including strategic opportunities to partner with Japan based technology providers.

Today, the Wall Street Journal is reporting (paid subscription required or free metered view) that Sharp Corp. will sell nearly a 10 percent equity stake to Hon Hai in order to: “… shake up its core-but loss making –liquid crystal display panel operations.” The deal calls for Hon Hai to take a 46.5 percent  stake in Sharp’s LCD production facility in Sakai, western Japan. The Sakai plant is expected to supply displays to Hon Hai and Foxconn later this year. This deal, valued at over $800 million is being reported as the biggest investment ever involving a Taiwan based company in a Japanese technology provider.

Hon Hai already had ownership interest in own LCD unit, Chi Mei Innolux, but the is reported to be saddled with financial losses and technological weakness. As our readers are aware, Hon Hai and Foxconn are the primary contract manufacturing providers to Apple.  Chi Mei is not involved as an LCD supplier to Apple but the WSJ speculates that this equity deal may position Sharp as more of a volume supplier to Apple’s small LCD display needs.  Sharp competes with LCD industry leader Samsung Electronics for LCD displays.

This move can also be viewed a counter to recent LCD supplier agreements involving Japanese producers. In August of 2011, Supply Chain Matters made mention of the formation of Japan Display, a merging of the LCD operations of Sony, Toshiba and Hitachi. That venture was reported to be backed by a $2.6 billion funding from a government backed agency, The Innovation Network Corp. of Japan.  The August announcement was noted to be a response to competitors Sharp, Au Optronics and Samsung who were garnering a healthy share of longer-term supply contracts.

It now appears that Hon Hai and Sharp are positioning for a more strategic supply relationship with Apple and other customers.  In the view of Supply Chain Matters, this deal may also represent another attempt by Hon Hai to vertically integrate high tech and consumer electronics production, including more influence over long-term supply contracts. We also view this deal as another sign of a changing contract manufacturing model as providers move to garner more value-added margin opportunities.

The open question is how Apple and other high volume consumer electronics providers will respond to this latest announcement from Hon Hai and Sharp.

Bob Ferrari

The following also appears as a published guest commentary on the Supply Chain Expert Community web site.

The one year anniversary of the tragic earthquake and tsunami that impacted northern Japan was by many accounts a game changing event for global supply chains. In a recent Supply Chain Expert Community blog posting, blogger Jim Fulcher makes mention of recent research findings from the Business Continuity Institute indicating that one year after, 82 percent of companies that reported supply chain disruption have confirmed some changes to their supply chain strategy, with 12 percent indicating significant changes implement.

The notion that no company is immune to such risks, even one that has incredible influence and buying power was brought forward last week in conjunction  with the announcement from Apple of its latest generation iPad tablet computer. The Wall Street Journal featured an article that extracted from two individual teardown analysis of the new iPad performed by firms UBM TechInsights and IHS iSuppli. The UBM analysis “found components with the same functions made by at least three manufacturers in different tablets.” Specifically, Apple has multiple tablet production sources for device memory and high-resolution display. NAND flash memory came from Micron Technology, Hynix Semiconductor along with Toshiba Corporation, a previous high volume supplier of memory for Apple iPhones. The new highly touted iPad high resolution displays were determined to be sourced from Samsung Electronics, LG Display and another company not conclusively identified.

While the strategy may not be a surprise for those who may know of Apple’s internal supply chain practices, the fact that a diversified sourcing strategy is expanding is another indication of the new importance of active supply chain mitigation has become. UBM and the WSJ both noted that the breath of suppliers is one of the most notable elements of the recent teardown of the next generation iPad and further speculate that the reason may be a sign that Apple is more actively practicing supply risk mitigation because of the past Japan and other disruptive incidents.  A glance at the suppliers of mention also triggers the thought that each supplier’s main operations are located in different geographic regions.

On Supply Chain Matters we recently dwelled on the one year anniversary and noted specific actions that automotive manufacturers Toyota and Nissan have implemented as a result of learning from the recent quake. Toyota alone discovered that approximately 300 production locations could be at risk and has now asked these specific suppliers to implement risk mitigation measures. Last week, community blogger and Kinaxis executive John Westerveld added his commentary that it is shame that if often takes a significant event to make all of the organization sensitized to the importance of assessing supply chain risk and developing risk mitigation strategies.  Jim also argues that supply chain risk management should be integrated under the umbrella of the Sales and Operations (S&OP) planning process because of its current scope, process frequency and data utilized to make decisions.   This author happens to agree with Jim and encourages our community to have a dialogue of its own regarding this important topic.

What we are now beginning to understand is that even Apple, the largest global supply chain influencer, who managed to come through the Japan tsunami and later Thailand floods incidents relatively unscathed, has implemented discernable supply chain risk mitigation.  The takeaway for all others is that like other areas of supply chain capability, the gap among leaders and laggards continues to widen, and supply chain risk mitigation is another critical capability within this gap.

Once again, are you educating and influencing your senior management to the need for more active risk management identification and mitigation strategies?

Do you believe that this responsibility falls under the umbrella of supply chain management, as opposed to finance or enterprise risk management?

Do you view the S&OP process as a natural extension to inclusion of supply chain risk mitigation?

One year is a long time in the current dynamic clock speed of business.

Bob Ferrari

The following also appears as a published guest commentary on the Supply Chain Expert Community web site.

Last week, Apple again captured traditional and social media mindshare with the introduction of the newest version of the iPad which is scheduled for customer availability later this week. Consumer frenzy for having the latest and greatest Apple device is again building and already the company is warning that initial supplies may not be able to satisfy pre-order demand expected for the planned March 16 availability date.

Beyond the headlines and the consumer frenzy to be the first to get one’s hands on this latest new device is speculation as to whether the post Steve Jobs era of Apple also implies shifting and added challenges to supply chain strategies for Apple.

If you believe that supply chain strategies must support business outcomes, then Apple will have to adjust some of its supply chain strategies.

In terms of sheer capabilities, the existing scope of supply chain fulfillment is staggering.  The company boasts that it sold 176 million iPod, iPhones and iPad devices in 2011, accounting for 76 percent of total revenues.  This represents over a half million of these devices shipped every day if you do not count Sundays.  That is not a lot of room to allow for capacity or supply shortages.  The continued shipments of all of these devices also led to the company’s recent announcement of surpassing 25 billion ‘Apps’ downloads from the Apple App Store.  The leveraging of recurring electronic content sales is another key strategic component of Apple’s business plan.

It is no wonder that Apple surpassed Exxon as the most valued company. With market capitalization exceeding 500 billion, stockholders respond to every move or any setback, particularly when it relates to supply chain.

The open question for speculation, however, is whether Apple has reached a crossroads concerning its strategic supply chain strategies and future capabilities.  Visibility to the company has clearly escalated given the numbers cited above, along with more visibility to the company’s high profit margins. Our recent commentary on Supply Chain Matters pointed to two recent watershed events as triggering a new phase.  Apple’s January announcement of a more aggressive stance in supplier social responsibility standards, a revealing New York Times article revealing current production and supply chain practices, and a corresponding ABC News Nightline visit to Foxconn facilities in China have added considerably more visibility to the inner workings of Apple’s supply chain. There have also been reported rumors coming from Apple’s supply base that indicate testing of a subsequent tablet computer with a screen size of about 8 inches with a potentially lower cost market entry. Our Supply Chain Matters belief is that Apple is positioning the next generation of capabilities to penetrate broader, perhaps more cost sensitive geographic markets.

All of these current signs point to the need for changing supply chain strategies for Apple, some of which may be conflicting.  Reuters columnist Richard Beales argues on his blog that Apple needs good, not just better, supply chain.  The title is a bit of a misnomer since this columnist’s argument is that with $500 billion in market capitalization and $100 billion in cash, Apple needs to shift its supply chain strategy to a higher cost model to fund more social responsibility.  The sheer visibility and brand image of Apple has placed the company supply chain practices under the looking glass, and Beale’s argument is that just as Nike encountered in the 1990’s, consumers will demand a more socially responsible Apple supply chain.

Last week in the Opinion section of the Wall Street Journal, Holman Jenkins Jr. column, The End of Apple’s Roach Motel,  (paid subscription or free metered view) speculates that if Apple continues to be successful in its content and cloud services models, its devices will become cheaper and more disposable.  His argument is that Apple’s margins will start coming down sharply and the “Roach Motel” will prove less formidable than assumed. That seems to argue for a lower-cost supply chain driven model.

A recent Reuters article points out that for retailers other than Apple, the profit margins for stocking products are thinner than other consumer electronics products.  From a customer foot traffic and interest perspective, retailers like Best Buy have no choice but to stock Apple products, but must in-turn upsell the customer to other products to uphold margins.  While Apple remains ‘the’ channel master, pressure will increase for higher margins or shared profits for retail partners.

Which direction Apple eventually takes is up to Tim Cook and his senior supply chain team. As a supply chain community, however, we should anticipate that  some strategy changes may be forthcoming.

What about your views?  Do you believe that Apple has to shift its supply chain strategies to respond to both business strategy and consumer sentiment requirements?

Bob Ferrari