The following commentary can also be viewed and commented on the Supply Chain Expert Community web site.

There is a developing story that should capture community reading interest because of its supply chain related learning.

General Motors Photo

One of the current day business news headlines concerns the General Motors developed Chevrolet Volt, the company’s premiere entry into the plug-in hybrid automobile market. The Volt has been highly touted as the future of automotive technology, and aggressive production, marketing and sales goals have been established for 2012. The vehicle currently comes with a rather pricey sticker price, namely $41,000, and GM believes that the innovative features of the futurist car will overcome price concerns.

After some months of initial sales, The National Highway Traffic Safety Administration (NHTSA) in its initial testing of the Volt has discovered instances of battery related fires.  Three NHTSA crash tests caused the car’s batteries to catch fire days or weeks after the test, a somewhat unusual occurrence.  While GM is still investigating root cause, suspicion points to a battery cooling system which may have been damaged as a result of the crashes.  GM has been quick and proactive to respond to this situation, has placed retail sales on-hold pending further investigation and has offered concerned owners options for either a free loaner car or the opportunity to return the vehicle.  GM however indicates that it remains highly confident of the safety and ultimate consumer acceptance of the Volt, and on resolving the current issues.

There is also a broader supply chain voice perspective to this story, one from which senior executives and cross-functional supply chain teams may benefit.

In late August, Bloomberg BusinessWeek featured an article; General Motors CEO Dan Akerson is Not a Car Guy.  We had cited this article in previous Supply Chain Matters commentary. The article itself reflects on GM’s newly appointed CEO, his lack of direct automotive industry experience, and more importantly his mission to change years of previous in-bred management culture at GM.  With the help of a hefty U.S. government financial subsidy and massive re-organization plan, GM is transforming itself to a leaner company.  Thousands of jobs have been shed and the survivors are being asked to be much more productive, agile and out-of-the-box thinkers. The article provides one management perspective quote from Akerson: “It’s not my role to make people comfortable. I don’t know what it was like five years ago, and really I don’t care. We are in a war.”

The article, however unintended, perhaps provides us another perspective relative to the current Volt situation. It cites a December 2010 management meeting when the Volt product development team had developed its plan to initially build 45,000 Volts, and assumed that the plan was “baked and ready to go”. Akerson instead challenged the team to come up with a plan to build 120,000 units, under the assumption that someone informed him (perhaps from sales and marketing) that a vehicle needs to sell at least 100,000 units to be successful.  Volt engineering and product development teams however were keenly aware that it took Toyota and its Prius model about seven years to hit the numbers that Akerson was requesting.  The other looming implication was that contracted suppliers would have to quickly nearly triple the volume of the vehicle’s high tech parts, especially its volume supply of lithium-ion batteries.

While readers can take in the rest of the story, we jump ahead to note that the final decision was to set a build plan for 60,000 units, one-third more than the originally recommended plan, but half the Akerson unconstrained challenge plan of 120,000.

A recent Wall Street Journal article  (paid subscription or free metered view) reflects on the current Volt situation before the fires.   The article also notes that supply was especially short through July, when only 550 of 2600 interested dealers had a Volt to show off to customers. Toward  the article’s  end, there are comments from GM legend and former Vice Chairman Bob Lutz, the originator of the Volt concept design.  Lutz notes that the car’s main problem is the high expectations it faces, and that this year’s build plan was far  too ambitious and the ramp-up was just too slow. Mr. Lutz affirmed his belief in the success of the Volt and described its ultimate success in  baseball analogy  as a “bases-loaded home run “. While we certainly do not profess to know all of the facts and details surrounding the Volt’s product plans and can only speculate what is being written, there is some learning surrounding this evolving story.

The point of view of Supply Chain Matters is that CEO’s and senior management have every right to challenge the status quo and encourage innovative thinking.  That stated, there is also the notion that operational and supply chain experience provides a basis of some understanding of what may be realistic plans, given various realities of ramp-up planning, volume production and testing.  Readers may also recall that other hybrids such as the Prius have experienced other problems along the way, such as braking, engine stalling and software issues, which were all overcome.  After all, this is new technology.

The most innovative design or coolest product can only succeed when all the links in the supply chain operate together, and, when appropriate, the voice and experience of supply chain should trump the needs for bravado.

Bob Ferrari

The biggest company focused news in global supply chain circles this year has to be a Bloomberg BusinessWeek article that published this weekend. The article’s title is: Apple’s Supply Chain Secret? Hoard Lasers, and we urge all of our Supply Chain Matters readers to take the time and read this article since it represents one of the best in-depth commentaries and reflections regarding the inner workings of Apple’s global supply chain.

As a community, we all have observed Apple’s abilities to launch products with military precision, to have the ability to support product volume shipments the envy of many, and to undercut competitors in scale and price, all without missing a heartbeat. Supply Chain Matters has posted many commentaries related to Apple’s closed knit ecosystem, the latest being our own view of the company’s extraordinary strategic supply chain capabilities. Readers know all too well about the secrecy that Apple affixes to all of its business processes and credit should go to Bloomberg writers Adam Satariano and Peter Burrows for performing a fantastic feat in journalistic interviewing and detective work. The authors conducted over a dozen interviews with former employees, unnamed suppliers and management experts surrounding Apple’s internal supply chain, to stitch the picture of global supply chain strengths and overall capabilities.

Without taken away the thunder of the article, we can summarize some key highlights:

• Apple began its innovation in global supply chain capabilities upon the return of Steve Jobs in 1997, and his subsequent hiring of Tim Cook to lead overall supply chain operations.
• Apple takes extraordinary measures to maintain secrecy of information related to its products and supply chain activities, even to the point of deploying electronic monitors and auditors to monitor potential information leaks.
• Apple not only “thinks big” in product design and capability, it also does the same in designing and deploying required supply chain capability. The company plans to double capital expenditures in 2012, nearly $7.1 billion, on its supply chain capabilities, along with an additional $2.4 billion in pre-payments to strategic suppliers. There is also more reinforcement and acknowledge of Apple’s ability to lockout competitors in strategic supply of key components such as LCD screen and flash memory. One executive “with a major parts manufacturer” is quoted as stating that his/her company declined a $1 billion payment from Apple because it involved committing much of its existing manufacturing capacity.
• Life as an Apple supplier is indeed lucrative, but comes with many requirements for agility and responsiveness to Apple’s needs, while having to deal with Apple’s slow payment cycles.

In a July commentary, we called attention to an article that differentiated closed vs. open supply chains. We reflected that closed supply chains, like that of Apple, have come to the forefront as a result of corporate strategy needs, in essence, making the supply chain a fabric to pronounced industry advantage. A closed, strategic supply chain has important people, process and technology skill implications, and stems from an orientation of thinking big and broader vs. supply chain as a collection of cost centers to be driven to maximum cost competitiveness.

A closed, strategic supply chain may not be appropriate for every enterprise, or may lack the leverage that a mid-sized business can leverage.  After all, Apple has had the ability to garner extraordinary product margins and profitability in its overall business model. But upon reading this BusinessWeek article, we can all certainly gain an understanding of what thinking big and bold really equates to for Apple, not only in product design and innovation but in a focus that supply chain capability and investment absolutely does matter as well.

Why not drop a copy of this Businessweek article on Apple’s supply chain on the desk of your CEO and CFO with the caption: “worth reading and worthy of discussion”.

Bob Ferrari

The following commentary can also be viewed and commented upon in the Supply Chain Expert Community web site.

Last week much of the aviation industry came together at the Paris Air Show and the event may well be remembered by Airbus as a spectacularly successful event.  The show also provided our supply chain community critical reminders of the importance that proper timing of new products and value-chain collaboration can play in an industry market.

During last week’s event, Airbus landed a total of 730 orders for aircraft at a catalog value of slightly more than $72 billion, which was double what executives previously estimated.  Not bad at all for one week’s haul, and an envy for any value-chain.

The primary headline however was the short-haul aircraft market and recent release of the updated A320neo, which accounted for 667 orders representing over 91 percent of commitments made at the show. The A320neo further attracted one of the largest orders on-record for Airbus, 200 A320neo aircraft from AirAsia Bhd valued at $18.5 billion. Airbus has now accumulated 1029 orders of the updated A320 since its announcement in December, an order volume that is sure to capture the attention of Airbus competitors. Another takeaway from the enormous success of the updated A320 is the new market power and enthusiasm of Asia based and lower-cost airlines that have fueled buying interest thus far.

The “neo” (new engine option) A320 boasts of an efficiency improvement package which incorporates both wing Sharklets and newer engine technology that Airbus claims will deliver 15 percent reduced fuel consumption, less CO2 consumption, additional payload and 500 additional nautical miles of aircraft range.  Airbus claims that the updated A320neo can deliver 16 percent less fuel burn per seat compared to Boeing’s 737-800, and 1300 more nautical mile range than Bombardier’s new C-series CS300 aircraft. One other product marketing claim is that the updated A320 has 95 percent spares commonality with the existing A320 family.

Two different aircraft engine options are being made available for the A320neo, the Pratt or Whitney PurePower PW11000G geared turbofan, or the CFM International LEAP-X. Each of the engine manufacturers collaborated with Airbus on meeting fuel efficiency and design targets. CFM is the engineering and product design consortium among France’s Snecma (SAFRAN Group) and General Electric Aircraft Engine Group. The LEAP-X turbofan is characterized as a new generation aircraft engine designed to leverage the newest technologies.  CFM has secured firm orders for 910 LEAP-X1A engines thus far valued at more than $11 billion in catalog pricing.  CFM engines are also exclusive to powering the Boeing 737-600, 737-700, and 737-800 aircraft.

According to an Airbus brochure, deliveries of the A320neo are planned to begin in October 2015, and according to financial media reports from last week’s show, many neo customers were motivated to place orders to secure their delivery slots, which are now estimated to be in 2018

Boeing, arch competitor to Airbus, competes in this short-haul aircraft segment with the popular 737 series aircraft. Other new market competitors include Bombardier and its C-Series line and China’s Comac. Boeing has yet to decide whether to re-power its proposed new version 737NG or come up with a new design that would offer airline customers greater cost savings.  Industry speculation is that large influential airline customers including Southwest Airlines and Ryanair have been urging Boeing to decide on a direction for the 737NS.  Judging from last week’s unprecedented activity among airlines willing to plunk down a monetary commitment, Boeing may well be in a difficult catch-up position, since it only garnered 80 new orders for 737’s last week. Reports indicate that Boeing may well opt for a entirely new design for the 737. That new design will have to best the A320neo performance as well as meet expected delivery windows for customers, which places more pressure on Boeing teams.  The commercial arm of Boeing also continues to play major catch-up with overdue deliveries of the 787 Dreamliner aircraft, and that track record does not bode well for Boeing’s predictability.

The Eagles had a very popular tune, In a New York Minute, who’s first refrain included these lyrics:

In a New York Minute
Everything can change
In a New York Minute
Things can get pretty strange
In a New York Minute
Everything can change
In a New York Minute

The airline industry, and especially its new wave of Asia, Middle East and emerging market carriers are redefining low-cost travel, growth and profitability, and now, aircraft market demand. Last week was perhaps a watershed event in determining the new competitive dynamics in listening to customer needs and proper timing of a new product. We can gather some important learning from this one show.

Bob Ferrari

There is a rather timely debate and discussion occurring within our community that reflects on the S&OP (sales and operations planning) process and its interaction with IBP (integrated business planning).  In a recent posting on The 21^st Century Supply Chain blog, Trevor Miles of Kinaxis puts forth an argument that for many manufacturers, the annual budgeting process is broken, and rather than a static mechanism, should rather be a continuous process driven by a consensus operations forecast, namely the S&OP process. Trevor brings forward a number of evidence points to support his argument, which readers can review and comment upon.

I thought I would take a slightly different perspective and reflect on what has been occurring across North American and global supply chains thus far in 2011, and reflect on whether a static annual budget would still serve as a barometer as we reach the half way mark of 2011.

To begin, we should set some context among supply chain operations and financial teams.  As we began 2011, Supply Chain Matters noted that the two significant global supply chain management challenges in 2011:

1. Exploding inbound material costs which could prove difficult to offset by higher prices of further cost reductions.
2. Rapidly changing markets and market dynamics forcing many supply chains to be more agile and responsive to explosive demand coming from emerging regions or hot product sectors.

On the financial side, many global manufacturers, while experiencing fatter profit margins, declared top-line revenue and market share growth as a key 2011 objective.  Annual budgets were set accordingly.

To provide a contrast of what can happen in just four months, we can reflect on two reports: The Institute of Supply Management (ISM) Semiannual Economic Report released this month, and the HSBC Purchasing Managers Index for China released in April.

The ISM economic outlook predicts that manufacturing growth among U.S. manufacturers is much better than expected.  The majority of respondents predicted revenues will be 13.2 percent higher in 2011.  In December, these same respondents predicted a 5.6 percent increase in 2011 revenues.  In four months, revenue expectations have more than doubled.  In terms of capacity, purchasing and supply managers report a current level at 83.2 percent of normal capacity, 3 percentage points higher than December, and coming close to capacity levels achieved in December 2006. In December, manufacturers were planning a 5.2 increase in capacity for 2011, but that capacity is now expected to increase to 8.1 percent for the remainder of this year.  Significant changes in a matter of months.

Turning to China, the manufacturing engine of the global economy, respondents note a lackluster growth in new business, a decrease in export orders, and a slower expansion of manufacturing production. Further noted is that manufacturers are cutting back on purchases and inventory noting a subdued rate of new order growth. Manufacturers in China and the U.S. are managing different business needs as well as different operating assumptions that are changing by the month.

Other key changes noted on both the U.S. and China reports are indeed rapidly increasing inbound prices and mounting parts shortages.  With the U.S., purchasing managers anticipated a 2.7 percent increase in prices in December, and have now noted that actual price increases have doubled to reflect on average, 6.1 percent increases. The majority of purchasing respondents now expect prices to increase 9.1 percent compared to end of 2010 levels.  Similar price increase concern is also reflected in the China. report. ISM specifically asked respondents what percentage of inbound material costs increases could be realistically passed along in higher prices.  The response was an average 34 percent, meaning the remaining portion would have to be offset by other factors. Earlier this year, senior managers might have been more optimistic regarding a strategy of offsetting costs with price increases.

At the beginning of this year’s budgeting cycle, nobody could have predicted a major earthquake and tsunami hitting Japan, and its subsequent impact on industry supply chains.  Both the U.S. and China reports make mention of initial indicators of impact and consequent parts shortages occurring.  ISM noted 23 percent of manufacturers anticipating that they will experience some supply chain related delays as a result of the Japan impact.

Our point in highlighting just these two examples of data is that business assumptions are indeed changing at a much more rapid rate.  The data and assumptions made just four months ago regarding key aspects of production, capacity, costs and availability are changing constantly, along with unforeseen events such as the earthquake in Japan, floods in the U.S. Midwest, or other natural catastrophes to come.  They all, at least in our view, reinforce thinking that budgets and operating plans will never be static and will always be changing.

Ultimately, the rapidly changed clock speed of business has impacted the iterations of the business planning and S&OP processes, and the sooner senior management and cross-functional teams acknowledge this, the better we can all move on toward determining the best means to manage needs for a much more flexible business planning and supply chain response management process.

Bob Ferrari

The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site.

We have penned a number of commentaries regarding Apple’s extraordinary supply chain operational management capabilities, the latest being last week’s posting, Apple’s Secret Sauce Should Be No Surprise to the Supply Chain Community.  This week, more public news has surfaced regarding Apple’s strategies and capabilities, specifically two different developments. Keep in my mind, Apple’s corporate culture is one of high secrecy and information in the public domain only scratches the surface to what’s actually going on. Apple continues to cast a very wide net in assuring production capacity and capability, and at the same time, is becoming a more influential force for overall consumer electronics supply chains.

Over on the International Business Times web site, Carl Bagh noted that Apple is again plugging strategic and tactical holes in its long-term supply strategy, placing a $7.8 billion order for key LCD, NAND memory and other electronic components from Samsung Electronics.  As noted in our previous commentary, while competitors scramble to launch alternative products in tablets and smartphones, Apple continues to aggressively negotiate long-term supply contracts with strategic suppliers, potentially locking-up key industry capacity.  In his commentary, Baugh cites DigiTimes as reporting that LG Display will benefit from a 35 million unit order for iPad displays in 2011, but also is not able to singularly meet Apple’s growing thirst for these displays. Also noted are Apple’s co-investments with key suppliers in building more manufacturing capacity, including Sharp Corp.’s $1.2 billion investment to build a new production facility for small and medium sized LCD displays.

On the supply chain social responsibility front, SiliconValley.com reported yesterday that last June, at the height of the incidents of worker suicides at Foxconn International, Apple’s largest volume contract manufacturer, COO and now acting CEO Tim Cook was quietly dispatched to China to personally meet with Foxconn management. The extraordinary but non-public visit of Apple’s highest ranking operations executive was intended to send a rather serious message, Apple was not going to tolerate these worker suicide incidents and wanted a remediation plan.  An Apple social responsibility report noted that Cook was accompanied by two experts in suicide prevention, which spawned later interviews of more than 1000 Foxconn employees. Keep in mind that some other companies might have issued a wide distribution press release noting such a visit.

The article also highlights other social responsibility actions that Apple has undertaken, including 97 first-time supplier audits in 2010.  Of particular note, 40 percent of these suppliers noted that this was the first time any large customer had audited their facilities.

Apple continues to cast a rather wide and profound influence across consumer electronics supply chains.  The question remains, are these strategies forcing Apple’s competitors to struggle for their required capacity and inventory, and will the industry be challenged with yet another year of supply and innovation challenges?

Supply Chain Matters readers, add your observations.  Has Apple’s continual influence in product innovation and supply contracting increased the stakes for competitors, or has it benefitted the industry as a whole?   Can consumer electronics players all benefit from Apple’s strategies?

Bob Ferrari