In a series of ongoing commentaries we have noted how some global manufacturers seem to be turning more towards closed vs. open supply chain deployment models.  We noted the evolving concept of closed vs. open supply chain deployment models from a past article published in the Financial Times.  A closed supply chain is described as a highly integrated set of networks in which many of the technologies being applied are developed at least partially by the company orchestrating the supply chain. This is a contrast with an open supply chains, where the emphasis is on standardized components that fit together in a modular fashion. In the open concept, suppliers are generally encouraged to be the main innovators and sell the same components to a range of other customers.

The latest clear example of movement toward a closed strategy has some rather interesting modern day parallels to the classic former Ford River Rouge complex.   Ford constructed the Rouge River complex in the late twenties to control the entire supply chain including the production of specialty steel it required. Henry Ford’s strategy was to control all of the key value-chain aspects for manufacturing a motor vehicle, including the control of raw materials.

Hyundai Motor, which operates under the umbrella of a family-owned group of companies consisting of Hyundai Motor, Kia Motors and Hyundai Steel, recently announced a strategic supply agreement for supply of one of the most crucial aspects of its value-chain, the supply of steel.  According to a published article appearing in the Financial Times, (paid subscription required or free metered view) Hyundai is seeking innovation in specialty alloys that can decrease the weight of its new model cars by 10 percent while continuing to enable more innovative vehicle design and fuel economies.

Rather than solely depend on two existing global steel suppliers, Nippon Steel and Posco, Hyundai is leveraging an $8 billion a family capital investment in Hyundai Steel to increase capacity for more innovative and modern blast furnaces. Hyundai Steel currently supplies approximately 30 percent of steel supply for both Hyundai and Kia, and plans to increase that number to as much as 45 percent by 2013. The new blast furnace capacity coming online and dedicated to Hyundai and Kia is designed to allow greater flexibility and speed to forge higher density steel for specific design needs and consequently more fuel efficient vehicles.

The announcement has fueled the classic debate of whether Hyundai Motor, by its increased reliance on its own steel supplier, will have too much of a dependence and exposure to the cyclical up and down market tends of the steel industry.  Then again, having a friendly and stable supplier may serve as an advantage for Hyundai Steel, especially given the current market growth trajectory of Hyundai and Kia Motors.

This is a development worth watching in automotive supply chains. It may produce evidence of whether a closed focused supply chain strategy in automotive provides a competitive advantage over the coming years.

Bob Ferrari

This is a brief update to our Supply Chain Matters and Expert Community commentary earlier in the week regarding aerospace supply chains remaining stressed, and specifically Airbus’s recently announced setback on its lighter weight and more fuel efficient multi-aisle aircraft, the A350.

In an interview which was published in the November 18 printed edition of the Financial Times, (paid subscription or free metered view) Louis Gallois, the chief executive of Airbus’s holding company EADS, expressed his personal apology for the announced delay of the A350.  He noted that Airbus made the decision to delay the introduction from late 2013, to the first half of 2014, because “we have to bring mature components to the assembly line and to get mature components we need a bit more time.” The Times reports that Airbus concluded that certain supplier components were not of acceptable quality and it was necessary to “stop and fix” the program.

The FT interview coincided with Mr. Gallois’s attendance at the Dubai Air Show event, along with all other major manufacturers..  The big headline of that event has been the announcement from Dubai based airline Emirates of the single largest commercial aircraft order, ever.  The airline ordered 50 of rival Boeing’s 777-300 long range aircraft at an estimated list price book value of $18 billion, with an option for an additional 10 aircraft. Deliveries are planned to begin in 2015.  A separate FT published article quotes an aerospace industry analyst as noting that Emirates selected the 777-300 because of the announced delay of the rival Airbus A350-1000, where planned first delivery has slipped from 2015 to 2017.

The European focused headline from the show was the perceived public humiliation incurred by Akbar Al Baker, the CEO of Qatar Airways, directed at Airbus, also reflecting on the delay.  Qatar is the designated launch customer of the A350.  According to a separate FT article, Qatar accused Airbus of “still learning how to make airplanes.”

Tough words indeed, coming from your launch customer.

But reports indicate that Qatar, after some last minute negotiation with Airbus senior management, later unveiled an order for 55 aircraft at list value of $6.4 billion, with a provision that Qatar would be the designated launch customer of the highly popular and new to arrive A380 neo aircraft. That obviously equates to maximum leverage of customer power and bargaining chips.  It’s like the analogy of the enterprise software account manager who makes the largest sale of the year on the last calendar day of quarter or fiscal year-end, with a healthy discount and all sorts of added perks for the customer.

To our earlier commentaries, airline customers, especially the newly emerging and more powerful global high growth carriers, are aggressively augmenting long-term lift capacity and are highly sensitive to aircraft delivery windows. They also practice high energy, savvy negotiation skills that reflect their current presence as aerospace industry disruptors.

Supply Chain Matters offers two additional follow-up observations, post Dubai Air Show.

First, we believe that Airbus should be praised and not chided for its latest actions.  Citing lessons learned from previous public delays of the A380 super jumbo jet and perhaps unstated, Boeing’s current three year delay status with the 787 Dreamliner, Airbus felt it was far more prudent to fix potential supplier quality problems now, rather than later, when the stakes are higher. A public apology coming from the CEO of any company is a bold statement of acknowledgement and commitment to accountability.

Second, airline customers have been patient regarding numerous setback announcements, perhaps leaving their gripes behind closed doors. We get the strong sense, however, that this will change during 2012 and beyond.

It seems that every very passing week brings fresh reminders of added stress in aerospace supply chains. The transfer of supply chain learning and a renewed emphasis on agility, risk avoidance  and operational excellence are now new table takes for all aerospace value-chain participants.

Bob Ferrari

Last week, Supply Chain Matters had the opportunity to participate in a briefing with Richard Wilson, President and COO, and Greg Holt, Director of Product Marketing for CombineNet, and we were somewhat impressed with the company’s current direction and offerings for sourcing, procurement and transportation management services teams.

For readers unfamiliar with this vendor, their expertise and transformation lies as a Software-as-a Service (SaaS) provider supporting advanced strategic sourcing process optimization and analytics needs.  These are typically vendor sourcing events that involve thousands of separate items with varying parameters. The company’s flagship offering, CombineNet ASAP (equates to Advanced Sourcing Application Platform) holds 17 U.S. patents and was designed to support highly complex supplier RFx supplier bid needs, including  a patented Expressive Bidding capability. One of this vendor’s legacies is its ability to support the most complex of sourcing requirements, including co-existing with other ERP or best-of-breed software offerings to support such unique needs. The company reports that 70 percent of existing customers have CombineNet ASAP  co-existing with ERP suites. It is one of very few vendors who provide specialization in the sourcing of transportation and 3PL services involving both price and non-price factors, including segment capacity.

The company has been transforming itself from late 2010, moving from a highly specialized, combined software and professional service business model, to a more user-friendly and market accessible SaaS platform provider that can offer sophisticated technology that is both user-friendly and an affordable alternative to other more expensive sourcing software. The goal has been enabling faster customer adoption and quicker value. Two consequent product platform upgrades in 2011 have added enhancements in sourcing scenario analysis rules, RFI template management, reporting and Excel-like features to analyze and manage sourcing and supplier related information. More compelling is a named user-based pricing model that can provide rather sophisticated technology at a reasonable price by today’s technology market alternatives, along with customer implementation times of less than a month for initial bidding events.

We were not surprised to hear CombineNet management report a 60 percent growth in new active customers thus far in 2011, with deals coming from food services, pharmaceutical, high tech, transportation services and other industries with complex sourcing parameters and requirements. Existing customer names are rather impressive including Bayer, Coca Cola, General Mills, Johnson and Johnson, Pepsico and P&G, among others.

CombineNet’s transformation is rather timely since the current business environment of financial uncertainty, rapid business change and compounding  supplier risk have made supply chain direct material and services sourcing a  rather dynamic process of many variables. If this vendor continues with its transformation efforts, we could well hear additional news, either in further industry penetration or being scooped-up by competitors.

Bob Ferrari

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

Supply Chain Matters has noted in previous commentaries that Aerospace supply chains are now under stress.  Many factors have led up to this condition. A significant recent uptick in airline customer orders for new and more fuel efficient aircraft is locking-up industry delivery  capacity for many years to come.  Increased outsourcing of major components to suppliers has precipitated significant program setbacks with major OEM’s Airbus and Boeing both struggling with aircraft programs that have experienced multiple year delays for customers. Boeing’s latest Q3 earnings report provided a specific  backdrop to the highly visible 787 Dreamliner program, which just entered operational service, but remains three years overdue in production and customer delivery fulfillment of over 800 aircraft.  Customers and suppliers now seek financial consideration for these delays while Boeing makes plans for a serious supply chain ramp-up in production and final assembly of 787’s.

But alas, Boeing is not the only OEM dealing with setbacks.  Last week, EADS, the parent for Airbus, announced its second delay associated with the new A350 passenger aircraft. Initial delivery will delayed by up to six months because of supplier issues, pushing the time window into 2014. EADS also incurred a €200 million ($271 million)direct  charge as an immediate result of this delay. The A350 is made with more lightweight composite materials and is the Airbus competitive alternative to Boeing’s 787.

An article published last week in the Financial Times (paid subscription or free metered view) indicates that this latest Airbus delay was attributed to suppliers being late with planned delivery of key components. Of more concern, Airbus warned that some suppliers were struggling to renew bank loans in the midst of the current Eurozone debt crisis, and there are signs of a new credit availability crunch for European small and mid-range manufacturers. The article reports that EADS has started giving financial support to some subcontractors, and has had to acquire a German supplier, PFW Aerospace. At the height of Boeing’s issues with the 787, it was also forced to acquire some key suppliers.

In a mid-October commentary, Supply Chain Matters noted that that senior supply chain executives should be contemplating scenario plans and contingencies concerning the ongoing Eurozone crisis and its potential impact on global supply chain processes.  One of the outlined areas was the availability of credit to finance ongoing inventory and working capital needs.  A worsening of bank fragility or outright bank or country specific financial failures could cause an additional credit crisis to cascade across industry supply chains.  The latest Airbus announcement is evidence of this growing risk.  We suspect Boeing and other OEM’s are not immune since each has key suppliers located in Europe.

Within the aerospace industry there exists a paradox. On the one hand, order volumes and backlog that stretch well into the next five years and beyond provide the most enviable situation for any industry in the current global economy.  Airbus alone now has an order book rate above €500 billion. Any company or industry would celebrate at having such a situation. On the other hand, supply chain process and program deficiencies, incidents of supply chain risk, and now the potential of financial crisis, are all compounding the ability to deliver the end product to customers in a timely fashion. This should be an industry humming on all engines, but success comes with a burden.

For aerospace supply chains, continuous scenario and contingency planning coupled with proactive response management may well be the S&OP agenda for many, many months to come.

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