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

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

The ongoing devastating monsoon floods that continue to impact Thailand will once again demonstrate the response management capabilities among high tech electronics and automotive supply chain teams.  The word “agility” is often an overused term in the context of supply chain processes, but in the case of the unfolding supply chain disruption, it will have significant meaning.

First and foremost, our hearts go out to people of Thailand.  The floods have now claimed over 500 lives, most from drowning, and countless thousands continue to endure the ongoing effects.  Weather forecasts indicate that the heavy rains, which began in July, will continue through the end of the year and we hope that the rains end sooner than that.

As with the March massive earthquake and tsunami that struck northern Japan, the cascading global-wide effects are still unfolding across multiple tiers of supply chains.  Flooding in the country has forced the closure of more than 1000 factories.  Thailand itself represents a significant vulnerability for hard disk drive (HDD) and Japanese automotive component production sourcing.  Estimates are that the region represents 70 percent of global HDD production. Western Digital, the global leader in HDD obtains 60 percent of its inventory from its factories in Thailand and the company has already indicated that it will ship less than half of planned supply for the remainder of 2011. Japan’s Nidec Corp., a major supplier of precision disk drive motors had the majority of its production capacity impacted, and news reports point to production workers ferrying available undamaged inventory on boats in an attempt to move the motors out of flood prone areas.  Industry observers warn of an outright severe shortage by Q1 of 2012, if alternative production is not found. Unlike what occurred in Japan, HDD and component producers had minimal safety stocks to buffer a major disruption of supply.

A posting in Eweek cites industry participants noting that once the rain stops and access to flooded factories can be garnered, it would take 2-4 weeks to pump out flooded buildings and upwards of 60 days thereafter before production levels could resume. Some observers point to a 20 million unit shortfall in supply per month before normal supply levels recover, while more conservative estimates point to a 50 million HDD shortfall over the next two quarters.  Some have stated that the ongoing Thailand floods will have a greater impact on high tech and consumer electronics supply chains than that which occurred in Japan earlier in the year. That impact will surely cascade to global storage and PC manufacturers.The PC industry has already been in turmoil and this incident adds more business challenges.  A New York Times article (paid subscription or free metered view) further points to a pending impact for cloud computing and infrastructure providers further up the stream, who rely on continued acquisition of HDD hardware to support the explosion of cloud and data storage needs.

For automotive supply chains, particularly those of certain Japan based manufacturers, Thailand based factories represented considerable sourcing of electronic components, plastic and rubber parts.  Honda and Toyota are the most impacted thus far, and pending parts shortages have already led to production cutbacks at multiple final assembly production plants including Japan, North America, and other geographic regions.  According to a Bloomberg BusinessWeek article, Honda has been especially hard hit with its two Thailand final assembly plants being totally submerged since October 6. Toyota estimates that since October 10, the floods have already reduced its Thailand based auto output by 69,000 vehicles. Jim Fulcher has provided a Supply Chain Expert Community posting that elaborates further on the cascading impacts for automotive supply chains.

Business and industry media this week has rightfully raised questions as to how these recent “black swan” or unprecedented natural disaster events have exposed vulnerabilities among industry supply chains. Has the quest for lowest cost production and hyper lean supply chains overridden and exposed vulnerability to significant business risk?

While many in the community can weigh in on that discussion, the immediate crisis at hand is once again, the testing of supply chain response management capabilities among those high tech and automotive companies currently impacted, and those that will be impacted.  After all, would an executive S&OP process ever consider the reality of mid double digit interruptions in critical supply or extraordinary supply price hikes caused from that shortage?  The answer is no!

However, during the Japan crisis, some companies such as Nissan, Cisco and Jabil demonstrated that once the disruption occurred, they had the ability to quickly assess overall supply and revenue impacts from multiple layers of their value-chains, and had the response scenario capabilities defined to either re-route supply from alternative sources, allocate limited production to key customers and distributors, specify and qualify alternative parts, or call on existing suppliers to help buffer impacts.  Even the supply chain teams of Honda and Toyota, that were the most impacted, eventually found ways to analyze impact areas and overcome disruption beyond original expectations.

Supply chain teams need to address two looming and significant cross-functional challenges in the days to come.  The first is re-visiting business and supply chain planning capabilities in light of the reality that major disruption, either internal or external related, is a given.  The ability to have scenario plans in-place along with the abilities to quickly assess and proactively respond to disruption are new table stakes. The second and longer-term challenge is a complete re-visit of component and finished-goods sourcing strategies in the light of what both the Japan, and now Thailand disasters have uncovered.  There can be no significant vulnerability to required supply streams, and every major geographic region requires an identified and well-understood business and supply continuity plan.

Bob Ferrari

There are many facets for how manufacturers identify and mitigate significant supply chain risks.  These often include operational or event-driven risks, but what happens when your prime distribution center for all of Europe can no longer receive product because of an ongoing product patent dispute?

Last week , customs officials in the Netherlands seized tens of thousands of Sony’s  PlayStation 3 game consoles because of trading ban handed down by a Dutch court.  LG Electronics secured this legal 10 day injunction against Sony because of an alleged patent infringement concerning the PlayStation’s Blu-ray video technology. According to published news reports, Sony and LG are also engaged in patent disputes in the U.S. as well, which involve flat screen televisions and smartphones.

What makes this situation a bit extraordinary is the high tech companies tend to resolve these patent disputes through adjustments to  technology cross-licensing and value-chain agreements and not outright injunctions. An injunction targeted in the Netherlands is obviously with some knowledge of Sony’s European supply chain distribution network for PS3. The Netherlands is Sony’s primary distribution center for all of Europe, accounting for upwards of 100,000 monthly PlayStation units shipped throughout all of Europe. Since the injunction is only enforceable in the Netherlands, Sony is now scrambling to find a temporary alternate distribution point in Europe, and is assuring European retailers that there will be no interruption in shipments.

Supply chain risk does take on different dimensions, especially when others know of your value-chain footprint.  Having a supply chain crisis, business continuity and response team in place is always a prudent investment.  High tech companies like Cisco already understand this important tenet of supply chain risk mitigation.

Bob Ferrari

There have been new developments this week in the area of major product recalls which warrants some Supply Chain Matters commentary.

The Saga of Johnson and Johnson Continues

The news headlines this week featured the announcement on the nationwide recall of more than 13 million packages of chewable versions of anti-acid drug Rolaids after reports by consumers of finding metal and wood particles in products.  Rolaids is a business unit of Johnson and Johnson’s McNeill Consumer Healthcare Group who has been challenged by a litany of previous other product recalls of millions of bottles involving suspected quality of products.  Stellar brands such as Tylenol and Benadryl were previously included in large product recalls and now another comes to the forefront.

To its credit, J&J and McNeill have instituted a large-scale corporate action plan to address manufacturing quality and control processes and have also taken the extraordinary step in the shutdown of McNeill’s Fort Washington PA manufacturing facility while all production processes and equipment are reexamined for remedial needs.

What makes this new recall even more troubling is that it involves production that occurred at an unnamed third-party manufacturing facility, and thus the quality crisis takes on a broader supply chain perspective.  A New York Times article notes that the U.S. Food and Drug Administration (FDA) has additionally cited a McNeill plant in Puerto Rico for distributing products that failed quality requirements along with other serious issues dealing with conformance to Good Manufacturing Practices (GMP).

On the regulatory and political front, this latest incident only increases the negative attention turned toward J&J’s practices.  The House Committee on Oversight and Government Reform through a spokesperson has indicated that this latest incident will add to committee efforts to seek answers from J&J and the FDA on the safety protocols in place at all J&J related facilities.

Meanwhile the financial implications related to this perceived breakdown in manufacturing quality continue to build for J&J.  Earlier estimates were that the plant closure would reduce sales by $600 million, not to mention an estimated $100 million plus investment in re-tooling plant production processes.  Other trade reports have indicated that consumers are now opting to purchase other brands, including generic ones, because of their concerns relative to the overall safety of  J&J brands.  Wall Street analysts are now speculating that J&J may decide on other plant closures, and some ratings on J&J stock are being degraded.

Readers may recall previous academic studies that correlated various disruptive supply chain events to consequent periods of degraded shareholder performance. In the case of J&J, there is yet another case-study reinforcement.  A company with a previous stellar reputation for product quality and consumer responsiveness is in crisis, and that alone should be a sobering signal to other industry players on the importance of identifying, understanding and mitigating all aspects of potential supply chain risk.

The Aftermath of the Massive U.S. Recall in August

The Associated Press reported that egg sales in the U.S. have started to rebound after the massive Salmonella-related recall involving 550 million eggs produced and distributed by Iowa based farms associated with conglomerate DeCoster Egg Farms. Retail egg sales in August were reported to be down 9 percent, making it the slowest month in at least two years. By November, retail sales assumed just about normal levels.  Some specialty egg producers, those with reputations for higher quality or organic actually benefitted from the crisis.

The article notes that U.S. consumers tend to have short memories, especially when dealing with such a widely adopted food staple as eggs. Consumers apparently have this belief that problems will eventually get solved.  Perhaps U.S. consumers need to reflect on the beliefs held by Chinese consumers, who after the massive contaminated milk scandals of two years ago, still have issues in the trusting of brands related to Chinese owned dairy farms.

The egg industry has spent about $1 million on an ad campaign that emphasizes a commitment to food safety.  Apparently, the belief that marketing can cure all ills remains. To its credit, one nationwide producer, Dixie Eggs actually hired a full-time director of food safety, a responsibility that was previously split among several other people. We applaud Dixie for its action. Other producers need to step-up their commitment to quality, beyond just marketing.

While U.S. consumers continue to exhibit short memory spans, we at Supply Chain Matters will at least attempt to keep a watchful eye on industry developments and comment on real efforts by the industry to actually improve quality and safety standards.  If industry players believe they have a real story to tell, than convince us.  Otherwise, let’s  sincerely hope that we do not have to revist yet another development in a large scale recall of egg and egg-related products.

Bob Ferrari

Since our last Supply Chain Matters commentary, additional information has come forth regarding the recent terrorist incidents involving bombs hidden in air cargo shipments, and governments and the air transport industry will need to come-up with a practical response to a growing threat.

Two different packages containing HP P2055 LaserJet desktop printers, air shipped from Yemen, one on a UPS cargo plane seized in the United Kingdom, and one in a FedEx cargo facility in Dubai, have both been confirmed as containing explosive devices within their respective toner cartridges.  The top bombmaker of Al-Qaida is strongly suspected as the mastermind, and the incident is widely believed to have exposed vulnerabilities in the global air cargo system.

Both packages which originated in Yemen, began their journey as carried baggage on civilian airliners and were later transferred to air cargo carriers. Both packages were reported as having bombs containing 300 and 400 grams of the industrial explosive PETN, almost five times more powerful than the bomb carried by a terrorist last December on a Detroit bound airliner. Press reports indicate that the UPS shipment that arrived in East Midlands in Britain initially tested negative for explosives and the flight was cleared for departure. After a tip to the potential threat, and the second package found in Dubai tested positive, did British security teams take a second look.  Intelligence officials now believe that both bombs were intended to be detonated in-flight, which presents a new and credible threat to international air transport. As we noted in our previous commentary, the implications of this heightened threat to air commerce is one that supply chain professionals need to pay close attention.

On August 1^st, new U.S. CSCP (Certified Cargo Screening Program) directives went into effect that required all air cargo originating in the U.S. to be screened at the piece level, prior to transport on a passenger aircraft. This program also includes incoming international originated passenger flights. There is some speculation that shippers are now avoiding passenger aircraft cargo to avoid the added costs of inspection.

Congressmen Edward Markey of Massachusetts was the primary sponsor of this air cargo directive.  In light of these latest incidents, Mr. Markey has now called for extension of the program to include 100 percent of all air cargo, including air cargo carriers.  With the recent U.S. election results, one wonders how legislators will respond to this call. Both the Homeland Security Transportation Security Administration (TSA) and air cargo carriers believe that 100 percent inspection is highly impractical at this point.  Technology has not yet provided practical approaches, and inspection processes implemented on today’s system would cripple air shipments, let alone carriers such as FedEx and UPS.  One report noted that a single inspection scanner could cost upwards of $10 million, and would require a five to ten minute process to check each shipment.

The status quo, however, is not an appropriate response, and some changes will have to be adopted.  In our view, this is a situation where governments, shippers, and air transport providers need to come together to adopt practical, yet stepped-up security approaches.  At a minimum, countries that harbor suspected terrorist activities should continue to be identified and targeted for high levels of outbound cargo inspection, even if it requires additional delays in movement.  Carriers such as DHL, FedEx, and UPS have highly sophisticated tracking technology, and each should allocate additional investment in integrating tracking with inspection identification and control. Additional bomb-sniffing dogs can also be explored. Foreign governments and the International Air Transport Association need to add their added cooperation and intent toward practical stepped-up surveillance of the global air transport system.  Fostering continuation of the status-quo only invites further incidents and potential loss of life and property.

Terrorists will continue to exploit weaknesses in global cargo security system and groups need to come together in implementing immediate and longer-term practical approaches towards security and safety of air cargo.

Bob Ferrari